China Spurs a New Golden Age of Economics
Reading Weiying Zhang’s “Re-Understanding Entrepreneurship,” published in English just this year, it occurs to us we may be living in a new golden age of economic thought.
More remarkable still, we may owe this goldenness mostly to the last 50 years of Chinese history. China’s astonishingly rapid progress from poverty—40 million dead of starvation in the 1950s—to wealth offers a body of knowledge likely to dominate economic thought for at least a century to come. It is often this way, when the best of what gets called economic theory often turns out to be history. Many of the best passages from the great economists are not theoretical or even analytical but descriptive.
On a first reading of “The Wealth of Nations,” readers may be surprised to see in the opening pages nothing of invisible hands, or free trade, or self-interest as a benign force. Instead, we are treated to a lengthy description of a pin-making shop, illustrating the power of specialization or the division of labor.
Readers familiar with author Adam Smith’s economics book by reputation might well ask “Where is the brilliant theory we’ve heard tell of? This is nothing but an account of the mechanics of production.”
It took us some decades, including an introduction to information theory and the remarkable research into the learning curve by the Boston Consulting Group and then Bain and Company, to grasp that this lengthy account of industrial mechanics was the best and most important passage in the book. What Smith was on to, though he did not have the language to express it, was the real source of all economic growth: learning.
The history of expanding wealth is the history of people learning how to produce more with less. Much of this learning comes down to the acquisition of “tacit” or “soft” knowledge not reducible to data or even clear explanation. As Weiying says in his own remarkable book, this knowledge is “ ‘know how’, not ‘know what.’” Paradoxically, this is why we need the very hard data on the learning curve to even see that learning has occurred.
By comparison the most famous theoretical passages in the “Wealth of Nations” are more wrong than right and have sown more confusion than understanding. Most damaging of all has been the mythical “invisible hand” supposedly guiding the economy like a great, Newtonian clockworks. No research, no visits to pin factories supported this fanciful notion. Invisible hands cannot be observed.
Smith, one assumes, never dreamed how mischievous a metaphor that ghostly hand would become. By boxing economic thought into a Newtonian model, Smith excluded from economics the very thing that explains economic growth: entrepreneurship. From that day to now, this error has persisted, warping economic theory into a study of elusive, illusory equilibria.
Vainly, economists see markets as efficient allocators of existing resources and remain silent, when not silly, in explaining how those resources increase. As Weiying says in this remarkable book, “Traditional economics believes the primary function of the market is scarce resource allocation,” and assumes “resources are [a] given.” Much of his book is devoted to abolishing this idea, for the “most important function of the market is not resource allocation” but “changing resources” either by innovating to “change the usefulness of resources or even obtain entirely new resources.”
Not allocation but creation is the market’s great gift. We miss this because so much of this creative activity is obscured by economic data and available only to historians engaging entrepreneurs on an intimate level, an effort as costly in time and treasure as it is rewarding to those who pursue it.
Now, almost 250 years after Smith’s great misstep, entrepreneurship may be walking that long silk road back into its proper place in economic thought. The compressed explosion of Chinese wealth, decades of progress made in years, has fixated a growing number of economists on that nation’s recent history. That history looks set to chase much faulty theory from the field.
Among English speaking economists, notable for their grasp of entrepreneurial sources of China’s rise, are the late Nobel Laureate Ronald Coase (“How China Became Capitalist”) and Nicholas Lardy (“Markets Over Mao”).
Valuable Chinese contributions are already almost too numerous to name, but certainly include Juan Du for her “The Shenzhen Experiment.” Juan destroys the notion of that remarkable place as an “instant city” and an example of successful government planning. As she shows, Shenzhen was the creation of capital-poor entrepreneurs who built a thriving city mostly by breaking the law.
Among Yasheng Huang’s multiple contributions stands out “Capitalism With Chinese Characteristics,” which, like Coase and Lardy, but with more detail, shows that Chinese capitalism was born in the poorest parts of rural China where government lacked the will or resources to get in the way. Meanwhile, he reveals glittering Shanghai as an artifact of government subsidies and rent-seeking clients, with stark divisions between the favored rich and the over-regulated and unconnected working classes.
More will come. Yet “Entrepreneurship Re-Understood” stands out as the most systematic and complete exploration of entrepreneurship either of us has ever encountered. That is thanks to Weiying’s exploitation of a first in history, 40 years of unprecedentedly rapid growth across an astoundingly diverse nation, eminently documented, and grounded in the history of still living entrepreneurs.
China is not the only source of the current empirical renaissance of economic thought. Oft cited in this space is the work of Gale Pooley and Marian Tupy who demolished several centuries of confusion about economic growth and inflation. They did this by the simple, ingenious (but laborious!) device of dividing historic nominal (not inflation adjusted!) prices of hundreds of goods and services by historic nominal wages. The result is Time Prices, measuring the dramatic two-hundred-year increase in how much our working time buys in goods and services.
We are waiting still for some aspiring empiricist to explain 40 years of low and declining inflation during the reign of Reaganomics. That history demonstrates that neither money supply nor interest rates—which variedly wildly across those decades—have much influence on measured inflation. When this work is done, we suspect the answer will be that the variable dominating the value of a fiat currency will be the after-tax, real return on investments denominated in that currency. This is because investors have the most discretion over whether to hold financial or “real” assets (to the extent yachts, van Goghs, classic cars and various other knick-knacks can be considered either real or assets). At our advanced ages, however, we will leave that work to others so inclined.
In the end, though, if one gift of the 21st century will be an economics that comprehends the real forces of growth, China will be its source.