Category: Economics


Zhao Ziyang was the third Premier of the People’s Republic of China during 1980-1987. He was then placed under house arrest for 15 years until his death. He argued widely for economic and government reform.
He says:
In order to revive the rural economy and enhance incentives for farmers, the prices of agricultural goods were raised. The aim was to reduce the urban-rural income gap. I was still in Sichuan when the policy was put forward, and I participated in the discussion. There were two key points. First, prices for agricultural and other rural products had to be raised, or else farmers would not have incentive to produce. Second, even though it was impossible at the time to remove the state monopoly on agricultural and other rural products, the quotas for mandatory procurement had to be reduced, especially in major grain-farming areas… After the Third Plenum of the 11th Central Committee, there were good harvests several years in a row: 1979, 1980, 1981, 1982, 1983, and 1984. The rural areas experienced a new prosperity, in large part because we resolved the issue of “those who farm will have land” bu implementing a “rural land contract” policy. The old situation, where farmers were employees of a production team, had changed; farmers began to plant for themselves.

The rural energy that was unleashed in those years was magical, beyond what anyone could have imagined. A problem thought to be unsolvable had worked itself out in just a few years’ time. The food situation that was once so grave had turned into a situation where, by 1984, farmers actually had more grain than they could sell. The state grain storehouses were stacked full from the annual procurement program.
(Taken from Chapter 2 of Part 3:The Roots of China’s Economic Boom, pages 97-98)

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I then reviewed the problems of our economic development since the establishment of the People’s Republic of China. In 1980, as compared with 1952[the year at which the economy was considered to have fully recovered from civil war], industrial output had grown 8.1 times, GDP had grown 4.2 times, and industrial fixed assets had grown 26 times. However, average consumption had only doubled. It appears that though industrial assets had grown a great deal, industrial output had not grown as much, not had GDP; average consumption even less. The GDP growth rate was much lower than the growth rate of agricultural and industrial output; the rise in living standards was also significantly lower than GDP growth, yet industrial fixed assets had grown much more.

This showed that our economic efficiency was very low. The improvement in living standards was not commensurate with what people had contributed with their labor. Therefore, I believed that the key problem with our economy was our efficiency and not the nominal speed of production growth.

Later, at the All China Industrial and Transportation Conference held in Tianjin in 1982, I gave a speech on issues of economic efficiency. I pointed out: “The prolonged neglect of efficiency in industrial production, and the blind pursuit of production output and the pace of growth have resulted in many absurd undertakings. Often we have fallen into the situation of ‘good news from industry, bad news from sales; warehouses are full and finances show a deficit.’ In the end, our banks have had to print money to patch up the holes, bringing harm to the state and the people.” I proposed a concept for approaching the economic efficiency issue: “Produce more products than society truly needs, using the least amount of labor and material resources.” That is, cut waste as much as possible while increasing social wealth, the key being that the products we make must actually be in demand. Otherwise, increased production just means more waste. There had been too much pursuing rapid production for its own sake. Factories produced large quantities of things that nobody wanted to buy. These were then stored in warehouses and finally ended up as trash.

How could economic efficiency be improved? How could products be made that were suitable to the needs of society? There were many aspects to this, but fundamentally it was related to the economic system. The solution was to adjust the economic structure and reform the system. There was no other way.

The reason i had such a deep interest in economic reform and devoted myself to finding ways to undertake this reform was that I was determined to eradicate the malady of China’s economic system at its roots. Without an understanding of the deficiencies of China’s economic system, I could not possibly have had such a strong urge for reform.

Of course, my earliest understanding of how to proceed with reform was shallow and vague. Many of the approaches that I proposed could only ease the symptoms; they could not tackle the fundamental problems.

The most profound realization I had about eradicating deficiencies in China’s economy was that the system had to be transformed into a market economy, and that the problem of property rights had to be resolved. That was arrived at through practical experience, only after a long series of back-and-forths.

But what was the fundamental problem? In the beginning, it wasn’t clear to me. My general sense was only that efficiency had to be improved. After I came to Beijing, my guiding principle on economic policy was not the single-minded pursuit of production figures, nor the pace of economic development, but rather finding a way for the Chinese people to receive concrete returns on their labor. That was my starting point. Growth rates of 2 to 3 percent would have been considered fantastic for advanced capitalist nations, but while our economy grew at a rate of 10 percent, our people’s living standards had not improved.
(Taken from Chapter 4 of Part 3:The Roots of China’s Economic Boom, pages 112-113)

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Chapter 2
Using the state to redistribute wealth from one citizen to another is different from general taxation for legitimate governmental functions, such as those enumerated in the U.S. Constitution. Rather than promoting the general welfare, redistribution schemes involve a group of citizens voting to have the government take property from others and give it to them…Besides being morally dubious, government transfers of wealth are degrading to recipients. As George Gilder put it in Wealth and Poverty, “It is extremely difficult to transfer value to people in a way that actually helps them. Excessive welfare hurts its recipients, demoralizing them or reducing them to an addictive dependency that can ruin their lives.” When government takes the property of one person and gives it to another, it sets up a lose-lose game disguised as a win-lose game. One group is coerced; the other is degraded. p.54

A good model for charity: it’s appropriate for emergencies and comes from a prior abundance. The more abundance, the more there is for charity. Again, the only known way to create widespread wealth is through capitalism. Of course, big campaigns to “end poverty as we know it” are hip. They inspire concerts and crusades. They warm our hearts. They give us a compassion fix. In contrast, the things that can actually help the poor sound about as glamorous as unsweetened oatmeal – property rights, rule of law, personal virtues like diligence and thrift, ingenuity, cultural values like trust, an orientation to the future, and a willingness to delay gratification. Yawn. Unlike the crusades and petitions, however, they create wealth. We know this. We Christians need to decide if we want to keep advocating what is hip and fashionable, or the oatmeal-variety stuff that actually works. Choosing the oatmeal option behind door number two might seem to marginalize the Christian mission to help the poor, but it does not. Ministries that treat humans as fully spiritual beings rather than mere mouths to feed, that encourage economic freedom rather than government largesse, that teach the poor to fish, that instill Christian values – which ultimately transform culture – will do far more to reduce poverty in the long run than all the cool celebrity-led campaigns put in together. Instead of being distracted by programs that don’t work, Christian leaders need to serve as prophetic if unfashionable voices for the rule of law, justice, and human rights for all (none of which is a euphemism for government wealth-transfer schemes). p.57

Chapter 3
Trading freely can add value even though the traded items remain physically unchanged.
Normally, when trading freely, the more trading partners there are, the better.
A free exchange is a win-win game. An exchange that is free on both sides, in which no one is forced or tricked into participating, is a win-win game. It’s a positive-sum game.
The game is win-win because of the rules set up beforehand. A free market is NOT a free-for-all in which everybody can do what they want. That’s raw competition…A free market isn’t like that. An exchange must be free on both sides.The participants are free to exchange, or not to exchange. Ideally, the players would be virtuous enough to play by the rules. But in the trading game, as in real life, you can’t count on the virtue of others. There’s a bully in every class. So you need an outside enforcer.
Scarcity is almost always real. The basic options are a win-lose society based on the laws of the jungle, a lose-lose society of coercive socialism, or a market where win-wins are possible. The right rules can make the trading game win-win, even when there’s scarcity.
Opportunity costs. When there’s scarcity, there’s almost always a trade-off. Trading can make me better off than I was before, but it can’t give me everything.
Economic value is in the eye of the beholder. The economic value of something is determined by how much someone else is willing to give up in order to get it. Labor often adds value to a product, as long as that labor creates what someone wants. But you can’t DEFINE economic value in terms of labor. p.62-65

Free trade makes it possible for people to play win-win games of exchange. If you aren’t forced to take a job building a Web site for an ad agency, you’ll take the job only if you think you’ll be better off as a result. And the agency won’t hire you unless they believe that they’ll be better off. So it’s a win on both sides. You shouldn’t compare who’s better off as a result of the deal, you or the ad agency. That way lies envy. Since it’s a free exchange, you should compare your status with the job versus your status without it… A free market doesn’t guarantee that everyone wins in every competition. Rather, it allows many more win-win encounters than any alternative…So in a market, competition is almost always better than monopoly, since competitors generally will focus on meeting the wants and needs of consumers rather than on stealing from them. p.70

The logic of competition in a market is not about destroying enemies. It’s about serving consumers better than your competitors. Where prices can roam freely, goods, services, and information will generally be well distributed. In fact, for this purpose, the market has no known competitors.
(ME: what causes “competition” to stay legal? Who enforces “rule of law” if not the government? And who makes sure the free trade is free? He has said that government should NOT be the police of the market…?)

Chapter Four
Money is a socially constructed reality that represents wealth or capital. We can use units of currency, like dollars, to measure how much capital someone has accumulated. But money isn’t capital itself. Money has value only if trading partners believe it has value.
But what about land? Land has a location, boundaries, dirt. That’s matter if anything is…But that’s not what makes them PROPERTY. “Property is not really part of the physical world,” argues Peruvian economist Hernando de Soto, “its natural habitat is legal and economic. Property is about invisible things.” Although squatters may be able to extract some value out of land they occupy by sleeping there or by planting cash crops that they can quickly harvest to eat or to sell, that land is not their property unless it is represented as part of a formal system that is widely seen as legitimate. “Property is not the assets themselves, but a consensus between people as to how those assets are held, used, and exchanged,” de Soto argues. “Remember, it is not your own mind that gives you exclusive rights over a specific asset, but other minds thinking about your rights in the same way you do. These minds vitally need each other to protect and control their assets.”
This system of representation allows land to become property, to become capital, to be used as collateral for loans, to be compared with and combined with other assets. Owners can then tap their property’s potential…Property owners have a vested interest in the health and stability of the social order that makes their property possible. They have something to gain and something to lose. They treat the same plot of land differently.

Though the word capital originally referred to cattle, it’s also reminiscent of the Latin word for head, caput. That’s much more fitting for modern economics, in which the mind predominates. Hernando de Soto points out that property laws make capital “mind friendly” since they allow physical assets like land to take on a parallel existence in the realm of representation. But this is only the beginning of an information economy…Information isn’t matter. Information comes from minds.

Even more startling is that over time, we can create more and more wealth with less and less matter. Futurist Ray Kurzweil has popularized this idea with his “law of accelerating returns.”

…contrary to untutored sense, new wealth comes not from matter alone, but from how we represent, inform, and transform matter…but wealth is created only in the right circumstances. Wealth is not static.

(Paraphrase: human equality and justice for all are not proper protests against capitalism. Pointing to the gap between rich and poor and then calling for equality is not understanding that human equality springs from the nature of humans, given to them by their Creator, not how much money they happen to possess. And there is no injustice in income gaps – as long as those who are rich and continue to make money, and those who are poor yet continue to make money, are coming by their money honestly. )

We all tend to link inequality of outcome or opportunity with injustice. But they’re not the same thing… Poverty is a problem. But the problem isn’t that some people are rich and some are poor, any more than the problem of disease is that some are healthy. The problem is quite simply that some are poor. If we want to bask in the wasteful heat of self-righteous moral indignation, then by all means, let’s keep blathering on about income gaps. But if we really want to help the poor, we need to get our eyes off decoys and focus on the real problem – poverty – and its only known solution: creating wealth.

Chapter Five
Adam Smith never attributed the happy outcomes of trade and business to the virtues of businesspeople. “It is not from the benevolence of the butcher, the brewer, or the baker,” he wrote, only to be quoted by every economics textbook ever written,” that we expect our dinner, but from their regard to their own interest.” Nevertheless, through the invisible hand of the market, individuals will “promote an end which is no part of [their] intention.” That end often benefits society overall. If you don’t read Smith carefully, you might think that he’s making the same argument [that vice is essential to bettering society – avarice is necessary for building a successful society] as Mandeville and Ivan Boesky – that individual greed is good for society. That’s a misreading of Smith, a misreading that was made popular by Ayn Rand… Smith didn’t goad butchers, brewers, and bakers to be more selfish. He believed that normal adults aren’t self-absorbed monads, but have a natural sympathy for their fellow human beings. His point about self-interest is that, in a rightly ordered market economy, you’re usually better off appealing to someone’s self-love than to their kindness. The butcher is more likely to give you meat if it’s a win-win trade, for example, than if you’re reduced to begging. Besides, even if you get food by begging, it’s degrading. Smith was a realist, but he knew the difference between self-interest and mere selfishness. “There is,” he said,” another system which seems to take away altogether the distinction between vice and virtue, and of which the tendency is, upon that accout, wholly pernicious: I mean the system of Dr. Mandeville.” For Smith, pursuing your self-interest is not in itself immoral…but self interest isn’t just looking out for number one at everyone else’s expense.

So capitalism doesn’t need greed. At the same time, it can channel greed, which is all to the good…Investments are a gift. Entrepreneurs don’t look AT their money but THROUGH it to what it can do.
Entrepreneurial capitalism requires a whole host of virtues…entrepreneurs set aside rather than consume much of their wealgh, they risk rather than hoard what they have saved, providing stability for those employed by their endeavors… and they have faith in their neighbors, partners, society, employees.. Very few critics understand this. Too often, even the fans of capitalism neglect the entrepreneur, focusing on free markets rather than free men and women. In short, we get capitalism without capitalists. As George Gilder says, ” Man, and not mechanism is at the heart of capitalist growth.”

Chapter Six
Max Weber is important for several reasons…He was discerning enough no to mistake capitalism for simple greed. Greed is universal, but capitalism is not. He understood that mere greed leads to theft or instant gratification, not capitalism. A thriving capitalist economy needs entrepreneurs who will save, risk, invest, and hope in the future, not clutch their hoard like Ebenezer Scrooge…but Weber should have located the sources of of capitalism not in Calvinism alone, but in Christianity more broadly. A contemporary sociologist, Rodney Stark, has done just that. Stark argues for the “rise of the West” based on “four primary victories of reason”:
1. Faith in progress within Christian theology
2. The way that faith in progress translated into technical and organizational innovations, many of them fostered by monastic estates.
3. The way to reason informed both political philosophy and practice to the extent that responsive states, sustaining a substantial degree of personal freedom, appeared in medieval Europe.
4. The application of reason to commerce, resulting in the development of capitalism within the safe havens provided by responsive states.