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Zhang Shuguang:The Challenge of New Economy to Institutional Economics

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Professor Claude Menard's speech gave a good overview on the new institutional economics from perspectives of both organizational theory and institutional theory, focused on the frontier issues of the new institutional economics theory and included many interesting ideas that worth further thinking.

 

I believe that theoretical frontiers of institutional economics should focus on a series of problems from real economic life. For example, the speaker spoke of an important point—the role of technology for institutional development and transformation. This is a very important question. However, another important and realistic issue is that the new information technology productivity formed by mobile Internet technology will inevitably establish a new production relations corresponded to it and an appropriate institutional arrangement to adapt with it. But the report did not discuss this issue. From the perspective of mobile Internet technology and information technology productivity development, there are several things need to be focused on:

 

First, unlike agricultural and industrial technology and productivity, information technology and its productivity is not confined to certain sectors or areas. Instead, it has a full coverage since all social and natural phenomena can be digitalized. Words and images, space and position, even human behaviors can be digitized. The world has become a digital ocean.

 

Secondly, industrial and agricultural technology and productivity consumes tangible resources in an exclusive way generally. These resources will be exhausted bit by bit. However, virtual digital resources can be copied and used repeatedly with almost zero marginal cost. Such consumption will not only exhaust the resources but add new information to the resources. Thus, data becomes a very important economic resource. This is very important.

 

Third, IT technology and productivity is to the contrary of industrial technology and productivity. Industrial technology and productivity is characterized by centralization, homogeneity and large-scale, but, information technology and productivity, on the other hand, is featured as decentralized, heterogeneous, network, small scale and wide range.

 

The above three characteristics of Information technology and productivity propose a series of new issues to the development of socio-economic system and the study of institutional economics theory. For instance, as the speech summarized, the Internet and IT technology impact and challenge the “golden triangle” of organizational theory: rights (decision/property), contracts (complete/incomplete), and transactions (economic/political).

 

Property rights. The speech spoke a lot of issues but neglected this one. If we see ownership rights as property rights, which should be further segmented, various rights under the concept of ownership rights should also be segmented, and one of the most important issue is the separation and segmentation of ownership rights and rights of use. Although such separation emerged early on agriculture as the tenancy system, but against the context of internet economy, new issues appeared to be different from the tenancy system, leading to a distinctive separation/segmentation. In the past, the separation of the two rights was limited by the material property—one rented the land so the others cannot. For this reason, institutional economics has been focus on ownership rights but not the rights of use, which is very ownership-centered. However, the ownership rights and use rights of digital information assets are separated. Since the rights of use can be repeated unlimitedly and in a non-exclusive fashion, one can rent an asset without influencing others’ use. Therefore, with the new form of economy, the rights of use is attached with higher importance, taking a dominance or even replace ownership rights to a certain degree. Responsive services that aim to satisfy people’s demands will be focus on the rights of use instead of ownership; the usability and access of objects becomes more important than the possession to them. Or in other words, it is better to utilize them conveniently rather than possessing them but without leveraging.

 

Not only that, since the rights of use become dominant and “using” is more important than “owning”, used by whom, how to use and the efficiency should be discussed. With lower importance, the old debates we had on the efficiency and importance of property rights—whether public or private rights is more important or of higher efficiency are no longer important issues under this new form of economy. Public owned products can be used in both private way, private owned objects can be used by the public, products and service are shared and used without considering the ownership. For example, who is the owner of shared bikes? Platform operators or users? Actually shared bikes have become a quasi-public products.

 

From the perspective of contract, there are complete and incomplete contracts. Modern contract theory is the theory of incomplete contract, which discusses principal-agent, information asymmetry, “hold-up problem” of specialized assets and special purpose investment, as well as issues like opportunism and moral hazards. In the case of information-based economy, the network platform and APPs are not principal-agent relationships. Particularity and specialty of assets are also seen as two separate issues. APPs can use cheap resources from the internet platform in an inclusive way, without impacting others. As terminals, information used and exchanged within the APPs will be summited to the platform, resolving information asymmetry issue. Therefore, there is no “hold-up” problem. Is this a come-back to the theory of complete contract? This is also a question that needs further study.

 

From the perspective of the transaction, although the existing institutional economics theory concerned about the transaction problem, most of discussions were on general transaction, just as the representation. Two forms of transaction are seldom distinguished: bargaining transaction and leasing transaction. The first form refers to the transaction of ownership right and features with the price of ownership; while the second form of transaction transfers the right of use with the price of use, in another word, rent. Since the information economy is focused on the right to use rather than ownership, new changes emerges from new phenomenon. For example, Zhang Wuchang, the new institutional economist proposed a lot of innovation in The theory of Share Tenancy, proving the equivalency of efficiency between the fixed rent and share rent and putting forward the theory of rent dissipation. In fact, this is the limitation of Zhang. the dissipation of rent value was discussed from the perspective of ownership. Since the market competition is limited and interfered, value of rent dissipated when part of the rent belongs to the owner failed to be obtained. However, if the market competition is sufficient, there will be no such issues of rent dissipation. If you look at the issue from the perspective of right to use, due to the decentralization and low cost of non-exclusive use, the massive involvement of APPs offers various type of decentralized and personalized services, creating huge amount of rent value instead of rent value dissipation. In this way, the division of rent value also changed. For example, the proportion of Apple’s platform changed from 30% to 15%. The APPs get the rest 85%. It should be said that the accumulation of rent and rent value is directional change.

 

Since the "Gold triangle" of organization has changed, organization also changes. The presentation mentioned enterprises, markets and cooperative organizations, with particular emphasis on cooperative organizations as an intermediary form and modeled the changes in the organization. Emphasizing the intermediary form is a very important mindset. In the Internet information economy, job division and business models between the network platform and APPs are typical intermediary form—not an enterprise, neither a market nor cooperative organization, but a cooperative form without having any cooperative organizations. In the past, discussions on organizations and ownerships are from the perspective of ownership rights, which made such organizations closed and centralized with hierarchical structure. On the other hand, organizations based on the rights of use tend to be more open, decentralized. This is also different from the traditional organizational theory.

 

To sum up, this series of problems and the recent changes are important issues that new institutional economics need to focus on and research. Only in this way can we really stand on the forefront to further develop the theory of institutional economics.

 

Thank you!

 



◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation