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Economists Should Provide a Correct Market Theory to Defend Market Economy

Oct 11-2021   



The mission of economics is to defend the market economy with a good market theory, says Prof. Zhang Weiying, one of the founding scholars of the NSD’s predecessor – China Center for Economic Research (CCER). Measured by this yardstick, “our mainstream economics” would achieve a score of 59 and fail the test, he adds.

 

In his speech on the occasion of the inauguration of Cheng Ze Garden as the new campus of the NSD, Prof. Zhang laments the failing of mainstream economics on the ground that it has no place for entrepreneurs and entrepreneurship, two of the most critical components of the market. The hypothesis of mainstream economics has ruled out the role of entrepreneurs, who are seemingly neither necessary nor possible, he says.

 

The truth is that in an uncertain world, knowledge and information are dispersed among people; as each person can only have limited knowledge, entrepreneurship is indispensable for decision making because the latter has to do with imagination and conjecture. The most important feature of the market is that free competition forces entrepreneurs to keep discovering and rectifying mistakes, or else they would go bankrupt. Therefore, equilibrium is not what defines the efficiency of the market, Prof. Zhang argues. In this sense, Keynesian economics’ lambast on the market is wrong.

 

On the issue of income distribution, Prof. Zhang believes that it’s a misleading concept that gives the impression of an existing income sitting to be distributed. What cannot be truer is that an income is created through the “sale” of certain things (product, labor service and the like), and the total income and wealth of a society largely hinges on the extent to which entrepreneurship is at work. If entrepreneurship is suppressed, he says, not only will profits be lost but also the income and welfare of all people.

 

A profit means that an entrepreneur has created value and met the contractual obligations towards the other stakeholders. It’s not a symbol of exploitation, Prof. Zhang points out. Using empirical data of Chinese provinces, he demonstrates that marketization is highly and positively correlated with the average salary of private-sector employees, and slightly but still positively correlated with the net return on assets of private enterprises. Moreover, when a region is more marketized, its poverty rate drops correspondingly.

 

Prof. Zhang also stresses the importance of income fluidity, something not to be seen in statistics. In a market economy, the rich are likely to lose their fortunes while the poor might move up the income ladder. Entrepreneurship makes a big difference. Many of China’s billionaires were almost penniless 20 years ago, so how is their upward trajectory supposed to prove that income distribution is unfair? Prof. Zhang asks.

 

Economists ought to provide a correct theory in the defense of the market economy, and Prof. Zhang calls on the NSD’s professors and all of China’s economists to make their due contributions.

Economists Should Provide a Correct Market Theory to Defend Market Economy

Oct 11-2021   



The mission of economics is to defend the market economy with a good market theory, says Prof. Zhang Weiying, one of the founding scholars of the NSD’s predecessor – China Center for Economic Research (CCER). Measured by this yardstick, “our mainstream economics” would achieve a score of 59 and fail the test, he adds.

 

In his speech on the occasion of the inauguration of Cheng Ze Garden as the new campus of the NSD, Prof. Zhang laments the failing of mainstream economics on the ground that it has no place for entrepreneurs and entrepreneurship, two of the most critical components of the market. The hypothesis of mainstream economics has ruled out the role of entrepreneurs, who are seemingly neither necessary nor possible, he says.

 

The truth is that in an uncertain world, knowledge and information are dispersed among people; as each person can only have limited knowledge, entrepreneurship is indispensable for decision making because the latter has to do with imagination and conjecture. The most important feature of the market is that free competition forces entrepreneurs to keep discovering and rectifying mistakes, or else they would go bankrupt. Therefore, equilibrium is not what defines the efficiency of the market, Prof. Zhang argues. In this sense, Keynesian economics’ lambast on the market is wrong.

 

On the issue of income distribution, Prof. Zhang believes that it’s a misleading concept that gives the impression of an existing income sitting to be distributed. What cannot be truer is that an income is created through the “sale” of certain things (product, labor service and the like), and the total income and wealth of a society largely hinges on the extent to which entrepreneurship is at work. If entrepreneurship is suppressed, he says, not only will profits be lost but also the income and welfare of all people.

 

A profit means that an entrepreneur has created value and met the contractual obligations towards the other stakeholders. It’s not a symbol of exploitation, Prof. Zhang points out. Using empirical data of Chinese provinces, he demonstrates that marketization is highly and positively correlated with the average salary of private-sector employees, and slightly but still positively correlated with the net return on assets of private enterprises. Moreover, when a region is more marketized, its poverty rate drops correspondingly.

 

Prof. Zhang also stresses the importance of income fluidity, something not to be seen in statistics. In a market economy, the rich are likely to lose their fortunes while the poor might move up the income ladder. Entrepreneurship makes a big difference. Many of China’s billionaires were almost penniless 20 years ago, so how is their upward trajectory supposed to prove that income distribution is unfair? Prof. Zhang asks.

 

Economists ought to provide a correct theory in the defense of the market economy, and Prof. Zhang calls on the NSD’s professors and all of China’s economists to make their due contributions.