中国经济改革发展之路(英文版)(txt+pdf+epub+mobi电子书下载)


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中国经济改革发展之路(英文版)

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Preface

The 16 essays featured in Economic Reform and Development the Chinese Way 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.However,in urban areas,the development of state enterprises was hampered,as their management was encumbered by government intervention and their property rights were ill-defined.The promotion of urban economic restructuring thus became the next crucial task.In that paper,I suggested that corporate reform be put before anything else,but that its main thrust should be directed at introducing the joint stock system and transforming state enterprises into firms that were liable for their own profits and losses,enjoyed autonomy in business activity,and were operated by a wide spectrum of investors.I believed that this suggestion,if adopted,would ensure success in economic restructuring and provide institutional guarantees for smooth economic growth in this nation in the years to come.

In “A tentative study of socialist ownership structure,”published in 1987,I introduced diverse forms of ownership that might work for the Chinese economy in the long term.I predicted that the nation’s ownership system would eventually include two economic forms: first,a small number of large corporate groups each funded by several investors; and second,legions of medium-sized and small private and cooperative firms,including selfemployed industrial,commercial,and farming households under a contract system,the majority largely invested by individuals and cooperatives.This dual economic system would play a positive role in promoting economic growth and technological progress,in relieving the pressure on employment,and in raising resident income.

“Coordinating economy and environment in less developed regions”was published in 1991,the year I,as advisor for the State Council Commission of Environmental Protection,spent considerable time on environmental economics.During my field surveys,I was able to see more and more clearly the intimate relationship between the economic development of impoverished areas and environmental protection.I realized that if we went single-mindedly to help local communities defeat poverty without working to coordinate the economic and environmental concerns,we could end up getting half the result with twice the effort,thus failing to deliver those communities from poverty and lead them onto the road of prosperity.A year later,the Chinese government established the China Council for International Cooperation on Environment and Development,and I was appointed as a Chinese member on the council and director of a working panel of experts in environmental economics.That position enabled me to go on with my research and policy consultancy service in this field.

In 1993,overheated investment triggered high inflation,which riveted the attention of economists in this country and prompted them to search for solutions to the problem.I wrote “Growth and fluctuations in economic disequilibrium”to spell out my opinions on government regulation policy.Specifically,I focused my analysis on two “alert lines”under conditions of disequilibrium.Given the imbalanced development in the Chinese economy,I asserted,it was inevitable for either the unemployment rate or the inflation rate to run higher than zero,and therefore,it was impossible to set the alert line on a zero unemployment or inflation rate.At what level of unemployment or inflation the alert line should be set should be determined in light of the actual situation.Moreover,there should be two alert lines,designated respectively as the first alert line and the second alert line.Accordingly,the operational space for the entire economy should be divided into four segments along the zero unemployment axis or the zero inflation axis,and along the first and second alert lines.

In Segment One,the economy runs below zero unemployment or inflation,which is deemed abnormal.This gives rise to workforce shortfalls or deflation,which calls for macroeconomic regulation and control steps.

In Segment Two,the economy runs above the zero unemployment or inflation axis without breaking through the first alert line,which is deemed normal,and does not necessitate governmental microeconomic regulation and control.

In Segment Three,the economy runs above the first alert line without breaking through the second alert line,which is slightly abnormal and calls for moderate macroeconomic regulation and control.

In Segment Four,the economy runs above the second alert line,which is abnormal to a grave extent and calls for intensified macroeconomic regulation and control,and,when things come to a head,extraordinary control steps.

In 1997,when Southeast Asia was engulfed in a major economic crisis and the Chinese economy was affected to a certain degree,I wrote “Meshing fiscal policy with monetary policy.”Its gist was that whether in dealing with this crisis or in executing the national economic policy,we have to learn how to coordinate financial policy and monetary policy.To tighten or loosen financial and monetary policies at the same time is something that can be done only under extraordinary circumstances.Under normal circumstances,a tight financial policy should complement a relaxed monetary policy,or vice versa.Only thus can good results be achieved in regulating national economic development.

“The dual foundations of efficiency”was published in 1998.It was written at a time when,with marketization making steady headway,the public had sufficiently understood the importance of efficiency but was yet to see the importance of the foundations on which efficiency rests.I pointed out in this paper that efficiency rests on two foundations,that is,the material and technological foundation,and the moral foundation.Equipment,factory buildings,raw materials,and workers’technological attainment are elements in the material and technological foundation of efficiency,while its moral foundation consists of people’s faith,confidence and cultural and moral attainments.History has proved that the material and technological foundation can only engender conventional efficiency.The moral foundation,however,can generate super efficiency.This bears out the momentous value of people’s faith,confidence and edification in culture and morals.In developing its economy,the nation is faced with the urgent task of bolstering up the moral foundation of efficiency,so that the moral and cultural character of the population can play a still greater role in economic development.

Having given a glimpse at the essays selected in this book,I believe that readers who have read this book will gain some insight into my basic thoughts on Chinese economic development from the 1980s through the1990s.

In publishing Economic Reform and Development the Chinese Way,I have benefited from the unstinting help of Professors Hao Ping,Ling Yuan,Norman Apritchard,Cai Hongbin,and Zhou Li’an.Without their unstinting assistance,it would have been impossible for me to put the book on readers’desks in such a short span of time.My heartfelt gratitude is also due Director Yu Chunchi and Chief Editor Cai Jianfeng of Foreign Language Teaching and Research Publishing,who made this translation project possible in the first place.Ultimately,I am immensely grateful to Wu Hao,managing editor of humanities and social sciences publishing,and translator-editors Zhong Zhilan,Ren Xiaomei,and Peng Lin,for doing a good job in producing this highly readable English edition of my selected economic essays.Li YiningGuanghua School of ManagementPeking University,ChinaJanuary 30,2010

Foreword

The success of China’s reform and development in the last thirty-two 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 reform in the state and other non-private sectors.The theoretical and policy preparations for ownership reform 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 restructuring”(Essay No.3 in this selection),was delivered on April 25,1986 in Peking University.His famous remark,“Economic restructuring may break down if price reform fails.The success of economic restructuring,however,hinges not on price reform,but on ownership reform,which entails revamping the corporate system,”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 reform 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.Once SOEs became sufficiently autonomous,comprehensive price reforms (i.e.,price liberalization)would lead to [1]the final success of the economic reform.In line with this mainstream paradigm,Chinese leaders also endorsed the “big bang”approach and implemented a “one-shot”comprehensive price reform in the late 1980s,which,unfortunately,led to more problems than it solved.

At the other end of the spectrum of the reform debates,criticisms of the theory of market socialism and its reform practices in Eastern Europe since 1968,led by Professor János Kornai,became increasingly influential in the 1980s.Kornai’s book Economics of Shortage became a bestseller in economics and Kornai himself an iconic figure among young intellectuals in China.His insightful analysis of state ownership and bureaucratic coordination led many young economists to believe that without ultimate private ownership,the expansion of enterprise autonomy and selfmanagement under impersonalized state ownership would not be a medicine that would be effective in curing the soft budget constraint (SBC)syndrome.The SBC syndrome would continue to dull the price responsiveness of enterprises and thereby constrain the effects of price signals.Kornai himself later also concluded that unless state property was sold to private owners at a real market price,an attempt to reduce the percentage of state ownership gradually,i.e.,to 95,90,85 percent [2]and so on would not be able to make a difference.

In sharp contrast to the above strands of thought,Professor Li had a keen observation of the de facto diverse property rights structure existing in SOEs in China.He argued that it was feasible and desirable to adopt the shareholding system in SOEs by quantifying interests among different public owners and then converting such quantified interests into shareholdings.With such a shareholding system in place,an individual public agency would have a measurable stake in the fortunes of a firm from which the agency would draw cash flow and control rights.As a result public agencies could more easily consolidate their material interests and assemble more consistent business strategies when facing market competition.They would find it in their best material interest to increase the value of the firm rather than to extend bureaucratic control over it.Furthermore,mixed ownership for a company as a result of joint investment by public,collective,and private partners and diverse forms of ownership in the economy would stimulate competition and induce further property right reform (also see [3]Essay No.4 in this selection,first published in 1987).

In the context of China in the mid-1980s,when the official ideology still viewed socialist state ownership as 100 percent ownership by the state on behalf of the whole people,it was analytically valuable,practically significant,and politically brave and skillful to highlight the de facto plural property rights structure of existing state ownership and then to link this structure to the feasibility and desirability of ownership reform.

Within academic circles in the West,Granick (1990)appears to have been the first person to analyze this plural structure.[4]Highlighting that Chinese SOEs were in fact agents with multiple principals exercising control over them,he asserted that these multiple principals acquired property rights through past investment in SOEs or traditional associations with individual SOEs.He cited a 1966 slogan “whoever builds and manages the enterprise has the use of its output.”This slogan was regarded as epitomizing property rights relationships of the 1970s,i.e.,instead of control rights being derived from ownership,de facto control rights now define ownership.In other words,this practical property rights arrangement is opposed to the usual textbook teaching in which the right to management is an attribute of ownership.

Rooted in the Chinese reality,the analytical work of Professor Li reveals that the conventional wisdom on state ownership in both the West and East is descriptively narrow.The claim that private investors should own the firm,despite its importance,is not the unique logical prerequisite of free markets and free enterprise.Diverse ownership and governance forms can emerge and evolve that are compatible with the evolutionary development of free market and free enterprise.The Chinese like to create a nickname for someone famous for a particular legacy and,not surprisingly,Professor Li is now known throughout China,as “Li Shareholding.”

Another area to which Professor Li has made an important contribution is comparative economic history and the history of economic thought(cf.,Essay No.11 in this selection,published in [5]1993).Integrating such comparative studies with his deep understanding of economic practices in China,he proposed an innovative augment on disequilibrium theory.As presented in Essays No.5 (published in 1988)and No.12 (published in 1993)of this [6]selection,he distinguishes two types of disequilibrium based on whether the majority of firms in the economy are viable profit-makers or not.The first type corresponds to the one dealt with in the existing disequilibrium theory,which features excessive demand or supply due to market friction,stickiness of prices and wages,and demand or supply constraints,rather than non-viability of firms.The second type is characterized not only by an underdeveloped market but also enterprises under various forms of bureaucratic control.He argues that China’s economy has belonged to the second category throughout its transition process.To make the transition from the second type of disequilibrium to the first,the top priority is the reform of enterprise system with the aim of producing viable and profitoriented enterprises.[7]This line of thinking provides a further support to his famous remark-“ownership restructuring holds key to the reform.”

In addition to constructing this second analytical foundation for his ownership reform theory,Professor Li’s work on the Chinese economy in disequilibrium also emphasizes the fundamental importance of achieving and maintaining healthy economic growth and social development in China under the conditions of the second type of disequilibrium.The majority of his essays in this selection discuss various coordination issues across economic reform,growth and development,and the urgency of finding solutions to immediate practical policy dilemmas.The central normative guideline has been that the reform and transition are means to serve economic growth and social development and,furthermore,that economic growth and social development are means to serve the well-being and happiness of ordinary citizens in society.

In dealing with the immediate policy dilemma,Professor Li has incorporated the methodology of “dialectical thought and synthetic analysis”of traditional Chinese medicine,which emphasizes holistic connections among many facets of human anatomy and physiology and examines the effect of the social and natural environment on the interrelations and conditioning of yin and yang.He pays particular attention to both the“treatment effect”and “side effect”of each policy pill,as well as its shortrun and long-run effects.For instance,the first essay of this selection was published in June 1980 when the high urban unemployment rate was at the top of policy agenda.With a thorough and comprehensive analysis of the historical and structural roots of the high unemployment rate,Professor Li suggested that in the short and medium run,the solution would be to actively develop labor-intensive manufacturing industries and labor-intensive export processing to take advantage of China’s abundant low-skilled labor force.However,in the long run,China has to develop human capital intensive manufacturing and services industries and actively promote human capital intensive exports so as to convert the persistent population pressure into an emerging comparative advantage.Therefore,it was strategically important to significantly increase investment in education in the 1980s so that China would no longer suffer high unemployment rates in the next two to three decades and become well prepared for the inevitable era of human capitalintensive production and exports.Clearly,this vision is still valid today.

The publication of this Economic Reform and Development the Chinese Way enriches the literature in English that examines the past,present and future prospects of China’s reforms,transition,and development.Although all the essays in this selection are well-known in China,they provide carefully examined alternative perspectives which scholars and students in the West may not be familiar with.I am honored to write the foreword for this excellent selection and commend it enthusiastically to scholars,policy makers,business professionals,as well as to more general readers,who are interested in the dynamics of China’s transition and the growing importance of China in the world.Sun LaixiangAcademician,the Academy of Social Sciences,UKProfessor and Head,Department of Financial & Management Studies,School of Oriental & African Studies,University of LondonAugust 9,2010[1]For an excellent critical review on market socialism in general and its manifestation in the 1980s in particular,see Kornai,János (1992),The Socialist System,Princeton: Princeton University Press.For a leading essay on market socialism for China,see Sun,Yefang (1982),“Some theoretical issues in socialist economies,”originally published in Chinese in the period 1958-1961,in Fung,K.K (ed.),Social Needs versus Economic Efficiency in China,Armonk,N.Y.: M.E.Sharp.For an influential essay which promotes comprehensive price reform in China,see Wu,Jinglian and Reynolds,Bruce L.(1987),“Choosing a strategy for China’s economic reform,”American Economic Review,Vol.78,No.2,pp.461-466.

  [2]See Kornai,János (1990),The Road to a Free Economy,New York and London: W.W.Norton & Company.

  [3]For more detailed and systematic discussions on multiple property rights and ownership reform by Professor Li,see Li,Yining (1986),Political Economy of Socialism,Beijing: Commercial Press; Li,Yining (1987),An Exploratory Study of Economic System Reform,Beijing: People’s Daily Press; and Li,Yining (1989),Thoughts on China’s Economic Reform,Beijing: Zhongguo Zhanwang Press.All these three books are in Chinese.

  [4]Granick,David (1990),Chinese State Enterprises: A Regional Property Rights Analysis,Chicago: University of Chicago Press.

  [5]Also see,for example,Li,Yining (2003),The Rise of Capitalism: A Study of Comparative Economic History,Beijing: Commercial Press; Li,Yining (2006),The Economic History of Rome-Byzantine Empire,Beijing: Commercial Press.Both books are in Chinese.

  [6]More detailed and systematic analysis on this topic is presented in Li,Yining (1990),CChhiinneessee .Economy in Disequilibrium,Beijing: Beijing Daily Press.This book is in

  [7]An important parallel research on the viability issue of SOEs in China (and other transitional economies)has been conducted by Professor Justin Yifu Lin.Lin employs the analytical perspective of comparative advantage and argues that the firms in heavy industries prioritized by the government in transitional centrally planned economies are not viable in open,competitive markets because their activities are inconsistent with the economy’s comparative advantage.This viability problem is another root of the soft budget constraint (SBC)syndrome.If the viability problem is not solved,the SBC syndrome will not be eliminated even though the socialist government is overthrown and all firms are privatized.See,Lin,Justin Y.(2003),“Development strategy,viability and economic convergence,”Economic Development and Cultural Change,Vol.53,pp.277-308; Lin,Justin Y.(2005),“Viability,economic transition and reflection on neoclassical economics,”Kyklos,Vol.58,No.2,pp.239-264.

The role of education in economic growth (1980)

In my speech “Technology education and capitalist industrialization:a study of the rise of technological power in Western Europe and[1]

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.

“Fourth,education enhances society’s scientific and cultural attainment,and sets the stage for promoting new products and disseminating and upgrading knowledge in science and technology.At the same time,education also lays the groundwork for the future growth of a nation’s technological prowess,and guarantees the supply of a constant stream of high-caliber researchers,engineers and managers,and skilled workers.

“Fifth,education enables society to preserve and disseminate its accumulation of scientific knowledge and productive experience free from barriers of time and space and national boundaries.It is through education that such accumulated knowledge and experience are spread from one nation to another and from one generation to another as humanity’s shared assets.”

I would like to go on with my observation of the relationship between education and economic growth on the basis of the speech I made and published two years ago.However,this paper has a different focus.While in my previous speech I looked into the major role education plays in expanding the economy and raising its growth rate,this paper underlines education’s important role in ensuring economic stability and sustained growth,and in providing effective solutions to problems that have occurred or may occur in the process of economic growth.In other words,my previous speech was about economic growth per se,whereas this paper is a study of employment,balance of international payments,income distribution,financial balance and other issues occurring in the process of stabilizing and sustaining economic growth.Furthermore,while my previous speech proceeded from the perspective of the economic history of Western Europe and America,this paper takes China’s socialist economy as its focus and background.

This paper is delivered in four chapters dealing respectively with education’s relationship with employment,balance of international payments,income distribution,and fiscal balance,so as to illustrate education’s role in guaranteeing economic stability and sustained growth.

I.The “structural”nature of the employment problem can be solved by developing and restructuring education

Theoretically speaking,any nation can grow its economy either by expanding its workforce or by investing more in machines and equipment and improving workers’technical knowhow and skills.The adoption of labor-saving technology and equipment may help cut down the material production sector’s demand for workers in the course of economic growth.Consequently,given a constant population growth rate,economic growth itself cannot ensure full employment.The number of jobs to be created through output increase is determined not only by the rate of production expansion,but also by which approaches are adopted for such expansion.If a country develops its economy not by hiring more workers but by adopting new technology and equipment and improving workers’cultural and technical proficiency,then the ability of its material production sector to absorb the workforce will be limited.

On the other hand,economic growth also entails a process of change in a nation’s economic structure.The inexorable law of material production is that some old manufacturing industries decline or are phased out while new ones rise and grow.The ratio between material and non-material production in the national economy is changing as well.It is an irrevocable trend in economic growth for some non-material production industries to grow in strength along with their shares in the national economy.With the national economic structure changing constantly,those working in languishing or failed industries need to find new jobs elsewhere.The rising industries in material production,and particularly the burgeoning industries in nonmaterial production,often run short of workforce.Thus the emergence and growth of new industries in both material and non-material production are major reasons why a nation can increase employment amidst economic growth.

The changing economic structure of a nation implies changes in both industrial and geo-economic structures.In China,underdeveloped regions may achieve a relatively higher economic growth rate,whereas developed regions may slow down,or grow at a relatively lower pace.Regions that either suffer a low growth rate or maintain a high growth rate mainly by spending more on technology and equipment will produce a glut of factory layoffs that will have to seek employment elsewhere,whereas regions with a high growth rate,those with a labor shortage in particular,are likely to accept the job-hunters.

These situations prove clearly that the employment problem confronting a country in the process of economic growth is mainly “structural.”That is to say,the success or failure in tackling this problem hinges on whether the workforce structure-the makeup of workers of different trades,industries and locations in a region’s total number of workers-is commensurate with local economic growth rates and economic structural changes,and whether the workforce itself can meet the technical needs of local economic growth.When the structure of a workforce does not match the local economic growth rate and the changing local economic structure,and when workers’technical proficiency level falls short of the needs of economic growth,unemployment will unavoidably exist alongside a surplus of unfilled job vacancies.

This paradoxical coexistence of unemployment and superfluous vacancies means that while people are looking frantically for jobs,many jobs are left unfilled.How is it that people lose jobs while the economy keeps growing?The answer is that if economic growth is achieved for the most part by raising labor productivity while the population growth rate remains high,those coming of employment age are likely to fail to land suitable jobs.Even if these people are a non-factor,industries and regions with slow or stagnant growth lay off workers.This is particularly true of developing countries,where agriculture-known for its low labor productivity-often dominates the national economy.In the industrialization process,large numbers of villagers who have just quit farming may find it hard to land [2]jobs.Unemployment-concealed unemploymentincluded-thus becomes unavoidable.

Why,then,are there vacancies that remain unoccupied?This is because,when the workforce structure does not tally with the prevailing economic growth rate and economic structure,the rising industries in both material and non-material production cannot find what they want badly: skilled workers and competent engineers,technicians,researchers,and managers.The same labor shortage can also occur in established industries in material production that maintain growth by relying heavily on new technology and equipment,so much so that even workers on their payrolls cannot measure up to what such new technology and equipment require of them.Seemingly unwanted jobs may also occur in newly developed places where required workers are in short supply.This is an outstanding problem with developing countries,where,for historical reasons,skilled workers that can keep pace with industrialization are scarce.

Generally speaking,the number of the jobless can never match the number of jobs awaiting them in a national economy.The ratio between the two numbers differs with the changes and readjustments in a nation’s economic growth rate and economic and workforce structure.However,even if the two numbers match each other,they cannot offset each other,because workers of different proficiency levels and fields of work are not interchangeable under modern production and technological conditions.In the long run,the coexistence of unemployment and unfilled job vacancies in a nation’s economic growth is not temporary,but,most probably,perpetual.That is to say,job vacancies may disappear when long-time job-seekers have found their jobs,but will occur again when new layoffs arrive on the scene.Unemployment,concealed unemployment included,is a waste of human resources,while job vacancies left unfilled are a waste of material resources-for them to exist at the same time is not only detrimental to economic growth,but also holds back the adoption and popularization of new technology and economic restructuring.The result is that the economy remains mired in low efficiency.Chronic joblessness can also be a major destabilizing factor for society.

In a nutshell,employment problems in a growing economy are attributable to the failure in reconciling the conflict between unemployment and unfilled job vacancies.Such is the “structural”nature of employment.

The employment problems confronting China are complicated.Some are universal to all economies,some are common to developing nations in economic development,but others are peculiarly China’s own.These three categories of employment problems are intertwined.The universal ones stem from the fact that the increasing use of sophisticated machines and technological equipment has whittled down producers’need for workers,unskilled workers in particular.Those common to developing nations arise from the new job needs of large numbers of unskilled laborers that have just quit farming at the time of an agrarian society’s transition to industrialization.The employment problems peculiarly of China’s own are partly to be blamed on incompetent labor administration,but most of them are attributed to the lopsided economic development resulting from the ten-year chaos of the“cultural revolution”that considerably narrowed down people’s job options.These problems were aggravated by the excessive population growth in the late 1950s and the early 1960s.Today,those born in those years are coming of age or will soon become eligible for jobs.If the employment problems for these people cannot be properly handled,both society and the economy will be in jeopardy.The situation is also complicated by a dire shortage of skilled workers and the low labor productivity of those in their jobs.The dilemma facing China today is that while many job-seeking youths are having trouble finding jobs,factories,too,find it hard to fill jobs with qualified workers.A nation’s aggregate volume of labor resources are derived by multiplying the total number of workers with their average level of technical competencythe chief indicator of labor quality.In that sense,China’s aggregate volume of labor resources is by no means abundant because its workers’average skill proficiency is low despite their sheer numbers.

The solution to our nation’s employment problems,in the final analysis,is to create a constant supply of new jobs to keep pace with economic growth.If we cannot create new jobs,the need for labor will shrink with the adoption of new technology,even if population growth is kept at a low level.

How to create new jobs?This involves the diverse economic sectors and forms of public ownership under the socialist system,as well as such factors as economic administration,various types of technical innovation,and the ratios between sectors and economic growth rate.These issues,however,are beyond the scope of this study.The topic at hand is this: Supposing substantial numbers of new jobs are created by readjusting and revamping the ownership structure,the economic system and the ratios between economic sectors,and by riding the nation’s robust economic growth,can the nation come to grips with its employment problems?Given the “structural”nature of employment in our country,we can assert categorically that the disparity between the structure of the workforce and that of the national economy will never be eradicated without corresponding development in education and without restructuring the education system.The dilemma between “people hunting for jobs”and “jobs seeking takers,”too,will remain for a long time to come.The important role of education in tackling employment problems rests precisely on its ability to deliver the nation from that dilemma.

Developing education and spending more on it can help dovetail the workforce structure with a growing economy’s need for workers at different technical levels and in different fields of work.To achieve that end,we have got to adapt our educational structure to the changing economic growth rate and structure,and act on the long-term need of economic growth to readjust the categories of schools and the setup of academic programs,and to variegate the schooling terms.Long years of observation reveal two options in this regard.In the first option,when existing and prospective job-seekers are not outnumbered by anticipated unfilled job vacancies,the main thrust of our effort can be directed at further improving education and raising workforce quality,so that every worker that has been educated or trained can qualify for more demanding jobs,thereby enhancing labor productivity and further promoting the adoption of new technology.In this way,not only can the needs of economic growth be met,but the number of unfilled job vacancies can be curtailed as well.In the other option,when the total number of existing and prospective job-hunters outgrows the anticipated number of unfilled job vacancies,we can lay equal stress on improving and universalizing education,so that more high-caliber professionals can be cultivated for the national economy while legions of job-waiters are tooled with one kind of skill or another to qualify for suitable jobs.To achieve this end,apart from further restructuring the economy to increase job vacancies,attention should also be paid to developing secondary technical and vocational education so as to put more job-seekers through training.The school term for students can be lengthened so as to curtail the number of prospective job hunters and better prepare students culturally and technically for future economic growth needs.In other words,we would rather let our youngsters learn more knowledge and skill than keep them waiting for jobs when they are ill prepared in both skill and knowledge.

As things stand today,it is believed the second option is more workable for China for a long time to come.Thus,in education development and reform,we cannot go single-mindedly after improvement to the neglect of the role of education in tackling the “structural”employment problem.

We should also remember that education reform cannot be accomplished overnight.For one thing,economic growth itself demands that our schools supply large numbers of well-educated and skilled workers who measure up to its needs.Failing this,stable and sustainable economic growth will be out of the question.For another,the economy’s ever-changing sectoral,regional and technological structures call for the adaptation of the education system.A certain level of national economic development is always consistent with a certain structure of education,with the latter changing in sync with the former.This fact should be considered when mapping out long-term national human resource plans.

So much for my analysis of the “structural”employment issue.The employment problems facing China today are “structural”in the main,but they do not stop merely at being “structural.”“Individual occupation selectivity”is another social employment issue for present-day China.When job openings are available,people can still choose to stay jobless.They do not lack the needed education and skill,but they make this choice out of occupational considerations.The causes of this employment problem are manifold,but education can still play a role in tackling it.This is because the mission of educators is not limited to teaching cultural knowledge and technical expertise.Character building and education in revolutionary values are essential to students in this country.

II

.Investment in education as a prerequisite for developing a knowledge-intensive economy; the gradual increase of knowledge-intensive exports as a strategic measure to improve China’s balance of international payments amidst economic growth

As to the patterns of technological innovation for developing nations in the modernization process,I have voiced my opinions in my article “On the roles of capital-intensive and labor-intensive economies in the modernization process of developing nations”(World Economy,issue No.6,1979).Because what I wanted to drive at in that article was that developing countries are not going anywhere if they choose to develop a capital-intensive economy more than anything else,I made no mention of the differences between skilled and unskilled labor and of the developmental trends of a labor-intensive economy.In this study,however,to explain why investment in education is a boon to stable and sustained economic growth,I find it necessary to look further into the patterns of technological innovation,or,to be specific,the role a knowledge-intensive economy can play in economic growth.

Theoretically speaking,a nation out to seek economic growth must boost its financial savings and raise funds for investment purposes.If the supply of funds is in shortage at home,something can be done to procure foreign funds under appropriate credit conditions and in light of the situation of the world capital market.The plus side of the use of foreign capital is that it helps overcome immediate foreign exchange and capital shortfalls and brings in advanced technology from other lands.However,in the long run,the commitment to repaying both principal and interest will eventually become a problem for the borrower.If the nation cannot increase its foreign exchange revenue from exports or other sources,balance of payments deficit may become a major hindrance to sustaining its economic growth.

Let us imagine a nation that is before or at the beginning of industrialization that has an abundant workforce,whose wages are low,and whose traditional exports of labor-intensive products have a competitive edge on the world market.Such a nation can use its foreign exchange earnings from exports to meet its domestic demand for technology and commodity imports and improve its balance of international payments.However,when industrialization reaches a certain stage,labor-intensive exports will gradually lose their edge and put the nation at a disadvantage for the following reasons:

First,a growing economy inevitably boosts national income gradually.While per capita national income rises on a yearly basis,worker wages go up as well.As a result,the gap in average wage between the nation and the developed industrial nations is likely to narrow down,thus diminishing the benefits of the “entry ticket”the nation can get from its low wages on to the world market.What merits particular attention here is that industrialization is a common trend for all nations.When industrialization arrives at a certain stage in the said nation,other less developed nations will follow suit and strive to expand exports and absorb advanced foreign technology.These“latecomers”are most probably in the possession of abundant workforce and even lower wages,and their exports of labor-intensive products are more competitive on the world market because they are made by workers with even lower pay.If the said nation goes on to depend on labor-intensive products for exports after it has increased workers’wages on the basis of economic growth and increased national income,it is bound to come across newer and tougher competitors on the world market,a situation that is obviously not in its favor.

Second,a considerable part of the products of a labor-intensive economy are primary ones.Economic growth is likely to boost the demand for primary products in nations pursuing industrialization.For instance,the demand for mineral products or farm and sideline produce tends to swell with the rise of new industries,urban development,development in communications and transport,and improvement in people’s material and cultural lives.Yet the effort to sustain massive exports of primary products can be inhibited by economic growth and growing domestic demand for such products.If that happens,the nation’s balance of international payments will be adversely affected.

Third,even though the output of labor-intensive products can grow in pace with a nation’s economy,such a growth rate is generally low.Moreover,their supply is restrained by natural resources and productive technology.This is because living labor accounts for the lion’s share of production costs,whereas materialized labor makes up a smaller portion of it.As a result,the growth of labor productivity is relatively slow.Supposing a nation in economic growth needs to import advanced technology constantly and repay the principal with interest on procured foreign capital,it must expand exports to meet that need.If that nation counts mainly on labor-intensive exports in return for foreign exchange earnings,it may not maintain its balance of international payments by expanding such exports because of their low growth rate and serious supply restraint.If the nation wants to expand its exports and maintain its balance of international payments,it can only have one of the three options.Option One: to export more non-labor-intensive products to pick up the slack in the slow growing supply of labor-intensive products.Option Two: to slash domestic demand for labor-intensive products and curtail its growth rate to guarantee exports.Option Three: to transform production technology for labor-intensive products and increase their labor productivity,so as to increase output and expand supply.Option One calls for changing the nation’s traditional dependence on labor-intensive products for export revenue.Option Two is predicated on cutting home demand and restraining domestic growth rate,that is,to expand exports at the expense of domestic demand and economic growth.Option Three will bring down labor intensity in the nation’s labor-intensive economy and gradually deprive it of its competitive edge.No matter what option is chosen,it is not only difficult but also against the law of economic growth for a nation to keep counting on labor-intensive products for export revenue when industrialization reaches a certain stage of development.

It should also be noted that even if a nation can still benefit from laborintensive exports at a certain stage of industrialization (when,for example,its wages are low enough,there are still no tough competitors on the international market scene,domestic demand for primary products has not grown strong enough to affect exports,or its labor-intensive economy is still robust enough to stabilize such exports),it gets a raw deal if it goes on selling labor-intensive products in return for non-labor-intensive imports.This is because the history and system of the world economy have determined that trade between non-labor-intensive and labor-intensive products on the international market is an unequal exchange of value,a situation that is not going to change anytime soon.This being the case,why should nations stick to labor-intensive products as the major source of export revenue after they have gone through a certain stage of industrialization?Why can’t they replace labor-intensive products with non-labor-intensive ones that can definitely stand them in good stead in world trade?

As shown previously,observed from whatever perspectives,heavy dependence on labor-intensive exports should definitely be relinquished when industrialization reaches a certain stage even though it is a necessity at the beginning.On no account should the practice of letting labor-intensive products take up the lion’s share of exports become a long-term state policy.

This poses a problem: Since it is both difficult and inappropriate for a nation to allow labor-intensive products to go on dominating its exports at a certain stage of industrialization,what is to be done with its balance of payments deficit in the course of economic growth?Supposing that nation’s international revenue from non-trade items is fixed,what should it do to increase exports so that it can boost imports and repay the principal and interest of foreign debts?

The way out rests in developing a capital-intensive economy,exporting capital-intensive products,or replacing home-made capital-intensive products with similar imports.Feasible though these options are,they are by no means simple.Some developed industrial nations in the world economy today have turned international trade to their advantage through long years of painstaking maneuvering.This,plus the abundant capital in their hands,is of good service to them in exporting capital-intensive products.It is no mean task to compete with the capital-intensive products from these countries,let alone gain the upper hand in such a competition.

For this reason,developing nations that are latecomers to industrialization should spare no effort to develop and export something else after they arrive at a certain stage of industrialization,and that is the products of a knowledgeintensive economy.

The knowledge-intensive economy,observed from the perspective of labor quality and technological innovation,is actually a way of categorizing innovations,industries and products.As illustrated in the foregoing,the strength of a country’s labor resources manifests itself in both the number and quality of laborers.Labor quality is not factored in when categorizing national economies into capital-intensive and labor-intensive types.Rather,economies are differentiated in this regard merely in terms of the ratio between labor and capital goods inputs in production by natural physical units.By contrast,in calculating the labor input by natural physical units,every person (or work hour)represents an equal amount of labor input;in calculating the input of capital goods,only their values are taken into account-the degree of sophistication of technology embodied in the capital goods and the technical proficiency of the workers using such goods are not factored in.However,an analysis in light of labor quality shows,firstly,labor input is naturally divided into skilled and unskilled labor input,and secondly,the input of capital goods is also naturally divided into those that,on one hand,embody technological sophistication and are applied by skilled labor,and on the other,do not embody the sophistication of technology used and are operated by unskilled labor.Thus national economies can also be categorized into skilled-labor-intensive ones and unskilled-labor-intensive ones.In a skilled-labor-intensive economy,labor is skilled,and the input of capital goods embodies mature technology in the hands of skilled labor.By the same token,products can also be classified as either skilled-laborintensive or unskilled-labor-intensive.Knowledge-intensive products are exactly skilled-labor-intensive products.

If a nation rich in workforce can not only keep upgrading workers’scientific and technical proficiency,imbue them with high labor productivity,and enable them to innovate production technology,but can also employ skilled workers and use capital goods that embody the sophistication of technology in production,then its products will not customarily be laborintensive but skilled-labor-intensive or knowledge-intensive.Such products are a crystallization of the latest science-and-technology achievements mastered by that nation’s labor-workers,technicians,scientists and researchers included-and the advanced technical levels they have attained.They also epitomize the latest progress in production technology and the high labor productivity the nation has achieved.If that nation can export this kind of product in return for unskilled-labor-intensive imports,rather than sell labor-intensive products in exchange for capital-intensive products,it can still be competitive on the world market even though its wages are rising with economic growth,and it can also open up one market after another to promote sales.Furthermore,because the nation has stopped exporting labor-intensive products,it can steer clear of the extant terms of exchange in international trade that are detrimental to labor-intensive products,thereby forestalling economic losses that might be incurred by the system of unequal exchange.

Technological innovation knows no bounds; nor will improvement of labor productivity stop at a certain level.A developing nation striving for modernization enjoys broad prospects in both economic growth and balance of international payments so long as it sets its skilled-labor-intensive economy on a track of ceaseless development.

Thus the important role of educational investment becomes apparent in coordinating economic growth and the balance of international payments.Without steady follow-up investment in education,we can never achieve universal and remarkable development in the workforce’s technical and work proficiency,bring forth high-caliber scientists and researchers,and revamp productive technology without letup.For this reason,investment in education is the prerequisite for developing a skilled-labor-intensive or knowledgeintensive economy.

To sum up,increasing investment in education is a strategic measure for improving the balance of international payments in the course of economic growth.Ours is a socialist nation.Where is our comparative strength in international trade?It lies in none other than the export of certain laborintensive products.We have got to make the most of this strength,and develop it unremittingly.However,we should never make it a long-term state policy for foreign trade,to say nothing of the inevitability that this strength of ours will dwindle gradually with national economic growth.From a strategic point of view,we must heighten the skilled-labor intensity of every export commodity and the skilled-labor intensity of every exporting company.Our nation will stay competitive on the world market for a long time to come if our exports of farm products are no longer customarily labor-intensive,but improved strains and quality products that epitomize advanced science and technology and the latest research and development achievements; if our exports of industrial goods are no longer run-of-the-mill products of the labor-intensive processing industry,but quality goods that reflect the distinctively innovated Chinese technology and nascent research results; and if what we sell to the world market are no longer ores,coal,crude oil or other mineral products but a good variety of quality products that are fashioned out of mineral raw materials and that mirror China’s new achievements in science and technology.Then the more productive our industrial and agricultural departments are,the more competitive our country will be on the world market.All these things,when done in due course,will put our nation’s workforce at an advantage not only quantitatively but also qualitatively.With our “knowledge”crystallized in produce and labor service,we will remain invincible in the world market.

III

.To increase wages and improve economic efficiency is the nation’s cardinal mission that can be attained-to a certain extent-through investing in education

The topic of this chapter is the relationship between income distribution and economic efficiency.In a capitalist economy,the trade-off between“equality”and efficiency has special connotations.Under capitalist ownership of capital goods,“equality”is based on recognizing the capitalist hired-labor system,whereas efficiency is an outcome of capitalist competition.Fundamentally speaking,there will never be true equality so long as the capitalist hired-labor system remains,but this is irrelevant to the theme of this study.Nevertheless,the relationship between income distribution and economic efficiency is a major issue that merits attention.

To care for people and cultivate them is the purpose of socialist production.To develop production is to improve people’s material and cultural wellbeing,and bring forth workers’talent.However,to develop production,we have got to be particular about efficiency and motivate our workers.Theoretically speaking,the principle of distributing to each according to one’s work,if carried out to the letter along with sound social welfare measures,is conducive to the development of production and enhancement of efficiency,as well as a guarantee for workers’pay raise provided development in production is ensured.However,workers’average income in this nation is low,and the influence of egalitarianism on income distribution very much alive.Both facts hamper economic growth,sap people’s enthusiasm,and render workers’pay rise all the more difficult.The egalitarian pattern of income distribution that has kept wages at a low level for a long time cannot be eradicated without painstaking efforts.

To illustrate this issue,and to explain the role education can play in readjusting the relationship between income distribution and economic efficiency,it is necessary to begin this study with the income distribution theory.

Generally speaking,in economic growth there may be two income distribution patterns.One is to pay workers entirely according to the quantity and quality of work done.Under the other pattern,the state takes steps to regulate people’s income by making allowances for low-income earners and limiting or deducting from the income of those highly paid.Proponents of the first pattern argue that paying people entirely according to the quantity and quality of work done represents a fair and square evaluation of the labor or service provided by every member of society,and that this is the only way to duly reward those who work hard and sanction those who malinger or dillydally,and to motivate people to work to the best of their ability and talent.Supporters of the second pattern hold that to reward people entirely according to the quantity and quality of work done is unfair because such quantity and quality are not entirely determined by whether people work hard or not.They argue that people differ in the ability to earn a living because there are broad differences in talent,intellectual attainment,physical strength,family background and education,and especially because people cannot choose the social and work environment and the capital goods they are supposed to use in production.For example,because some happen to be using highly productive machines while the others are not,someone may have worked hard,but the quantity and quality of work he does compare unfavorably with what is done by someone else who does not exert himself but has better talent and family background and works in a better environment.These factors embody the limits of the practice of rewarding people entirely according to the quantity and quality of work done,and are responsible for the fact that some people work harder than others but make less money while others do not work as hard but earn more.It thus stands to reason for the state to adopt regulating measures to give allowance to lowincome people and limit the incomes of highly paid people.

Supporters of either income distribution pattern try to make their cases also by citing income distribution’s beneficial effect on economic growth.Supporters of the first pattern believe that paying people entirely according to the quantity and quality of work done can inspire every worker to take the initiative into his hands and improve his expertise and skill,thereby promoting national economic growth.According to them,people’s enthusiasm will be dampened,and their work efficiency reduced,if they are not paid according to the quantity and quality of work done,or if their incomes are evened up arbitrarily.Supporters of the second pattern believe that the first pattern tends to widen the income gap between members of society,thereby adversely affecting the mindset of some people,so that lowincome people may become so frustrated and disappointed as to hurt the national economy.

The controversy surrounding these two income distribution patterns,however,makes little sense for capitalist economies.A capitalist society cannot possibly pay workers according to the quantity and quality of work done,and its class nature determines that it cannot regulate the income of members of various classes in reasonable ways.The superior socialist system makes fair income distribution possible,as it can maximizes economic growth by dispensing income on a rational footing.The superiority of socialism,however,is yet to be brought to full fruition in China.Egalitarianism in income distribution and low average worker income are established facts in this country for a variety of reasons.Ambiguity in production goals compels people to produce for production’s sake year in,year out.The belief that the more egalitarian it is,the better income distribution becomes makes it impossible to distribute income reasonably and motivate workers with it.As a result,the economy grows at a snail’s pace,labor productivity remains penuriously low,and workers’disposable incomes cannot be increased,so much so that social stability and unity are affected.The situation has reached a point where something has got to be done about it.But what exactly is to be done?In my opinion,when we discuss how to regulate the relationship between income distribution and economic efficiency,we must proceed from our nation’s established income distribution pattern,from the egalitarianism that has been prevalent across the land for years,and from the current average income of workers.History cannot be reversed.It won’t do to conjure up an income distribution pattern based on the assumption of “what we would have done if we were living in the pre-liberation year of 1949.”Important though it is for us to explore such a pattern,it cannot solve real-world problems because the established wage standards make it easy to raise wages and hard to reduce them,and because the established welfare benchmarks make it easy to raise welfare and hard to reduce it.

Given the status quo in our nation,we are not getting anywhere if we stop paying people according to the quantity and quality of work done and increasing people’s average income,and allow egalitarianism to go unchecked.It will not work,either,if our government acts impetuously,turns a blind eye to the real practices of income distribution and the welfare steps that have been taken,and carries to extremes the practice of paying people strictly according to the quantity and quality of work done.Considering the historical circumstances under which the current income distribution practice has come about,I believe the order of the day should be to gradually increase workers’pay in the process of developing production.Egalitarianism and low average worker income are the main causes behind low work efficiency;and low work efficiency is a major hindrance to economic growth.Our mission at hand is to root out egalitarianism and carry out the principle of distributing to each according to his work.That is to say,under the precondition of raising workers’actual income,we must do what we can to pay them in light of the quantity and quality of work done.If we keep doing this,workers’income is bound to grow considerably within a few years.However,a universal rise of average worker’s pay may also result in the income of some people rising more quickly than others,thereby widening the income gap.If the growing income gap disgruntles some people,it will not be too late for the government to remedy the situation with regulatory steps,such as increasing the private income tax rate and levying an inheritance tax within the framework of a progressive tax system.In my opinion,we have got to foresee this potential trend and refrain from taking premature countermeasures.The problem will be taken care of sooner or later.

Coordination between income distribution and economic efficiency amidst economic growth involves not only the long-standing distribution pattern and the past and present wage and welfare systems,but also a number of ideological issues.For instance,such important ideological issues as workers’political awareness,social mores and values,and people’s understanding of what “equality”and “happiness”really mean can affect,one way or another,people’s enthusiasm,initiative and efficiency at work,and the balance between income distribution and economic efficiency.We must be careful about the countermeasures we are going to take against these ideological issues if we are to increase workers’pay without crippling their enthusiasm for work or hurting economic efficiency.

What,then,is the role of education in coordinating the relationship between income distribution and economic efficiency?Can education investment speed up the accomplishment of the abovementioned tasks?There is no doubt that education has a certain ideological impact on those being educated,thereby helping them foster a sound outlook on life,a sense of social responsibility and other values that should not be overlooked.It is also indisputable that this impact is not an issue.What is at issue is the content of such education and the approaches to it.In this study,however,I want to draw attention to the following four pertinent economic issues:

First,as education can improve people’s money-making ability by raising their cultural and technical levels,an effective way to help low-income workers make more money is to put them through certain professional education or training.If the principle of distributing to each according to his work is followed in real earnest,a worker schooled in professional knowledge and technical expertise can earn more than those who lack such knowledge and expertise.Thus he is a beneficiary of the education he has received.Regular and spare-time education can both help individuals increase their private income.Therefore,those who have passed a certain level of academic or technical examinations should be issued a diploma or certificate and paid accordingly in the workplace.Developing education can upgrade the quality of the entire nation’s workforce and boost the work efficiency of those who have been educated.This is particularly the case in this age of modern science and technology,where a growing economy badly needs quality workers who can never be replaced no matter how many low-quality workers there are.Low-income people will be stuck in the low income brackets,and their work quality will remain low if they do not receive professional training.It is thus clear that developing education helps bridge income disparity,increases efficiency,boosts the economy and increases workers’average income.

Second,the lack of labor mobility is detrimental to the effort to enhance economic efficiency and increase income.However,labor mobility is a complex issue that is beyond this study.What I want to say right now is this:Supposing the workforce in our nation has become somewhat more mobile through institutional and other reforms and readjustments,this leaves another important problem to be addressed,that is,there are people who,for lack of professional knowledge and skills,are not able to adapt themselves to the changing economic structure and ever-improving technology by changing their jobs.In the course of economic growth,large numbers of villagers quit farming as a result of raised productivity in agriculture,but their poor adaptability to new careers makes it hard for them to be absorbed by other sectors in need of workforce.Thus large numbers of them have stuck in agriculture,where their labor cannot be fully utilized.Social efficiency suffers as a result.What merits particular attention is that,under these circumstances,low efficiency,lack of vocational adaptability,and low income are interrelated,and can also be addressed by relying on education development.Only through education can low-income people change their jobs when and where necessary,and get higher pay; only when their abilities and talents are brought into play in their new jobs can society reduce its loss in efficiency.

Third,low income not only affects its earners but also carries over to their younger generation.This is true everywhere,and socialist China is no exception.A socialist society is theoretically free from hereditary tenures,workplace discrimination and cliquishness,but children from low-income families have few schooling opportunities and even fewer opportunities to go to college.When they start work,they have fewer chances to get new jobs,let alone jobs with high pay.I think we should admit that their problem is caused by economic factors.A comparison of low-income families with high-income families shows that if income disparity has become a reality in the first generation,by the time of the second generation,a few lowincome families may quit poverty,but most of them will remain poor or even become poorer.This is because,judging from the Chinese reality,among the generation of people in their forties and fifties,families with poor education generally have more children than others.In these families,few housewives hold jobs,a factor which keeps their per-family income at a low level.Low income leads to low level of education,and low level of education leads to low income,and the vicious cycle goes on and on.It goes without saying that the government may take steps to provide children of low-income families with more educational opportunities.But this way of doing things can backfire,because in an environment where higher education is underdeveloped while the remnant influence of feudalism still lingers,government steps can degenerate into some people’s tools for selfish gains.When that happens,there will be serious consequences: The efficiency of the national economy will be eroded,and a drain of precious human resources will occur.To break the vicious cycle suffered by low-income families without affecting economic efficiency and dashing talented people’s hope for education,we must develop education.We must expand higher education and vocational education dramatically to increase the rate of school enrolment of low-income families’children and prepare them for high-income jobs in the future.At the same time,we should never do anything that might either erode society’s economic efficiency or deprive gifted people of the opportunity to continue their education and bring their talent into full play.

Fourth,with the whole picture of the national economy in mind,low-income people and their families cannot be asked to improve their income level on their own.If our economy today were still under the kind of turmoil and sabotage that we saw during the decade-long “cultural revolution”,or if our economic growth was very slow,little could be done to address the low-income levels as a social problem,no matter how hard these people worked to raise their incomes or improve their and their children’s future money-making ability.The effective solution to income distribution problems in the course of economic growth comes down to national economic development,GDP growth,consistent technological innovation,and ever-increasing labor productivity.This is precisely where the role of education comes into play in regulating the relationship between income distribution and economic efficiency amidst economic growth.As I have said in the previous chapter,improving labor quality is a major guarantee for economic growth,while any achievements in innovating technology and raising labor productivity can be regarded as the accumulated results of investment in education.

Incidentally,I use the term “high-income”in this study as a reference to a certain group of individuals or families in the context of China’s income distribution situation.It is relevant only to what happens in China,where the income levels of both workers and government functionaries are on the low side.This renders any comparison of China with the absolute statistics on average international income meaningless.Instead,it makes a lot more sense to compare the consumer-goods structure (the percentage of food expenses in a family’s income in particular)and the hourly wage’s purchasing power(the exchange ratio between hourly wage and durable consumption goods in particular).For this reason,while riding economic growth to raise the income level of low-income families,we should also work to improve the income of all workers and government employees,so that every family can see changes in their consumption composition and the exchange ratio between hourly income and durables.Of course this arduous task cannot be accomplished without a whole package of government steps.To develop education and increase funding for it is one such significant step.This is because only with a quality workforce and robustly growing labor productivity is it possible for everyone to make enough money and for production costs to drop enough to bring down the prices of consumer goods,change every family’s consumption structure,and raise everyone’s hourly income higher enough to afford more consumer goods.These changes are interconnected and mutually promoting.Universal changes in family consumption structure and universal increases in worker wages can yield more jobs and make it easier to solve employment problems.

IV

.Despite the conflict of rising educational funding with fiscal balance at the present stage of economic development,investing in education helps boost fiscal revenue amidst economic growth

Developing education calls for more funding.Where shall the money come from?The mere mention of this question arouses concern about an added burden on state treasury.That is why people are saying the need to develop education and increase the funding for it is in conflict with the effort to maintain fiscal balance.

At the present stage of China’s economic development,government funding is crucial to education development.But is government the only source of funding for education?Of course not.To solve employment problems and create more jobs,we cannot count on direct government investment alone and turn a blind eye to nongovernmental fund-raising efforts.By the same token,we cannot set our eyes only on state coffers and relinquish social fund-raising efforts if we are to develop education and put more people through school.In this study,however,let us forget about raising funds for education from nongovernmental channels and suppose that government funding is the only financial resource for education in this country.

In that case,there is no lack of theoretical support for the concern that increasing educational funding will result in fiscal deficits.Supposing the financial revenue is fixed or its growth rate is rather low while the growth rate of educational investment and spending on teachers’salaries are high,then financial deficits become unavoidable.Deficits increase money supply,which in turn causes prices to rise.Furthermore,if fiscal revenue is fixed while expenditure for national defense,administration and other purposes is curtailed to a maximum,increasing educational funding is likely to cut directly into investment in material production.This may reduce the economic returns from material production (or its profit growth rate),and inflate production costs (or bring down the cost reduction rate).In both scenarios,fiscal revenue and balance will be adversely affected,which may eventually trigger price increases.

However,we may see another possibility if we look a bit farther.Increasing educational investment is beneficial to both economic growth and the effort to maintain fiscal balance in the course of economic growth.Other things being equal,the source of increasing net revenues for an enterprise lies in its success in managing labor productivity to outgrow wage costs,expanding commodity production and reducing consumption of raw materials induced by improved labor productivity.As far as the entire national economy is concerned,increasing labor productivity to boost enterprise revenues is a reliable way to raise fiscal revenues and stabilize prices.In this light,the role of boosting educational investment speaks for itself.This is because,as I have said previously,increases in labor productivity can be regarded as an outcome of educational development.

This point of view can be further elaborated in three ways.

Firstly,insofar as its nature is concerned,education investment should be seen as a productive investment.Like investment in material production(such as building a factory or adding machinery and equipment),educational investment can also help increase the GDP.The difference between the two kinds of investment is that while investment in material production embodies itself in increasing the quantity and quality of material products,investment in education is reflected in workers’improved cultural and technical proficiency or in increasing the number of laborers who measure up to certain industrial or job requirements.The results of the former investment are plain for all to see,whereas the outcome of the latter can be easily overlooked,so much so that educational expenditure has for a long time been regarded as non-productive.If the role of education in promoting national economic development is still perceived in that old light,the inevitable conclusion is that adding educational funding can only upset fiscal balance.If,on the contrary,spending on education-an investment in human capitalis deemed conducive to heightening the cultural and technical proficiency of the workforce,thereby raising labor productivity and speeding up economic growth,then it is ultimately beneficial to fiscal balance.

Secondly,spending on education as a productive investment is characterized by a cycle that is longer than the construction cycle of the infrastructure,such as transportation and power supply.Of course there is no lack of cases in which educational spending brings quick economic returns,such as certain short-term training programs for technical workers.Generally speaking,however,it takes time to groom workers to a certain proficiency level in culture and technology,and it takes a much longer time to bring forth professionals of a certain caliber.Such facts give rise to the misunderstanding that education is like “distant water that cannot slake immediate thirst.”As a matter of fact,that misunderstanding can be averted if people take a strategic point of view and regard education as a productive investment capable of yielding lasting economic returns,and if they can see the continuous role education can play in economic growth.To put it another way,if you are frustrated to see money being spent on education year in,year out,then you must be patient enough to wait until the number of laborers of a high cultural and technical caliber starts growing with each passing year.Just as education spending has about the same long harvesting cycle as infrastructure investment,so it can bring the same significant benefits to the national economy.

Thirdly,as a productive investment,education benefits society with its salubrious effect on the national economy as a whole.That effect can be easily neglected if we lose sight of the whole picture of society and the national economy,or if our vision is limited to a certain region,industry or firm.Of course,the direct effect of education investment can be felt in an individual region,industry or firm,especially in the case of certain types of local school or a factory’s training school for technicians.This,however,is less important.Social gains from educational investment are a lot greater.Such gains are reflected,for one thing,in the fact that,by changing jobs or locations,educated workers will spread to all economic sectors and regions,and for another,in the improved scientific and cultural attainments of the entire population and the emergence of a rich crop of new inventions and innovations.Every invention or innovation is the fruit of long-accumulated investment in education,and,therefore,belongs to the entire society.With these inventions and creations,society is able to raise labor productivity,promote economic growth,improve workers’living standards and work conditions,create more jobs,and increase per capita national income.All these are the benefits society can reap from education.In all,if we shift our point of departure from a single region,industry or firm to take in the panorama of society,our judgment of the actual economic returns of education will not be limited to what a region,industry or firm has spent on education,nor shall our evaluation of the beneficial effect of education investment be restrained by the size of a partial investment.Clearly,even though increasing education spending in the course of economic growth may temporarily expand fiscal expenditure or curtail the income of some localities,from a long term point of view and by taking the overall situation into account,such spending is paramount to raising labor productivity,and effective in sustaining growth in national income and fiscal revenue.

Now that the benefits of developing education to the maintenance of fiscal balance in the long run are established,how should we look at the conflict between short-run increases in education spending and the need for fiscal balance?Let us return to the two hypotheses I have set at the beginning of this chapter.

Hypothesis One: Fiscal appropriation is,at present,the only source of funding for education.As a matter of fact,it is unnecessary to regard fiscal appropriation as the only source of funding for education,because nongovernmental fund-raising efforts hold great potential in this regard.How such potential should be tapped depends on the making and enforcement of government policy.We can save a huge amount of government spending on education as long as our policy allows non-government entities or individuals to run schools.Schools can be run effectively by involving non-government entities or collectives,and there is no lack of success in this field.I see nothing wrong with individuals running schools.Accomplished doctors,artists,accountants,translators and so on,are doing our nation and our youngsters a service by taking apprentices and teaching them knowledge or skills individually or by teamwork.These individuals are doing a lot of good to both the country and people when they run private vocational,technical or continuous education schools by tuition and cultivate talents for society without asking the government for a single penny.We would rather see young people in school than have them stay idle.As well as schools,an abundance of work-study programs are available for these people.To insist on running schools according to certain “rules”or “stereotypes”can do nothing but hold back development in education and put unwarranted burdens on the state treasury.

Hypothesis Two: Supposing fiscal revenue is fixed and defense and administrative expenditures have been pared down to a minimum,more spending on education can mean less investment in material production and result in fewer economic returns,to the jeopardy of fiscal revenue.Reality,however,has never been that simple.As we all know,investment in material production is just one condition for boosting aggregate production.There is at least another condition,and that is the economic returns from investment.If we can increase economic returns from investment in material production,speed up funds’turnover rate,and maximize the economic returns for every dollar spent,then we will see no reason why such investment cannot be downscaled.The former condition has been overestimated for a long time while the latter condition is overlooked,as if the more the investment is made,the higher the accumulation rate will become,with no consideration given to the economic returns of such investment.Astonishing waste is the inevitable result,and there is no lack of bitter lessons in this regard.Given a fixed fiscal revenue,why can’t we do more to raise the turnover rate of funds and improve the efficiency of investment in material production?To speed up the training of technicians and managers is an effective way to enhance the economic returns of investment in material production.As long as we can find ways to raise the economic returns of such investment,it will not hurt the aggregate output,companies’economic returns,or government revenue to develop education with money saved from it under a fixed fiscal revenue.

V

.Conclusion

In this study I have looked into the positive role education investment can play in tackling problems in employment,international payments,income distribution,and long-term fiscal balance in the course of China’s economic growth.We have no alternative but to speed up educational development by spending more money on it,if we are to ensure stable and sustained economic growth,tackle the nation’s “structural”employment issue and weaknesses in international trade,and coordinate the relationship between income distribution and economic efficiency.The economic history of other nations indicates that it is easy to achieve temporary economic growth,but difficult to gain stable and sustained economic growth on the basis of coordinated development in all fields of socioeconomic development.

In the West,class antagonism and other fundamental conflicts inherent in capitalism are worsening; and unemployment,inflation,international payment deficits and unequal income distribution are entangled with the need for economic growth in an insoluble mess.Even if these capitalist nations can increase investment in education,the best they can accomplish is to ease the situation temporarily-there is no way they can find real solutions to their problems.Despite that fact,since the 1960s Western economists have been emphasizing the role of education in economic growth and urging their governments to take human capital investment policy and human resource planning as important measures to ensure long-term economic growth.

Socialism is a superior system.Problems of one kind or another do occur in our economy,but these problems are not inherent in the socialist system.On the basis of eliminating private ownership of capital goods under capitalism and carrying out the distribution policy of “from each according to his ability,to each according to his work,”it should be a great deal easier for our nation to coordinate diverse social and economic interests in the course of economic growth.Education definitely has a bigger role to play in this regard than under the capitalist system.How is it,then,that education has not played such a role in the past?This question merits careful thinking.In my opinion,apart from long years of interference from ultraleftist ideology and the sabotage of the Lin Biao Clique and the Gang of Four,it also has a lot to do with our short-sightedness,our failure to consider socialist economic development from the viewpoint of national development strategy,and our lack of understanding of the role of education in long-term economic growth.To those who cannot see the nature and role of education in perspective,education is a “soft”task that can be laid aside or delayed at will.Something is amiss,however,with that line of thinking.Therefore,I wrote this article with the same intention as when I wrote my thesis “Technical education and capitalist industrialization: a study of the rise of technological power in Western Europe and America”two years ago.That is,to send this message to our government policymakers: You have got to put a premium on education!When you mobilize society to raise money and open up schooling opportunities for our workforce,please make sure you will increase fiscal spending on education by a wide margin and thereby accelerate the development of education in our nation.—Journal of Peking University (Philosophy and Social Sciences),issue No.6,1980[1]This speech was delivered at Peking University’s 1978 “May Fourth”Science Forum,and carried in Social Sciences Front,issue No.4,1978.

  [2]Referring to individuals who know that no suitable jobs are available but choose nTroatn tsola troerg.ister as being employed,even though they would prefer to have a job–Translator.

Effective and rational investment under socialism (1982)

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.

I.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.The amount of investment determines the degree of changes in economic scale.Therefore,for a given return on investment,economic growth rate is always predicated on a given rate of investment,i.e.,the percentage of national income spent on investment.

Investment always manifests itself as the primary driving force behind economic growth.The term “primary driving force”refers to the initial impetus that can set a stagnant economy on the track of growth.Without this initial impetus,no economy can be delivered from stagnation.

The relationship between supply and demand or between production and consumption may be thrown off balance in economic activity.The same can happen between economic sectors and between economic regions.If this lack of coordination is allowed to deteriorate further,it can bring down the economic growth rate or,worse,lead to zero or negative growth.Investment is indispensable if this situation is to be remedied and sustained economic growth ensured.Here,investment is still the primary driving force in adjusting economic structures,coordinating supply and demand,and maintaining economic relations in equilibrium.

Stagnant development of productive technology,worn-out equipment and outdated technological processes,misuse of equipment and raw materials,or failure to eliminate weak production links in good time in the course of economic activity can erode workforce productivity or inflict financial losses.If these conditions are allowed to continue,they will not only hold back economic growth but also adversely affect government revenue for the obvious reason that financial losses in enterprises invariably diminish government revenue.To reverse shrinking workforce productivity and compensate for enterprise losses,it is necessary to increase investment while adopting necessary management countermeasures.This is precisely where investment can be used as the primary driving force to renovate production technology,raise workforce productivity,and boost corporate profits and government revenue.

The reason why investment becomes the primary driving force on these occasions is that the significance of investment does not lie in the demand for it,but in the chain reactions it causes in economic activity.The demand arising from investment is,after all,limited,but the chain reactions it causes in economic activity can play a much larger role in national economy.

More investment means higher income,and higher income can stimulate investment.If this virtuous cycle can be made to last,a cumulative process will result in which investment brings along more investment,and income brings about still more income.This is how economic growth happens,how technology is upgraded and labor productivity grows,and how growth in corporate profit and government revenue are realized.By the same token,without the initial investment,there will be no subsequent investment; and without the income yielded by the initial investment,a constant flow of income will be out of the question.

This being the case,it is clearly unwise to underestimate or overlook the tremendous role investment can play as the primary dynamo behind economic growth.

My above analysis is,of course,built upon a given condition of management.It is not uncommon that mismanagement results in low labor productivity,sluggish economic growth,and financial losses.For this reason,this situation can be changed to a certain extent simply by improving management,without increasing investment.

My analysis is also based upon the initiative and motivation of the workforce.It is not uncommon that the lack of initiative or motivation,or the failure to motivate the workers and give full scope to their initiative limits workforce productivity to such a low level as to reduce the economic growth rate and incur corporate losses.In that scenario,we can also change the situation not by investing more but by taking proper steps to motivate workers and put the initiative into their hands.

II.Effective and ineffective investment

The effectiveness of investment rests with its ability to fuel economic growth,but not all kinds of investment have such ability.Investment may also be ineffective.Ineffective investment refers to the kind of investment that yields zero or negative growth.

Investment effectiveness or ineffectiveness has dual implications:microeconomic and macroeconomic.In microeconomic terms,investment becomes effective if it can boost the investor’s output (that is,increase the investor’s net output value).Otherwise,it is ineffective.In macroeconomic terms,investment becomes effective if it causes the national economy to grow (that is,increases national income); failing this,it is ineffective.Because all investment must go through certain processes from the start of the action to the yield of increases in production and national income,the time factor must be considered,that is,the length of interval from the beginning of investment to the date when output begins to grow and national income begins to rise.That duration varies in length with the situation in different sectors.However,no matter how long it takes,the effectiveness or ineffectiveness of investment hinges on whether the economic growth it has brought about is positive,zero or negative.

If the time factor is not considered,investment is ruled ineffective only if it cannot enhance production capacity or contribute to aggregate social product.Any investment can be ruled effective if it enhances production capacity or increases aggregate social product.Thus the number of ineffective investment should be kept low,because most investment can yield production capacity and add to aggregate social product after a certain period of time,thereby contributing to economic growth one way or another.

However,it is far from enough to judge the effectiveness of investment or the lack of it this way.The time factor must be taken into account,that is,the length of time it takes from the onset of an investment action to the realization of output and national income increases.I have defined effective investment at the beginning of this article as something that is prompt in bringing about production capacity.In other words,no investment can be effective if it is overly time-consuming.

You may wonder why my definition of effective investment should contain the word ”prompt.”In what light should we understand that word?How can we tell whether investment is effective or ineffective based on our understanding of that word?As we all know,investment refers to the occupation of a certain amount of available capital for a certain period of time,whereas the available capital occupied by investment is part of the newly created value in the national economy that may be put to other uses in material production.Used properly,it can raise aggregate social product and elevate economic growth.Therefore,investment entails a certain degree of “probable”or “potential”increase in aggregate social product and economic growth rate.If this amount of money used as investment is prompt in bringing about production capacity,this “probable”or “potential”increase can be converted into an actual increase in aggregate social product.If this amount of money is left idle,it will never yield actual increase in aggregate social product.If an amount of money that can be invested to yield production capacity promptly is left idle,it obviously means losses in aggregate social product and national economic growth rate.

Supposing this amount of money is used as investment but takes a longer time than usual to enhance production capacity,it does absolutely nothing to boost aggregate social product or economic growth during that extra inactive period of time.Because,in this regard,inactivity is synonymous with losses in both aggregate social product and economic growth.During that extra time this amount of money should be regarded as ineffective investment.Moreover,even after it has yielded production capacity and begun to contribute to aggregate social product,it must make up for the losses it has caused previously to the national economy.Only after that can it qualify as effective investment.

This is why,in assessing investment effectiveness,due consideration should be given to the time needed for investment to put together production capacity.

How,then,should the word “prompt”in the wording “being prompt in yielding production capacity”be understood?Because of the differences in industries and investment projects,it is necessary to use the average time it takes for a specific industry or investment project to build production capacity as the benchmark.Investment that takes less than the average time to achieve the anticipated result can be regarded as being “prompt.”The less time it takes to be effective,the “prompter”it becomes.Investment projects that take more than the average time to foster production capacity should be deemed “tardy in bringing about production capacity.”The more time it takes in this process,the “tardier”it becomes.

With this benchmark,the effectiveness or ineffectiveness of investment can be defined as follows:

(1)Investment that cannot yield production capacity or contribute to aggregate social product is ineffective investment;

(2)Investment that takes less than the average time to yield production capacity is effective investment;

(3)Investment that takes more than the average time to yield production capacity can be deemed effective only after it has reaped production capacity,contributed to aggregate social product,and made up for the losses it incurred during the extra time it took to yield such a production capacity.Before it has met these goals it should be regarded as ineffective investment.

III.Rational and irrational investment

No study of investment is complete if it focuses only on whether it has furthered economic growth or not.As the primary driving force behind economic growth,the positive role of investment lies not just in boosting aggregate social product and economic growth rate,but also in coordinating economic relations and goals of development.In that sense,investment is actually a balancing force in an economy,and hence investment is deemed rational only if it acts as such a balancing force.

Investment,however,may play an opposite role,that is,to disrupt the balances of economic relations and goals of economic development.Instead of keeping the economy on an even keel,it can throw the economy off balance or aggravate economic disequilibrium.Such is one of the attributes of irrational investment.

If investment is irrational,it may still help increase aggregate social product in the short run when it is effective.But in the long run,what appears briefly as effective investment can disturb economic relations,cause or aggravate economic disequilibrium,and result in a stagnation or downturn in aggregate social product.

Thus it is more important to see whether investment is rational or not than to judge if it is effective or ineffective.The concept of rational and irrational investment belongs in macroeconomic investment theory.When we talk about rationality or irrationality of investment,we do it in the context of macroeconomics.

Whether investment is rational or not depends on what role it plays in(1)economic growth,(2)price stability,(3)job creation,and (4)increase in labor income.Investment is considered irrational if it performs badly in one of these four fields,but it can be regarded as rational if it contributes to one field while the other three fields remain roughly constant.Investment becomes more rational if more such fields have improved while fewer of them remain constant.

Thus the definition of rational investment can be put more specifically:

As far as the role of investment in the aforementioned four fields is concerned,investment is rational if it has improved one of these fields while the others show no sign of decline.

If economic growth has picked up after investment is made,and the other three fields remain intact,that is,they have neither improved nor deteriorated,this is a typical case of effective investment also being rational,or to put it differently,effective investment and rational investment becoming the same thing.The minimum requirement for investment to be at once effective and rational is that it can at least promote economic growth while maintaining the status quo of the other three fields.

To combine effective investment with rational investment under that minimum requirement is just the starting point of arranging investment.We should try to improve all the four fields after investment is made.The more rational investment is,the more effective it becomes and the longer it can stay effective.The reason for this is clear: Without increasing aggregate social product,basic prices stability cannot be maintained,new job positions cannot be created in the national economy,and labor income will decline,and as a result,the national economy as a whole will deteriorate,and sustained economic growth becomes out of the question.

As much as the time factor should be taken into account when investment effectiveness or ineffectiveness is studied,the same should be done when investment rationality or irrationality is observed.This is because only by generating production capacity can investment play its role in coordinating economic relations,but it takes a period of time for that to happen.The length of this period is determined by the characteristics of the economic sector and the investment project in question.

What merits attention in this regard is that investment impacts price stability,the creation of jobs,and labor income in different ways.Before production capacity is generated,because there is only financial input and no output in aggregate social product,the amount of currency in circulation grows,which will have a negative impact on price stability.If,after production capacity is yielded,the growth rate of aggregate social product resulting from the investment is still lower than the growth rate of the amount of currency in circulation,it may still have a negative impact on price stability,a possibility that should not be overlooked.The situation,however,is different with the creation of new jobs.Investment may begin creating jobs immediately after it is made,because the investment action itself can absorb some workers.However,after investment has brought about production capacity,it may either increase employment (including the jobs created by this investment itself and the jobs created by other industries or firms under its impact),or reduce employment (including fewer job opportunities in other industries or firms under the impact of this investment and fewer job opportunities directly caused by the termination of the investment project).With regard to real labor income,apart from the investmentinduced changes in price level and employment that are likely to affect labor income,the investment-induced changes in labor productivity are a more important factor that inevitably affects changes in labor income.Before production capacity is realized,few significant changes will happen to labor productivity.Therefore,during the interval from the start of investment to the materialization of production capacity,changes in labor income are mainly related to changes in price level and employment,whereas after production capacity is created,changes in labor productivity will have an increasing impact on labor income.

Thus,to judge if investment is rational or not,not only its impact on price stability,job creation,and real labor income after it has brought about production capacity,but also its impact on these fields during the interval from the outset of the investment to the yield of production capacity should be observed.If the former impact is considered but the latter neglected,it is likely that the investment in question may have already had a negative impact,and a seriously negative impact at that,on the balance of national economy before it reaps production capacity.In that scenario,even if investment has generated new production capacity,its earlier negative impact on national economy may be so grave as to hold back the effectiveness of production capacity or offset its positive impact on balancing the national economy.

IV.Discrepancy between effective and rational investment

As I have pointed out in the foregoing,the criteria for judging effective investment are different from those for rational investment.The roles of effective investment and rational investment in the economy are different as well.Effective investment is not necessarily rational investment.Even if effective investment is also rational,it is not necessarily the most rational investment.On the other hand,although rational investment must also be effective,it may not be the most effective investment.The discrepancy between effective investment and rational investment is apparent.

For instance,a specific investment project or investment in one certain field may be effective because it can raise aggregate social product,but it may have a negative impact on price stability by taking up so much funding for so long as to affect the amount of currency in circulation before it creates production capacity.After creating production capacity,the investment in question may also diminish the job positions it has created and cause other industries and firms to reduce their job positions.Even if it has created production capacity,the investment can still cause real labor income to dip due to price changes,job market fluctuations and declining labor productivity.Given these possibilities,and by taking its multiple goals and the balance of national economy into consideration,effective investment is likely to be irrational or have just a small degree of rationality at best.

Observed from the perspective of multiple goals and the balance of national economy,a certain investment is rational because it has improved at least one of the four fields-economic growth,basic price stability,job creation,and labor income-while the other fields have shown no sign of deterioration.However,because rational investment has to attain multiple goals,its capacity to boost aggregate social product may be lower than maximal (for instance,if the investment is not put into a highly sophisticated automated factory),although it can still boost aggregate social product to a certain extent.In this case,it cannot be counted as the most effective investment.

How,then,should we deal with the discrepancy between effective and rational investment?We may study the question from a normative or a positive approach.

A normative approach calls for realigning the goals of investment in the order of importance,urgency and priority of the multiple goals that the investment aims to attain.Then overall consideration should be given to the problems to be solved through this investment and the means of solving these problems,so as to find out to what extent effectiveness and rationality of this investment can be coordinated.According to the aforementioned definition,investment is rational if it has improved at least one of the four fields while the others show no sign of deterioration.The question now is which one of these four fields should be improved first.The answer must be based on a study of the actual situation to see which one of the four goals is most attainable.However,the answer also involves judgment of values,that is,which goal is more important and which goal is less important.To observe investment through normative analysis is to prioritize the four goals from judgment of values in order to make rational investment.

The positive approach follows established norms and rules,or is based on the assumption that all goals are equally important,to find ways to coordinate effective and rational investment.The solution to the discrepancy between effective and rational investment is related not only to the preconditions of a given investment but also to the methods of raising and operating the fund needed for this investment.The next chapter explores,from the viewpoint of positive study,the preconditions of investment and how to raise and operate the fund of investment.

V.Resource and marketability for effective and rational investment

The shared attributes of effective and rational investment are that,firstly,both can only take place where there are sufficient and usable economic resources,and secondly,there must be markets for the products of the production capacity they have created.In other words,economic resources and marketability are prerequisites for investment to be at once effective and rational.

Economic resources fall into two categories: material and human.Material resources,that is,means of production,include production equipment,raw materials,fuels and power,means of transportation,and storage facilities.Human resources encompass unskilled and skilled labor force,the latter including technical and management professionals.These resource conditions are indispensable for every investment project.

Now that effectiveness of investment hinges on its speed in putting together production capacity and boosting aggregate social product,it is difficult,or even impossible,to turn investment promptly into production capacity in the absence of means of production and human resources.Even if an investment project has been completed,it still cannot increase aggregate social product if it has no sufficient supply of means of production-such as raw materials,fuels,power,and spare parts for maintenance and repair purposes-and adequate labor force,or if transportation,storage and other factors fail to meet production needs.In this regard,investment-the primary driving force behind economic growth-is based upon the adequacy of useful economic resources.Investment can put together production capacity rapidly where idle productive resources and a variety of idle workers are available.It can also quickly bring about production capacity where productive resources and labor force are unavailable but can be obtained through minor readjustments,or where economic resources are in short supply but there is an adequate foreign exchange reserve to be used to buy those deficient resources from foreign markets.However,in the latter scenario,things tend to be complicated because it involves the balance of foreign trade and of international payments.In the absence of all the abovementioned conditions,investment becomes ineffective because it cannot promptly create production capacity.

Given that the rationality of investment is determined by whether it can meet the four goals of economic growth,basic price stability,job creation,and real labor income,effectiveness-that is,promptness in creating production capacity-becomes the minimum requirement for rational investment.Because adequate supply of economic resources is a prerequisite for the speedy creation of production capacity,such supply must also be guaranteed for rational investment.Otherwise it cannot meet all four goals at the same time.

The next consideration is the market conditions for investment,that is,the product salability of an investment project.Whether such a product is made for production or consumption purposes,there must be people willing to buy it at a certain price.If production is carried out only for the purpose of meeting certain output quotas and the product cannot be sold out and has to be piled up in warehouses,the investment will not be able to contribute to economic growth.This conclusion is understandable,because investment can be rational only if it contributes to aggregate social product,maintains basic price stability,creates new jobs,and increases real labor income.Those roles can never be realized if nobody wants to buy the product of an investment project.Furthermore,investment may have a negative impact on prices and labor income if its product cannot be sold out.Such investment is irrational.

Is product marketability also a prerequisite for effective investment?Because whether investment is effective or not is determined by whether it can bring about production capacity promptly and boost aggregate social product,people may argue that the effectiveness of investment is irrelevant to product marketability.They believe that investment is effective as long as it can produce a certain amount of products,regardless of product salability.In their eyes,investment becomes ineffective only if it cannot create production capacity or cannot do it fast enough-investment should not be deemed ineffective if it can bring about production capacity speedily even though its products are unwanted on the market.This idea,undoubtedly,is not correct.

This idea is wrong in that it only accepts the literal meaning of production capacity,and severs production capacity from product marketability.It is,therefore,a misunderstanding of production capacity.We know that the production capacity of a factory built with an amount of investment is only nominal if it does not produce and supply products.If the factory’s products cannot meet market demand and only belong in warehouses,this factory is a non-factor at best because of its failure to supply society with usable products.We would rather this kind of factory did not do anything,for the fuel,power,raw materials and so on it consumes could have been used for meaningful purposes.Therefore,production capacity created by investment should be real,rather than nominal.It should supply society with marketable products instead of things that cannot be sold out.If the effectiveness of investment and the creation of production capacity are understood in that light,product marketability must be regarded as a precondition for effective investment.

The argument that the effectiveness of investment is unrelated to the marketability of its product exactly mistakes nominal production capacity for real production capacity.The effectiveness of investment rests in real,rather than nominal,production capacity it creates.

VI

.Profitability of effective and rational investment

Investment profitability is an important theoretical issue.Even if the product of an investment project can be sold out,what will be the consequences if it can only be sold out at a lower price than its production and interest costs?

First of all,this kind of investment cannot be recouped in that case.Moreover,even after the investment project is completed,further expenses are needed to keep production going; otherwise even the original scale of production cannot be maintained.This kind of investment,even if it can bring about production capacity and its products are marketable,poses more losses than gains,and should never be allowed to happen.

Nevertheless,if we extend our vision from an individual investor to the entire national economy,different opinions may occur on investment profitability.

The national economy is an integrated entity,in which all sectors are organically connected.Some sectors or firms may have the needed economic resources and their products can meet market demand.But,for one reason or another,their products are priced equal to or lower than their production costs and interest expenses,and therefore,they cannot generate a profit.Should investment be made in such a sector or firm?Is profitability an overriding condition for investment?It seems that neither question can be answered with a simple yes or no,because both involve how the macroeconomic effectiveness of investment should be measured.

As illustrated in the previous chapter,effective investment has both macroeconomic and microeconomic implications,while rational investment belongs in the macroeconomic realm.Observed from a macroeconomic point of view,some kinds of investment in certain sectors or firms are unlikely to make a profit,but can contribute to faster growth in other sectors or firms and to the balance of national economy and coordination among investment goals.This kind of investment is still necessary,and can be regarded as both effective and rational.

Defenders of investment that is at once ineffective and irrational in practice may also cite the macroeconomic effectiveness of investment to back up their argument that this kind of investment should not be cancelled.They may accuse those who want to do so of lacking macroeconomic farsightedness.They can always find a “reason”to justify any investment project they like,arguing that it is so important to the national economy that it cannot be ditched even if it is not making money.Indeed,this issue can easily become controversial,and can never be settled if we accept the existence and significance of the macroeconomic results of an investment project without setting benchmarks for its effectiveness and rationality in macroeconomic terms.

This is where econometrics comes in handy.Despite its limitations,the methods of econometrics are still useful for analyzing investment effectiveness and rationality in macroeconomic terms on certain occasions and under certain premises and presumptions.

The resource and market conditions for investment should be considered in the first place.Investment,no matter what kind it is,must be guaranteed with an ample supply of means of production and human resources,both of which are prerequisites for production capacity.The products invested in should also meet market demand,otherwise they can only become part of warehouse stockpiles and their production capacity is nominal at best.Various econometric methods can be employed when we analyze the resource and market conditions for an investment scheme.Generally speaking,the input-output analysis can be employed to determine the situation regarding resource supply and market demand.

The conditions for investment profitability come next.Investment profitability in microeconomic terms can be computed with cost-benefit analysis.Relationships in this regard are relatively simple.By factoring in the given output and price conditions,as well as production costs and interest expenses,we can clarify whether an invested project is making or losing money.Then the deadline for recouping the investment-normally a major benchmark for judging the microeconomic effectiveness of an invested project-can be set with reference to the production cycle.

The situation is a lot more complex when it comes to judging if an investment project is making a profit or not from a macroeconomic perspective.Investment rationality in the field of material production and investment effectiveness in macroeconomic terms cannot be studied without comparing various relations in the national economy and dissecting the input-output relationship between sectors in the national economy.If the product of Sector A is not only supplied directly to consumers but also needed by Sectors B,C and D for their production,while the products of Sectors B,C and D are also both supplied directly to consumers and needed by Sectors E,F,G and H for production purposes,and if that cycle goes on and on,then the results of follow-up investment in Sector A will be reflected not just in that sector’s augmented income but also in the augmented incomes of Sectors B,C,D,E,F,G and H.Suppose there is a certain ratio between income and employment,then the results of follow-up investment in Sector A will be reflected not just in its increased number of jobs but also in the changes that have taken place in the number of jobs in the other sectors.Using counterfactual analysis,we can compare the results of the following two approaches: first,to study total income,net income,employment and other variables before Sector A was invested in; second,to study the changes in the variables such as total income,net income,and employment in the other sectors after Sector A was invested in.From this comparison we can get to know the degree of profitability of investment in macroeconomic terms.Suppose that a certain investment project does not make money for itself,but contributes to the growth in total income,net income and employment in other economic sectors,and the benefits to the national economy from the growth in these sectors outweigh the losses caused to the national economy by the investment project’s failure in making a profit,then the investment can still be considered as a gain to the national economy.As a matter of fact,there is an investment-recouping period for the project,but such a period is reflected in the national economy.If,on the contrary,a comparison of the two approaches indicates that the investment does make a profit for itself but has inflicted losses in total income,net income and employment on other sectors,or that the investment is losing money while these sectors’increases in gross income,net income and employment are negligible so that the benefits the investment has yielded for the national economy are barely enough to offset the losses it has inflicted on the national economy,such an investment is deemed detrimental to the national economy.If allowed to continue under the excuse of cherishing its macroeconomic results,the said investment becomes irrational,and-in macroeconomic terms-ineffective as well.

VII

.Relationship between investment fund supply,public finance and investment

To make investment both effective and rational,due attention must be paid to the supply of funding.Suppose an investment project has favorable resource and market conditions and its product can be sold briskly enough to guarantee an after-sale profit,but it cannot continue or has to stop midway because of fund shortage,then it cannot put together production capacity in good time,and cannot become effective investment.Furthermore,this kind of investment is irrational because it is a loss to the national economy when the money spent fails to yield production capacity.

If,on the contrary,an investment scheme can yield production capacity promptly but spends too much to achieve the purpose,it may also disrupt public finance or money circulation,thereby exerting an adverse impact on price stability.Thus it can never become rational investment.

What can be done to avoid improper supply of funding and ensure effectiveness and rationality of investment?Let us begin answering this question by studying the relationship between investment and public finance.

Under socialism,fiscal appropriations are an important source of reinvestment.They generally have a direct impact on the volume and scale of investment and its effectiveness.More importantly,the impact of such appropriations also extends to the relationship between the multiple goals of investment and to investment rationality.

When we try to coordinate the relationship between economic growth and basic price stability,we face the urgent task of preventing the demand for monetary funds from running out of control,or,to put it another way,we must prevent the amount of currency in circulation from growing too fast.Inflation is eventually attributed to the failure of the growth in aggregate social product to outpace the growth in the amount of currency in circulation.Inflation can be prevented or erased only by boosting the growth rate of aggregate social product,reducing the growth rate of the amount of currency in circulation,or both.

Fast growth in the amount of currency in circulation is mainly an outcome of fiscal deficit or bank credit expansion.Therefore,when there is a serious fiscal deficit,especially when such a deficit has lingered for several years,fiscal appropriation designed to increase investment funding must be used cautiously.Otherwise the amount of currency in circulation may be further increased.

However,insofar as investment is the primary driving force behind economic growth,the lack of sufficient investment can neither boost aggregate social product nor change the situation where aggregate social product grows slower than the amount of currency in circulation.Tightening up investment alone can neither eliminate fiscal deficit nor effectively keep inflation away from the door.This is because economic sectors are interlinked and only by constantly restructuring these sectors and their products can the proportional relationships in the national economy be coordinated.However,restructuring sectors and products calls for followup investment on most occasions.If investment is tightened up merely to eliminate deficits and forestall inflation,the national economy will fall further out of proportion and coordination.Worse,it can also land some industries or firms that may expand production and make a profit in financial loss,thereby doing a disservice to the effort to turn the fiscal situation around and eradicate inflation.

From the perspective of increasing aggregate social product,technical renovation and equipment upgrading are material conditions for labor productivity increases,but both call for follow-up investment.If investment is tightened up merely to wipe out deficits and forestall inflation,it is very difficult to boost labor productivity and aggregate social product by improving their material conditions.Furthermore,if other conditions remain unchanged but equipment cannot be upgraded for lack of necessary investment,workforce productivity will decline.As a result,the industries and firms that could have been producing and making a profit will lose money,and public finance and the effort to control inflation will be jeopardized as well.

To ascribe the rise of financial deficits or inflation merely to investment growth is to oversimplify a complex matter.Effective and rational investment is actually an important means by which to eliminate deficits and inflation,rather than to aggravate them.It is ineffective or irrational investmentinvestment that drags on and fails to yield production capacity,investment in unmarketable products,investment that is made in marketable products but incurs heavy losses or distorts economic relations-that should be held responsible for deficits and inflation.

This being the case,what merits the attention of the fiscal department is that they should curtail or cancel all the investment projects that lack resource and market conditions or fail to yield macroeconomic returns.However,investment projects that yield production capacities promptly,produce marketable products,make profit,and are conducive to the growth of total and net income of various sectors in the national economy,should not be curtailed or axed.Effective and rational investment is a dynamo behind a robust and booming national economy,and a robust and booming national economy is the solid foundation of public finance and a guarantee for stable fiscal revenue.The financial department can avoid inappropriate supply of investment funding as long as it takes a scientific attitude toward investment,that is,to invest in what should be invested in and not to invest in what should not be invested in.

VIII

.Choice of investment funding raising channels

Fiscal funding is a major financial source for investment,but certainly not the only source for it.Under socialism the money needed for investment purposes comes from at least four avenues: fiscal appropriations,non-governmental fund-raisers,business reserve funds,and bank credits.

Short-,medium-and long-term bank credits can be used as a source of money for all purposes of investment.Their strength lies in that they can urge investors to tighten up financial auditing and pay due attention to the microeconomic results of their investment projects.The bank,by screening investment plans and monitoring the spending,plays a definite role in enhancing the macroeconomic results of investment.

Apart from money raised by way of savings and bond purchases,the funds from non-governmental sources also include the money procured from people of all walks of life to run cooperative firms and boost domestic development.

Business reserve funds refer to the portion of profit that firms are allowed to retain on the principle of autonomy to buy equipment,upgrade technology,expand production,reduce costs,and increase output.

Of the four major sources of funding,fiscal funding is not always the principal one.People can make their choices according to investment needs and financial situation.No matter what source is chosen,however,the aforementioned investment conditions should always be kept in mind.On no account should ineffective and irrational investment be made.Whenever an investment project gets off the ground,no effort should be spared to maximize its effectiveness and rationality.

A point that can be easily forgotten is that non-governmental fundraisers are not only a substitute for government investment but also a method to withdraw money from circulation.The role of such fundraisers in substituting for government investment comes through when investment projects originally to be funded with fiscal appropriation revert to social fund-raising.However,investment is not just a supply of money.Guaranteed material supply is indispensable,too.The money raised from non-governmental channels needs to be spent on means of production.However,means of production needed for investment purposes are basically provided by the government department in charge of supplying them.If the government department does not possess sufficient means of production needed for an investment project,it means that the resource conditions for the project are not ripe.Just as I have said in my analysis of investment conditions,investment without adequate supply of means of production is ineffective and irrational and,therefore,should be abrogated.By the same token,if a nongovernment-funded investment project fails to get off the ground,it will not adversely affect the national economy.If the government department has sufficient means of production for an investment project,it means that the material conditions are ripe and that the project in question can be undertaken.In this case,the government department contributes to the national economy by supplying the needed means of production and withdrawing money from circulation.Otherwise,if non-governmental funding is replaced with fiscal funding,it cannot withdraw money from circulation even though it could also be used for investment purposes.

From another point of view,in the absence of fund-raisers,what is the best use for money held in non-governmental hands?This kind of money may end up in banks as saving deposits,or be spent on consumer goods.If it ends up as saving deposits,banks will have to think about how to put the money to good use.When there is investment demand,supply of money by bank credit plays the same role as non-governmental money-raisers.However,if the money does not become saving deposits but is spent on consumer goods,especially on those in short supply,market supply will be strained.For this reason,if investment conditions are suitable and money can be raised from non-governmental sources,such investment projects are more rational than others.—Finance & Trade Economics,issue Nos.1 & 3,1982

Basic thoughts on economic restructuring(1986)

Years have passed since economic restructuring came under way in this nation.What is to be done next?Here I would like to share

my thoughts,which come in twenty-eight points,and involve seven issues altogether.Some of these ideas may be controversial,but I see controversy as a good thing.Without discussion and debate,there will be no economic prosperity.

I.Ownership reform holds the key to economic restructuring

(1)Economic restructuring may break down if price reform fails.The success of economic restructuring,however,hinges not on price reform,but on ownership reform,which entails revamping the corporate system.This is because price reform serves the main purpose of shaping an environment in favor of the growth of the market economy,but only ownership reform or corporate system reform can address such issues as interests,responsibility,motivation,and incentives.

(2)The purpose of ownership reform is to build state firms truly liable for their own gains and losses.Being “truly liable for their own gains and losses”means that,for one thing,firms should bear all the consequences of financial losses,and for another,gains and losses must be symmetrically treated not only for firms but also for their leaders.The most crucial task of ownership reform is to make state firms really accountable for their successes and failures,and,even more so,to answer the question of what is to be done with firms in the red.Symmetrical treatment of gains and losses means that firms should enjoy their profits while absorbing their losses rather than passing the ball to the state,which is exactly what firms are doing today.Taking responsibility for their own losses will stimulate them to improve management.The reason why some non-state firms can stay dynamic and motivated under pressure is because they can treat gains and losses symmetrically-meaning that they have all the economic gains to themselves while being totally liable to economic losses,bankruptcy included.As things stand in this nation,the best that can be done with a failing state firm is to demote its general manager or shift him to another post.This way of doing things cannot be sustained.Gains and losses must be treated on a balanced footing.Mismanaged firms should go bankrupt,and bankrupt firm should be liquidated.There should be both a bankruptcy law and a social security act,and issues such as reemployment for layoffs should be tackled in real earnest.

(3)Collective firms may adopt the shareholding system.State firms may also be transformed into shareholding companies,holding companies,or socialist enterprise consortia.

The shareholding system talked about here is not about selling stock shares to workers or other individuals (although of course,some of the shares can be sold to workers and other individuals),but about distributing interests among public owners according to the number of shares they hold.There can be a variety of public shareholders.After a state firm has its current assets evaluated,its net assets should be counted as state shares because they come from state investment.The investment added by a local government to a state firm becomes locally owned state shares,while the shares in the firm’s possession come from its own investment.In addition,investment made by other state enterprises also becomes shares owned by these enterprises.The positions of the stockholders on the board of directors are arranged according to how many shares they hold,but it is the board of directors that decides the policies and principles for a shareholding firm.Only in this way can the difficult problem of detaching government administration from business management be effectively addressed.The board of directors is established through the shareholders’congress.In this case,all shareholders are public owners.In such a structure,even if some shares are sold to individuals,they are unlikely to take up a large portion of the total stock.

The holding company system is another option that works under public ownership.Once a state firm becomes a shareholding company,its shares can be put up for sale.In the West,a holder of less than 51% of the shares of a company can control it and turn it into his branch company.We can do the same.If,under the holding-company system,a powerful state company can turn itself into a socialist enterprise consortium by buying shares to control a number of companies,it can change the behavior of these companies,and shift their focus from short-run business to long-term operations with a broad strategic vision.In that position,the socialist company can adapt its policy decisions to long-term development goals.Whatever it does,an enterprise consortium must take the overall scheme of things into consideration.For instance,it can take the lead in oil development in northwest China.If it has foreseen a boom in the petroleum industry coming to that region in a few years,it may consider investing part of its profits there.To boost development,it may also engage in trans-sectoral or trans-regional business operations in return for an average internal profit.China’s western region should not be developed piecemeal by an assortment of small concerns,but should be handled by such giants as socialist consortia.

(4)The tactics for ownership reform should differ depending on industry,locality,and business size.Firms may be categorized into industries according to their importance to the national economy and the scarcity degree of the resources they need,before deciding which industries should be shored up first and what kind of firms-public,collective or privateshould be developed in the main.Such industries and enterprises should also be considered in the light of local conditions,and categorized according to their sizes.Large state firms in important industries or regions should be preserved,while other companies can be leased or subcontracted out; some of them can be sold to collectives or individuals.In this way,the state can let go of most small firms in order to keep those essential companies that form the backbone of the economy under socialist ownership.These “backbone”firms may be developed into competitive socialist enterprise consortia,or transformed into multinational corporations that will be a force to be reckoned with on the world market.At the end of the day,however,they will remain state owned.

How about medium-sized and small firms?This depends on what industry is in question.Their shares can be sold to collectives and individuals to create companies under mixed ownership.

This design of ownership reform holds the key to the success of economic restructuring.Once it is translated into reality,it will impart motivation,a sense of responsibility,incentive,and interest in our enterprises,and diversify ownership and management without sacrificing the leadership role and dominance of public ownership.

II.The need for a relatively complete market

(5)Market can balance supply and demand with its self-regulatory function,but it also has limitations that can only be overcome with government regulation.However,this does not mean government can do it all,or that market is needed only when government is weak.In my opinion,the relationship between government and market should be interpreted in this way: Market enables the economy to regulate itself and coordinate supply and demand,but needs government regulation to make up for its shortcomings,such as its limited resource supply and incomplete economic information system.The bottom line for economic restructuring is that the socialist economy should be a market economy in the first place,and then a market economy supplemented by planning.

(6)Market regulation coexists with government regulation.They supplement each other,but are not mutually interchangeable.They combine to form a dual mechanism,which,nevertheless,is not the combination of two separate elements.Government regulation must take market regulation as its starting point,and works merely to pick up the slack of market regulation.Market prices are greatly variable.Besides free prices resulting from complete competition,there can also be prices from incomplete competition; and state-regulated prices must be based on a wide variety of market prices although there can be discrepancies between planned prices and market prices.The causes and magnitudes of such discrepancies are subject to government regulation,which should still take market prices as its basis.

(7)A relatively well-functioning market mechanism cannot be transplanted; it can only grow to completion by itself in an economy.In the past,it could not grow in this country because it lacked a salubrious environment,i.e.,a socialist market economy.Today,it can grow and improve over time,as long as we are resolved to put a socialist market economy in place.Please note that I am using the term “relatively wellfunctioning”to describe my idea of a market mechanism.The market mechanism cannot become completely competitive the way things are in China under the current circumstances.We should be fully aware that our economy is limited by scarcity in resources,and that government regulation is needed to supplement market regulation.

(8)A socialist market system should encompass four markets.First,a commodity market that entails a consumer goods market and a capital goods market.A real estate market should also be included,because commercial housing is an inevitable trend in our economic development.Second,a capital market which includes a securities market.Once the shareholding system is introduced,a securities market is needed; otherwise,share flow and trading will be out of the question.The securities market can be regulated,and specialized securities markets set up.Where conditions are immature,banks may act as intermediaries to issue and deal in stock shares,or work as brokers to mortgage stock shares or discount them for cash.Third,a technology market for payable transfers of research and development results.Fourth,a labor market,or service market.Having never been opened to free competition,our labor market is fragmented and differs across localities.Given labor’s limited lateral and vertical mobility,the labor market can only grow gradually.

We have got to develop a unified commodity market in which nationwide circulation of consumer and capital goods is allowed.If such goods cannot be circulated nationwide,the reasons are more economic (such as high costs and low economic returns)than non-economic.The capital market referred to here should be unified nationwide as well.If capital cannot circulate across the land,it should likewise be attributed to economic causes,rather than government interference and other non-economic factors.

III.Raising government efficiency

(9)Effective economic decisions,policy enforcement,and economic supervision are hallmarks of a highly efficient government.A government with little or no work efficiency is invariably crippled by legislation that is absent,bypassed,laxly enforced,or simply superseded by state power.An inefficient government plus an incomplete market can scuttle economic reform no matter how good the reform plan is.Therefore,to make economic restructuring a success,we must raise government efficiency without fail.

(10)Government efficiency is more needed in economic regulation than in government intervention,more for indirect market control than for direct market control,and more for guidance planning than for central planning.We should be aware that managing the economy has become more challenging after economic restructuring came under way.The efficiency level of our economic administrators leaves a great deal to be desired.We must speed up training to raise their overall quality and proficiency,for only thus can government efficiency be boosted effectively.

(11)We should relinquish planned management if it is arbitrary and unscientific,and dismantle economic regulation if it is ineffective and arbitrary.In either case,we would let the market mechanism run its course.Thus,the kind of government regulation that is paired with market regulation should be scientifically viable and highly efficient.The dual mechanism does not mean market regulation and government regulation are both indispensable.Government regulation should be predicated on scientific feasibility and high efficiency.If we reject willful government intervention and bring the role of the market mechanism into play,at least we can boost the economy during fluctuations.The involvement of a bull-headed government can only inflict stagnation or setback on our economy-what happened in 1958 across this land was a typical case in point.We should learn to differentiate between sound and unsound government regulation.Sound government regulation is good in that it can overcome market failures;unsound government regulation can do nothing but nullify the self-regulatory function of the market mechanism.The market mechanism can strike a general balance between supply and demand and facilitate economic growth,even though it may take more time and is likely to cause major fluctuations in the course of it.If we can see the dual mechanism in such light,we are able to open up new horizons.

(12)Administrative reform is a must if government efficiency is to be raised.The system whereby government officials are selected and appointed must be overhauled.We should evaluate the performance of civil servants within a framework that holds them accountable for the goals set for their tenures.It makes no sense that these people can only be promoted and not demoted.It makes little sense,either,that people can be both promoted and demoted.Of course,there should be both promotions and demotions,but only competent officials should be promoted and incompetent ones demotedno exception should be made in this regard.Only thus can the government work efficiently,and institutional reform be speeded up.

IV.Entrepreneurship and socialist entrepreneurs

(13)China needs legions of socialist entrepreneurs as much as it needs entrepreneurship.Our entrepreneurs should have strategic vision,dare to innovate and create,be pragmatic and imbued with organizational and business acumen.In economic restructuring,socialist entrepreneurs should be protected,and their talent given full scope.Without entrepreneurs and entrepreneurship,the economy will be sluggish even if the ownership system is transformed,and even if shareholding firms,enterprise consortia,and newtype state firms are established.As argued above,ownership reform holds the key to economic restructuring.But the next question is: Who are to run the restructured state firms,and to use their talent to inject life into these firms?None other than entrepreneurs.Without entrepreneurs,ownership reform can get nowhere.Entrepreneurship is essential to ownership reform.In the years of reform,we should never lose sight of the importance of entrepreneurs and entrepreneurship.

(14)Socialist entrepreneurs do not come forth by doing the government’s bidding,nor can they be groomed in a “greenhouse.”Their destiny is bound up with the development of the socialist market economy and with the economic activity of their enterprises,where they come to the fore through competition.We should keep an eye on businesses in adversity,rural firms included,for these are where socialist entrepreneurs are likely to emerge.We should go to medium-sized and small firms and those run by farmers if we are to find socialist entrepreneurs.Because those who can emerge unscathed from unfriendly territories at least have the makings of an entrepreneur.“Socialist entrepreneurs are born of pressure.”That line sounds realistic to us all.Entrepreneurs born of adversity are the only people who can bring a competitive edge to our firms.

(15)Entrepreneurs and entrepreneurship are fruits of the market economy.The farther the socialist market economy advances,the more entrepreneurs will turn up,and the more impact entrepreneurship will bring.The burgeoning socialist market economy can provide a constant supply of entrepreneurs-this is more effective than putting a lot of factory directors or managers through advanced training courses.Without a market economy we will not be able to produce so many socialist entrepreneurs.By the same token,our university economics departments cannot necessarily cultivate entrepreneurs even though they are doing a fair job of instilling basic economics knowledge in students.

(16)Enterprises must be allowed to go through a “metabolic process”in which the new supersedes the old.Ill-managed enterprises should call it quits or be closed down,phased out,or liquidated.For a certain percentage of enterprises to go bankrupt on a yearly basis is not the end of the world for the socialist economy.The platform for the socialist market economy should be preserved for emerging,dynamic,and competitive enterprises.Market competition is a whirlwind that can dispose of outdated and inefficient firms and preserve competitive ones.But more importantly,it can level the ground for more enterprises to grow.Such is the process of innovation.Such is the way socialist consortia come to stay,and the way socialist multinational companies carve out a niche in the world market.Only in this way can our economy respond to the pressure of competition and brim over with vitality.

V.Economic norms based on socialist ethics

(17)Social inequity spawns social instability,but social instability does not necessarily stem from social inequality.Income disparity may spur efficiency,but efficiency does not necessarily come from such disparity.In an objectively equal society,if the standard of living first rises and then drops,with increase outstripping decrease,the irreversible nature of consumption,income,and wages can also work psychologically to cause social unrest.In an objectively equal society,there are people who work harder and make more money than others,but there are also those who work less and are paid less.If those who make less money refuse to accept the fact that they do less than others and claim that they have been taken advantage of,they are likely to stir social instability.If the income gap exceeds a certain limit,it can affect efficiency and drive some people to despair and indolence.That is why in the socialist economy,the relationship between equality and efficiency should be handled properly.Equality,as we understand it,entails turning workers into owners of capital goods,equal opportunities for all and distribution according to work done.Efficiency,as we understand it,is also based on public ownership of capital goods,on equal opportunities,and on the principle of distribution according to work done.Only with this understanding in mind can the relationship between equality and efficiency be well handled.

(18)From an economic point of view,despite its limitations,the market mechanism enables the economy to grow amidst fluctuations.From the perspective of social coordination,however,the limitations of the market mechanism are more pronounced,for the market itself cannot coordinate social development.We do not seek economic growth for growth’s own sake.Rather,economic growth should be consistent with coordinated social development.Efficient government regulation is needed because its impact is both economic and social.The social impact of government regulation manifests itself in regulating income distribution while ensuring economic growth,an impact that is mandated by the socialist goals for socioeconomic development.Thus,in the course of economic restructuring,progressive income tax,income-adjustment tax,and allowances for low-income families are needed,but should be kept within reasonable bounds to ensure economic growth and social harmony.At the same time,however,we have got to know that we cannot do without these taxes and allowances in securing economic growth and social harmony.This is exactly what economic reform is all about.

(19)An important task of socialist cultural development is to foster new values.For instance,what is “equity”?What is “employment”?What attitude should we take toward the policy of “allowing some people to get rich first”?These questions should be considered in a new light,so that we can clarify the dos and don’ts in economic restructuring,and know what to strive for and what to give up.People tend to cling to things not worth their devotion.To change that habit calls for a change in values.We cannot make a sound judgment on economic restructuring without changing our values.

(20)The concept of family and the small-time producers’belief in egalitarianism are at the core of the Eastern cultural tradition,whereas individualism is the nucleus of modern Western culture.The two are mutually conflicting.Those of us who live in a developing nation striving for modernization on the basis of traditional Eastern culture invariably find ourselves torn between these conflicting values.What we pursue is socialist modernization,and the problem confronting us is not so much to choose between the values of our traditional culture and the values of the modern Western culture as to go beyond these two cultures and explore new values that suit socialist ethics.This is a hard nut to crack,but we have to do it.In that sense,to change our values calls for an even more profound revolution than economic restructuring,a mission that cannot be fulfilled in just one generation’s time.We have to be fully aware of the arduous and protracted nature of this mission.

VI.Immediate issues to be handled in real earnest

(21)Extending lateral ties in the economy is a major immediate-term task for economic restructuring.Only by extending such ties can we unify our commodity market,gradually bring about a capital market,and lift the barriers resulting from the interference of central and local government boundaries.This task is of paramount importance.If we cannot promote lateral economic ties between firms and let them collaborate and exchange with each other in capital,labor,and technology,and if we do not allow one company to sell its products on another company’s turf,we can never build a workable market mechanism and break down the barriers between central and local government boundaries.This task is high on the agenda of the immediate round of economic restructuring.As we build on what we have accomplished so far to go on with economic reforms,the main thrust of our endeavor should be to extend lateral economic ties.

(22)As things are today,excessive investment in infrastructure construction remains the number one headache in the Chinese economy.Overheated consumption funds can only take a second seat.This does not mean excessive increase in consumption funds should not be controlled,but that it is not our primary concern.Make no mistake about it,the consumers in our nation have money to spend in return for the material products and labor services they have provided.Income is always relevant to supply.If the control of consumption funds is overly tightened up,it can stifle supply and demand at the same time,and its side effects on economic development will be felt sooner or later.In regulating the economy,aggregate demand and supply should be properly controlled.On no account should we cut supply while curtailing demand.I believe premature consumption should be avoided,but there is no reason to say that China today is already in a period of premature consumption.Of course we should draw a lesson from other developing nations’experience and forestall the emergence of premature consumption.There are two telltale signs for premature consumption.One is an excessively low saving rate.By contrast,the saving rate in our nation is maintained at 30%,which is deemed a high level.The other is that the lion’s share of scarce resources is overused by a new mode of consumption.For example,production will be affected if too much petroleum is consumed in everyday life.That scenario is yet to be experienced in this country.Clearly,there is no trace of premature consumption in China today.

(23)Equilibrium is part of an analytical approach,and the starting point of economic analysis.Equilibrium itself is not the goal.Our goal is to achieve the Four Modernizations.The socialist economy always swings around an equilibrium point as it moves along.In that sense,we are not seeking balance for balance per se.Fiscal balance and credit market equilibrium can mean nothing if the economy stagnates.We have got to know that equilibrium can be maintained at a low or high level.Low-level equilibrium can be easily achieved by adopting a retrenchment policy.If,instead of going single-mindedly after curtailing demand,we do everything we can to stimulate supply,we can achieve high-level equilibrium,not to mention the fact that the economy always advances while hovering around an equilibrium point,which is a sign of basic equilibrium whether demand outgrows supply slightly or vice versa.In China today,for demand to outgrow supply slightly is a preferred and realistic option,whereas it is unrealistic to expect that supply can slightly outgrow demand.That is why we should adapt ourselves to the current situation and learn how to run the economy under such circumstances.

(24)Government policy stability and continuity should be maintained to set people at ease,especially those in the thick of economic reform.Policy volatility can mar government policy.Major economic unrest often occurs when firms and individuals hasten to take countermeasures upon sensing an imminent major policy change.For this reason,if we can foster a settled sense of economic stability in firms and individuals and keep them confident in government policy,we can take the edge off the impact of the shock waves that might come from economic restructuring,and carry out reforms in a healthy social environment.

VII.Tentative projections of the Chinese economy

(25)The leading position of the state sector in the national economy is not determined by its proportion of the nation’s total number of firms or aggregate output value,still less by its shares in the key branches of the national economy.Rather,it is determined by its control of industries that are the lifeblood of the national economy,and by its shares in the output of crucial commodities.In the long run,there will not be many state firms,as most enterprises in this country will come under mixed or collective ownership.Moreover,the state firms referred to here are not the familiar old-fashioned type.Rather,they will be transformed into shareholding or holding companies that are publicly owned in the main,and some of them will belong to a certain enterprise consortium.

(26)From a long-term point of view,there is no reason why mandatory plans cannot be abolished to make way for guidance plans as the one and only form of planning.Of course,there must be certain conditions to make it happen.One such condition is that key resources are no longer in short supply and that the disparity between demand and supply has been reduced.Another condition is that the government is efficient enough in running the economy,because it is more difficult to carry out guidance planning than mandatory planning.

(27)Of the four economic policy instruments in use today-fiscal policy,monetary policy,price control,and wages-the decision-making power to determine wages should be delegated to firms at the grass roots level.Central and local governments should use fiscal and monetary policies as chief economic regulatory means.Unless absolutely necessary,the use of price control as an economic lever should be minimized.Such is my idea of how to shape our long-term macroeconomic regulatory system.The State Planning Commission should take charge of drafting relevant long-and medium-term development plans.

(28)The rural economy is probably where the Chinese economic landscape will change most dramatically.Farmland will devolve to the hands of skilled farmers.Farms will grow in size under a household responsibility system.Labor productivity will go up,and surplus labor force will be reallocated to rural firms.The countryside will be clustered with small towns,which will combine with large cities to form multilayered economic networks.Small towns will become cultural,educational,commercial,and recreational centers that also provide a complete array of community services.The improving Chinese standard of living will be benchmarked not by current cash-income growth but by increases in household wealth.—A report to the Peking University “May Fourth”SymposiumApril 25,1986

A tentative study of socialist ownership structure(1987)

I

Ownership reform stems,in the final analysis,from the requirement for developing a commodity economy in this nation.It also arises from the unchangeable position of companies as commodity producers.Whatever its form,ownership structure should contribute to the promotion of production.A monomorphic ownership structure is detrimental to the growth of the commodity economy,to the motivation of firms as commodity producers,and to the effort to make the most of the superiority of socialism.All this gives rise to the mission of hammering out a post-reform ownership structure.

Will the post-reform ownership structure include public ownership?The answer is in the affirmative: Public ownership will be included.However,the reformed public ownership will no longer be the same as it is today.There will be differences between the two.

Under the influence of the traditional economic mode,people believed that the only workable way to run public companies was to put them directly into the hands of government institutions.In the reality of socialist economic development,however,the drawbacks of this practice were becoming pronounced.Companies became appendages of the government,which held all the power over human resources,finance and materials,and kept a tight rein on them.A company’s performance thus had no direct bearing on its economic gains,nor was it held accountable for its own economic losses.Such was the inevitable outcome of the direct government intervention of business management,in which public ownership was synonymous with the direct involvement of government institutions in corporate activity.This is why the main thrust of ownership reform should be directed at public ownership.

We should know that in a public company,both capital goods and products belong to the public.The public attributes of such institutions represent the people’s fundamental,overall and long-term interests.Recognition of the public ownership of such companies means that they are engaged in production and management in the common interest of the entire citizenry.The issue here is: How can public companies manifest their public nature in production and management,and go about their economic activity truly in the interests of all the people?It should be noted that public companies are not an empty concept but entities in the thick of economic activity.Their public nature is embodied in the fact that both their managers and workers are responsible for the interest of the whole population in such activity.However,this responsibility does not mean that public companies can only be run by the government.Moreover,it should be noted unequivocally that,supposing the public nature of these companies could be manifested only under government management,those companies that are malfunctioning and riddled with malpractice cannot honor their commitmentrather,they can only betray the basic interest of the entire state and citizenry.Thus,in transforming public firms,we must understand their public nature in a new light.That is to say,their public nature should be reflected in the results of their economic activity rather than in being state-managed.To reform public ownership is neither to negate this form of ownership nor to change the nature of public companies.To reform public ownership is precisely to emphasize these firms’public nature through effective and fruitful economic activity.II

An essential task of the socialist ownership structure is to meet the requirement of the developing socialist commodity economy that forms of ownership should be diversified.Ownership diversity means that a socialist society may have more than one form of ownership,both public and nonpublic.Moreover,capital goods need not come solely under public ownership but under a mixture of state,collective,and private ownership.In this mixed ownership system,public,collective,and private ownership are intertwined and infiltrate each other in a “you in me,me in you”situation.That is to say,the capital goods in a company may come under a mixture of ownership.The need for ownership diversity,including ownership mixtures,arises from the nature of labor in our nation at the present stage of development.Workers still care about their labor input-which differs in quality and quantity-and its economic returns out of the concern for their own interests.Furthermore,due to differences in working conditions,companies also vary in managerial performance and economic returns.Some may be more productive than others.The earnings from such extra output should be put at these firms’own disposal so as to spur their managers on to improve management.Diverse,mixed forms of ownership enable firms and workers to align themselves with production and management performance because this is where their own interests are at stake.

The existence of diverse and mixed forms of ownership is also relevant to our nation’s present level of labor productivity.We know that a certain form of ownership of capital goods is determined by the development level of society’s labor productivity.What forms of ownership should be adopted or allowed in a socialist commodity economy is circumscribed by the law governing labor productivity improvement.As things stand in our nation,productivity is relatively low and its development is uneven.This implies that,independent of man’s will,diverse forms of ownership will be around for a long time to come while infiltrating or integrating each other inside a business.

In all,when designing a new national ownership structure,we should decide what kind of corporate ownership system is really needed.Such a decision cannot be detached from the requirements of the commodity economy and the restraints arising from the nature of labor and the level of productivity at the current stage of development.To advance the commodity economy,every company must organize its production and business as a producer,have the final say on production,supply and marketing,and strive to survive and grow through competition.The issue here is not so much“decentralizing power to companies”as “returning power to companies.”Companies should have the decision-making autonomy that they deserve as commodity producers.The same is true with public companies.After ownership restructuring is completed,the government should put capital goods at these companies’disposal and allow them to handle the fruits of their economic activity.As to what form of ownership a company should adopt,it should be decided according to the merits of individual cases.III

It is both necessary and workable to establish and develop shareholding companies in a socialist society.Socialist construction cannot do without colossal sums of money.Dispersed capital should be pooled,and the financial potential of all sectors tapped.To allow companies to issue stock shares helps pool money and meet the funding needs of production expansion.Public ownership of capital goods is the foundation stone of the socialist economy.Shareholding companies should be built on the same foundation.If a collectively owned company sells shares to its workers,its collectiveness will remain intact because it is formed with money raised from and by its workers.The fact that the shareholding system can operate for collective companies should not be a cause of concern.The issue here,rather,is whether public firms should be allowed to issue stock shares,and whether doing so will change their public nature.We must see it in perspective.It is wrong to insist that only collective firms can issue shares and to forbid public companies from doing so.The adoption of the shareholding system by public companies should not be judged from a traditional viewpoint.

If a public firm becomes a shareholding company,its shareholders may fall into three categories judging from the current structure of capital goods ownership: central government agencies,local government agencies and the company itself.If all its shareholders are in the public category,the company’s public nature will not be affected.If the public firm raises funds from all walks of life,its new shareholders will roughly fall into three categories,excluding foreign investors: other local government agencies and other public firms,collective firms and workers.If all the new shares are sold to the first category of shareholders,the firm’s public nature remains.If the new shares are also sold to the second and third categories of shareholders,the firm’s public nature will acquire a collective element.No matter what happens,the enterprise remains publicly owned.

To determine who controls the use of capital goods,it is necessary to find out who are running the shareholding company,because the right to own capital goods and the right to use them are separated.The operation of such a company is controlled by its managers.Given that the shareholders of a socialist shareholding enterprise are workers or organizations that represent the workers’interests,then the managers elected by shareholders’representatives should also be regarded as the workers’representatives.In a shareholding company under public ownership,if the second and third categories of new shareholders have contributed more money than the old shareholders and the first category of new shareholders,the company is still in the hands of those representing public ownership.If the second and third categories of newcomers have bought more shares than the others but such shares are scattered rather than concentrated,the company is still under public ownership.In all cases,the company’s public nature remains basically unchanged.

Even if a shareholding company is controlled by the second and third categories of new shareholders who have contributed more money while the shares held by the second category of new shareholders are not scattered,isn’t the enterprise still a public socialist enterprise?Isn’t the management of the company still in the hands of those representing workers’interests?Is there anything to be concerned about?

Now,a look at the superiority of the enterprise shareholding system.As the best option available for invigorating our companies,the shareholding system has at least three advantages.

Firstly,the shareholding system can fundamentally change the situation in which government administration is confounded with business management,and thereby turn companies into purely economic entities.Under this system,the general manager is held accountable to the Board of Directors,and the Board of Directors is responsible to shareholders,and thus the company can no longer be an appendage to a government department.The shareholding company makes its own decisions in compliance with government policy and economic legislation.In other words,the government can no longer interfere in the company’s business,but can influence its economic activity by holding its stock shares.The economic relationship between enterprises and the government becomes one between paying and levying taxes,and the enterprises will have no problem in making their own business decisions.

Secondly,a shareholding economy works relatively more effectively in meeting the need to allocate production factors efficiently.The profit level of such a company is a signal that guides the shift of capital to highprofit fields,thereby rationally allocating capital and workforce,and raising capital utilization efficiency.The shareholding company can find a foothold in market competition and develop itself only if it can put its capital to best use,utilize it sensibly,and avoid decision-making errors and waste of money.Government departments may,through legislative and compensatory measures,attract share capital to the national economy’s weak links and backward sectors in a well-planned fashion,and promote the rational allocation of productive resources from a macroeconomic perspective.

Thirdly,raising funds by selling shares helps pool idle money from non-governmental sources to meet financing purposes.Under the prerequisite that funds are raised from non-governmental sources and workers are allowed to buy shares individually,the surplus of personal consumption fund comes in the form of newly added share capital that cannot be withdrawn arbitrarily.For this reason,after the surplus fund for personal consumption is absorbed to buy company shares,it is unlikely for such money to be withdrawn from a shareholding company and spent in the consumer goods market.Apart from allowing individuals to buy shares,the shareholding economy can also use part of the profit at a company’s dispensation as a major fund-raising source.By pooling idle money from localities and companies and spending it on construction projects that have a close bearing on the immediate interest of these localities and companies,the shareholding economy can also speed up development,and effectively create jobs for society,rural areas in particular.IV

The practice of companies buying each other’s stocks gives rise to a corporate stock-holding system under socialism.As an inevitable result of economic development,this system,also known as “participatory system,”originated in an economic organizational form that emerged from the monopolist stage of capitalism,when a big corporation infiltrated other companies by buying their majority shares and getting them under control.The control through stock-holding and penetration into multiple companies eventually brought about a corporate system in which the general company branched into one level of subsidiaries after another.Under capitalism,therefore,the corporate stock-holding system is a tool with which large capital controls and manipulates small capital.

As a form of business management in society’s large-scale production,the stock-holding system can be made to work for the socialist shareholding economy on account of the dual attributes of business management: its natural attribute determined by society’s large-scale production,and its social attribute determined by the social system.In terms of society’s large-scale production,socialism is identical to capitalism; in terms of social system,socialism is categorically different from capitalism.Thus a socialist society can adopt the stock-holding system by retaining its natural attribute and altering its social attribute.

In a socialist economy,a competitive and highly efficient company may use its after-tax profit to buy another company’s stock shares.When it has become the other company’s majority shareholder and thus taken control of it,it will run or reshuffle that company according to its own will.Because of the role of equity and equity-related interests,the scramble between companies for majority holding rights is bound to intensify.When that happens,it is a boon,instead of a bane,for every shareholding company on the scene,because it gives them a good opportunity to improve their economic efficiency.When products become highly substitutable,when the prices of consumer goods show a large degree of elasticity,and when the profits from those products that are being upgraded become unstable,illmanaged businesses will be in danger of being “taken over”by others if they fail to cope with the situation.When such a business is taken over,the buying company may buy its stock in a large amount by taking advantage of its declining profit rate and its shareholders’hasty disposal of their shares.In this way the new CEO turns it into a subsidiary,and goes further to overhaul its production,management and technology.This happens even in a monopolistic industry,where failing companies are in danger of a “takeover.”

A small business that does not perform well may be taken over by its employees.These employees are scattered stockholders with a shared desire for their business to make a profit and grow,and their personal interests are tied to its gains and losses.When and where possible,they may pool their equities and act collectively to take over the business and reshuffle its management.When this happens,it is definitely conducive to the future success of the business.V

A powerful large socialist enterprise under the shareholding system may organize trans-sectoral and trans-regional business,and,through multilevel share-controlling actions,establish multiple layers of subsidiaries to form a socialist corporate consortium or enterprise group.Several large socialist enterprises can foster different economic ties and combine themselves into a consortium or enterprise group.At the center of a socialist corporate consortium is the decision-making matrix-or holding-company.Under the parent company there are first-and second-layer subsidiaries which,rather than being mere branches or appendages,do business independently,make their own decisions,and bear the responsibility for their losses and gains.The matrix company exerts its influence through its control of stock shares.That is to say,the parent company carries out its business principle through its equity,thereby fending off the drawbacks of administrative intervention.This corporate management system,in which rights are both centralized and decentralized,helps set a company’s business activity on a rational and efficient footing.

Some giant socialist enterprises may rise,and some others may fall in market competition.To put it another way,one giant socialist corporate consortium may grow in strength while another may fall into a decline.There is nothing odd in this phenomenon.A giant enterprise can stay competitive and at the top of the ranking chart only with sensible and effective development strategies,wise leadership and fine workforce quality.Companies or consortia are doomed,no matter how large they are,if they are no longer competitive,if their development stratagems are wrong,or their leaders and workforce are low in quality and proficiency.The shareholding system and the controlling shareholder system compel a company to readjust and save itself.Without such readjustment and self-rejuvenation,a waning company can only watch helplessly as its stock dwindles in value and its property rights become vulnerable to a takeover.Such a takeover,however,may give the company a new lease of life and return it to the ranks of competent competitors.

Under the stock-holding system,the relationship between banks and enterprises may change in one of two ways.First,specialized banks may convert themselves into commercial corporations under shareholding management,and allow businesses to purchase their stock shares to become their shareholders.Judging from the prospects of ownership reform in this country,it is not unlikely that businesses will hold stock shares of specialized banks and join their management.Second,demutualized banks may also participate in managing other businesses; and,as things stand at the present stage of development,the relationship between banks and businesses is more likely to change this way.We can assume that banks are not just loan providers.They are also stockholders of businesses and can run their own companies.After a bank gains control of a business’stock,the common interest resulting from this will bring the two sides closer.A bank that holds the stock of a large business can send representatives to join the latter in managing its funding,production and business operation.

Banks can also convert themselves into socialist banking consortia through their involvement in business.Such a banking consortium may work alongside a socialist corporate consortium to do business that transcends departmental and regional boundaries.At the core of this banking consortium is a central bank that functions as the holding company.The first and second tiers of subsidiaries to such a central bank are not its branches or affiliates;rather,they are economic entities that make their own business decisions and are liable for their own gains and losses.The holding central bank needs to influence the production and management of these subsidiaries by way of its equity.Moreover,the bank’s involvement in business also helps improve its credit management because if a business applying for a loan has no idea about the risks involved,the bank providing the loan is liable for such risks.If the bank cannot recoup the loan it has issued in due time,or if the project invested with the loan falls through,the bank will bear the financial loss thus incurred.In a shareholding company established with a bank’s participation,the outcome of business failures is borne by all partners,a fact that can galvanize the bank into improving its management.VI

Mixed-ownership companies,as the name suggests,are economic entities invested jointly by public,collective,and private partners.Firms of this type allow for joint business activity under different types of ownership even in the absence of the shareholding system.However,demutualization of firms inevitably produces a large number of companies under mixed ownership.Enterprises under a single type of ownership will go on as usual,but the emergence of many mixed-ownership economic entities will be an inevitable trend in a socialist economy.

How to define the nature of such mixed-ownership companies in a socialist society?If a public or collective enterprise has increased its capital by raising funds through stock share sales,and thus obtained a certain portion of share capital from a mixed-ownership firm and controlled its management,this company should be regarded as a public enterprise.If such a mixed-ownership firm is not deemed public,what else should it be?Let us look into this matter more closely.If,say,an enterprise has been set up with funds raised by selling stock shares to both companies and individuals,such a mixed economic structure should be regarded as an economic conglomerate under a new form of public ownership,which is different from traditional types of public or collective ownership.

We regard this type of economic conglomerates as public enterprises because they are similar to collectives whose partners buy stock shares with capital goods or cash.They represent a brand-new type of public ownership enterprise,which not only identifies workers as masters of capital goods but also energizes itself by becoming an independent commodity producer that makes its own business decisions and bears responsibility for its own gains and losses.Such economic conglomerates are most likely to become the mainstay in China’s future corporate ownership structure.

The emergence of mixed-ownership companies meets the demand to boost productivity in socialist economic development,corresponds with the reality of the country,and promotes the commodity economy.Such firms can grow in both rural and urban areas.Flexible in business operation,they can adjust their corporate sizes according to circumstances to accommodate the idle and the jobless and better connect rural and urban areas.The presence of such mixed-ownership firms challenges old public enterprises to improve their management and start ownership reform at an early date.VII

Like mixed-ownership companies,small cooperatives represent another nascent form of ownership.Convenient and flexible,these small cooperatives differ from mixed-ownership firms in two ways:

First,the shareholders of a mixed-ownership company are enterprises and individuals,and state-owned companies may buy their way into it.By contrast,small cooperatives are formed entirely by individual shareholders.

Second,mixed-ownership companies vary in size,whereas cooperatives are generally small,even though it is possible for them to grow bigger and evolve into mixed-ownership companies.Nevertheless,cooperatives tend to remain small,at least in the formative stage.

Small cooperatives,being organized by individuals who buy their way into them,identify their workers as masters of capital goods.That is why they are seen as a new form of socialist public ownership.Their members own the capital goods,join in collective labor and management,and distribute their after-tax profit among themselves.Such earnings may be used to cover daily expenses or be converted into new stock shares.Members of such a small collective get paid for their labor as employees while earning a certain percentage of the tax-paid profit as shareholders.

Small cooperatives are especially suitable for businesses in retailing,handicrafts,community services and farm produce processing.Their members are engaged in collective labor,make economic decisions and share gains and losses.Whenever funds need to be raised,they put their heads together to decide the ceiling and floor for the money to be paid by every member according to a ratio between labor and fund.This way of doing things is entirely agreeable to the nature of small cooperatives.

It does not matter whether or not a small collective calls itself a“shareholding company.”They represent the collective sector in the true sense of the term.They differ from shareholding companies precisely in that,instead of turning to society for financial help,they raise money exclusively among their members.They can become mixed-ownership firms if,someday,they start to raise money by issuing stock shares to the public.

To encourage individual workers to form their own small cooperatives by buying shares or converting their contribution of capital goods into shares,and to confirm the collective-i.e.,public-nature of such cooperatives,is to respect both theory and practice.To accept the small cooperatives as public enterprises is for no other purpose than to recognize an established social fact that has to be accepted as such.

Small cooperative enterprises are often called “small collectives”or“collectives run by individuals.”People may name such firms any way they want.However,when you choose to call them “small collectives,”you are wrong if you think that small collectives are not as good as large collectives or that small collectives should be turned into large ones.When you choose to call them “collectives run by individuals,”you are wrong if you believe that they are “informal collectives”or that they should be converted into public collectives.We must see cooperatives exactly as a form of collective economy as well as a form of socialist ownership that is highly flexible and adaptable to different levels of productivity and corporate scales.The cooperative economy does not necessarily need to develop itself into other forms of collective ownership,and there is absolutely no such inevitability either.The cooperative economy,other forms of collective economy,and the mixed-ownership economy each have their own strengths and applicable scopes,and should be allowed to exist side by side and develop together in the long run.VIII

We may regard the adoption of the household responsibility system that links remuneration with output as the first step toward rural ownership reform.In this chapter,let me make some tentative study of the next stage of ownership reform in rural areas from the perspective of the national ownership structure.

Let us start with some background information about the next stage of rural ownership reform.We have to understand that,on the basis of initiating the household responsibility system,the rural economy is being restructured in transition to a large-scale commodity economy.Rural areas will adapt their production and processing undertakings to market demand,and provide large quantities of farm and sideline products.The advance of the commodity economy enables every farming household to enter the commodity market as both producers and business operators.Rural ownership reform should keep up with the burgeoning commodity economy.

According to the requirements of the commodity economy,the rural household responsibility system will be maintained for a long time in agriculture,forestry,fishery,and animal husbandry.However,rural production and businesses are bound to develop along specialized lines.That means some fields of production will operate independently and be specialized.On the basis of a division of labor and collaboration,farming households can freely collaborate with one another in different forms.The assets of such voluntary economic cooperation will be owned by the members,who will distribute the earnings among themselves according to work done.Part of such earnings,however,may also be distributed according to shares of capital or of capital goods.This will give rise to a large number of small cooperative farms (forest,fishing and animal farms included)similar to the small cooperatives described in the previous chapter.A creation of the broad masses of farmers in their production activity,these cooperative farms will play a major role in the future development of the rural economy.They represent a new type of collective economy,and a breakthrough from the old agricultural collective economy in which capital goods and labor are centralized.On the basis of household management,these farms can bring farmers’funds and production factors under cooperative management.The emergence of such farms is nothing short of another round of rural ownership reform that can fire the enthusiasm of the rural population for production and development.

In the course of developing a commodity economy,the issue of revamping the ownership of old rural enterprises will be put on the agenda.These rural enterprises,according to common sense,represent a form of cooperative economy run by farmers (and townspeople)with their own money,labor and technology.Although many of them are dependent on loans,they are supposed to repay such loans with nothing but their profits.However,in actual fact,these enterprises have changed their collective economic nature and evolved,to a certain extent,into local government-run businesses.Some local officials,holding the power to appoint or dismiss the managers of these businesses,are given to interfering in their business activity.Farmers can hardly benefit from such businesses because their profits are often manipulated by these officials.Such problems with the old rural enterprises can only be redressed through ownership restructuring-that is,to put an end to government interference in them and let farmers be their true masters.

I do not here deny the fact that many rural enterprises are doing perfectly well and that,in many places,local farmers are benefiting from them.Rural enterprise ownership reform is not directed merely at mismanaged enterprises.Of course,enterprises that do not perform well should be straightened out,and the best way to do so is to restructure their ownership.However,well-run rural firms need ownership restructuring as well.Now that rural firms are collective economic entities,they should not become appendages to grass roots governments and muddle along under government administration that is entangled in business management.We have got to restore them to their true beings as collective firms.If we limit ownership reform to poorly run enterprises,we must answer the question: If,someday,a local government comes into the hands of a new leader who has changed the old way of doing things,will well-run enterprises start going downhill?Is there any way to prevent this scenario from materializing?Clearly,all rural firms,large or small,good or bad,should have their ownership restructured.Only by starting from ownership reform can these companies’business problems be fundamentally addressed.As to which enterprises should be the first to engage in such a reform,this should be decided in light of actual production and management situations.

How,then,should rural enterprise ownership be reformed?The guideline is to liquidate the assets and check the accounts,and to distribute the stock to every member household.In this way,farmers can become shareholders who can impose their will on their companies through voting in elections and exercising their management rights.Major issues on income distribution will be settled by consensus.Apart from getting paid for work done,shareholders are also entitled to dividends allotted according to shares.Township governments are not allowed to run enterprises,and their power should be limited to guiding and helping farmers in business activity.New rural firms and cooperatives established by rural workers with their own money,and mixed-ownership firms are,without exception,new types of public enterprises.Farming households should also be allowed to run wholly owned enterprises that belong in the private sector.

Rural supply and marketing cooperatives should have their ownership revamped in two ways.First,large numbers of rural supply and marketing cooperatives at the grass roots level should be converted into independent cooperative firms.Only thus can they truly become supply and marketing cooperatives that make their own business decisions,function as independent accounting units,and take responsibility for their gains and losses.Their after-tax profit will be dispensed among members according to shares after a certain amount has been set aside as public accumulation fund and welfare fund.Second,supply and marketing cooperatives at and above the county level,including specialized companies and industrial and commercial businesses,should be transformed into mixed-ownership,shareholding companies that make their own business decisions as independent accounting units and are accountable for their own gains and losses.They will have the same organizational setup as other shareholding companies.

By putting the rural ownership system through the abovementioned reform steps,the relationship between township governments and rural businesses will undergo another round of profound changes comparable to those taking place upon the adoption of the household responsibility system linking remuneration to output.The mode of rural economic activity born of the Movement of Agricultural Collectivization (1954-1955)and particularly of the Movement of the People’s Communes that began in 1958,should be totally abolished.Grass roots governments will become pure administrative institutions detached from everyday production and business.Institutions that subject the broad masses of farmers to centralized administration,that allow a tiny number of township and town government officials to impose their will on people’s economic activity,and that have hindered the growth of rural commodity economy and kept the monolithic rural economic structure unchanged for long years,will eventually be consigned to the dustpan of history.

The economic role of grass roots township governments will be limited to guiding the rural commodity economy.Land management is part of that role.The principle that land is public property shall never be changed,but it should not prevent land from being used with compensation.It is also the mission of grass roots governments to prevent arbitrary requisitioning of farmland and bar the selling and buying of land.These governments should also find ways and means to help local farmers beat poverty,organize them in running businesses,and help these businesses solve problems.They will also have a “matchmaking”role to play,that is,to bring enterprises together for technological and economic collaboration.“Serving the people”should be the motto for local governments in steering the advancement of the rural commodity economy.The purpose of their administration is specifically to serve farmers’business activities.

IX

Proprietorship over capital goods is at the core of ownership.However,to interpret ownership merely as proprietorship over capital goods is a narrow-minded understanding of the substance of ownership.In a broad sense,ownership also encompasses the organizational form of production and the administration and management of production,apart from proprietorship over capital goods.This being the case,the ownership reform discussed in the foregoing involves not only changes in ownership of capital goods before and after the reform,but also changes in the organizational form of administration over production.The new socialist ownership born of the reform effort refers precisely to proprietorship over capital goods,to new organizational forms of production,and to new administrative and managerial systems over production.

The reformed socialist ownership system will not be singular but plural.It will constitute multiple forms of ownership and can be understood from the following perspectives:

In terms of capital goods proprietorship,it will encompass diverse forms of non-public ownership in the service of the socialist economy,with socialist public ownership taking the lead.Under public ownership,there will be enterprises owned by all the people,enterprises under mixed ownership,and cooperatives.Under non-public ownership,there will be private firms,foreign-invested companies,and equity joint ventures with Chinese and foreign investment.

Concerning the organizational form of production and the administrative and managerial system over production,enterprises owned by all the people and enterprises under mixed ownership can be run on their own or rented or contracted out to cooperative enterprises or individuals.Likewise,cooperatives can also be run by themselves or rented or contracted out by individuals.

This socialist ownership system is born of the need of the burgeoning socialist commodity economy.In a shareholding company under public ownership,dividends are dispensed among shareholders according to their shares of capital (or money paid for stock shares),and shareholders are investors who contribute to production through the shares they have bought.The money they have spent on shares is similar in nature to bank savings,and therefore,they also deserve remuneration in the form of stock interest.The stock shares invested in the economy contribute a lot more to the growth and overall interest of the socialist economy than to the shareholder’s individual interest.Leased and contracted management serves to adapt public enterprises to the demand for boosting productivity,allocating production factors effectively under the current circumstances,minimizing waste in human,material and financial resources,and promoting production.

I deem it unnecessary to say anything here about the presence of private economy that does not belong in the public sector of the socialist ownership system.This is because the private sector exists to supplement the socialist economy and help create jobs and tax revenues.Self-employed workers rely on themselves in business activity.It is only normal for them to make more money through diligence and shrewd management.Given correct government policy,effective administration,and sensible education and guidance,the private sector can grow in the course of serving socialism.

To sum up,ownership reform will bring about a dual economic system.On the one hand,the national economy will contain hundreds of large enterprises that will grow into corporate consortia (enterprise groups),which,through multilevel investment,will bring about a network of second-and third-tier subsidiaries.These consortia will point out the way for the national drive for industrialization and technological progress.On the other hand,the national economy will have numerous small enterprises under cooperative,private or mixed ownership,which will form a close-knit network of collaboration while competing with one another.Their shared mission will be to address the problems arising from the reallocation of surplus rural workforce,farm and sideline product production and processing,from the efforts to raise rural residents’income and build small towns,and from everyday services for urban and rural residents.These two groups of economic entities will each follow a different course of development and coexist in a mutually complementary relationship.—Hebei Academic Journal,issue No.1,1987

Two types of disequilibrium and the mainstream of current economic restructuring (1988)

I.Differences of resource allocation in equilibrium and disequilibrium

In economics,disequilibrium is pertinent to Walrasian equilibrium.The latter is achieved under the assumption of a complete market and a flexible price system.Disequilibrium,which is a kind of equilibrium arrived at in the absence of a complete market and a flexible price system,is also dubbed“non-Walrasian equilibrium.”

According to the theory of French economist Léon Walras (1834-1910),given that the market is complete and the price system flexible,given also that traders possess full information and prices adjust instantaneously with changes in supply and demand,then under a given price condition aggregate demand must equal aggregate supply,excess demand and excess supply do not exist,and the settlement of every transaction is guaranteed by an equilibrium price.No deals will be reached before equilibrium price is attained; only with equilibrium price can transactions take place.According to this theory,overproduction,unsalable products,chronic unemployment,and inflation associated with excess demand will never happen.

The analysis of Walrasian equilibrium,alien to economic reality,had long drawn acute criticism from dissentient Western economists.In The General Theory of Employment,Interest,and Money published in1936,John Maynard Keynes (1883-1946)went out of his way to dissect the unemployment and other perennial problems in capitalist society.Nevertheless,up till the early 1960s Western economists’study of disequilibrium was partial and unsystematic at best.Their interpretations of Keynesian economic theory were categorically divided as well.Mainstream Keynes followers believe that Keynesian economics is still a theory based on equilibrium and that Keynes did not negate the Walrasian equilibrium theory despite the fact that he somewhat amended it.Some other interpreters maintain that Keynesian economics broke through the limits of the equilibrium theory and provided initial but systematic pronouncements on the disequilibrium theory.They back their argument by citing Keynes’s belief that market mechanisms are not necessarily effective,and that market alone cannot totally coordinate trading activities,with the result that output,levels of employment and investment are subject to fluctuations,whereas overproduction,unemployment,and insufficient investment demand are commonplace under capitalism.

The disequilibrium theory has made substantial headway since the late1960s.Studies of disequilibrium have indicated that under the condition of an incomplete market where prices fail to adjust demand and supply,economic forces will proceed from their respective circumstances to adjust themselves to the point where they are well adapted to each other and where equilibrium is achieved.Obviously,the equilibrium achieved by way of disequilibrium is not the equilibrium in a complete market but in an incomplete market; it is not the kind of equilibrium with zero unemployment and zero inflation rates,but with both unemployment and inflation in presence.In other words,disequilibrium is actually a form of equilibrium; but unlike the kind of equilibrium described in the Walrasian theory,it is the kind of equilibrium that exists in reality.Such is the connotation of disequilibrium.

If an economy is exactly in Walrasian equilibrium,the market will be highly self-restraining in resource allocation.The market’s self-restraining role can be fulfilled smoothly through the changes in the actual and expected benefits of every microeconomic agent.When a microeconomic agent believes that a certain resource input will bring no benefit and decides to stop it,this microeconomic decision also measures up to the efficiency standard of society’s resource allocation.If,on the contrary,the agent believes that a certain resource input is beneficial to itself and decides to increase it,its improved efficiency will also help boost social efficiency in resource allocation.Therefore,so long as the agent is sensitive to its own interests,its resource allocation will be adapted to market prices,and resources are bound to be channeled into efficient sectors,localities and enterprises and withdrawn from inefficient sectors,localities and enterprises.The market’s self-restraining function in the process of resource allocation manifests itself in that it does not allow any ineffective resource input to last and enables resource allocation to automatically measure up to efficiency standards.

II.Two types of microeconomic agents and two types of disequilibrium

As my analysis of the market’s self-restraining role in resource allocation indicates,the ability of the market to adjust and rectify excessive expansions and recessions in economic practice is closely tied with the full vitality of microeconomic agents participating in market activity.Economic equilibrium is certainly on the premise of complete market and flexible prices,but the vitality on the part of microeconomic agents is a more important and fundamental prerequisite.

Thus microeconomic agents can be divided into two categories: those with full vitality,and those without full vitality or totally lacking it.A microeconomic agent can be brimming with vitality because it makes its own business decisions and takes full responsibility for its gains and losses.Such a firm can choose the best investment opportunities and patterns of production and management,distribute its after-tax profit according to its own interests,and take investment and management risks on its own.Such a firm is an independent commodity producer and manager.Such an individual,in economic terms,is a trader that takes part in market activity independently.Any microeconomic agent that does not have these attributes invariably lacks full vitality or lacks it totally.

In equilibrium,microeconomic agents are certainly brimming with vitality and,on this basis,form a complete market.This point need not be repeated here.What I want to find out is this: Is it true that microeconomic agents invariably lack full competitive vigor under economic disequilibrium?To find the answer,it is necessary to divide economic disequilibrium into two categories.

Economic disequilibrium in the first category is marked by an incomplete market,inflexible prices,presence of both excess demand and excess supply,and restraints on both demand and supply,while microeconomic agents in the market are independent commodity producers that make their own business decisions and take responsibility for their gains and losses,and that have the freedom to choose their investment opportunities and modes of management and bear investment and business risks.

Economic disequilibrium in the second category is characterized by an incomplete market and inflexible prices,and more importantly,by a market filled with microeconomic agents that,instead of being independent commodity producers making their own business decisions and bearing their own gains and losses,neither have the freedom to choose investment opportunities and management modes nor bear the responsibility for investment and management risks.Such microeconomic agents have not shaken off their status as government subsidiaries or are bound hand and foot by their pre-capitalist ties.

If my division of economic disequilibrium stands,there is reason to believe that the disequilibrium in a capitalist economy belongs in the first category and that the disequilibrium in a pre-capitalist economy belongs in the second category.What happens in a socialist economy should be treated differently.Disequilibrium under a traditional and dual-track economic system falls into the second category because its enterprises have yet to shake off their status as government subsidiaries.Under the new economic system born of economic reform,enterprises become independent commodity producers that make their own investment and business decisions,and are liable for their gains,losses as well as investment and business risks.Thus the disequilibrium in the new economic system falls into the first category.

In the first category of disequilibrium,microeconomic agents are full of vitality.However,these microeconomic agents are in an economic disequilibrium.They make transactions in incomplete markets where prices are inflexible and information is incomplete and congested.Therefore,such vitality is limited by this environment.For instance,price rigidity makes it hard for these agents to adjust production in response to price signals,and wage rigidity also prevents them from optimizing their resource allocations.However,a microeconomic agent that has full vitality but is circumscribed by its environment is very different from a microeconomic agent that lacks full vitality.This is exactly the difference between the first and second categories of disequilibrium.

III.The market’s self-restraint role in the first category of disequilibrium

The self-restraining role of the market in resource allocation can work effectively under economic equilibrium,that is,it may prevent any ineffective resource input from becoming protracted under two conditions.Firstly,the market is perfect and prices are flexible; and secondly,microeconomic agents can transact according to their own interests.The first category of disequilibrium furnishes the second condition because microeconomic units are already brimming with vitality.Its only problems are incomplete markets,inflexible prices,and an economy in which restraints exist on resource supply and demand.However,we ought to regard microeconomic agents having full vitality as a more important condition than having a complete market.This is because a complete market and flexible prices serve mainly to provide a friendly environment for the development of a commodity economy,whereas encouraging microeconomic units to regain their competitive edge helps solve problems in market participants’interests,responsibilities,incentives and motivations.Even when market is complete and prices are flexible,its self-restraining role in resource allocations will be sharply limited if microeconomic agents do not have full vitality,cannot take advantage of complete market and flexible prices to make transactions,lack aggressiveness and enthusiasm to sensibly allocate resources and raise their resource utilization rate,and cannot bear the economic losses incurred from improper resource allocations.

All this indicates that the first category of economic disequilibrium possesses the more important one of the two conditions that enables the market to play its self-restraining role,that is,the existence of microeconomic agents with full vitality.This condition is beneficial for the market to fully play its self-restraining role.Because these kinds of microeconomic agents can act in their own interests to make deals,their instinct can prevent them from putting their resources into ineffective economic activity and enable them to refuse ineffective,efficiency-reducing approaches of allocating and utilizing resources.Consequently,even though the market is still incomplete and prices are inflexible,and even though there are still restraints on resource supply or demand,in the process of resource allocations,the market can still follow the efficiency standard to adjust the allocations and combinations of resources,thereby avoiding protracted ineffective resource input.

Nevertheless,the first category of disequilibrium is still a kind of disequilibrium,under which resource input is still different from that under equilibrium.The impact of this category of disequilibrium on microeconomic agents’market transactions and patterns of utilizing resources manifests itself in three ways:

First,with an incomplete market and imperfect and frictional information access,microeconomic agents cannot obtain adequate and timely information,and a lot of information they have obtained is incorrect.However,they have no alternative but to make resource input and combination decisions under the guidance of such limited or even erroneous information.This is likely to bring low economic efficiency and cause resources to be allocated in violation of efficiency standards.

Second,with inflexible or rigid prices,the adjustments of resource allocation by microeconomic agents will be restrained.This is because price rigidity cannot reflect the degree of resource scarcity and the results of resource input and,therefore,they find it hard to optimize their choices of needed resources.If,under rigid prices,the microeconomic agents are unable to follow optimized resource allocation approaches,the waste or idling of resources in allocation processes can hardly be avoided.

Third,because of the restraints on supply and demand,resources are allocated on a short-term basis where demand and supply are unbalanced.This entails tougher competition for microeconomic agents.In the case of supply restraints,the microeconomic agents on the demand side face the problem of limited supply sources and have to input more to secure supply.By the same token,in the case of demand restraints,the agents on the supply side face the problem of a limited market and have to input more to reach their sales goals.The extra resources spent by these agents for either supply or sales purposes are a manifestation of an abuse of social resources,which means more resources have been consumed than economic equilibrium allows.This is a clear example of improper resource allocation.

The above-mentioned impacts of the first category of disequilibrium on microeconomic agents’transactions and utilization of resources indicate that,even though the market can still play its self-restraining role,its effectiveness is whittled down.

IV.The market’s self-restraining role in the second category of disequilibrium

The two conditions-a complete market with flexible prices and full vitality of microeconomic agents-for the market to play its self-restraining role effectively in resource allocation are absent in the second category of disequilibrium.Thus the market’s self-restraining role is greatly restricted in the process of resource allocation.This may be analyzed in two ways.

On one hand,the reason why microeconomic agents lack vitality is that they have not truly become masters of their own interests,that the fruits of their production are not directly and inevitably related to their interests,and that they are not held accountable for the economic losses resulting from their production,management or investment mistakes.In this way,they lack not only motivation and stimulus but also pressure and a sense of responsibility.They may become indifferent to opportunities that are obviously in their economic interests and help elevate their resource allocation efficiency.But at the same time they may willingly do things that are apparently detrimental to their own economic interests and that may aggravate their inefficiency in resource allocation.The market’s self-restraining role is rendered ineffective when microeconomic agents are callous about boosting resource allocation efficiency,to say nothing of following efficiency standards to control the input and utilization of resources.

On the other hand,the reason why microeconomic agents lack vitality is not only that they do not care enough-or do not care at all-about their gains and losses in production and management,but also that their performance in production and business is subject to restrictions imposed by government departments-they have to do the government’s bidding.For this reason,even if microeconomic agents care for their gains and losses in production and management and wish to readjust their input and use of resources,their status as government subsidiaries determines that they can not follow their own will,interests and principles.The market is thus stripped of its self-restraining role in resource allocation; there is nothing it can do no matter how unreasonably resources are allocated and how gravely efficiency is impaired.

The above analysis testifies that in the second category of economic disequilibrium,it is hard for the market to play a proper self-restraining role in resource allocation.This is exactly where the significant difference between the first and second categories of economic disequilibrium rests.In the first category of disequilibrium,the market’s self-restraining role still works despite the constraints on it.By contrast,in the second category of disequilibrium,the market’s restraints on ineffective resource input can hardly be made to work.Therefore,if efficiency in resource utilization declines due to insufficient resource input or inappropriate resource combinations,the market is unlikely to rectify it.Even if the market can send a warning signal about the widening gap between the demand for and supply of a certain resource,or about a drop in economic efficiency or a large price fluctuation,microeconomic agents are unable to receive it.Even if they can receive it,they cannot-or do not want-to adjust the destinations or combinations of their resource input.Maladjustment in resource allocation will thus prevail,and grow from bad to worse,with one of the following three possible outcomes.

Possibility One: The economic disarray caused by increasingly disproportionate resource allocation forces the government to intervene with non-economic means in an attempt to rectify it.Such non-market intervention,usually known as “rectification”or “policy readjustment,”is not uncommon in the second category of disequilibrium.It should be noted that the government in this context refers to the supreme decision-making echelon.Only when this echelon has sensed the serious nature of such disproportionate resource allocation and resolves to “rectify”it or “readjust”its policy,can such non-economic means of intervention be applied.However,by the time the supreme power has discovered the seriousness of the problem and resolves to do something about it,a lot of time has been wasted,and the delay inevitably causes considerable economic losses.

The issue,however,comes down to how the supreme policy-making echelon “rectifies”the situation.Only when the policy-makers have fully realized that the emergence and aggravation of disproportionate resource allocation are caused by the second category of economic disequilibrium (that is,incomplete market,inflexible prices and microeconomic agents lacking vitality),and only when they are determined to eradicate this category of disequilibrium,can the “rectification”effort reap real results.If the decisionmakers’desire is to reverse the disproportionate resource allocation by noneconomic intervention while leaving this kind of disequilibrium intact,the strains on resource demand and supply can only be relaxed temporarily at best,and the disproportionate resource allocation will become so protracted and complicated as to involve another round of “rectification”or “policy readjustment”after a certain interval.The ultimate result is that unsolved problems grow in number,obstruction become more and more stubborn,the“rectification”effort becomes more and more difficult,and the situation goes from bad to worse.

Possibility Two: When disproportionate resource allocation occurs incessantly and hurts the economy badly,while the government decides not to intervene with non-economic means,which means it will not work to reverse the disproportionate resource allocation,the situation will keep worsening.When the problems have accumulated to a point where the conflict between resource demand and supply comes to a head,the economy will suffer from “stagnation,”“inflation,”or “stagflation,”and,in the worst scenario,be pushed to the brink of collapse.Only then can the market’s self-restraining role in resource allocation come into play.That is,when the economy is teetering on the verge of collapse,microeconomic agents will be forced to seek a way out.Confronted with a difficult and almost hopeless situation,they have no alternative but to seek a solution on their own through transactions that serve their own interests (or the interests of their workforce).

In this situation,many trading activities between microeconomic agents for their own interests are underground in the second category of disequilibrium.The rapid rise of such an underground market may force those microeconomic agents to pay more dearly for closing deals to their advantage,thus further changing the direction of resource allocation.Nevertheless,the underground market is still a kind of market,where sellers and buyers may bypass the intervention by non-economic factors and allow transactions to be impacted by the scarcity of commodities and the prices determined by this scarcity (similar to the prices under incomplete competition).Under these circumstances,the market’s self-restraining role in resource allocation can work so that sellers and buyers can reach deals under mutually acceptable conditions.In this way,the underground market contributes more or less to alleviating the difficult economic conditions and preventing disproportionate resource allocation from causing a total economic collapse.This seems ironical,but is most likely to happen in the second category of disequilibrium.

Possibility Three: When resource allocation grows increasingly more disproportionate and leads to economic deterioration,the government realizes that the problem is caused by economic disequilibrium and that such disequilibrium manifests itself not just in market incompleteness but,more importantly,in a lack of vitality among microeconomic agents.Thus the government sets about overhauling the economy institutions while taking steps to revitalize these microeconomic agents and gradually improve market completeness.Meantime,in this reform process,the government also adopts macroeconomic regulatory steps,coordinates these steps with market regulations,and strives to ease the strains on resource allocation,thereby directing and combining social resources more appropriately.

Possibility Three is undoubtedly the least probable.When the economy is in the second category of disequilibrium,there is inertia in the economy that will push it closer to Possibility One.Possibility Two is usually not what the government hopes for in the second category of disequilibrium,but it is very probably the economy’s spontaneous reaction when government intervention fails and there are no effective methods to control economic chaos.Meanwhile,if the economy moves towards Possibility Two,this may also be caused by the government’s ineffectiveness in dealing with severe disproportion of resource allocation and underground trading activity.Possibility Three,however,may become reality only when:

-severely disproportionate resource allocation and economic aggravation awaken the government to the necessity of economic restructuring,especially the need to revive microeconomic agents through such restructuring;

-microeconomic agents,while gradually putting an end to their status as government appendages thanks to the government’s effective economic restructuring steps,become motivated to care more about their own gains and losses in response to internal incentive and external pressure;

-at the same time,with the adoption of appropriate macroeconomic regulatory measures by the government,disproportionate resource allocation has been alleviated and the market’s self-restraining role has been brought into play;

-and finally,on the basis of results achieved by the government in economic restructuring and regulation,the economy has come under the dual regulation of the market and government,causing a gradual improvement in resource allocation.

Obviously,none of these preconditions can materialize easily.However,under the second category of disequilibrium,of the aforementioned three possible outcomes of lopsided resource allocation,only Possibility Three is worth striving for.If Possibility Three becomes the reality,the second category of disequilibrium will be converted into the first category of disequilibrium.If economic equilibrium is an unrealistic proposition,to convert the second category of disequilibrium into the first category is nothing short of a second best choice.

V.Possible friction between dual mechanisms in the first category of disequilibrium

Market and government mechanisms may work in accord on one occasion and fall into disarray on another in the course of economic development.Inconsistency between the two may well be unavoidable.

The friction that may arise between the dual mechanisms is an issue pertinent to economic disequilibrium.Given the fact that disequilibrium falls into two categories,we should bear each category’s attributes in mind when looking into such possible friction.Let us first consider what may happen in the first category of disequilibrium.

The inconsistency between market and government regulation in the first category of disequilibrium is apparent in two ways.

Firstly,if there are both market and government mechanisms in the economy in the first category of disequilibrium,with the former playing a basic regulating role and the latter assuming a regulating role at a higher level,friction may arise between them when supply is in disarray with demand.In this situation,because of market incompleteness,the rise or fall in prices can only slightly ease supply or demand shortfalls,and price changes cannot entirely reach the goals of market regulation.If,at this stage,the government steps in to make up for the deficiencies of market regulation but its regulating steps are at odds with the intention of market regulation,the shortfalls may be eradicated,but market mechanism will be damaged.This is a reflection of the friction between the two mechanisms.In other words,in this situation,government mechanism can work only at the expense of market mechanism-at least to a certain degree.

How should we evaluate the inconsistency or friction between the two mechanisms?We can only evaluate them from their regulatory results.Is it necessary,and worthwhile,for the market mechanism to be damaged,if only to a limited degree?Of course it is always better to rectify the situation in which supply falls short of demand or outstrips demand through government regulation without causing any damage to market mechanism.In that scenario,the two mechanisms are well coordinated and free from friction.But things do not necessarily go that way in reality.Therefore,the inconsistency between the two and the damage caused by government regulation to market mechanism can only be evaluated from the regulation results.Only by such evaluation can we see if such inconsistency is necessary and worthwhile.However,no matter what happens,friction between the two is highly probable.

Secondly,contrary to the above proposition,market mechanism may also hold back government regulation in the first category of disequilibrium,due directly to an incomplete market,incomplete and untimely information,the failure of prices in regulating supply and demand,and constraints on resource supply and demand.For instance,on certain occasions when the government takes steps to regulate the allocation of resources,these steps may not reach the expected goals because of factors such as incomplete market and incomplete and untimely information.In this scenario,the government hopes to inform market traders of what gains or losses are to be expected from its regulatory steps,in the hope that they will follow their own interests to readjust the allocation and input of their resources.In the meantime,however,the market is also conveying,through its own channels,its information on gains and losses to these traders.As a result of different information accesses and incomplete and delayed information,market mechanism may either accord with the intention of government regulation,which is,of course,the best scenario,or disturb or restrict government regulation.Both possibilities are also reflections on the inconsistency or friction between the dual mechanisms in the course of resource allocation or economic operation.

To sum up,in the first category of disequilibrium,market and government mechanisms may,in their coexistence,be locked in a state of inconsistency,and frictions between them are possible,and,sometimes,even unavoidable.

VI.Possible friction between dual mechanisms in the second category of disequilibrium

The second category of disequilibrium is more serious in degree than the first category.Therefore,the possible friction caused by the coexistence of market and government mechanisms may be more acute than in the first category of disequilibrium.This can be interpreted in three ways.

First,the fact that enterprises are not independent commodity producers or have not put an end to their status as government appendages will hold up their efforts to organize production and input

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