Inscription: On September 19, 2021, the inauguration ceremony of the new campus of Chengzeyuan of the National Development Research Institute and The School of South-South Cooperation and Development of Peking University was grandly held, focusing on the theme of "The Mission and Inheritance of Chinese Economics", six founding professors such as Lin Yifu, Yi Gang, Haiwen, Zhang Weiying, Zhang Fan, and Yu Mingde made videos or shared on the spot. This article is based on the sharing of Professor Zhang Weiying.
Professor Zhang Weiying
Mainstream economics failed
What is the mission of economics? In my opinion, it is very simple, it is to defend the market economy. Defended by what? It is to use a good market theory.
Looking at our mainstream economics now, if I want to score it, I want to score 59 points, and fail. Why not pass? The reason is simple, the most important thing in the market is entrepreneurship and entrepreneurship, but there is no entrepreneur and entrepreneurship in our mainstream economics. Why not? Because the assumptions of mainstream economics have ruled out the entrepreneurial function, the entrepreneur seems neither necessary nor possible.
Mainstream economics assumes that everyone knows everything, that all information, resources, technologies, preferences are given, and that the rest of the work is computing. This computational work requires no imagination, alertness, decisiveness, or even risk-taking, and therefore no entrepreneur, a computer can do it. Therefore, our existing economics is not successful in explaining and defending the market. We can't even explain why profits persist. In mainstream economics, profit is a manifestation of market imbalance and therefore inefficiency; under equilibrium, all the income of a company is decomposed into costs, and there is no profit.
In fact, in an uncertain world, knowledge and information are scattered in the minds of different people, each person has only limited local knowledge, decision-making is inseparable from imagination, speculation, and therefore entrepreneurship. Entrepreneurs can certainly make mistakes. The effectiveness of the market is not that entrepreneurs do not make mistakes, that the economy can achieve equilibrium, but that free competition forces entrepreneurs to constantly discover and correct mistakes, and if they do not correct mistakes, they will eventually go bankrupt. This is the most important feature of the market. Therefore, we cannot measure whether the market is efficient by whether the market has reached equilibrium. Keynesian economics' critique of the market is wrong because it uses equilibrium as the criterion for whether the market is valid.
Economists assume that everyone is rational, so that markets can be designed. But the real market is evolved, not designed by anyone. Reason itself is the result of evolution, not the premise of evolution. Evolution has no goals, only the survival of the fittest. Thus, designing the market in any way, in Hayek's words, is a "fatal conceit," overestimating one's own abilities, overestimating the power of reason, overestimating the power of scientific knowledge.
Mainstream economics can't even convince people of the simple idea that the market itself leads to common prosperity. Adam Smith changed our thinking from a "zero-sum game" to a "positive-sum game," but neoclassical economics brings us back to a "zero-sum game" mindset. If the resources are given, the technology is given, the cake is given, and the production and distribution problems can be dealt with separately.
The misleading nature of the concept of "income distribution"
"Income distribution" is an important topic in the study of economics. But in my opinion, the concept itself is misleading, because it gives the impression that income already exists, is already there, and the question is how to distribute the income that already exists. Since income already exists, if some people get more and some people get less, it proves that the market is unfair and needs to be redistributed by the government to achieve fairness. In fact, income is created, not already having a fixed amount out there, waiting for people to distribute it. In the market, each participant earns income not by "distribution" what already exists, but by "selling" something that others need (products, labor services, etc.). If someone else doesn't have a demand for his product or service, he can't have an income. How much income and wealth a society has depends to a large extent on the function of entrepreneurs. The entrepreneur's function is to discover, create, and profit from meeting consumer demand. If entrepreneurship is suppressed, not only profits are lost, but everyone's income and welfare.
Entrepreneurs take profits, but that doesn't mean entrepreneurs have an advantage in earning income. What is profit? It's what someone else has left. The "others" here, now called "stakeholders," include consumers, employees and creditors, as well as suppliers. If the consumer in the market is not satisfied, if the economist does not get what the economist calls "consumer surplus" (value minus the price), the entrepreneur cannot make money; if the worker does not receive the wage income agreed in the contract, the entrepreneur cannot make a profit; if the creditor does not get interest, the entrepreneur cannot make money; if the supplier does not get the payment, the entrepreneur cannot make a profit. In the market, only the profits of entrepreneurs may be negative, and the income of all other stakeholders cannot be negative--- unless the enterprise goes bankrupt, but the definition of enterprise bankruptcy is that the enterprise is insolvent, the entrepreneur's profits are gone, and the liquidation proceeds must first repay the debt (including arrears of wages). Therefore, if entrepreneurs want to get rich, they must first make others rich and bring benefits to others.
Profit is a sign that the entrepreneur creates value and satisfies the contract revenue claims of other stakeholders, not exploitation. Despite the element of luck, on average, whether an entrepreneur in a competitive market can make money and how much money he can make depends mainly on his entrepreneurial ability. If you think that profits are "trick or treat", you yourself "take a chance" to see? But it is very regrettable that now such a basic truth actually seems to be unclear, as soon as it comes to common prosperity, it is thought that it must take another road to achieve it, and it seems that cutting off Zhang San's ears can cure Li Si's deafness.
Let me illustrate the relationship between marketization and common prosperity by using the differences in wages and profit rates between China's provinces. Taking 2016 as an example, according to the market-oriented data provided by the Beijing National Economic Research Institute, the average wage of private enterprises is highly positively correlated with the degree of marketization, and the correlation coefficient is +0.71. Roughly speaking, for every 1 point increase in the market-oriented index, the average annual per capita wage of private enterprises increased by 1826 yuan. In particular, it is worth mentioning that in areas with a market-oriented index of more than 10, no per capita annual wage is less than 45,000 yuan; while in areas with a market-oriented index of less than 10, there is no per capita annual wage of more than 41,000 yuan. The correlation between the market index and per capita disposable income is higher (correlation coefficient +0.78). For every 1 point increase in the market-oriented index, per capita disposable income rose by $2,237. In areas with a market-oriented index greater than 12, no per capita disposable income is less than $30,000; in areas with a market-oriented index below 12, no per capita disposable income is higher than $28,000.
At the same time, we see that while the market-based index is also positively correlated with the return on net assets of private firms, this correlation is much weaker (correlation coefficient +0.34). This means that the positive effect of marketization on per capita wages is greater than the impact on the return on net assets. The main reason for this is that capital is more liquid than labor, and higher marketization means more fierce competition among entrepreneurs, resulting in relatively higher wages and relatively lower profit margins. As a result, the share of wages in private entrepreneurs' operating income increased significantly with the increase in the degree of marketization (correlation coefficient in industrial enterprises was +0.45).
Another noteworthy is the significant role of marketization in solving poverty. Still taking 2016 as an example, the correlation coefficient between marketization and the poverty rate of the rural population is -0.85. On average, the marketization index of a region rises by 1 point, and the poverty rate of the rural population in the region decreases by 1.1 percentage points. Of the 12 regions with a marketization index below 8, only 2 regions have a rural population poverty rate of less than 5 per cent; while in 19 regions with a marketization index of more than 8, only two provinces have a rural poverty rate of more than 5 per cent, of which 7 regions with a marketization index of more than 10 have a rural poverty rate of more than 2 per cent.
The income mobility of the real population is more important
People often talk about statistical income distribution data. But statistical income distribution figures are very misleading. Statistics may tell us what the bottom 20 percent and the top 20 percent of the population earn in one year and a few years later, and the gap between the high and low is getting wider and wider, as if the lowest earner 30 years ago and the lowest earner today are the same people. In fact, statistical income groups and real-world income groups are not a concept. Statistical income groups are classified by income, real-world people are flesh-and-blood people, the same person, different years may belong to statistically different income groups. Because the market is a process of continuous reshuffling, today's high-income groups are different from ten or twenty years ago. The "poor" of ten years ago may become "rich" ten years later.
For example, the market economy is like a hotel with different stars, there are five-star hotels and one-star hotels, each hotel is full of people, but the names of travelers are always changing, today's people who live in five-star hotels may move to the basement later, there are also some people who originally lived in the basement, because they have the ability to move to five-star hotels. This is the change in people's relative income under the market economy.
The key to this is entrepreneurship. Due to the competitive nature of the market, even successful entrepreneurs will always be surpassed by latecomers. Moreover, entrepreneurship is more difficult to inherit, not that the father has an entrepreneurial spirit, the son must have an entrepreneurial spirit and will be equally successful. When most entrepreneurs are old, their entrepreneurial spirit is also weakened, and even if the son inherits the father's business, the company may decline. Therefore, in a market economy, the rich cannot be rich forever, and the poor cannot be poor forever. If the poor have an entrepreneurial spirit, he will outperform the rich.
To illustrate the misleading nature of the statistics, let me do a small simulation. Suppose that a society consists of two people, A and B; in the initial year (the first year), A's income is 100 yuan, B's income is 500 yuan, so A is poor and B is rich, and the absolute income gap between the two is 400 yuan, and the relative income gap is 5 times that of the former. It is assumed that the annual growth rates of low and high incomes are 5 per cent and 10 per cent, respectively, but the relative positions of A and B change once a year. That is to say, in the second year, A becomes rich and B becomes poor; in the third year, A becomes poor again, B becomes rich again; and so on. Then by the 10th year, statistics tell us that the income of the rich has increased by 135.8% to 1,179 yuan in 10 years, the income of the poor has only increased by 55% to 155 yuan, the absolute income gap is 1,024 yuan, the relative income gap is 7.6 times, it seems that the poor are getting poorer, the rich are getting richer. But the real situation is that poor A ten years ago became rich people ten years later, rich people B ten years ago became poor people ten years later; ten years later, the total income of A was 4788 yuan, and the total income of B was 4439 yuan. (See figure below).
This simulation is, of course, too simple, but sufficient to illustrate the misleading nature of statistically income distribution data. The data provided by the Hurun Rich List is a good proof of this. Judging from the historical sequence of the data on the list, the list of the rich is always changing. For example, the 100 richest people on the list in 2010 have only 34 left in 2015, and the other 66 have dropped the list. I can say with certainty that the people who rank in China's rich list today, not to mention 30 years ago, or even 20 years ago, many people were in the low-income ranks, and many people could even be called "poor eggs". How can the fact that these poor people become rich shows that the income distribution is unfair?
The problem of vertical income mobility of the population is a more important research topic than the changes in the income gap between the "poor" and the "rich" reflected in the statistics. We should pay more attention to the vertical mobility of income and be wary of class solidification. But it's puzzling that economists who study income distribution are accustomed to using statistical data for income groupings and pay little attention to changes in the incomes of real people in the real world. In the study of changes in income distribution in China, the study of Professor khor and Professor Pencavel of Stanford University is a rare exception. They found that between 1990 and 1995, if the urban population in China was divided into five groups by income, only 43.9% of the highest-income group in 1990 still belonged to the highest-income group by 1995, and nearly 5% fell into the lowest-income group. At the same time, only 49.6 percent of the lowest-income earners in 1990 were still among the lowest-income earners by 1995, and 50.4 percent had jumped out of the lowest-income brackets, with 2.1 percent of them entering the highest-income brackets. This is just a change in the five-year period.
Look at the situation in the United States. The media often says that the gap between rich and poor in the United States has widened over the past few decades, but if you go back to each specific person (the data is based on the taxpayer identification number provided by the tax department), the conclusions will be completely different. For example, in 1975, more than 3/4 of the lowest-income group accounted for 20% of the income group, and by 1991, more than 40% of the people had entered the top 40% of the income group, of which 29% had entered the 20% of the highest income group, and only 5% of the people were standing still. Another example is the lowest income group, which accounted for 20% in 1996, and by 2005, the income of the highest income group, which accounted for 20%, increased by only 10%. High-income people are more mobile. For example, according to the U.S. National Revenue Service, between 1992 and 2014, the top 400 people with annual incomes totaled 4,584, of which 3,262 (71%) made the list only once in those 23 years. More than half of Americans will be in the top 10 percent of their income at some point in their lives. (Data from Thomas Sawwell's Intellectuals and Society and Discrimination and Inequality)
The responsibility of the economist
In short, statistical economics tells us that the state of income distribution is misleading. It is very regrettable that some scholars always use these misleading statistics to say things, and many people are willing to accept this misleading. The French economist Thomas Piketty is not only famous for his book Capital in the 21st Century, but also earned a lot of money, which is really absurd. Many scholars have pointed out that his income distribution statistics contain fatal errors that do not stand up to scrutiny. Such economic research is harmful to society and not beneficial.
The great thing about a market economy is that it gives everyone the opportunity to be, no matter how poor you are now, maybe you will become rich in the future, and it will punish everyone who does not work hard, no matter how rich he was. The mission of our economists is to defend the market economy and provide a correct theory for it. So far, the market theory of mainstream economics has not passed, and we professors at the National Development Institute, scholars and economists throughout China have the responsibility to make their own contributions.
Note: This article is based on the first draft of the recording, and has been supplemented, modified and confirmed by myself.