A reply to Wallace’s 山登绝顶我为峰

Here is my reply to Wallace’s 山登绝顶我为峰 blog entry,

As a non-economist, I am not knowledgeable enough to pick Prof. Steven Cheung’s best economics paper. But I can say his way of thinking and analyzing problems have played an important role in shaping my own. So to me, the most important series of articles were the following three that he wrote in 1984 to share his insight about how to think and analyze.

思考的方法（上）, （中）, （下）

For me, I try to read and learn from people like Professor Cheung, Warren Buffett (his 2008 biography), Richard Feynman, and Bill Buxton for their specialized knowledge but also the way they analyze and solve problems and sometimes even how they live their lives.

Wallace, you mentioned,

2. The style is getting closer to Adam Smith

One major strength of Smith’s work is the evidenced based approach. I would argue that Professor Cheung’s articles in recent years are often short of evidence, despite that the creativity still exists.

I wonder if the main reason of Prof. Cheung’s articles in recent years being “short of evidence” was due to Prof. Cheung having “internalized” lots of these “evidences” and not wanting to spend time and energy to write and record them? You see, this reminds me of the story of a math professor standing in front of a class proving some theorem and then stop for half an hour and then said to himself, “oh yes, this is obvious” and then continue on with his proof without any additional explanations.

Wallace, am I right to think and say that those missing evidence and data may be “obvious” to professor Cheung, but for many other economists to have a chance to understand and follow the professor’s line of reasoning in a concrete and reproducible manner, a lot more of these missing evidence and data have to be included and provided?

While I don’t know how likely is this, but without the missing evidence and data, there is much less chance to point out any potential flaws in the analysis and reasoning thus making the theory less able to stand the test of time?

山登绝顶我为峰

「《佃农理论》是四十多年前发表的了，之后那么多年我有其它作品超越《佃农》的水平吗？很难说。巴赛尔及几位朋友认为《价格管制理论》胜出，但那是三十五年前的作品了。我认为三卷本的《经济解释》及去年的《中国的经济制度》胜出，同意的人可能不多。科学的顶峰真的摸不着，无从界定。我觉得自己的经济文章愈来愈随意，愈来愈变化多，愈来愈像二百多年前的史密斯。今天以中文下笔，只凭一点灵感，直觉认为是对，逻辑复核一下，向有趣的地方推呀推的，但规格再不严谨了。世事多知了不少，挥洒远为容易。多活了数十年，经验累积是无可避免的吧。」

This article by Professor Cheung has brought up two discussable issues.

1.  Among all his works, which is the best?

I personally would vote for ‘The Fable of the Bees’: a paper with much originality and supported by solid empirical data. 

2.  The style is getting closer to Adam Smith

One major strength of Smith’s work is the evidenced based approach.  I would argue that Professor Cheung’s articles in recent years are often short of evidence, despite that the creativity still exists.

「中国的经济制度」

Professor Cheung has said this paper is another peak of his academic achievement.  It is thus very worthwhile to spend time to study this work.

I like the idea of adopting Contractual Arrangement as the theoretical basis for the concept is more comprehensive and fundamental compared to property rights, institutions (which are simply various types of contractual arrangement).   Using regional competition to interpret the growth of China is another powerful approach. 

I expect Cheung to go more in depth the role of government in marketization.  It also surprises me that the process of establishing necessary infrastructures (especially the legal and financial ones) is not covered.  The part on China’s monetary policy is interesting but there is obviously a lack of details, especially without touching how China has relaxed her capital control on a gradual basis.

Recent articles on economic recovery

Professor Cheung has recently written a series of articles of economic recovery. There are a few interesting issues that can be discussed.

1. He supported China’s government spending plan but insisted that Keynesian approach ought not be adopted;

2. 「金融机制出了大事，人民之间的财富会有转移，而不少财富可能蒸发了，但美国鼎盛的人材依旧，资源依旧，厂房楼宇依旧，江山也依旧——生产力当然不变。」Is it true that productivity really remain to be the same?

3. 浮沙指数——借贷与抵押的比率, should we blame 高浮沙指数given that the 指数is generated from the market? BTW, I would argue that 浮沙跟泡沫都是指同一樣的現象;

4. 「财富等于收入除以利率（W=Y/r），调整的机制过程可以很复杂，这里不说。财富（W）一下子暴跌，不回升，收入（Y）与利率（r）一定要调校。市场的利率（不是贴现率）向下调校不易：银行的借与贷皆不易（解释过了），而就是市场利率被政府所迫而下降，借贷难行这利率没有意思。余下来是收入（Y）的向下调校了。所谓收入，其实是物价乘产量（P x Q）。选择物价下降还是产量下降呢？当然选物价下降，因为物价只是交易的媒介，但产量却是人民享用的饭碗。以产量下降调校，苦不堪言也。」

Despite that both W and Y drop and r increases during the financial tsunami, I am not sure if the above logic flows (i.e. W drops and thus leads to…..).

My trip to Shenzhen

Back in November, I was able to attend 佃農理論四十週年研討會. It has been my long time dream to meet with Professor Steven Cheung and it was finally fulfilled!! Cheung was very nice to us all and spent a lot of the time in answering questions that we asked, at both formal and informal meetings. It’s interesting to find out that scholars and economists who do not share his view are generally perceived by Cheung as not capable.

Cheung’s major contributions to economics are in two ways: his study of contractual arrangment (institution) and methodology. As transaction and information costs keeping altering under the continuous changes of technology and political constraint, any economic theory is subject to adjustment and modification. On the other hand, methodology is probably more ‘long lasting’ in terms of the sustainability. The ideas of

1. studying the real world constraints;

2. transaction costs should be measured in an ordinal sense;

3. avoidance of unobservable factors including utility;

4. theories must be testable;

5. downward sloping demand curve

are and will still be valid, if we insist on economic explanation. Sometimes I feel that even Professor Cheung himself finds it hard to keep up with the above in his recent articles.

Almost all the participants have been under heavy influence of Professor Cheung and his thinking. The ‘common background’ easily created a bond among us during the 3-day conference.  Individual speakers tended to focus too much on praising Professor Cheung instead of discussing about his thinking. Very few counter arguments or challenges about Cheung’s new paper on China could be heard throughout the event.

It would be great if similar conferences can be held in the future on a more regular basis. More rigorous discussions, if not debates, should be encouraged at future events.

Prof. Cheung on global financial crisis – a clarification with Becker

Here is an interesting piece, “金融灾难的核心问题——与贝加商榷” which professor Cheung tries to clarify a few things with what professor Becker wrote in the Wall Street Journal. The professor also referenced Maurice R. “Hank” Greenberg’s (former Chair and CEO of AIG) written statement before the House. Here is an excerpt,

AIG的前总裁M. R. Greenberg十月七日在众议院的供辞，令人叹息（见http://oversight.house.gov/documents/20081007101332.pdf）。我非常欣赏这个八十岁的老人家，完全没有理由怀疑他的顶级专业知识水平。老人家的供辞的一个重要部分，言下之意是说：美国的金融市场是一片浮沙，可以赚钱，但你要懂得怎样避重就轻，在浮沙走动时你要步步为营，一眼关七，不可有半步差池也。从其它读到的报道理解，这片浮沙之所以形成，是因为借贷没有适当的抵押保障。对街上人解释，是借钱可以用物业或股票或货币或真金白银作抵押，也可用政府债券，但衍生出来的工具或债券不可靠，因为拆到底往往只是君子一言。

Following is a chat between Mr. Hank Greenberg and Charlie Rose. Enjoy.

Is The Professor wrong about Usain Bolt?

Professor Cheung wrote about Liu Xiang (刘翔) and Usain Bolt in this entry “从刘翔弃赛说黄龙觅士“. I have written about Liu Xiang here and have nothing much to add.

What I do want to humbly point out is I think the Professor is wrong in his assessment of Bolt,

“牙 买加的飞人博尔特可谓不识时务。冲线之前他伸臂拍胸，明显地缓慢了下来，仍然以九秒六九破了一百米的世界纪录。如果此公不搞搞震，九秒六○易过借火，这样 的纪录可能维持数十年。“

Given the talent of Usain, I think he is so good that he can pretty much break the world record a few times as he improves. So, economically, why would he want to push it all the way out to something that will take him years to break? If I had Usain kind of talent, then theoretically speaking I can break a world record once and get it to 9.60 OR break it a few times (or nine times) over a few years, one for each of 9.68, 9.67, 9.66, … 9.60. If I were Usain, it seems rather obvious that I would definitely want to choose the later option and gain the benefit & hype of extending my “wow” factor and sustaining people’s attention. To me, the commercial and advertising values will certainly be higher after each contract negotiation every few years.

Here is a link to my brief “Dear Usain Bolt“.

P.S. And I think there is prize money for breaking a world record in some of the international track competitions too.

P.P.S. Sorry I haven’t blogged about The Professor’s “Economic System of China” yet as I have been preoccupied with many things on my plate. I will blog about the article when I find some time. I will.

A reply to Kin Ming

My guess is that in a country with under developed institutional arrangement, regional competition is particularly helpful.  If region A is getting too unreasonable in terms of policy, taxation and corruption, investors can shift to region B instead.  In other words, the regional competition can, to a certain extend, serves as a powerful tool to reduce ‘crazy practices’, including corruption.  In the long run, to strengthen the institutional arrangement (i.e. delineation and enforcement of property rights) is still inevitable.

Wallace

中國經濟制度的題外話

對於張五常教授的《中國的經濟制度》，仍在反覆沉思。思考方向主要有兩點，其一是相較於早已以資產界定權利的國家，地區競爭制度為甚麼在權利結構從以等級轉為以資產界定時特別重要。其二是地區競爭制度在創造中國經濟奇蹟的同時，是否同時存在阻礙中國經濟發展的特性。

上述兩者未有結論，不妨先分享近日閱讀中國近代史所得。

包產到戶作為中國經濟改革的開始，卻原來並非由政府倡議。七八年的十一屆三中全會，中央仍然指出不許包產到戶，但同年部分地區的災情，卻迫使部分地方的農民及幹部，自行「發明」了包產到戶的制度。

地區競爭制度有賴中央下放權力。這種安排最早見於五八年，中央把國企、計劃經濟管理、基建審批等權力下放地方。只是中國此後屢生政治風波，不時反左反右，於是地方權力收收放放，未能貫徹推行。

RE: After reading Professor Cheung’s China series

After reading Professor Steven Cheung’s paper (Chinese version), there are a few issues that maybe worthwhile to think about.

1. 層層承包 is a clever way to conduct the economic reform Without creating too many shocks and resistance.  The label of ‘Communist’ can still be kept.  Having said that, is this system the Best in human history?  If not, should China continue to upgrade 層層承包 (走自己的路)or gradually shifts to the American system?  Should the American system be the final destination (Cheung disagrees but Demsetz seems to hold this view)?  These are all very important questions to answer.
2. Monetary policy: One major reason that Zhu was able to maintain rather stable exchange and inflation rates had to do with China’s capital control.  Unlike Cheung, my concern is not that China is shifting to US’ monetary approach, but rather how China may relax her capital control without having to suffer severe financial crisis.  The improvement of existing financial infrastructures, unfortunately, is not covered in the paper.
3. Unlike most papers and reports that focus on statistics and figures, this paper focuses a lot on the institutional arrangement, which is definitely essential to interpret China’s emergence.

I have a feeling that China may not go all the way to the British/US’ approach, but would definitely need to borrow some key elements from the British tradition.

1.  Rule of law (a constitution that protects human rights and property rights and most importantly, is well enforced);

2.  Independence of courts (China seems to be very hesitant to use the term ‘separation of powers’.  Even so, the increasing dependence of courts is a MUST!);

3.  The relationship between businessmen and officials (the problem is that many officials are now taking up businessmen’s role to promote business opportunities; the competition among provinces helps to control; the degree of corruption <an official who ‘charges’ too high would lose the business to other regions>; even so, China should start to redefine officials’ role and keep them away actively involved in businesses);

4.  Freedom of media must be further enhanced to monitor the government(s)

 Whether Universal suffrage and muti-party system…are necessary?  These are the two elements that I am not so sure and keep asking myself.  The bottom line is to be correct rather than politically correct.