Resources, Power, and Economic Interest Distribution in China

Zhang Yishan, Yu Weisheng, Wang Guangliang

• Publisher: Routledge
• Year: 2021
• ISBN:
  9781000290370
• Edition: 1
• Topic: Business
• Subtopic: Business generale
• Index: Business

Based on an investigation of economic and resource allocation factors and their close relation to economic power, this book puts forward the power paradigm, a new economic research paradigm revealing the relationship among power, institutions, and resource allocation mechanisms, helping to establish a valid connection between macroeconomics and microeconomics and shedding light on real-world economic issues.

Drawing on classical, neoclassical, and institutional economics and how these schools of thought have impacted on economic development in China over the past century, the book sheds light on distribution processes and argues that enterprise contracts, market pricing, policies, laws and regulations can all be classified as interest distribution mechanisms informed by a variety of power games. The power paradigm suggests that to achieve full utility and an optimal allocation of resources to foster social welfare, power reciprocity needs to be shared among different economic agents at the same hierarchy level while making sure that power and responsibility are equivalent for each economic agent.

The book will appeal to research students and academics interested in heterodox economics, pluralist approaches, institutional economics, and game theory.

1 Introduction

Power plays a critical role in social economic development, and the subject of power is increasingly garnering the attention of society. In China, for the past century, economic change and development has reflected as structural change and economic and political power games. Economic development is a process of continuous adjustment and improvement in various powers, for power relations play a central role.

China’s development from primitive capitalism to industrial capitalism during the late Qing Dynasty was believed hindered largely by underdeveloped science and technology and backward political institutions. In fact, the fundamental reason for the hindrance was the monopoly of the dynasty’s imperial power. Politically, China’s Qing Dynasty abolished the institutions conducive to the development of a decentralized system, which constricted the creativity of local authorities and people. Economically, the government monopolized all large-scale organized activities including the production of salt, iron, and matches. Free enterprise did not exist. The Westernization Movement during Qing Dynasty was characterized by government monopoly over big industries. The industries were partly business and partly government. Such a centralized feudal bureaucratic system impeded the emergence of industrial and commercial capitalists. Because bureaucrats controlled every aspect of society, there was no legal room for private activities. Any economic activity was surrendered to imperial powers and to bureaucratic control and pressure. It was impossible to have a fair and sound market order or to establish private firms. When state power sought the interests of the privileged class, and consequently, damaged public interests, China inevitably experienced economic stagnation.

In the period of the Republic of China, the economy was alternately controlled by military forces and foreign powers. On the one hand, warlord scuffles, anti-Japanese wars, civil wars, and social unrest frequently occurred. On the other hand, foreign concessions and privileges continued to infiltrate. In cities, only a few industrial firms had backward technology. Moreover, most were controlled by either the four most influential Chinese families or foreign capital. Therefore, the working class was enslaved by foreign and comprador capital. Even the national bourgeoisie did not obtain political and economic power and were pushed aside forced to live dependently on others. In rural areas, landlords and rich peasants, who accounted for less than 10% of the population, possessed over 90% of production materials and land. This wealth brought economic and political power to exploit and oppress the peasants. Moreover, foreign invaders plundered and pillaged. Chinese peasants lived in extreme poverty, suffering from hunger and cold for a long time. When there was no way to ensure rights to subsistence for the masses, the only solution was dictatorship of the proletariat and equal distribution of land through armed uprisings to seize economic and political power.

After the establishment of the People’s Republic of China in 1949, land reforms expropriated the land of landlords and rich peasants through forceful political power, and the land was distributed to peasants. Due to natural resource shortages, such reforms gave most Chinese farmers the right to subsistence and development and resolved the power imbalance to some extent. Therefore, productive forces were liberated and the agricultural economy advanced. For urban industries, the new government confiscated comprador and foreign capital and emancipated national capital in the early days of the People’s Republic of China, which gave all economic agents relatively equal economic power. As a result, every social class was highly motivated, and the industrial economy advanced rapidly. With agriculture and industry development, people’s lives improved, as the most basic needs of the people were met. Unfortunately, the socialist transformation of capitalist industry and commerce around 1954, the Great Leap Forward Movement in 1958, and the People’s Commune Movement in 1960 rendered all production materials publicly owned, including land, which led to highly centralized economic power and, consequently, a planned economy emerged. The planned economy allowed administrative power to penetrate every aspect of society from production, distribution, exchange, and consumption to politics and culture. Such distortion and expansion of administrative power caused consecutive political movements. These movements culminated in the Great Cultural Revolution and deeply affected Chinese economic development.

Chinese economic reform after 1978 was a complex process of power decentralization instituted by the central government. The reform was a process that comprehensively redefined the frontier of each power and cultivated market entities. Reforms returned power to individuals and firms by rearranging power structures to realize the economic incentives of micro-agents. On the one hand, China’s gradual reform is a process of defining economic power that increases in complexity as it progresses. The structural changes in the process can be categorized into four phases.

The first stage is to define the right to use a product, the right to benefit, and the right to use labor and land. Such definitions significantly improved efficiency in production and exchange. The improvements were reflected in the household contract responsibility system in rural areas, the state-owned enterprise contracting system in urban areas, and the emergence of privately or individually owned business in the early 1980s. In the second phase, the right to transfer products and labor and the right to benefit from labor were defined. The rights were demonstrated in the transformation of state factories and shops into state-owned enterprises and in the separation of ownership from management. Meanwhile, private enterprises and township and village enterprises emerged and grew. The third phase defined financial assets and land transfer rights evidenced by the establishment of stock markets and the emergence of real estate business in coastal areas. The fourth phase defined ownership and recognized personal and corporate property rights. Particularly, the recognition of private property in the Constitution made the distribution of such rights more in accordance with the requirements of market orientation. As proof, the scope of state ownership reduced and its weight decreased. Moreover, the private sector became the main driver of economic growth. On the other hand, China’s regional separation of power was consolidated by institutionalizing the financial relationship between the central and local governments. In the process of reform, the central government decentralized different administrative power among regions. In the 1980s, there were four Economic Special Zones. Then, 14 coastal open cities were established under direct planning by the state, municipalities with independent planning status under the national social and economic development, the development of the Pudong area, the development of the western region in China, the revitalization of the northeast regions, and the rise of the central China followed. Each round of power decentralization to local authorities motivated local development and provided experience and a driving force for the next round of reforms.

However, the power decentralization was excessively slow for rural reforms, and the peasant masses did not obtain the power they deserved. In the late 1970s, land use right in rural areas was assigned to the peasants. From 1984, they were allowed to transfer such rights partly. Such early form of household contract responsibility system did result in remarkable improvements in agricultural productivity, but the inchoate process of power decentralization and balancing reached a standoff in 1985. The focus shifted to city and industrial reforms, which rendered the newly improved countryside largely forgotten. The unreasonable power structure in the rural areas is reflected in the following aspects.

First, there is an absence of land ownership. The People’s Commune Movement caused peasants to lose land ownership and the right to use it because governments could commandeer the land at any time in the name of public interest. Without long-term ownership of land and land use right, there is no incentive to build farmland capital construction. Therefore, agriculture lacks long-term, steady, and rapid development. Second, there is no right to education, and peasants have no access to higher education and vocational training. Even the nine-year compulsory education is not ensured. Without education, how can the rural population find opportunities for employment? How can they improve labor productivity and escape poverty? Third, the right to social security is also absent. Due to policy reasons, peasants face a range of discrimination. The rural population is deprived of a minimum wage, medical insurance, unemployment compensation, and living allowances including the cooperative medical service and free education that they were entitled to before the reforms. Fourth, the free migration right is absent. Although peasants are common civilians, they cannot relocate to cities to work, live, and study on an equal basis due to the household registration system. Of course, they are unable to enjoy the fruits of Economic Reform and Open Up and the opportunities of development. Fifth, the right to free speech is denied to peasants. Peasants are the most disadvantaged group among all of China’s social classes. Because it is geographically scattered, the rural population lacks organization and knowledge concerning rights protection. It is safe to say that a lack of power is the root cause of the long-standing problems besetting China’s agriculture sector, its rural areas, and its farmers. Therefore, the solution is to award peasants the same power as other social classes.

This context explains our motivation to investigate power and its effect on economic and social development, particularly with respect to resource allocation and the distribution of interests. Power has become a widespread social phenomenon since interpersonal dominance behavior emerged in civilized society. Power relationships exist among individuals, between individuals and groups, and between groups and other groups. Thus, the power relationship can be considered an objective need and the basis of the survival and development of society. Without certain power to maintain, adjust, or develop the basic order of society, society will collapse. Hence, society is a power entity composed of various power networks. Power is narrowly defined as political power, the control given to an individual over other individuals by a specific organization, and the broad definition of power refers to the ability of an individual or social group to influence the behavior of others from their own perspective. The definition of power in this book, as generally recognized by theoretical circles, is the influence and control of a behavioral subject on other subjects based on the resources owned by the controlling agent. Bargaining power, or negotiating power, is an external manifestation of power in the negotiation process. The power of the behavioral subject in a certain game is determined by the importance, scarcity, and substitutability of the resources it controls. “Right” is different from “power.” “Right,” a term we use in this book, as Coase notes, is the entrepreneur’s authority to manage and conduct the allocation of resources. To some extent, it is the equivalent of the power of control, or property rights (Coase, 1995).

Research questions

The essence of neoclassical economics is a free market competition mechanism that yields prices whose fluctuations provide signals between demand and supply. According to these signals, the distribution of social wealth and the allocation of social resources readjust. In this process, commodity prices are determined by the market as are wages, interests, and land rents. There is no room for power in this economic process; power of all types subdues non-personified market effects. All decisions are the response to market orders. The limitation of neoclassical economics lies in its excessively idealistic presumptions and conclusions.

After Keynes, the neoclassical synthesis incorporates social economic reality. However, there is irreconcilable contradiction between market clearing and unemployment under this framework. Macroeconomics pays attention only to aggregate demand adjustment, while microeconomics is only concerned with the emergence of costs and prices. Macroeconomics and microeconomics are not necessarily connected, leading to a lack of individual rational choice based on macroeconomics, while microeconomics cannot explain macroscopic reality sufficiently. One cause of this phenomenon is an overemphasis on the formalization of economic theories. From Ricardo’s abstract deduction (1891) to Marshall’s economic modeling (1961), when economics became a science, the curse of formalism was entrenched. As neoclassical studies highlight the pure economic factors of social phenomena in the models, the relationship between individuals transforms into relationships between individuals and things, even between one thing and another thing, based on the rational choice of economic subjects in a market environment. The economic agent was completely materialized; there is no difference in labor, but the subjective initiative is ignored. As a result, economics has lost its vigor and become blackboard economics.

The formalization of economics has another deleterious consequence; economic research is completely separate from politics. Since Keynes, government intervention in the economy has always been the center of the argument. Neoclassical economics believes that the market mechanism will automatically lead to optimization of resource allocation, and government intervention will only bring deadweight loss to the economic system since the government has no better information than the market. The opposite opinion is that the economy cannot reach optimal levels through market mechanisms; even if it does have such capability, the adjustment will be long and painful. In fact, economy and politics were not initially separated, and economics was born out of politics. The purpose of classical economics is to formulate relative national policies based on economic research results to promote social development, which is the logical order according to old institutional economics. Galbraith (1992), the institutional economist, states that the attempt to separate the economy from politics and political intentions is completely meaningless; it obscures true economic power and its intention. This attempt to separate the two is also the main reason for economic decision errors and misjudgment. Pure economic theory that does not integrate the political environment and institutions will inevitably ignore the effects of political intentions on the economy. Such ignorance usually has serious consequences. In fact, there is no econo...

Table of contents

• Cover
• Half Title
• Series Page
• Title Page
• Copyright Page
• Table of Contents
• List of figures
• List of tables
• Preface
• 1 Introduction
• 2 Power and economic power paradigm
• 3 Economic power and corporate contractual arrangements
• 4 Theory of transaction price based on the power paradigm
• 5 Price determination in goods market
• 6 Price determination in financial market
• 7 Price determination in labor market
• 8 Theoretical foundations and boundaries for government intervention
• 9 Economic power structure and the optimal allocation of production factors
• 10 Institutional change with power as the underlying logic
• 11 Conclusions and prospects of the research based on power paradigm
• Afterword
• References
• Index