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 |
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...