The human factor in efficiency studies

In a market economy efficiency is regulated by market, as economic activity is driven by interests. To gain interest, every resource investor must group his production factors in light of supply and demand and prices, and raise his efficiency. Therefore, the mechanism behind efficiency in the market economy is none other than the interest mechanism, or market mechanism, and the investor's goal is to maximize his interest. Thus motivation for interest and the lure of goals are unified insofar as efficiency is concerned.

Where there is government regulation besides market regulation, there will be the impact of government regulation on efficiency. The lure of goals is by and large a manifestation of such impact. Government goals are multiple rather than single. To meet its goals, the government needs to influence resource investors by way of regulatory means, and compel them to choose investment fields and forms of investment in line with government goals. Efficiency is affected as a result.

Because market regulation works hand in hand with government regulation, efficiency, whether high or low, is under their combined influence. Our study of this issue, however, does not stop just here. We need to probe deeper into it, because those engaged in market activity are individual traders, each being a resource investor. Market participants are subject to government regulation.

The sixteen essays featured in Economic Reform and Development in China were chosen from amongst those I wrote and published during the period 1980–1998. They are reflections of my thoughts on certain important issues pertinent to the economic development of China in the intervening years.

For instance, the opening piece, “The role of education in economic growth,” was published in 1980, when the nation was setting about the task of confronting and resolving long-neglected issues shortly after the adoption of the policy of reform and opening up to the world. I was keenly aware of the fact that as a result of the decade-long “cultural revolution” that started in 1966, education had been seriously damaged and its development gravely held back because it was despised by leaders and the masses alike. Consequently, it was imperative to attach the utmost importance to developing education and cultivating talents, and it was against that background that the paper was written. In it I pointed out that if education continued to be scorned in such a manner, China would lose both its present and its future.

“Basic thoughts on economic restructuring” was written in 1986, a little more than seven years after the initiation of economic restructuring in this nation in 1979. By that time, a household contract system had been adopted in rural areas nationwide, which brought about a dramatic increase in farm produce output and an initial improvement in rural living standards.

Peculiarities of cultural and art products

Cultural economics is not concerned with the process by which cultural and art products are produced but with the economic issues pertinent to the production and reproduction of such products. Thus something has to be said about the attributes of cultural and art products. In terms of economics, they fall into two categories: those in the form of physical commodity, like audiovisual products, fine arts, books and periodicals; and those in the form of service, that is, labor services provided by cultural and art organizations, such as performance art. In comparison with material production, the production of cultural and art products is unique in that it is more individualistic and creative. Looking back, we may find nothing inappropriate with the way we categorize cultural and art products and interpret their peculiar attributes. However, if we probe the issue of cultural economics more deeply, we will know where the problems are.

If, for instance, a novelist or playwright comes up with a novel or a drama script, the first material form of his brainchild is a manuscript instead of a published book. This manuscript must be recognized and accepted by editors of a press or a journal before it turns into the book form and is sold on the market. Thus the material forms of cultural and art products we see on the market are a kind of “collective” product, that is, products brought into being “collectively” not only by authors but also by editors, printers, and the like.

More and more people are coming to terms with the importance of rural enterprises to the Chinese economy, an importance that has been borne out by reality. The reform of large and medium-sized state enterprises and the development of rural enterprises are part and parcel of the effort to reshape the microeconomic foundation of the socialist market economy being developed in this nation. Academic discussions are elaborate and thorough concerning the property rights reform of large and medium-sized state enterprises, but somewhat lacking on the significance of similar reform of rural enterprises and the approaches to it. Indeed, discussions about the latter have merely touched upon the development of the “joint-stock cooperative system.” In truth, the property rights reform of rural enterprises is no less important and difficult than that of state enterprises. Moreover, the term “joint-stock cooperative system” is yet to be clarified. All this necessitates some in-depth study.

To begin with, we should not take the burgeoning development of rural enterprises over recent years for granted. Rather, we should contemplate the role of the market in the survival and development of these enterprises, and look at the question of what is to be done to adapt them further to the market.

Rural enterprises have no lack of competitors. On the home market, they compete with each other, but their competition comes mainly from state enterprises, large urban collectives, private businesses, equity joint ventures with Chinese and foreign investment, and imported commodities.

What is effective investment? To put it simply, it is the kind of investment that works promptly in putting together production capacity, boosts the supply of aggregate social product, and stimulates economic growth. What is rational investment? In short, it is the kind of investment that maintains basic price stability, creates many job opportunities, and raises labor force income while spurring economic growth. Whether investment is effective or not is determined by whether it has increased aggregate social product; and the effectiveness of investment is measured by the growth rate of aggregate social product. In contrast, whether investment is rational or not is determined by whether it has met the following goals: (1) boosting the economy; (2) maintaining basic price stability; (3) creating more jobs; and (4) raising labor force income. And the rationality of investment is measured by its actual results in meeting these goals. Effective investment may or may not be rational investment. Under socialism, it is not enough for investment to be merely effective. No effort should be spared to turn effective investment into rational investment, and with the largest possible degree of rationality at that.

Investment – primary dynamo behind economic growth

Economic activity is a dynamic process in which one period of production, distribution, exchange, and consumption circumscribes the next period. To allow production, distribution, exchange, and consumption to take place on a larger scale in the next period, a certain amount of national income from the previous period must be spent in investment.

An unanswered question in our nation's economy is how to foster a congenial relationship in which economic reform, growth, and industrial restructuring supplement each other, so that the economy can grow effectively in the course of economic reform, a new mechanism for resource allocation can be found through economic growth and industrial restructuring, and the traditional economic system can be converted into a brand-new one.

This is no easy mission. The Chinese economy is in a state of disequilibrium. The market is incomplete. Resources are in shortage. Firms are yet to become commodity producers that are motivated by their own interests. Under these circumstances, if we rely mainly on market regulation to decide prices when our firms cannot pursue their own interests, and if the flow of production factors is still hampered by ambiguous property rights, we are courting two dire results. For one thing, prices will rise, market information will be distorted, and our industrial structure, instead of running on an even keel, will become even more lopsided to inhibit future economic growth. For another, if we count mainly on government regulation and allow the government to impose restrictions on prices and quotas on commodities, some industries may grow fast, but the development of other industries will be hindered. Economic growth may be maintained at a certain rate, but because firms are apathetic about improving their efficiency, the establishment of a new resource allocation mechanism will inevitably be delayed or encumbered.

Restraints of disequilibrium on growth and fluctuations

The late 1960s witnessed a great stride made in disequilibrium theory. In his two papers, “The Keynesian counter-revolution: a theoretical appraisal” and “A reconsideration of the microfoundations of monetary theory,” American economist Robert Wayne Clower came up with a notable argument on disequilibrium theory: Economic instability comes not from a specific market but from discordance between markets, a discordance that stems from the incompleteness of these markets and of the information transmission mechanism between them. If this argument on disequilibrium is applied to analysis of economic growth and fluctuations, the result will be obvious: Not only will the equilibrium equation of growth predicated on the complete conversion of savings into investment and the full utilization of the production capacities thus yielded become void, but the supposition about fluctuations that lists the restrictions of income and its changes on effective demand as a major destabilizing factor in an economic system will also be considered as having major limitations.

Shortly afterwards, Swedish economist Axel Leijonhufvud published On Keynesian Economics and the Economics of Keynes among other books. Like Clower, Leijonhufvud reinterpreted the Keynesian economic theory with a disequilibrium approach, and made his own analysis of the causes behind economic stability and instability. He maintains that between labor supply and commodity sales on the economic chain in real life, there are intermediary links, including employers hiring workers, workers producing commodities, employers paying workers, workers buying commodities with their wages, and employers selling commodities.

In my speech “Technology education and capitalist industrialization: a study of the rise of technological power in Western Europe and America,” I dwelled on the relationship between education and economic growth in light of economic history. What I was driving at was that education is a major recourse for nations to groom technological personnel, and that only by putting a premium on education and the cultivation of talents can less developed nations boost their economic growth rates and catch up with and surpass the developed countries. As I put it in that speech, the role of education in economic growth has five aspects:

“First, education provides society with a supply of researchers and designers who can venture into the unknown, innovating in science, renovating and transforming productive technology. Without such contingents, the best a nation can do is to tag along after other nations, but in that way you cannot score major breakthroughs in science and technology.

“Second, education provides society with engineers and technicians who can master and apply advanced means of production. Without such technocrats, even if a nation has acquired sophisticated tools of production, it cannot put them to best use.

“Third, education brings forth production and technology managers well adapted to society's level of industrialization. Without teams of such managers, the production process can be prone to colossal waste in human, material and financial resources, making it impossible to benefit from the superiority of advanced productive technology.

The success of China's reform and development in the last thirty-three years has attracted global attention. The major steps which have led to China's success exhibit many Chinese characteristics. Of these the most striking is the ownership reforms in the state and other non-private sectors. The theoretical and policy preparations for ownership reforms took more than ten years. From being heterodox in the mid-1980s they had become mainstream thinking by the mid-1990s.

Professor Li Yining was arguably the most eminent figure in this process. His most influential public speech on ownership reform, entitled “Basic Thoughts on Economic Reforms” (Essay no. 3 in this Selection), was delivered on 25 April 1986 in Peking University. His famous remark “Economic reforms in China may break down if price reform fails. The success of economic reforms, however, hinges not on price reform, but on ownership restructuring” soon appeared in the headlines of a number of leading reformist newspapers and later on became a new proverb in the discourse of Chinese reforms.

In the mid-1980s, “market socialism,” which was initially promoted by Oscar Lange and Abba Lerner, was the guiding principle of economic reforms in China and Eastern European socialist countries. This principle advocated that the introduction of autonomy to state-owned enterprises (SOEs) would induce SOEs to behave like profit-maximizing firms.