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Qian Yingyi:comment on the status and characteristics of institutional economic

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First of all, I notice that the area of institutional economics or new institutional economics receives far more attention in China than any other fields, compared with other countries. In 1997, 20 years ago, the International Society for New Institutional Economics was founded at Washington University in Saint Louis, and Professor Claude Menard was one of the main organizers back then. I also attended the founding ceremony. Coase, North and Williamson, they were all there, and that was the only event I know that all of the three attended. Prior to that, in 1991, Coase won the Nobel Prize in Economics; in 1993, North became the Nobel Prize Laureate in Economics, so the institutional economics was enhanced to a very high level. Institutional economics is highly valued in China, totally because of what happened in China over these years. Throughout the reform from the planned economy to the market economy, institution is a basic factor, and Chinese economists, officials and people all attach great importance to institution-related issues, so this topic in China attracts more attention than in other countries.

 

Second, I will start with Professor Claude Menard's last slide, where he suggested that more studies would be needed in the future on the mixed system between the market and the hierarchy. In Williamson's book, he compared the market and hierarchy to two alternative means of transaction. This is a great academic breakthrough at that time, because there were a lot of economists studying the market, but very few would study the hierarchy. Claude Menard has just said that there were a lot of mixture between the two. You can also find this in the literature, for example, franchise is between the two. Professor Claude Menard gave the example of the airline alliance, which is also a mixture, as the alliance is neither an independent hierarchical business, nor completely competition within the market, but a hybrid system. In China, with innovation, there will be more hybrid systems. For instance, many companies these days tend to pursue a business development path called the establishment of “enterprise ecology." What does it mean, to build enterprise ecology? It is not the internal expansion of the enterprise, but to invest in a number of closely related enterprises. This is a very prominent phenomenon among Internet companies, and their organizational structure is very interesting. Decades ago, Toyota in Japan established their corporate network through signing parts supply contracts. In today's China, companies are more likely to establish their corporate networks through investment. This is to give you some examples to tell that studies on hybrid system is very interesting.

 

Third, in terms of research mechanism, Professor Claude Menard also proposed to add a “meso” mechanism between the "macro" and "micro" mechanisms. This inspires me to comment on the status and characteristics of institutional economic studies in China. With years of research experience, now I see that we focus too much on the two ends and neglect the middle part while we are studying institutional economics. What does "two ends" mean? On the one hand, we have discussed a lot on concepts and principles of institutional economics, reading classical works by Coase, North, Williamson, or even by their predecessors. We know very well the basic concepts and principles of institutional economics; for example, the term "transaction cost" is used far more frequently in China than in any other country in the world. On the other hand, it is about the experience and observation from practice; we pay attention to observing businesses, status and details in the rural areas because of empiricism in the philosophical tradition of China, which is our strength. These two aspects are the “two ends”. However, we are missing the middle part, namely, to deduce theories from the empirical phenomenon and to refine logical models and theories based on concepts, which is what we need.

 

Let me give you an example about Williamson’s and Hart's research work, to further explain. Williamson's books had a great influence, and won him the Nobel Prize. He invented the term "new institutional economics", but this is not his main contribution. The important thing is that he made the transaction cost more concrete. Williamson cited an example of the relationship between power plants and coal mines, and he raised the relationship to theories and introduced asset specificity. This is a very important step forward; otherwise transaction cost would just be a very abstract concept. Therefore, good studies are supposed to raise concrete experience and observation to the level of theories, while fitting the abstract concepts and principles specifically into models and theories. This is what I call the “middle part”. Why did Hart win the Nobel Prize? He further associated property rights with control rights on the basis of Williamson's asset specificity leading to transaction cost, and derived a series of theories that could be applied extensively, such as in corporate finance. This is the power of their research work. In the 1980s, when Hart's theories were in the process of development, we were used to be his students, so we were aware of the development process. This research path is very inspiring for our research on institutional economics in China today.




◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation