A CCR Research Study

Introduction

The following is the third and final part of a report on CCR’s research project into the “Virginia School” of political economy, and its role in China. Part I was published in our February issue; Part II, on the divergence and distinctions between the “Chicago School” and the “Virginia School,” was published in March. In this part, we discuss how the ideas of James Buchanan and the Virginia School, also known as “Public Choice,” struck a responsive chord in China among reformers who were examining all varieties of Western economic thought, to help them find a path to modernization while still remaining true to their self-professed guiding Marxist principles. With the help of skilled colleagues, we located materials available only in Chinese, which demonstrate the influence and impact of the Virginia School on the past three to four decades of economic and political reform in China.

Part III. Buchanan and the Virginia School in China

Since the mid-1980s, hundreds of Western books on economics have been translated into Chinese. Included in these, and in other Chinese publications such as academic journals, is a large body of literature concerning Public Choice (gonggong xuanze lilun). At least five of James Buchanan’s books have been translated into Chinese.

By many accounts, Buchanan’s work on “constitutional economics” has had a major influence in China.

Feng Xingyuan, a Professor at the Chinese Academy of Social Sciences, and Deputy Director of the Unirule Institute of Economics, Beijing, was interviewed by the Shanghai Economic Review in 2013. Feng is described as “not just a commonplace Buchanan fan; he is also directly involved in the spread of Buchanan’s ideas in China.” Among other things, he translated Buchanan’s work on “Constitutional Economics” into Chinese. Asked about the impact of Buchanan’s thought on China, he said that Buchanan had been studied early in the reform period by Tang Shouning of the Chinese Academy of Social Sciences, who had concentrated on introducing Buchanan’s concept of “constitutional economics” and the distinction between constitutional and post-constitutional situations. Feng explained:

The constitutional stage is the level of rule-making and the level of choice between rules. In other words, reform is the choice of new rules. The post-constitutional situation is when the rules have been selected or there is no change in the rules; the stage of choosing how to operate within the established rules. Here constitution refers not only to the political sphere, but to all areas of human activity such as economy and society.

Over the past ten years we have basically not entered into the constitutional stage. We are still in the post-constitutional stage defined by the rules established in the past. A true reform involving changing the rules has not occurred. Economic reform today means patching things up under the existing rules. But now we have run out of room for that. Now we need real reform.

Now we place high hopes in a new generation of leaders. To implement constitution, to carry out the fight against corruption, as promised, but also to achieve the Chinese dream, the great rejuvenation of the Chinese nation. The Chinese dream implies that from now on every citizen should speak with more integrity about justice, about right and wrong. Now we have very high expectations for China to enter the constitutional stage.

So Buchanan’s influence on China is rather profound. His influence is not limited to the realm of theory, but is acting in a subtle way on the country as a whole…

After a number of scholars have come under Buchanan’s influence, the prospect of advancing reform has become quite solid. These scholars can in turn influence the officials they are in contact with.[1]

Most significant, from the standpoint of understanding Buchanan’s impact on China, is a lengthy 1998 discussion between Buchanan and Wang Dingding , professor at the National School of Development at Peking University.[2] The discussion ranged from Buchanan’s personal biography and intellectual development, all the way to philosophical issues – with ethical and moral issues playing a major role in their discussion, including both Western Judeo-Christian and Confucian ethics.

Wang Dingding: Now we are discussing the most interesting topic. We just discussed the “lower limit” of the process of constitutional and moral education. We can consider that there is a level which could be called the “Moral Threshold” such that, when the moral level of a group of individuals is below this critical point, then the constitution which these people can achieve will be so narrow that the social contract will not be broad enough to support a market economy…. Do you agree with me?

Buchanan: This is true.

Wang Dingding: So we need moral education, I mean the kind of moral education in which people can form core values and fundamental norms. These values and norms should be suited to the market economy…

Buchanan: Well, I think we already talked about the nature of the problem. About fifteen years ago, a lot of people (Wang notes: in particular the Chicago School) believed that the market by itself is everything, the market can solve all problems, that “the market” is the only thing needed. But look at what happened with the reforms in Russia and Eastern Europe. The population had not received a moral education, one allowing society to adapt to the market; neither from their moral traditions (which had been destroyed by decades of socialism) nor simply from the introduction of the “free market” alone. They had no such code of ethics to follow, so the market could not operate. Instead, either gang rule or martial law-style government control prevailed. Both norms produce a large amount of corruption (Wang’s notes: lack of competition necessarily leads to corruption). So if you are just sitting and waiting for the free market to emerge, all you will get is gangs or corrupt bureaucrats. You can’t achieve a market society under the rule of law [in that manner], you cannot achieve the market economy system. Without this system, “the market” is just chaos.

Here we can see a reflection of how, over time, Buchanan incorporated moral and ethical elements into his outlook. This may be the most important reason why Buchanan and Public Choice have found a favorable reception in China. Other reasons are the openness toward government and public-private partnership, the advocating of gradual reform as opposed to the rapid decontrol known as “shock therapy,” and their rejection of other elements of the so-called “Washington Consensus.” And on a microeconomic level, the notion of “rent seeking” has been found helpful in analyzing specific economic management and political challenges in China.

“Rent-seeking” – one of the defining concepts of the Virginia School and Public Choice — was first developed by Buchanan’s close colleague Gordon Tullock in 1967, when both were at Virginia Tech. Most commonly now applied to bribery or corruption, it was originally applied by Tullock to, among other things, monopolies and tariffs, and to advantages derived through political action. As Buchanan put it, “If there is value to be gained though political action, persons will invest resources in efforts to capture this value. And if this value takes the form of any transfer from one group to others, the investment is wasteful in an aggregate value sense.”[3]

Put another way, rent-seeking involves the use of real resources to capture a pure transfer, and thus reduces efficiency. Others describe it as extraction of value from others, without making any contribution to productivity. It is distinguished from profit-seeking, which involves the production of real wealth, in contrast to the unproductive redistribution of existing wealth. [4]

It is reported that the first economist in China to introduce the concept of “rent-seeking” was Wu Jinglian, who had studied Marxist political economy in the 1950s, and had been a subject of persecution during the Cultural Revolution. He was in the center of the reform process from 1979 on, and many China experts consider Wu Jinglian to be the most important economist in China during the decades of reform. He is also regarded as a “fan” of James Buchanan.

Wu Jinglian applied the “rent-seeking” concept to the problem of corruption in 1987 in a lecture and in a book.[5] And over two decades later, during a New York Times interview in 2009, Wu was still stressing “rent-seeking.” As he put it:

In the 1980s, a lot of economists were wondering: What is the reason for corruption? Some said it was based on the shift from Marxism to capitalism. I think corruption is based on rent seeking [bribery and kickbacks] – and the government interfering in the economy.

Wu Jinglian expressed the view that the government has too much power, and that its ability to interfere in the economy should be reduced. In his efforts, Wu said, he has two enemies: the crony capitalists, and the Maoists who want to go back to total government control.

Another scholar, in reviewing the changing role of the state in China’s economy and its economic theory,[6] examined the view of the role of the state among three schools of economic thought in Chinese scholarship in the mid-1990s: (1) the Market Failure School – showing where the failure of markets to provide for socially desirable outcomes, requires government intervention; (2) the Neo-classical School –the most prevalent, which stresses the efficiency of markets and minimal government intervention; and (3) the Structuralist School – which does not accept any fixed relationship between the market and the state, but holds that the range of state intervention should vary according to the circumstances. Within the second category, the neo-classicists, the Public Choice theory of the state “strikes a strong chord,” writes the author. The pervasive corruption in Chinese society has led them to believe that public officials are just “rational maximizers” like everyone else. Most government officials are seen as primarily concerned with survival, promotion, and other rewards, and they use their authority to distort economic transactions for their personal benefit whenever the opportunity arises (this author contends), and thus they believe that state intervention ought to be reduced to a minimum.

But this should not be taken to mean that Public Choice is anti-state. An example of how scholars have acknowledged that Buchanan and his colleagues recognize a positive, even “beneficial” role for the state, is found in a recent Korean study of Chinese economic development, which stated:

In the context of criticizing the main stream economics, Buchanan suggests an argument of constitutional economics as follows:

“We must redesign our rules, and our thinking about rules, with the ultimate aim of limiting the harm that governments can do, while preserving the range of beneficial governmental-collective activities,” Buchanan wrote. “We plead with our fellow academicians to cease their proffering of advice to this or that government or politician in office. Good games depend on good rules more than they depend on good players. Fortunately for us all, and provided that we understand the reason of rules in the first place, it is always easier to secure agreement on a set of rules than to secure agreement on who is or is not our favorite player.”[7]

Other Public Choice scholarship concerning China

The Public Choice journal, published by the Center for the Study of Public Choice at George Mason University, has published many articles from and about China, on topics such as decentralization and bureaucratic corruption, determinants of government size, liberalization and rent-seeking in China’s labor market, the pricing system, tax structure, as well as a number of reviews of books on China’s development.

And in the area of “transitional economics,” that is, the transformation out of communist state-controlled economies, Public Choice definitely comes down in favor a gradualism, as opposed to the rapid privatization and price-decontrol known as “shock therapy.” The Encyclopedia of Public Choice [8] points out that China has carried out incremental reforms in order to minimize the potential backlash against economic reform; this enables the government to build public support for reforms; and if some policies turn out to be mistaken, it is easier to reverse them, than under conditions of shock therapy. Gradualism makes reform more acceptable to a majority of citizens over time.

Notable in this respect is a 2007-2010 study on “China’s evolution toward an authoritarian market economy”[9] which uses game theory (a “predator-prey” model) to show that “improvements in the rule of law and in the protection of private property rights are not needed for short-run economic growth.” The author, Zhang Yongjing, reviews the literature on transitional reform, and he identifies the two competing views as:

  1. The “Washington consensus view” (WCV), promoting “shock therapy” reforms in Central and Eastern Europe, which proved to be complete failures.
  2. The “evolutionary-institutionalist perspective” (EIP), which advocates gradualist or incremental reforms, “which have been vindicated so far by the Chinese experience … China’s market miracle.”

China has fully adopted the EIP approach, the author says. In contrast to the Washington consensus view, which believes government should be eliminated from economic decision-making as much as possible, EIP advocates minimal government intervention to provide the institutional infrastructure needed for economic growth. WCV supports mass privatizations; EIP supports organic development of the private sector. And so on. “Cross-national evidence has supported the EIP because China’s market miracle has consistently exceeded the much more sluggish economic growth of Central and Eastern Europe over a period of 20 years.”

But, says the author, the economic literature on EIP has not yet provided any formal theoretical modeling to explain China’s success. There are still a number of questions to be answered, which revolve around the co-existence of authoritarian governance side-by-side with evolving institutional changes. A second conundrum is the weakness of research methods, which the author proposes to resolve through the application of evolutionary game theory — including “predator-prey” models, and the distinction between “stationary bandits” and “roving bandits” – which, he says, first, provide a means of showing how evolution toward a well-functioning market economy is quite possible under authoritarian governance, and secondly, that they show how a self-interested dictator can perform like an altruist.

With this model, the author states, it is possible to explain why China has been able to achieve high levels of economic growth without following the prescriptions of the “Washington consensus.” As a 2008 article in the Economist, quoted by the author, had stated: “China seems to be a standing contradiction to the argument that the rule of law is needed for growth.”

Indeed, a recurring theme in the Public Choice literature on China is challenging the “Washington Consensus” view that democracy equals efficiency, economic growth, and prosperity. This is of course a fundamental challenge to the Chicago School – which contends that less government means higher efficiency, and that free markets always produce the greatest efficiency. In fact, the notion of rent-seeking itself poses such a challenge – in that “democratic” interest groups, and their associated lobbying and “log-rolling,” can produce great unproductive waste and inefficiency.

Public Choice and the Virginia School have made a significant contribution in helping Chinese leaders and scholars chart a path out of communism and into a market economy, but without going to the other pole of radical free-market fundamentalism — which, in its extreme form, denies any positive role for the state, and excludes questions of morality from public decision-making.

* * *

CCR intends to continue this study, exploring how the Virginia School and other schools of economics and political economy have influenced modern China.

  1. The interview appeared in the Oriental Morning Post, Shanghai, Jan. 15, 2013. Translation by CCR.
  2. GaoXiaoyong and Wang Dingding, Interviews with Nobel Prize Winners in Economics, Chaohua Publishing House, Beijing 2005. Translation by CCR. The story is told that, in 2013, a Chinese translation of Buchanan’s “The Limits to Liberty” was published with a long preface by Wang Dingding. When the books arrived at the bookstores, however, it was found that Wang’s preface had been torn out of all the copies.  Wang responded by posting the whole text of the preface on a website.
  3. James M. Buchanan, Public Choice: The Origins and Development of a Research Program. Center for the Study of Public Choice, George Mason University, 2003.
  4. P.J. Hill, “Public Choice: A Review,” Faith & Economics, No. 34 (Fall 1999), p. 3; “Rent Seeking,” Wikipedia, accessed 13 February 2017.
  5. Li Xinggang in the Chinese Journal of Economics and Management (2000).
  6. Shaoguang Wang, “Learning by Debating: The Changing Role of the State in China’s Economy and Economics Theories,” Policy Studies Journal, 23:1 (Spring 1995), pp. 11-25.
  7. Geoffrey Brennan and James M. Buchanan (1985), “Is Constitutional Revolution Possible in Democracy?” The Reason of Rules: Constitutional Political Economy (Indianapolis: Liberty Fund, Inc., 1985), quoted in “The Chinese Economic Model Revisited: Any Implications for the New Economic Thinking?” by Jehoon Park, Incheon National University (draft).
  8. Michael J. G. Cain, “Transitional Economies,” The Encyclopedia of Public Choice, Springer, 2004.
  9. Yongjing (Eugene) Zhang, “China’s evolution toward an authoritarian market economy – a predator-prey evolutionary model with intelligent design,” Public Choice 151:271-287 (2012).