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Economic Sciences Are Facing Major Data Revolution

 

 (Chenggang Xu, PhD of Harvard University, Chair Professor of economics at the University of Hong Kong, Special-Term Professor of Tsinghua University, Research Fellow at the CEPR (Europe), co-editor for three major international and Chinese journals in economics and finance, chief economist of China Reform. He served as Reader in London School of Economics, researcher at Harvard Institute for International Development, Chair Professor of Seoul National Univerisy, President of the Asian Law and Economics Association (AsLEA), and consultant for the World Bank and the IMF. He won the Sun Yefang Economics Prize in 2013. The following is the keynote speech by Professor Xu at Great Minds China Forum on 12th September.)

 

Economics has gradually become, or at least tried to become a strict discipline since late 19th century. Economists have always been working hard to learn physics consciously, aiming to make economics become a discipline like physics.

 

I’d like to briefly introduce the origin of so-called “physics” from the perspective of methodology. It started when people observed the sky, the major breakthrough of which was the invention of the telescope. The telescope helps people figure out how the earth revolves around the sun, and laws of movement of a large number of planets. The basic common sense we known is from Kepler’s invention of the telescope and the systematic description of the mathematical laws of planetary motion, which laid the foundation for physics. The reason why Kepler’s law of planetary motion and Galileo’s law of fall is regarded as two empirical basis of modern physics is because that phenomena described by the two laws raised doubts from Newton, leading to the establishment of systematic theory of physical sciences. The relationship between the theory and empirical evidence is very basic, important and cross-disciplinary. Theories guide ways to approach and observe questions. Empirical observation, in turn, challenges theories. Since ancient Greece, the theory had always believed that laws of motion planets in universe and things on earth were the same. However, Newton found that facts of Kepler’s law of planetary motion and Galileo’s law of fall were not the same- planets move in elliptical orbits, while objects move in a straight line. They are contradictory. Therefore, Newton established a theory to connect them together, which is the source of the basic common sense of physics that we all know today.

 

When we discuss economics, theoretical thinking and empirical research are the two important aspects. Empirical research is decisive, without which, theoretical arguments cannot achieve any results. For example, there are numerous discussions from ancient Greek philosophers to scholars in today. But arguments can never be settled without empirical verification. Back days in Cambridge, Newton had done experiments about the light, and found that results were totally different from statements of ancient Greek philosophers. He then published a report in Cambridge. Since the findings was not the same as statements from ancient Greek sages, people regarded it as utter rubbish.

 

 Newton said that no matter what did ancient Greek sages say, these were results from empirical observation. The story proves that empirical research is the foundation, and that the theory is based on regularity of facts observed from empirical studies. Ultimately, theoretical studies have to be consistent with the regularity of facts. If without supports of empirical researches or regular facts, or is different from the regularity or pattern observed from empirical studies, it is can never be called a theory of economics.

 

Now I’m going to discuss issues of Chinese economics. The so-called Chinese economics should be understood as the study of economic issues raised in China rather than another kind of economics. Actually, studying issues of Chinese economy must go beyond traditional economics and research methods of economics. This is because China’s economy has never been an isolated economy, but involves with politics, society, and the institution. Institution of Chinese characteristics is the most difficult problem in studying Chinese economy, but many are not fully aware of it. The Chinese system and systems of other countries are like chalk and cheese.

 

Because China has a unique history. First, monarchy lasted over two thousand years in China, much more longer than any other countries around the world. Legacy of the two millennia of monarchy has been rooted in the society. In addition, the Communist Party of China voluntarily copied the totalitarian system from the Soviet Union to China since 1950. The hybrid system of the Soviet totalitarian system and monarchy then went through the “Great Leap Forward” period and Cultural Revolution, and evolved into the system existed before China’s reform and opening up. On this basis, the Chinese system has again changed during the reform period, and becomes the current system.

 

It is a fundamental challenge in social sciences to learn of and thoroughly analyze the system and phenomena produced under the system, including knowing the way China has gone through in the past, knowing why we reformed this way, and why we enjoyed better economic growth in the early stage of reform, and why we encounter serious economic instability currently? Such instability is not accidental, then what is the root cause in terms of institution of such instability? These challenging questions are generated in the context of the Chinese system. Like in physical sciences, if the physical structure is unstable, it is predicted the structure will collapse sometime.


For example, we have known that there are very serious problems in the system of the Soviet Union and Eastern Europe. I have mentioned that the Chinese system is the hybrid one of the Soviet Union and the traditional system of ancient China. More specifically, for instance, when we discuss about financial markets, there is an important basic prerequisite. The most basic prerequisite for the first financial market is the protection of private property rights. The reason is very simple. Because security markets deal with private property rights. If the system fails to that, then the security market cannot work. In other words, all the securities are actually financial contracts, which depend on the system to carry out. If the system does not exist, the financial market cannot work.

 

Then comes to the whole financial market. All developed financial systems we talk of today are backed with independent judicial systems. Not until the major problem happened in 1929, was financial supervision, an auxiliary means, introduced. Financial supervision is an auxiliary means of the court. In the context of without an “independent judicial system”, we try to adopt a supervision of bureaucratic system. It does not work. This is an example.

 

Moreover, I am not doing macroeconomics, but I’d like to say a few words on general discussions related with macro monetary policy. It is because the so-called transmission mechanism that monetary policy has effects on the real economy. The transmission mechanism is actually the system. Transmission mechanisms under different systems vary. There is a very different nature between the transmission mechanism in China and that under the market economy. I won’t elaborate on this “black box”. But in general, this black box is obviously different in the soft budget constraints. Ubiquitous soft budget constraints lead to different transmission mechanisms, under which, foreign currency-related principles do not fit in China. Therefore, copying things of the West won’t work.

 

I’ve mentioned the importance of empirical evidence. I would like to add one more comment, or observation, which is not my imagination. I’ve observed that the current economic sciences, or more extensively, the social sciences, are facing a major revolution, not only for China but this discipline. Why? Because the Internet has brought big data, which, all of a sudden, makes data, both the current and historical, of all aspects of society become applicable and collectable. Such a large number of data promote the development of social sciences. And indeed it happened in the last few years. Mr. Xu (Xiaonian) mentioned that the discussion of institutional issues was not the mainstream. It was right in the past. But the past few years have witnessed rapid and significant changes.

 

Every top university of the world, whether it being MIT, Harvard, Stanford, Berkeley or LSE, has subjects like political economics and economic history. The economic history we talk of is not limited to the history of the economy. We name it as the history of economics, studying history of society with economic analysis methods. The reason why it suddenly enjoys rapid development and the new generation of scholars increase dramatically is because of the big data. I emphasize empirical research because it is costly. Therefore, it is very important to have a foundation with clear directions to invest in empirical researches, especially for the young. In fact, the exchange itself is not particularly difficult in China. The key lies in China’s empirical researches to achieve sound development.

 

 

 

 

◆please indicate the source if authorized: National Economics Foundation

◆photo:National Economics Foundation