Trying to get rid of surfing, wasted too much time, any suggestion?.......................... 七宗罪?............................... 1,没有原则的政治;2,不劳而获的财富;3,没有理智的享乐;4,没有特点的知识;5,没有道德的商业;6,没有人文关怀的科学;7,没有牺牲的崇拜。............................................. 虽然这是圣雄甘地说老印的.......

Thursday, June 23, 2005

anxious and inspiring


Relationship of Economic Development and Political Monopoly, and the Sixteenth Congress
Yang Xiaokai Qu Zhining

The institutional economic historians represented by Douglas C. North found that the marine trades of the Atlantic, the Mediterranean and the Black Sea in particular, the long distance transatlantic trade, beginning at 1500, was one of the key conditions of industrial revolution, in which the institutional differences exerted important effects on economic growth, especially, on the process of industrial revolution.

Adam Smith’s Division of Labor Theory could characterize the benefits brought by trade and related economic growth accurately.

Adam Smith explained that division of labor arises while specialization of production activities was promoted; an enhanced specialization created supply and demand; then trade emerged. Expansion of supply and demand means the market capacity expands; and a larger market would promote further division of labor and specialization. Such harmonious cycle with division of labor and market trade interacting as both cause and effect, that was the most important thought in Adam Smith’s The Wealth of Nations, it was also the origin of economic development that Adam Smith saw. Economic society grows steadily out of the harmonious cycle of division of labor and market expansion. The Atlantic trade of Western Europe ignited the said harmonious cycle of economic growth and brought up the first industrial revolution in the history of mankind. Yang Xiaokai’s new work, “Economics” and ”Development Economics” (The Chinese Edition was published by the Social Sciences Literature Publishers ) analyzed the process with a lot of models.

Although the Atlantic trade since 1500 had decisive impact on the development of Western Europe. Many countries making profits on Atlantic trade in 16th to 19th centuries had Adam Smith’s doctrine to characterize the essence of their economic growth. However, with Atlantic trade in common, we saw industrial revolution in England and Holland, but not in Spain and Portugal. Why?

Recently, Simon Johnson and Daron Acemoglu of the MIT, and James Robinson of the University of California, Berkeley, studied the problem painstakingly in their new paper, The Rise of Europe: Atlantic Trade, Institutional Change, and Economic Growth, together with a lot of empirical evidences. They saw the economic growth of Western Europe in 16th to 19th centuries as a paragraph in the theory of long run history of economic growth. However, if one could study the contribution of 16th to 19th centuries development of Atlantic trade in economic growth, and thereby probe into the framework of economic growth theory, perhaps it would be possible for people to understand further the principles of the comprehensive theory of economic development.

Johnson et al compared different conditions of England and Spain in Atlantic trade. They found not only Spain preceded England in carrying on Atlantic trade, but also that the former was more superior to the latter in many respects. In other words, objectively speaking, if industrial revolution could occur in England, it could also occur in Spain. They found that in general Spain was more superior to England in three following points.

First, Spain and Portugal preceded England in long distance navigation and exploration in the Atlantic, and mastered navigation technique and experience earlier. It could be said that Spain and Portugal were two predecessors in the whole Atlantic trade. They dominated and even monopolized the whole Atlantic trade in a relatively long period.

Second, Spain and Portugal preceded England in oversea trade; they occupied South America, which was more richly endowed in natural resources than North America. They traded with better conditions of resources.

Third, Johnson et al cited the periphery theory of Marxism and Neo-Marxism that development of imperialism must based on exploitation of colonies. The more was the exploitation, the more powerful would be the exploiter. However, the strategy of colonial government in the case of England was very different from that of Spain. The English colonies were autonomous regions. England allowed the colony to have its own parliament and autonomous rights of taxation. Only in the case of the motherland being in war, her parliament would pass a resolution to tax the colony for war spending with the participation of the colony’s representative. England didn’t even tax her former colony, Hong Kong, on this regard. Therefore, the Chinese government hasn’t taxed Hong Kong after it was returned to the fatherland in 1997. On the other hand, Spanish colonies had no parliaments, and they had power of taxation. A lion’s share of the tax revenue was transferred to the motherland. Relatively to Spain and Portugal, England didn’t see the exploitation of colonies to meet the motherland’s needs as the goal of colonization. However, Spain and Portugal did exploit their colonies. In the light of Marxism and the periphery theory development of Spain and Portugal imperialism would stir up industrial revolution in them.

But history aroused industrial revolution in England but not in Spain. North and South America was the colony of England and Spain respectively. Now the United States of North America is the superpower in the world, and most South American countries are still developing, with unstable governments and uneasy economy.

In view of these historical contradictions Johnson et al suggested a series of theories of harmonious cycles, from Atlantic trade to institutional transition, from institutional transition to long run economic development. Profits produced in Atlantic trade stirred up economic and industrial revolution. And political institutions of the nations in the initial phase of Atlantic trade were closely related to the institutional transition later with Atlantic trade in vogue.

Johnson et al put forth three important hypotheses. First, Atlantic trade had important influence on European economic development. Second, profits from Atlantic trade could catalyze institutional change. Third, the prerequisite of institutional change was related with the degree of royal despotism.

Johnson et al formulated a comprehensive argument based on the aforesaid three hypotheses: if opportunities of Atlantic trade could constitute harmonious cycle with innate institutional changes, benefits derived from Atlantic trade would arouse economic growth and industrial revolution. And the political institutions in the nations at the initial period of Atlantic trade were closely related with institutional transition in the course.

They collected historical data to prove their viewpoints. They cited the extent of urbanization and per capita GNP as two proxy variables of the extent of division of labor under trade development. They gathered data on extent of urbanization in east, west and south Europe, from 15th to 20th centuries. Their empiric research found that cities conducting Atlantic trade developed very well, while those without Atlantic trade such as east and central European and Mediterranean city states, including Italian cities, had developed slowly.

In addition they developed the institution index to characterize three institutional features. First, the extent to which business activities were encroached upon by the royal house or other privileged groups in the nations or city states. Second, to what extent private property was protected. Third, to what extent people were free to do business in profitable trades. These indices could be used as proxy of transaction efficiency. They found that as Atlantic trade continued to prosper, the city-states engaging in Atlantic trade increased evidently the protection of property, the limitation of power of the privileged, and the freedom of doing business. And those involving little in Atlantic trade saw few changes. Their regression analysis on empirical data proved that in addition to the positive effects on extent of division of labor and urbanization of Atlantic trade, which was negatively affected by the extent of autocracy in political institution.

Third, they found also limitation to royal autocracy was sterner in England and Holland at the initial stage of Atlantic trade than in Spain and Portugal.

The English parliament had many check and balance measures toward the royal house, while Spain and Portugal were autocratic kingdoms, the initial condition had evidently effects on institutional changes conducive to better transaction efficiency. That is to say, during the expansion of Atlantic trade, policies such as restraint of royal prerogatives, protection of private property (in particular, protection of private land ownership), and business freedom were much bettered in England than in Spain.

After one had understood how Atlantic trade affected west European economic growth, there emerged a new picture of industrial revolution quite different from the old one. It took England instead of Spain as its background.

New rich merchants appeared after England embarking on Atlantic trade. They conflicted with the royal house and the privileged in preserving their acquired wealth or struggling for more profits. As England had already comparatively liberal representative political institution, the parliamentary politics exerted positive influences on institutional reform. Thus there emerged a lot of new political and economic institutions. For instance, the separation of state and royal budgets, prohibition of political parties involving in profit-seeking firms, automatic registration of firms without approval of the government, free entry of foreign trade without special permission, i.e., the common people could make profits in Atlantic trade, and other institutions favorable to economic growth emerged accordingly.

The appearance of new institutions was preceded by the collapse of trade monopoly of Tudor Dynasty as a result of English Revolution. During the Restoration of James I, the political monopoly of Cromwell, the post-revolution chancellor of England, was brought down and the parliament was restored. James II intended to retrieve royal monopoly privileges of the king. However, the parliament invited the foreign king (William III whose wife was the princess of England with the right of succession to the English throne), from Holland, initiated the Glorious Revolution, thus to avoid new political dictatorship to which a second revolution might lead, creating a republic with a fictitious king to restrain the king’s prerogatives, and overthrew the rule of James II with William’s forces, preventing the recovery of the king’s monopoly privileges.

The large quantity of evidences collected by Johnson et al shows that big trading companies connected with the royal household were decreasing, their size became also smaller, and people without connection with the royal houses and with no privileges had also made profits in Atlantic trade. In this process trade opportunities brought up new class of merchants with no connection with royal prerogatives, of whom some might be with wealth matching the nation’s treasury. These new rich men paid taxes as usual, they had representatives in the parliament voicing for them, and they could thus exert certain influences politically, exceeding the old privileged class both in numbers and influences. Moreover, the new rich members of the society are no longer a fixed class. There was a great deal of mobility in social ranks. Atlantic trade shattered the barrier of class ranks in England; the common people could share benefits from Atlantic trade, which were not monopolized by the state. Any one could be a success entrepreneur and join the upper class. The high mobility drove further the evolution of division of labor and trade development, promoted what Adam Smith called the harmonious cycle of economic growth. The entire society became richer and industrial revolution occurred thus in England.

It was remarkable that among the new rich created by Atlantic trade many were entrepreneurs with landed properties. Their properties were protected, and then converted into money funds, which were sources of capital to be invested further in profitable undertakings. That is to say, effective protection of private property including landed property didn’t make landowners an obstacle of economic growth, but converted them into an assistant thereof.

Atlantic trade in Spain produced different results from that in England. Spanish court monopolized Atlantic trade. Only the royal house, its chartered companies and ranks could involve in trade, none of common people could enter in it. In addition, Spanish court could tax the colonies; profits from Atlantic trade strengthened further the power and autocratic status of the sovereign. And the insurmountable rank system in society became more stony. At the same time the royal house spent trade profits in luxuries and flaunty wealth, benefits from Atlantic trade can’t be used wisely by the society, therefore there emerged insurmountable class ranks, social mobility became stiffened, disparity between the rich and the poor was widened, benefits from Atlantic trade couldn’t be shared by the commoners , there emerged no new class of merchants, no institutional innovation in society, it was impossible to see harmonious cycles promoting economic growth , industrial revolution wouldn’t occur in Spain.

In summary, the discovery of Johnson et al had the following implications. It told people to re-examine the process of West European economic development, to grasp the key role of Atlantic trade in it and the initiation of the first industrial revolution and its induced economic growth. Second, it refuted Marx’s proposition that development of imperialism must build on exploitation. On the contrary, it was in those parliamentary countries wherein royal autocracy was restrained emerged industrial revolution and capitalism. Within them there was no royal prerogatives, no stiff privileged class, with versatile social mobility, protection of private initiative to do business. That is to say, the institutional difference between England and Spain was reflected in openness or not of business activities, and the latter affected the existence or not insurmountable class ranks in society. Third, their findings were similar to that of North, Thomas, and other institutional economists. They found that institutions did play a key role in economic growth. Recently, Yang Xiaokai and Liao proved vigorously this guess with an infra-marginal model.

The above-talked story had a special relevance to the open-up and reform of Chinese economy. The open-up and reform of China opened Pacific trade similarly to the open-up of Atlantic trade. Most economic growth since 1978 has come from Pacific trade. Till now China has enjoyed a huge trade surplus with the United States of America. It testified the proposition that China has derived benefits of economic growth from Pacific trade.

Unfortunately, the reform and open-up of China was based on the government’s monopoly and regulation of business activities. The restraint of business activities made the benefits from Pacific trade since reform and open-up not conducive to be shared with the general public. Bureaucratic enterprises and their connected private firms monopolize them. Although China has joined the WTO, the government continues to keep monopoly and regulation of business activities since reform and open-up. The government doesn't allow people to establish their enterprises, the founding of a firm must be subject to approval. The government monopolizes banking, insurance, communication, news media, automobile manufacture, and most foreign trades.

In fact, as long as the founding of new firms is subject to approval, the government can control business activities of all industries. As it is impossible to registrant automatically, you must establish connection with the government in order to do business, bribe or even buy up government officials. It is because business and trade freedom are regulated by the government, one must rely on “relations”, “contacts” to succeed in business. There emerged a special rank with companies private in name, bureaucratic in essence. What were the gravest are the obstruction of social mobility, widening of disparity between the haves and have-nots, and the increasing probability of social unrest.

Last year, the 16th congress of the communist party passed the resolution opening the party’s door to capitalists. Many bureaucratic merchants and chief executives of companies connected with the authority present in the congress. It was to institutionalize monopoly interests. It made China to resemble Spain in the 16th century, not England. The Chinese government might unite more closely with the chartered businessmen. That is to say, Pacific trade might make China Spain-like.

Therefore, if one hopes Chinese economy to have a long lively and sustainable development, the chief key among keys would be to break down monopoly of government in business and trade activities, to restrain intervention of government in trade, prohibition of parties’ involvement in profit seeking undertakings, to cutoff the channel between party and state treasuries, to liberalize competition among parties, to create equitable and rational institution of election, to permit parties to take turn, to establish political system with division of power and check and balance, the correspondence between power and responsibility, etc., that China would allow Pacific trade to promote harmonious cycle of institutional and economic growth similar to England in 500 years ago, to create long time stability and order for China, in contrast to Spain with short time prosperity and eventual decline.

(The Translator: Wang Hongchang)


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