Vision and Calculation

Economics from China's Perspective

Sheng Hong

• Publisher: Palgrave Macmillan
• Year: 2020
• Print ISBN:
  9789811528972
• eBook ISBN:
  9789811528989
• Topic: Business
• Subtopic: International Business
• Index: Business

This book is a collection of articles on the author's thinking and analysis of China's problems by using the mainstream economic methods. Topics covered include families in traditional China, land permanent tenancy system, changes of land institutions since modern times, rationality of specialized market, similarities and differences between rent and tax, the role of contracts change in the China's reform, analysis of Asian financial crisis and American financial crisis, the paradox of medical insurance, the business model of e-retail platform with zero price, the relationship between transactions and cities, the religious man who is different from the economic man, and theological coordinates of economics.This book provides a nuanced analysis using a China-styled economic approach for scholars while also allowing lay people to enhance their knowledge of China through the stories and cases presented.

© The Author(s) 2020

S. HongVision and Calculationhttps://doi.org/10.1007/978-981-15-2898-9_1

Begin Abstract

1. On Familism

Hong Sheng ¹

(1)

Unirule Institute of Economics, Beijing, Beijing, China

Hong Sheng

Email: [email protected]

1.1 A Family Model

1.2 The Maximization of Family Interests

1.3 The Reinforced Family Institutions of China

1.4 The Moral Education of Familism and Transcendence Beyond Beyond Life and Death

1.5 The Border of Family and Competition Between Families

1.6 The Family-Based Political Structure

1.7 The Familist Constitutional Framework

1.8 Conclusion: The Research Approach on Familism and Individualism

References

Keywords

FamilyInstitutionsChina

I would love to extend my thanks to Mr. Xu Dianqing, for whose family story inspired me to write this thesis and his agreement on my relating of the story in this thesis. My thanks also go to Mr. Wang Dingding, Zhang Xianglong, Jiang Qing, and Zhang Yan for their constructive suggestions on the revision of the thesis, and also Mr. Ye Hang and Chen Zhiwu for their insightful comments.

End Abstract

While comparing China with the western world, people often go to two kinds of extremes. Some think that China is totally different from the western world, while others don’t think that there is much difference between them. The correct answer obviously lies in between. But the key question is what their similarity is and what their difference is.

At an early stage, western economics had a history of interaction with Chinese cultural tradition (Maverick 1946; Tan Min 1992). From this point of view, they share the foundations of rationalism and the philosophy of natural order. “Rationalism” refers to man’s capability to calculate costs and benefits. Despite lofty moral ideals, the Confucian scholars often used the reason “this is good for you” to persuade people to do something. Western economics itself is about cost-benefit analysis. As to the philosophy of natural order, it can be seen in “Does the God speak? The four seasons shift, and plants and animals grow” by Confucius, and “Do nothing, and everything is accomplished” by Lao Tzu; it can also be found among the Physiocrats,¹ the pioneers of western economics. Based on this philosophy, Chinese cultural tradition and western economics both developed toward economic liberalism, advocating economic freedom and limited government.

So what’s the difference?

1.1 A Family Model

My friend , Prof. Xu Dianqing, once told me a story: when his family first arrived in North America, they were caught in a dilemma: to establish residency, it was crucial for a member of their family to obtain a diploma from a local university, but they could not afford tuition for all of them. So they held a family meeting and decided that his two children and he would go to school while his wife went to work to support them.

Upon hearing the story, I immediately asked if the decision was made in a dictatorial way or a democratic way. Was it “dictatorial” because he, as the male patriarch, made the decision; or “democratic,” because his two children and he, as the majority, made the decision. But to my great surprise, Prof. Xu said: “You are wrong. It’s my wife’s decision.” So what did I miss?

Suppose there are three persons in a family and each person has a fortune of ¥ 100. However, an investment in human resources will cost them ¥ 120. If they insist on individualism, none will make such an investment. But they make a decision to spend ¥ 240 on such an investment for two of them. Besides losing the opportunity, the third person suffers the loss of ¥ 40. Generally, the income generated by the ¥ 40 is for now being lost. For example, if the yearly interest rate is 5%, then ¥ 2 is lost every year.

Again, suppose a person without human resources investment earns ¥ 10 every year, while a beneficiary of the investment earns ¥ 40. The individualist family (“Family B” hereafter) made no investment and its members earn a total of ¥ 30 in a year; while the familist family (“Family A”) made the investment and will earn a total of ¥ 90. If we divide the payment among the family members, even the person who “sacrifices” will soon be paid back and even profit. See the following Table 1.1 for more details.

Table 1.1

Comparison of resources allocation and income between the individualistic family and the familist family

Family	Member	Original wealth	Wealth allocation	Yearly income	Distribution 1	Distribution 2	Distribution 3	Distribution N
A	1	100	120	40	30	60	90	30 × N
	2	100	120	40	30	60	90	30 × N
	3	100	60	10	30	60	90	30 × N
B	1	100	100	10	10	20	30	10 × N
	2	100	100	10	10	20	30	10 × N
	3	100	100	10	10	20	30	10 × N

Note: Family A and Family B are shown in this table. Each family has three members, represented by “1,” “2,” and “3.” The two families have the same original wealth of ¥ 100. However, in Family A, out of the ¥ 300, ¥ 240 is equally divided between Members 1 and 2 to invest in education, with ¥ 60 left for Member 3, while in Family B, the wealth of ¥ 300 is equally divided among the three members. Since there are two members in Family A who have invested in human capital, their yearly income is ¥ 90: ¥ 40 + ¥ 40 + ¥ 10, while that of Family B is ¥ 30: ¥ 10 + ¥ 10 + ¥ 10. According to the principle of equal distribution among family members, each member of Family A will receive ¥ 30 in the first year (Distribution 1), accumulatively each member will receive ¥ 60 in the second year (Distribution 2), and in the Nth year, each member will receive ¥ 30 × N. Each member of Family B will receive ¥ 10 in the first year and ¥ 10 × N in the Nth year. For the sake of convenience, the interest income of the original wealth is not taken into account

Obviously, Family A’s decision is better than that of Family B, because no matter for the whole family or for the individuals in the family, the income of the former is higher than that of the latter. Since the family consists of family members, the family assets measured by the market are mainly represented by the human capital of family members. The increase of family income is mainly the result of the increase of the human capital productivity of family members. If we capitalize it and then imitate the concept of “enterprise value,” we can say that “family value” is increased.²

The mode of Family A works only because its members trust each other not to leave the family, so the one who “sacrifices” will be paid back.

But isn’t there any other way of financing for Family B? For example, two of the family members each can borrow ¥ 20, from the third person and then return the money once they complete their education. But borrowing and lending requires certain conditions, such as the existence of courts and financial markets. Without courts, it is more likely for people to break the agreement, and without financial markets, it is hard for people to agree upon the price of borrowing, which would dramatically increase the costs and the risk of failure of the deal. Therefore, in the early stages of human society when there were no courts or financial markets, the advantage of Family A’s mode was more obvious. And this family mode, once formed, profoundly influenced the development institutions in the society.

Even when there are courts and financial markets, Family A’s mode is still useful, because of the many costs associated with these two institutions, such as distance to the court, direct expenses and time put in the law suit, possible mistakes and errors in judicial rulings, bank interest, risks of the securities market, the adverse selection and moral hazard of the insurance industry, and so on.

Besides, family is full of special contractual relationships, including not only the responsibilities and obligations regarding resource allocation but also the sexual relationship, fostering children, and providing for senior members. The composition of all these relationships will in turn reinforce and secure each and every relationship in it, establishing a stronger and more reliable relationship between family members without any interference from the market or law and their costs. This is why Prof. Xu’s family made the decision as I have mentioned at the beginning of the chapter.

We call Family A’s mode the mode of “familism,” and Family A is a “familist” family, in contrast with Family B, which is an “individualist” family. “Familism,” as we define it, uses the whole family but not individuals in the family as a unit in cost-benefit calculations . It is not only thus perceived by people outside the family but also agreed by family members. Inside the family, the distribution of weal...

Table of contents

• Cover
• Front Matter
• 1. On Familism
• 2. Vision and Calculation
• 3. When Public Goods Become Private Goods
• 4. On the Homogeny, Separation, and Substitution of Rent and Tax
• 5. The Economic Nature of the Permanent Tenancy
• 6. Transactions and Cities
• 7. How Should the Institutions Change?
• 8. Contracts Matter: Toward a More Developed Explanation of History
• 9. Hedge Funds, Financial Markets, and Nation-States
• 10. The Institutional Factors of the Financial Crisis in the United States
• 11. The Economic Logic of Specialized Markets
• 12. A General Theory of Rent-Seeking: Rent Dissipating, Rent Keeping, and Rent-Seeking
• 13. Medical Insurance Paradox: A Hypothesis on Medical Price Increases in Proportion to Copayment Rate Decreases and Verification in China
• 14. Zero Marginal Cost and Virtual Rent
• 15. Religious Person and His or Her Implication in Institutions
• 16. On the Theological Coordinates of Economics
• Back Matter