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Building a Government-Market Relationship with Chinese Characteristics

Dec 06-2024   



From a market point of view, what should the government do?

First, the government should intervene when the market fails or even when a crisis occurs. In recent years, China's thinking on bailout has always been tied up with the issue of moral hazard. Should we consider moral hazard before we bail out the market? I think it depends on the situation. If the market is failing, or even if there is a crisis, the government should bail out the market first, so that the market can "survive" first, which is much more important than dwelling on moral hazard.

 

Second, since the market is incapable of correcting inequality in income distribution, it is necessary for the government to promote common prosperity to ensure social harmony and stability. The market economy is capable of achieving Pareto optimality. Pareto optimality is a concept related to efficiency, but not to income distribution. A state of extremely unequal income distribution can also be Pareto optimal. From this perspective, the market does not have the ability to change the inequality of income distribution. Therefore, there is a greater need for strong government regulation in the area of income distribution so that productivity can truly benefit everyone.

 

Third, the government not only needs, but also has full scope to promote industrial development through industrial policy. In the modern industrial chain, there are several market segments in each industry. In each market segment, there are economies of scale in product production. As long as the first mover is the first to scale up, the latter can gain a very strong competitive advantage. From this point of view, the state should promote the domestic industry to preemptively form scale advantages. China's new energy vehicle industry is a good example. The success of China's new energy vehicles cannot be separated from China's support policies for the new energy vehicle industry over the past decade. Therefore, industrial policy is necessary and useful, and our country should intervene in the development of the industry.

 

Fourth, government revenue should be returned to the people to some extent. As far as the modern economy is concerned, it is very important to develop production and it is equally important to find demand for this production. Our government, in addition to tax revenue, also receives a large amount of returnable income from holding a large number of assets. Under such circumstances, there are two ways for the market to achieve a balance between supply and demand: one is for the government to transfer income to the private sector and enhance the private sector's ability to create effective demand; the other is for the government not to transfer income to the private sector, but for the government to create effective demand. The main reason for the lack of effective demand in China in recent years is that the government has not returned revenue to the people and has not actively spent money itself. As a result, the whole economy has been poorly circulated and has been in a state of insufficient effective demand for a long time.

 

Conclusion

How should the relationship between the market and the state be managed? The market is the foundation, the government is the market leader and regulator, but also the market participants. To judge whether the relationship between the government and the market is appropriate,  there are 3 standards: whether it is conducive to the development of productive forces, whether it is conducive to the improvement of comprehensive national strength, and whether it is conducive to the improvement of people's living standards. The influence of market players is based on the premise of income, and the more income, the more market influence. If market players are unable to convert their income into effective demand, it will lead to a lack of effective demand, which in turn will lead to other economic problems, and the government, as a market participant, follows the same rule. Considering the social benefits, the current fiscal expenditure can be invested more in infrastructure works such as building bridges and roads to provide solid and strong support for the sustainable development of China's economy.

Building a Government-Market Relationship with Chinese Characteristics

Dec 06-2024   



From a market point of view, what should the government do?

First, the government should intervene when the market fails or even when a crisis occurs. In recent years, China's thinking on bailout has always been tied up with the issue of moral hazard. Should we consider moral hazard before we bail out the market? I think it depends on the situation. If the market is failing, or even if there is a crisis, the government should bail out the market first, so that the market can "survive" first, which is much more important than dwelling on moral hazard.

 

Second, since the market is incapable of correcting inequality in income distribution, it is necessary for the government to promote common prosperity to ensure social harmony and stability. The market economy is capable of achieving Pareto optimality. Pareto optimality is a concept related to efficiency, but not to income distribution. A state of extremely unequal income distribution can also be Pareto optimal. From this perspective, the market does not have the ability to change the inequality of income distribution. Therefore, there is a greater need for strong government regulation in the area of income distribution so that productivity can truly benefit everyone.

 

Third, the government not only needs, but also has full scope to promote industrial development through industrial policy. In the modern industrial chain, there are several market segments in each industry. In each market segment, there are economies of scale in product production. As long as the first mover is the first to scale up, the latter can gain a very strong competitive advantage. From this point of view, the state should promote the domestic industry to preemptively form scale advantages. China's new energy vehicle industry is a good example. The success of China's new energy vehicles cannot be separated from China's support policies for the new energy vehicle industry over the past decade. Therefore, industrial policy is necessary and useful, and our country should intervene in the development of the industry.

 

Fourth, government revenue should be returned to the people to some extent. As far as the modern economy is concerned, it is very important to develop production and it is equally important to find demand for this production. Our government, in addition to tax revenue, also receives a large amount of returnable income from holding a large number of assets. Under such circumstances, there are two ways for the market to achieve a balance between supply and demand: one is for the government to transfer income to the private sector and enhance the private sector's ability to create effective demand; the other is for the government not to transfer income to the private sector, but for the government to create effective demand. The main reason for the lack of effective demand in China in recent years is that the government has not returned revenue to the people and has not actively spent money itself. As a result, the whole economy has been poorly circulated and has been in a state of insufficient effective demand for a long time.

 

Conclusion

How should the relationship between the market and the state be managed? The market is the foundation, the government is the market leader and regulator, but also the market participants. To judge whether the relationship between the government and the market is appropriate,  there are 3 standards: whether it is conducive to the development of productive forces, whether it is conducive to the improvement of comprehensive national strength, and whether it is conducive to the improvement of people's living standards. The influence of market players is based on the premise of income, and the more income, the more market influence. If market players are unable to convert their income into effective demand, it will lead to a lack of effective demand, which in turn will lead to other economic problems, and the government, as a market participant, follows the same rule. Considering the social benefits, the current fiscal expenditure can be invested more in infrastructure works such as building bridges and roads to provide solid and strong support for the sustainable development of China's economy.