Preface to Vision and Calculation / Sheng Hong

视野与计算封面

As an author who has published several books, I have always felt that publishing books is amazing. Suddenly one day, a person will say to you, “I read a book of yours many years ago, and it had a great impact on me.” In reality, this situation is very rare. More often, you do not know who reads your book and what impact it had on him or her. For instance, I have read the books of the human sages. They have passed away and do not know what kind of impact they have had on me, how they have inspired my thinking, and how I wrote out those inspired thoughts and shared them with others. However, this is the mysterious mechanism of the development of human culture.

This book, Vision and Calculation is a collection of my papers. The papers were originally written in Chinese, and now they have been collected and published in English. Although I have published several books in English, they have all been research reports for the Unirule Institute of Economics. It is only because I am the leader of the research team and the main writer that I use my name and the name of the collaborator as the authors’ names for those reports. However, this book is composed of all of my own papers. This gives me the feeling of facing my English readers directly. I will not know who reads my book or what magical results it will have for them. However, I feel obliged to make it easier for my English readers. Therefore, herein, I’d like to introduce my own academic and cultural background and explain what I think ordinary English readers may find difficult.

The title of this book, taken from one of the articles, is called “Vision and Calculation”. Economics has always posited that people are rational economic people and that they will make rational judgments through cost-benefit comparisons. However, we often see irrational behavior. In 2010, a sensational event occurred in China. A young man, Yao Jiaxin, hurt a woman while he was driving. Instead of saving her, he killed her with a knife. This, of course, was morally reprehensible. Nevertheless, from an economic point of view, it was also wrong according to rational calculation. Yao Jiaxin’s reason for killing the woman was that the injured women would pester him. Nonetheless, there was a high probability of his crime being uncovered by police and of him being sentenced to death.

There have been many explanations given in psychology and economics about calculation errors. My explanation is that the calculation is wrong because of the limited field of vision. A person’s calculations depend on the information that he or she obtains. The more comprehensive the information, the more accurate the calculation. Additionally, the amount or comprehensiveness of the information depends on the field of vision. The larger the field of vision of space and time, the more abundant and comprehensive the information and the more accurate the calculation. In this regard, I quote a Chinese idiom that says, “The mantis stalks the cicada, unaware of the oriole behind”. This idiom comes from a story from the Spring and Autumn period (770-221 BC). The story tells that the King of Wu wanted to attack the state of Chu and refused to listen to criticism. At this time, a young man went several times to the garden behind the palace with a slingshot. The King of Wu asked him curiously what he was doing. The boy said, “I saw a cicada chirping in the tree, but it did not know that there was a mantis behind it; the mantis wanted to catch the cicada, but it did not know that there was an oriole behind it; and the oriole wanted to eat the mantis, but it did not know that I wanted to shoot it down with a slingshot.” After hearing this, King of Wu decided not to attack Chu. This story vividly illustrates the importance of vision to calculation.

Therefore, why are people (let alone other creatures) limited in their field of vision? The first reason is it takes attention resources to observe and pay attention to external things, and natural evolution makes creatures save their resources as much as possible. For most of the millions of years of evolution, humans were hunter-gatherers. They only needed to pay attention to the range of a few hundreds of meters and the current time. Beyond this range, the direct threat to their survival was greatly diminished. Thus, applying more observation and attention was a waste of scarce attention resources. Thus, nature automatically limits human attention to a smaller area. The second reason that people are limited in their field of visions is that when people and other creatures find a beneficial target (such as prey), they are more likely to focus on this target and automatically ignore other targets. This is what I call a “win a little game, lose a big game” mistake. However, with the rapid development of human civilization in the most recent thousands of years, the cooperation between human beings has made the factors that affect a person’s costs or benefits far beyond his or her physiological field of vision, which may be at the other end of the earth or in another period of time. This requires that people’s vision extend beyond the past. Nevertheless, when the psychological structure cannot be quickly evolved and adjusted, overcoming the mistakes of having too small of a vision depends on learning, education, religion and other cultural traditions.

The subtitle of this book is Economics from China’s Perspective. I think there are two difficulties for ordinary English readers. The first is “economics”, and the second is “China”. Regarding the difficulty of understanding “economics”, my book can be regarded as a collection of economics papers. Because my academic major is economics, I am myself an economist. Generally, economics is not hard to read, but I have included some papers herein that contain many mathematical formulas and geometric charts. Their interpretation will not be a problem for readers with an economics background, but they may bring difficulties to ordinary readers. However, I would like to say that these formulas and charts are not the most important part of these papers. If you find it difficult to interpret them, you can skip them and only look at nonmathematical parts and conclusions. I included mathematics in this book mainly because I was influenced by some examples of neoclassical economics and because my research at the Unirule Institute of Economics required the inclusions of some numbers to express judgment and persuade readers; thus, I developed a slight habit of using mathematics.

As an economist, I can be regarded as an economic liberalist. My academic background is mainly in new institutional economics. I think that I inherited the tradition ranging from Adam Smith to Friedrich Hayek. I can still remember the excitement of reading Hayek for the first time. To date, I am still studying Hayek’s Law, Legislation and Liberty. Obviously, there is no mathematical formula in Hayek’s book. The so-called new institutional economics refer to the economics tradition created by Ronald Coase. In the late 1980s, I read Coase’s “The Nature of the Firm” and “The Problem of Social Cost”. I not only applauded his theoretical insights but also clearly realized how powerful his theory is in explaining and the practical value of the market-oriented reform in China at that time. I later corresponded with Professor Coase and edited and organized the translation of his selected work The Firm, the Market and the Law. When we heard that Professor Coase had won the Nobel Prize in economics in 1991, the Chinese version of the selected work had just been published.

In 1993, I was invited by Professor Coase to be a visiting scholar at the University of Chicago Law School. For half a year, I had discussions with Professor Coase almost every week. I had read Professor Coase’s main articles before I went to Chicago, so what I learned while I was there was more about his thinking methods and academic style. Regarding his thinking methods, he urged me to pay attention to experience and oppose “blackboard economics”. He once took me to the Chicago Board of Trade to see trading scenes and told me to “learn the real world”. Regarding his academic style, he encouraged me to form academic concepts and theories by using communication and argument. For example, when I asked him to define “institutions”, he said that the definition should be formed by the interaction and competition of different definitions. Additionally, he had excellent intuition and the proper judgment of unfamiliar things. He did not come to China, but when we talked about China’s rural reform, he said that China’s success was due to the fact that there were still families remaining after the dissolution of the people’s communes, while Russia’s failure in a similar reform was due to there being only individuals left after the dissolution of the collective farms.

Then, I did not see Professor Coase for 14 years. In 2008, he proposed to hold an academic conference on China’s 30 years of reform and opening up at the University of Chicago. He used his Nobel Prize to fund the conference attendance of dozens of Chinese economists, entrepreneurs and officials, and he invited me to attend. “To struggle for China is to struggle for the world,” he said in his closing speech. In 2010, Professor Coase organized another academic conference in Chicago. This time, he did not need to fund the travel of the Chinese attendants. On December 29, 2010, to celebrate his 100th birthday, we held a large-scale academic conference in Beijing called “Coase and China” and invited Professor Coase to give a speech via the Internet. “Just as China has Confucius, Britain has Adam Smith”, he said. In 2013, while he was planning to visit China, he unfortunately fell ill and died. I cannot help but feel sorry for him when I think that he once said, “I intend to set sail once again to find the route to China, and if this time all I do is to discover America, I won’t be disappointed.”

Professor Coase founded two schools of thought by himself. In the field of law, it is called “law and economics”, while in the field of economics, it is called “new institutional economics”. I am an economist, so I am closer to the new institutional economists, such as Professor Douglas North. His Structure and Change in Economic History helped me to understand Coase’s theory. Professor North visited China many times, and he also attended the Chicago conferences organized by Professor Coase in 2008 and 2010. Therefore, I have had many opportunities to meet and discuss with Professor North. The other new institutional economist to whom I am close is Professor Harold Demsez, who, either together with Professor Armen Alchian or independently, published papers on property rights, which are important classics through which we can understand the theory of property rights. When I met Professor Demsez in Chicago in 2008, he was a humorous old man. In addition, I heard Oliver Williamson’s lecture on “transaction cost economics” at the Institute of Industrial Economics at the Chinese Academy of Social Sciences in 1988. Another person I should mention is Steven Cheung. Compared to Coase, in terms of age, he is a next-generation scholar. However, his contributions and influence are so great that he could inspire Coase himself, as well as North and others. More importantly, he is Chinese. Cheung introduced new institutional economics to China and attracted the attention of new institutional economists to China. I first read his paper “The Contractual Nature of the Firm”, and then later, I read his doctoral dissertation The Theory of Share Tenancy and his other early papers. I increasingly feel that his theory is one that can explain the Chinese phenomenon better by using new institutional economics.

Therefore, it can also be said that my economics papers are mainly those of new institutional economics. For example, “When can Public Goods become Private Goods” is a paper that further studies the theory of property rights. In 2002, when I was commissioned by the Ministry of Water Resources to study water rights, I found that the default allocation principle of river water resources in traditional China is that whoever has the ability to dig the canal has the right to the water. However, in modern society, the cost of digging canals has greatly decreased, and there is no water distribution rule established for rivers. In fact, all regions compete for water resources by digging canals, which is known as the “upstream first” principle; this approach resulted in the total reservoir capacity of the middle and upper reaches of the Yellow River exceeding the annual runoff of the Yellow River, which, in turn, resulted in the scarcity of water resources in the Yellow River Basin as a whole. Thus, the Yellow River was cut off for several years. I think that when the cost of obtaining a certain resource is quite high, it may not be a scarce resource because scarcity means that the demand is greater than the supply. What determines demand is not only the scarcity of resources themselves but also the cost of their acquisition. Thus, when the cost of obtaining resources is lower than a certain extent, the resources that are not scarce will become scarce. Only when resources are scarce is it necessary to establish property rights. Therefore, with the development of technology, it seems necessary to establish water rights for water resources without original property rights.

The institution of property-rights is related to the physical characteristics of resources. Water is a liquid that flows and is boundary-changeable. To establish property rights, it is more difficult to define the physical boundaries of water than it is those of solid objects. From solid to liquid to gas, to sound, to landscape, and to intangible assets, such as digitality and creativity, they can be considered as a continuous pedigree. An effective property right, first of all, must be “held” by its owner and then must be “exclusive”. However, if you want to hold this right, you have to pay the cost or the “exclusive cost”. The physical characteristics of a resource will affect its exclusive cost. A liquid is more difficult to hold than a solid, and a gas is more difficult to hold than a liquid. Only when a solid container, such as a reservoir, a bottle or a balloon, has been created can a liquid or gas be effectively held. Regarding idea-related products, due to the development of printing and the Internet, it is difficult to define their physical boundaries, which can only be protected by an artificial property right system, i.e., the intellectual property system. Thus, the concrete form of the institution of property rights, in a dimension, is related to the physical characteristics of resources.

Regarding the difficulty of understanding “China”, I include several aspects. The first aspect is China’s reform and opening up. This is the field in which I have invested much energy in the past years, and I think it is also the focus of my English readers. The second aspect is the history of China, especially the economic history. Understanding this is necessary to understanding China, including modern China. The third aspect is Chinese culture. This is an important aspect of understanding why Chinese people think in the ways that they do and why China is different from the English-speaking world. The fourth aspect focuses on the problems present in China, which is an important reason why Chinese scholars put forward such problems. The fifth aspect is looking at what has happened in foreign countries from the perspective of China and to give an explanation for these events from the perspective of China.

Let us talk about my cultural background first. Although I am a Chinese, in the early years of my education, I basically did not touch the traditional Chinese culture, which herein mainly refers to the Confucian and Taoist culture. In the middle and late periods of the Cultural Revolution (1966-1976), I worked as a worker in a factory. What I know about “Confucian culture” is a few words of Confucius that were criticized in the movement of “criticizing Lin and criticizing Confucius”. After I was admitted to the People’s University of China in 1979, I mainly studied economics. In addition to Marxist economics, I also studied Western economics. I think that culturally, I am a citizen of the world. However, ironically, it was my first visit to the United States in 1987 that made me feel connected to Chinese culture, because the United States is not a country without cultural color. At the same time, Chinese in the United States also respect Confucius. After returning to China from the United States, I began to read many books about Chinese culture, including Feng Youlan’s History of Chinese Philosophy, which was recommended by Mr. Li Shenzhi, and Hou Jiaju’s Free Economic Thought of Confucianism in the Pre Qin Period. Of course, the most important thing was to read the original scriptures, including The Great Learning, The Doctrine of the Mean, The Analects of Confucius, Works of Mencius and Tao Te Ching.

In the tradition of Confucianism and Taoism, what I first agree with is a thought similar to those found in economic liberalism. Confucius said, “Does heaven speak? Yet the four seasons run their course and all things come into being. Heaven does not speak!” Lao Tzu said, “Tao often does nothing but does everything.” This kind of expression of natural order philosophy seems more wonderful than Smith’s “invisible hand”. There are still “hands” in Smith’s theory, but there is no “mouth” in Confucius’s theory. When I was at the University of Chicago, I borrowed Lewis Maverick’s China A Model for Europe from the library. This book includes an English translation of Quesnay’s Despotism of China and the author’s own description of how European missionaries’ letters about Confucianism affected Quesnay and Smith. Later, I read Zhu Xi’s collection of Confucian maxims in the Song Dynasty, Jinsilu ( Reflections on Things of Hand), and Wang Yangming’s Chuanxilu ( Instructions for Practical Living) with conscience as the core value; influenced by Jiang Qing’s Introduction to Gongyang Theory, I paid attention to the political system of traditional China. Because of the consideration of the problems after the rise of China, I also paid attention to the thought resources about cosmopolitanism in the Confucian literature and to the Confucian ideas and traditions about family, including the Book of Filial Piety. Having comprehensively combed the Confucian literature, I thought that I could use economics to give a reasonable explanation of them, and I began to teach a course called “Economic Explanation of Confucianism” at Shandong University in 2008, and I published the revised lecture notes in 2015. I can call myself a Confucian.

Understanding Chinese history and culture, it is easy to find the key differences between China and the West, such as the attitude towards the family. There are families in the West, but there is “familism” in China. In my article “On Familism”, I put forward that familism mainly refers to the economic calculations based on the family. This is very different from calculations based on individuals. There are at least two differences between the family and the individual. The first difference is that the individual has a limited life, while the family has an unlimited life, in theory. The second difference is that individualistic individuals are independent of each other, while familial individuals are dependent on each other. Once economics changes the basic research unit, the conclusion may be quite different. For example, a family-oriented society is more inclined to sustainable development because the family life is infinite and its discount rate is zero. If we start from the maximization of family welfare, then succession is more important than the current interests because, if the family is terminated, no matter how great the current interests, the family’s utility is zero. As Mencius said, “There are three ways of being unfilial, and the worst one among them is having no descendant.” Moreover, because the interests of family members depend on each other, their individual decision-making cannot be independent. However, if we look at the Chinese family tradition from the perspective of individualism, we will mistakenly think that the individual’s behavior in the family is very irrational.

Another misunderstanding is about the institution of property rights in traditional China. Among the foreign scholars whom I have contacted, some believe that China has no property rights tradition at all. Many Chinese scholars agree. This belief is caused by the long-term misunderstanding of Chinese intellectuals. Since modern times, especially after the Opium War between China and Britain, China’s military failure has led to the extreme emotions of many Chinese intellectuals. When they criticize the Chinese tradition, they believe that nothing is right in China, i.e., “everything is inferior to other nations”. This naturally includes the institution of land property-rights. In my article “How Should the Institutions Change”, I noted that China has had a formed institution of land-free sale since at least the Han Dynasty. After the Song Dynasty, and until the Ming and Qing Dynasties and the Republic of China, the land property-rights institution became increasingly mature, forming permanent tenancy. Regarding the permanent tenancy, I made a more detailed discussion of this concept in another paper, “The Economic Nature of Permanent Tenancy”. The right of permanent tenancy not only refers to the forever tenancy right but also includes some property rights. This is the inevitable result of permanent tenancy and fixed land rent. Therefore, the land property right can be divided into two levels, namely, the surface land right and the undersurface land right. Moreover, these two types of rights are both independent and complete property rights. When either of them is sold to a third party, the consent of the other party is not required.

It is strange that this kind of perfect land system, which is close to textbook, has been the object of Chinese revolution since modern times. Why is this so? I have made a preliminary discussion in the article “How Should the Institutions Change”. Advocates of the Agrarian Revolution believed that the land was too concentrated at that time. For example, Mao Zedong thought that approximately 70-80% of the land was concentrated in the hands of landlords. However, later researchers posited that he also regarded public land as land owned by the landlords, so he thus overestimated the land concentration. Du Runsheng, another Communist, thinks that the land concentration is only 40%. Zhao Gang’s research notes that the Gini coefficient of the land distribution in the period of the Republic of China is only 0.3-0.5. If the surface land right is also regarded as a property land right, then the land distribution is more average. The second accusation of the advocates of the Agrarian Revolution is that the landlords seriously exploited the peasants. However, this was also denied by later research. For example, Gao Wangling’s research notes that since the Ming and Qing Dynasties, the paid-in-rent ratio had been continuously reduced from 80-90% to 50-60% in 250 years because the landlords did not have the compulsory means to collect the land rent, and the government did not intend to help the landlords collect the rent. Therefore, the nominal rent rate had been adjusted downwards several times.

In “How Should the Institutions Change”, I also compared the land institutions and their changes in England. In the period of the Industrial Revolution, Britain’s land system was still the land tenure system established by William the Conqueror. If a person wanted to buy a piece of land from a peasant, he had to replace the peasant’s serfdom status and be loyal to the Lord when he received the land; thus, a land transaction cost 3-5 years of land revenue. Therefore, the land resource reallocation at that time mainly depended on land leasing with convenient procedures, thus completing the transfer of land resources to industries and cities during the Industrial Revolution. In China, the Agrarian Revolution deprived landlords of their land by violence. After land was distributed to the peasants, it was then concentrated in the hands of the government through collectivization. The Agrarian Revolution destroyed the better allocation between the land and the farmers, and because the people’s communes were allocated agricultural resources by the government; thus, there was no incentive. Consequently, from 1952 to 1978, China’s agricultural labor productivity never exceeded that of the 13th year of Guangxu (1887), and the year of the most severe famine in three years (1961) was only 67% as productive of that of the 13th year of Guangxu; additionally, this period did not promote industrialization or urbanization. This comparison tells us that China’s mistake was not only the wrong judgment regarding the nature of the land institutions but also the mistake of the format of the institutional change, that is, the institutional change promoted by violence.

Thus, even if the direction of a reform is correct, the key factor for the success of that reform is whether it can take a peaceful form. This is exactly what happened when China began its reform and opening up in 1978. After three years of famine, Mao Zedong made a small concession, that is, he allowed farmers to have a small amount of private land. Later, it was found that the yield per mu of the private plots was four, five or even ten times that of the collective lands. This was clearly the result of the incentive. This message was brought to the top of the Communist Party by Du Runsheng, who later became known as the father of China’s rural reform. The choice the officials faced at that time was whether they could change the so-called collective land into private land. If the property-rights institution should be changed, then the law should be changed. The ideological inertia formed in the Mao era made China not have the political conditions to change the law at that time. Later, the actual choice made was a “land household contract system”. The implementation results were obvious to all. From 1978 to 1988, China’s agricultural output value increased by an average of 15% per year. Interestingly, the success of this institutional change can be explained by the Coase Theorem and other institutional economics theories. In my article “Contracts Matter: Towards a More Developed Explanation of History”, I discussed this issue in detail.

The Coase Theorem states that if a judge makes an arbitrary decision regarding property rights, then as long as the transaction cost is zero, the parties can optimize the allocation of resources through free transaction. An extension of this theorem that is close to the fact is that “even if the mistakes of government intervention cannot be corrected temporarily due to political or ideological factors, people have a way to correct them. This is the way of contract, which avoids the difficulty or cost of correcting the mistakes of government at present.” This suggests replacing property-rights reform with contract reform. The contract theory is Steven Cheung’s greatest contribution to the new institutional economics. In his Theory of Share Tenancy, he noted that different contracts would bring different efficiencies in the same situation under the same property-rights institution. Changing contracts changes efficiency. The institution of property rights can be resolved into contractual rights, that is, the right of use, the right of income and the right of transfer. The key to the success of China’s rural reform is the changing of the contract between the farmers and the state and the collective from fixed wages to fixed taxes and fixed rent without changing the land property-rights institution. The former means that, no matter how hard they try, the income of the farmers will remain unchanged; the latter means that as long as farmers pay a fixed amount of tax and of rent, the output increased by their efforts will belong to the farmers themselves.

Another explanation for the success of China’s reform made by Professor Steven Cheung is described in his paper entitled “The Economic System of China” presented at the 2008 Chicago conference. He noted that the success of China’s reform mainly depends on competition among county governments. The object of competition is capital and human resources. The means of this competition is the reduction of the price of land. To win firms’ investment in locality, land price can be reduced to zero or even negative values. The county government’s revenue depends on taxes. In 2011, Steven Cheung held a conference on the “Economic System of China” in Shenzhen. My paper “On the Homology, Separation and Substitution of Tax and Rent” was written for this conference. I appreciate Professor Steven Cheung’s deep understanding of the relationship between rent and tax. I think this understanding is probably related to his permanent residence in Hong Kong, because Hong Kong is a zero tariff-low tax-high land price area. The local government’s finance mainly depends on the income from land leases. If an economic agent is both the landowner and the tax collector, there will be some substitution made between rent and tax. A low tax rate means a high rent rate. If the county governments in mainland China have both land rights and tax power, it is a reasonable choice for them to reduce the land price and seek taxes. However, Professor Steven Cheung has made a small mistake here, that is, according to the constitution, rural land is not owned by the government, and the low-cost land provided by the county government to enterprises has been seized from the hands of farmers by force. When the property-rights institution is destroyed, the price of land is distorted, and his theory appears as a miscalculation.

The other two important phenomena leading to China’s miracle are the emergence of specialized markets and urbanization. I have discussed these phenomena in two papers, “Economic Logic of Specialized Market” and “Transactions and City”. The specialized market is especially developed in Zhejiang Province. I have been to Haining’s leather clothing market, Taizhou’s plastic small furniture market, Yongjia’s bridgehead button market, Liushi’s electrical appliance market, etc., which are all specialized markets covering the whole country of China; the market radius of Yiwu’s small commodity market extends beyond China’s borders. Why can specialized markets exist? It is because a specialized market is specialized in selling a certain kind of good, so that various designs, styles, varieties and brands of this kind of good can be sold in one market. This will bring consumers the utility of variety, that is to say, the selection range of commodities will be increased so that they can be closer to the consumers’ own preferences. For this extra utility, consumers are willing to go further to visit markets. This is the main reason for the existence and development of specialized markets. Due to the huge demand brought about by the specialized market, enterprises gather around the market for production so that the specialized market drives the industrial development of the surrounding areas. This is one of the important characteristics of the economic development in Zhejiang Province.

The development of China as a whole is an enlarged version of this specialized market model. Large cities along the coast and in mainland China are formed by the aggregation of many specialized markets, whose market radius is as large as the world. The huge demand flowing into the huge cities attracts a large number of Chinese and foreign enterprises to invest in these cities and their surrounding areas, which in turn drives the expansion of these cities. Therefore, with China’s decades of economic take-off, this is a rapid urbanization process. The urbanization rate (the proportion of urban population to the total population) has increased from 30% in 1996 to 60% in 2018, with an average of 17 million farmers entering the cities every year. According to William Lewis, urbanization is one of the two main driving forces of modern economic development, and the other is industrialization. Urbanization brings a huge demand for municipal infrastructure investment and housing investment; it also brings a substantial increase in the income of rural residents after they become urban residents, and it brings important changes in their consumption habits to form a new permanent consumption demand. According to my estimation, in recent years, China’s annual investment in the municipal infrastructure has been approximately 2.5 trillion yuan. If the target of China’s urbanization rate is 80%, then the promotion of urbanization to China’s economic growth will still last for more than ten years.

In 2010, the Qianhai Cooperation Zone of Shenzhen invited us to develop urban industrial planning, which enabled me to think more deeply about this issue. In this regard, Krugman and Masahisa Fujita are pioneers. They believe that the scale economy of production makes people gather into cities. However, there seems to be a gap. In my opinion, cities are based on transactions. Because the trade brings the trade dividend, people will gather for the trade and then bring the market network externality; that is, the growth of the trade opportunity is faster than that of the population density, which will bring more trade dividends and further promote the agglomeration of people. Therefore, the process circles and repeats in this manner. At the same time, agglomeration will also bring the external costs of congestion. The trade dividends minus the external costs of congestion is considered the “agglomeration rent”. When the population density reaches a certain degree, the agglomeration rent reaches the maximum value, and the size of the city is also determined. Here, the transaction is the basic unit of research. Coincidentally, institutional economics is also based on using transactions as the basic unit of research; thus, here, spatial economics and institutional economics connect with each other. According to this principle, I have developed a planning model that combines spatial economics and institutional economics, which is a general equilibrium model considering spatial and institutional factors. It can not only help local governments plan but also test institutions and policies.

This kind of city-based research model can also be used in research on the Internet. The two aspects have a common feature, that is, the gathering of people. On the Internet, this is seen as virtual agglomeration. The rise of Internet giants such as Alibaba and Tencent after 2000 is the continuation of the Chinese miracle on the Internet. However, their business models have some puzzling points. Specifically, the marginal cost of online transactions or social platforms is zero, so according to the microeconomics doctrine, the price of their services should be zero; however, according to this method, they will have no money to earn. This is very similar to the “utility pricing problem” discussed by Coase many years ago, which stated that the marginal cost of public utilities with the nature of natural monopoly is lower than the average fixed cost. Thus, if such goods are priced according to the marginal cost, they will bring losses. Harold Hotelling advocated that the government should subsidize the loss, while Coase proposed two-part pricing, that is, consumers should pay both the marginal cost and the average fixed cost. Still, there is no subsidy from the government, and the ordinary consumers of Taobao or WeChat have not paid a cent for their services. Thus, how can Alibaba and Tencent make money?

I explain this in the article “Zero Marginal Cost and Virtual Rent”. When Alibaba and Tencent provide free services to consumers, then these consumers gather, of course, within the virtual space of the Internet. However, that is enough. As long as they can communicate with each other’s willingness to buy and sell and actually close deals, then they have an experience similar to meeting in the real market, but the congestion externalities are almost gone. The previous discussion has noted that as long as people gather, there will be agglomeration rent. Because the agglomeration is created by Alibaba and Tencent’s free services, they have reason to collect rent. The objects of rent collection are those who want to occupy a more central position in the virtual space; the formats of rent collection can be platform royalties, transaction commissions, bidding for a more central position, etc. As it turns out, the rents they receive not only offset the costs but also generate surpluses. This is their business model.

There are some additional papers that I think also think are very valuable. However, I think the preface should not be too long, so I would like to talk about them briefly. Not counting the recent trade war, in the process of China’s marketization, there are two relatively large external influences: the Asian financial crisis and the American financial crisis. In my two papers, “Hedge Funds, Financial Markets and Nation States” and “The Institutional Factors of the Financial Crisis in U. S”, I discussed these crises from the perspective of China. It is worth emphasizing that I put forward “loss equilibrium” in my later paper to describe the situation in which people are willing to accept losses to obtain the possibility of huge profits. In my article “A Generalized Rent-seeking Theory”, I mainly discussed the rent brought about by government regulation in China and the various ways that people, enterprises or government officials try to retain rent when they see that the rent values may dissipate. Another paper, “Medical Insurance Paradox: the Hypothesis that the Price of Medicine is Inversely Proportional to the Copay Rate and its Verification in China”, is a byproduct of my research at the Unirule Institute of Economics. We found that the rapid growth of medical expenses in China seems to be closely related to the popularity of medical insurance; thus, we put forward a hypothesis that the price of medicine is inversely proportional to the copay rate. Our research generally supports this hypothesis.

The last two papers, “Religious Man and its Meaning of Institutions” and “Theological Coordinate of Economics”, are two papers that go beyond the scope of economics. The real world must be beyond the scope of economic explanation. In the past two decades, some masters of economics have also paid attention to this problem. For example, when discussing the constitution, James Buchanan proposed that the term of the rational economic person alone could not explain why the US Constitution drafters would consider the interests of future generations, and he explained it with “ethics of constitutional citizenship”. The Santa Fe School proposed that a society would collapse if there were only economic persons and no strong reciprocators. Compared with economic men, religious men do not care about interests; thus, they are either strong reciprocators of society or they have ethics of constitutional citizenship. By God’s measure, even if human beings no longer existed , He would still be doing something towards the rebirth of human beings or intelligent creatures similar to human beings hundreds of millions of years later. This is a matter that can only be understood if we get rid of the current utilitarian computing. If we only see the immediate utility, then human beings could have neither become human beings nor developed today’s civilizations. In contemporary China, familism has disintegrated, but most of the people we see are individuals without faith. Only when a group of elites has emerged consisting of those who have transcended utilitarianism and who firmly believe that the natural order is good under any circumstances can Chinese civilization be truly revived.

November 16, 2019 in Fivewoods Studio

Vision and Calculation , bublished by Palgrave Macmillan, 2020

Author: flourishflood

Economist, Confucianist

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