to study:
Transition—Economic Reform

[What are the differences in the reform strategy in East Europe and China? 
According to Qian et al, why China's economic reform was so successful so far? 
According to Nee, why market reform would benefit director producers (workers) more?]

1. First, China's reform was gradual and incremental, with state-owned enterprises continuing to exist in tandem with new market-oriented firms. At the same time, the new firms were provided with suitable climates to develop and grow. Contrastingly, East Europe's reform was rapid, entailing a fast process in the privitization of state-owned enterprises. Policymakers were pressured to proceed with rapid privitization. Overall, there was widespread small-scale privitization and moderate progress in large-scale privitization.

Second, the price mechanism in China was introduced very slowly vis-a-vis that in East Europe. The system in the former was dual-track, meaning that central coordination was tempered with increasing dosages of price-signals due to the workings of the market mechanism. For instance, the fiscal contracting system was introduced in 1980, which called for a certain proportion of fixed planning, together with consideral fiscal autonomy from the central government through the workings of the markets, especially in local regions. This can be juxtaposed with the situation in East Europe, where the price mechanism was introduceed rapidly, leading to the persistence of corporate governance problems, as well as extreme financial crises during the reform period, taking the forms of high inflations in fiscal and monetary forms. This could be attributed to the fact that the introduction of the price mechanism happened too quickly, and institutions were not securely put into place, implemented, nor well-established.

2. Despite a deviation in variables like a lack of political reform as well as little secure private property rights which runs counter to developmental trends in the West, China's economic reform is successful hitherto due to the following factors-- federalism, Chinese style:

a. Decentralization that directly limits the central government's control over the economy.

b. Also, decentralization induces competition among local governements, which constrains their behavior and gives them a substantial range of positive incentives to foster local economic prosperity. E.g. competition for foreign capital even if facilities are not yet well-established. This places pressure on the local governments to improve infrastructure.

c. Local govermental reforms have called for the provision of welfare of their residents, which trumps the conditions of nearby areas that fought marketization. The reforms led to the accumulation of resources, as well as changed the overall mindset of those initially skeptical of reform, spiralling into a virtuous cycle.

d. Because of the absence of a single goverment with monopolistic control over the Chinese economies, local regions can choose policies that are best tailored to their geographical conditions, amongst other factors like wealth and history. This is imperative in a large country of huge and booming population, as dissemination of information, implementation of policies and schemes, as well as the maintenance would be impeded by the sheer size alone. Therefore, dividing these into blocs of regions would greatly facilitate the ease.

e. In addition, having different regional policies, as well as through seeing the results over time, can a region choose which policy to undertake, with the benefit of experience and hindsight.

f. Shirk's assertion of local political officials as creators of systems of patronage and loyalty, since contracts and laws are centered regionally, and the approval of contracts is contingent upon the decisions of the local officials in order for local enterprise.

g. Yet the system of patronage and political spoils has its limits due to Chinese-style federalism and internationally-based competition. Since patronage has led to less success in Latin America and Africa in terms of global competition, the reasons accounting for China's economic success run deeper.

h. The restructuring of political institutions.

However, it would be noteworthy to include features of Chinese culture in the analysis for a more holistic view. All-in-all, the development model of a particular economy is highly tailored towards its unique temporal and spatial factors.

3. Nee starts off with the argument that state socialist redistributive economies involve the appropriation of surplus from producers through nonmarket trade of labor and commodities, which is later redistributed through administrative processes. This tends to favor new classes since redistributors have a greater propensity to favor their own.

Therefore, with the shift to market transition, Nee proposes three theses about the redistribution of rewards, which benefit producers more.

First, he suggests that there is a shift in the sources of power from the redistributive administrative sector to the marketplace. Also, the markets provide greater economic incentives. Third, market coordination leads to new opportunity structures, which changes how structural constraints affect socioeconomic outcomes. These three facotrs, when operating in tandem, results in the reduction in the relative transfers of surplus from producers to redistributors, but also changes opportunity structures and incentives, thereby leading to greater benefits derived by producers, changing the dynamics of social inequalities, as the mechanism shifts from hierarchies to markets.
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Entrepreneurship
[1. According to Leibenstein, what is the role of entrepreneurship in economic development?
2. According to Baumol, why is entrepreneurship sometimes productive, sometimes unproductive, and sometimes destructive? Elaborate your answer with examples. ]

1. 
The standard competitive model of the economy, assuming the price mechanism and perfect information, hides the vital function of the entrepreneur, according to Harvey Leibenstein. Essentially, a “one-to-one correspondence between sets of inputs and outputs” do not exist, due to incomplete contracts for labor, the fact that the production function is not completely specified or known, and that not all factors of production are actually marketed. To him, it is first and foremost imperative to distinguish between routine entrepreneurship, which is a type of management, and the Schumpeterian or N-type entrepreneurship. The former can be defined as “the activities involved in coordinating and carrying on a well-established, going concern in which the parts of the production function in use (and likely alternatives to current use) are well known and which operates in well-established and clearly defined markets”. N-entrepreneurship occurs when “not all the markets are well established or clearly defined and/or in which the relevant parts of the production function are not completely known.” In the light of these, the entrepreneur is an intermarket operator. But in the case of N-entrepreneurship, a successful entrepreneur is required to connect different markets, is an “input completer”, creates or expands firms, and most importantly, fills in the gaps in market deficiencies.

For any given economic activity, there has to be a minimum quantity of inputs that are required. In the event that there is a shortfall of the lower limit, the entrepreneur is required to fill the lack of the marketable inputs, becoming an input-completer.

According to Leibenstein, the entrepreneur is also able to search for and unearth economic opportunities, evaluate them, channel the required financial resources, make time-binding arrangements, take responsibility for management, act as the ultimate risk bearer, be in-charge of the motivational system, search and discover new information and use them for new markets, techniques and goods. Therefore, according to the Schumpeterian analysis, the entrepreneur is able to create new goods and services, discover and connect new markets, utilize new raw materials, come up with new methods of production, and new organization of industry.

Leibenstein points out that certain thinkers’ interpretation of the entrepreneurial role may give the impression that markets are perfectable by the elimination of monopolistic influences. However, he stresses that the role of entrepreneurs do not depend solely on the existence of market imperfections.

The model of the firm in perfect competition can be likened to a complete net with well-marked and well-defined pathways and nodes, in which each element (i.e. each firm or household) of each node deals with the other nodes along the pathways equally for a particular commodity. In reality, however, there are obstructions and holes in the pathways, with some poorly-defined and poorly-marked nodes. He proposes that entrepreneurial N-type activities will make portions of the net less obstructed through the extension of markets, yet may make others even more impeded through the creation of obstacles like monopolies and high entry costs.

As inputs are not defined completely or adequately, the entrepreneur makes up for the deficiency. Leibenstein provides an instance in which a country has to produce a certain commodity with a certain machine, but the machine is banned. In this case, only entrepreneurs with access to information on how to construct the machine can enter the industry. I believe this powerful example is sufficient to enlighten one at least superficially about how the entrepreneur is able to fill up for market deficiencies.

Other types of important inputs that are not well marketed include the types of management as well as market knowledge. An important aspect of management is one’s ability to access and utilize factors of production that are not well marketed. In my opinion, this can be tied to William Baumol’s proposition in the paper Entrepreneurship: Productive, Unproductive, and Destructive, to extend the Schumpeterian model of entrepreneurship more widely for greater depth of analysis, since the original model only takes into account new factors of production rather than providing access to already-available technology that a certain geographical region has no access to hitherto.
In addition, Leibenstein elaborates on the role of the entrepreneur as one who might have the capacity to obtain finance based on family connections rather than on the willingness to pay a certain interest rate. Banks, for instance, may grant loans based on the long-standing connections and reputation. This shows that entrepreneurship is beyond training or one’s innate capabilities, but also hinges on one’s network. This point is further elaborated when Leibenstein goes on to suggest that the entrepreneur may need to have the capacity to operate well in the political arena connected with his economic activities. In my opinion, family connections and one’s social networks can be classified under Pierre Bordieu’s concept of social capital as they may aid one financially. Also, when the large corporations controlling the economy is highly tied to the political realm, in the instances of state-owned enterprises, otherwise partially-owned, or when corporations and the state have an interdependent relationship in the former funding campaigns whilst the latter provides contractual jobs for the former, one’s network plays a crucial role in entrepreneurial success.

Yet, some gaps are inherent, as some inputs are thought to be unmarketable, whilst others are difficult to market and therefore are frequently unmarketed. Instances include the implausibility of having a perfect risk-taking market, or that motivational systems cannot be marketed as this hinges on a dynamic internal-external environment that is highly variable and always changing. This reflects that the entrepreneur may not be completely efficacious as a gap-filler, but rather is required to adapt to situational and temporal changes.
Slack also exists within the firm due to varying levels of motivation, and that not all inputs are marketed. Therefore, the lack of one-to-one mapping between inputs and outputs, coupled with the presence of imperfect knowledge means that price signals are no longer accurate. These gaps can be counterbalanced by the role of the entrepreneur with the increased efforts in directing resources and in making operational decisions.

If part of the process of development involves the creation of economic capacity and the creation of demand, the entrepreneur can be described as the instrumental person behind the creation of capacity. This can be exemplified by the fact that firms do not operate on their production possibility frontier, and that the level of actual output is determined by the internal motivational state of the firm, interacting with the situation of incomplete information. The gap between the actual costs and true minimum costs if production were to occur on the PPF provides an opportunity for entrepreneurs to produce at lower costs, therefore filling the cost deficiency.

Finally, Leibenstein concludes that the impulses as a result of entrepreneurial acts lead to sequences of entrepreneurial activities and changing opportunities that influence the pattern and rate of growth. Inventions result in changes in the level of technology, adding new elements to the market net, and quite plausibly shifting the PPF further, creating more room for future growth.


2. 
In his paper Entrepreneurship: Productive, Unproductive and Destructive, William Baumol starts off with the widely-propagated assumption that growth is related to the amount of entrepreneurship activities. However, the main tenet of his hypothesis holds that the entrepreneur’s existence may at times be unproductive or destructive. He suggests that the rules of the game, i.e. the economy’s reward structure, dictate how entrepreneurial resources are allocated, thereby affecting the type of entrepreneurial activities and their impact on the economy. In addition, changes in the rules can alter the composition of the class of entrepreneurs and its size.

In the annals of history, the different types of rewards have exerted considerable effects on patterns of entrepreneurial behavior, even though admittedly, other factors play substantial roles. For instance, sophisticated technology that was already existing did not get disseminated in the ancient Roman society; whilst during the “High Middle Ages” in which progress and change were not the ethos of the epoch, inventions were spread with a great fervor, reflecting the presence of productive activity. Therefore, certain periods have certain institutions—both formal and informal-- that dictate whether entrepreneurial efforts are allocated towards productive or unproductive activity.
Schumpeter posits that entrepreneurship comprises of the introduction of new goods and services, the use of new production methods, the discovery of new raw materials, the finding of new markets, and the organization of industry. To Baumol, that the entrepreneurs are able to undertake a variety of the above tasks simultaneously suggests that there exists an allocation of entrepreneurial inputs, or efforts, amongst the tasks. Yet, it is essential to expand Schumpeter’s list, which is exhaustive, in order to lend credence to a deeper line of analysis.

Entrepreneurial effort marshaled in the direction of obtaining already-available technology to a certain geographic region can be considered as a productive activity as it introduces new methods of production and possibly, the technical-skills level of the workers. With greater output produced, the price falls, and demand increases, boosting the economy as a whole. As the technology disseminates through the country, production costs decrease; and in a bid for competition, innovation is spurred, spiraling into a virtuous cycle.
Baumol goes on to argue that the allocation of entrepreneurship resources can have a profound effect on the level of innovativeness of an economy, as well as on the extent of dissemination of technological discoveries. The existence of a strong positive correlation between the degree to which an economy rewarded productive entrepreneurship and the fervor of the innovation historically, bears testament to his assertion. For instance, the clamping down on new ideas and other manifestations of freedom in the fourteenth century marked a period when innovation was not rewarded, but rather punished. Therefore, the epoch saw a substantial economic slowdown. On the other hand, the industrial revolution in the 18th century with its ethos of innovation extending to present times has accorded the businessperson with a substantial degree of wealth and respect—both of which are rewards. The output growth that follows can be argued to be a result of allocation into productive activities, therefore setting the bedrock for continued innovation.

Rent-seeking procedures like the discovery and subsequent exploitation of legalities in order to divert economic rent may be classified as unproductive activities. Contrary to Schumpeter’s stand on monopoly, Baumol takes the activity to be unproductive, since a monopolistic situation is unproductive to the society as a whole. For instance, a monopoly can set prices and output levels, therefore restricting access to a good or service for certain members of society. Consumer surplus falls, yet the higher profit lags behind the fall in the former. The presence of deadweight loss decreases the utility to society. Therefore, the allocation of entrepreneurial resources between the productive and the unproductive plays an imperative role.

The contemporary form of rent-seeking activities under the cloak of litigation, takeovers, tax-evasion and avoidance efforts constitute the bulk of unproductive entrepreneurship, as resources are diverted from a part of the economy to a certain group, without a correspondingly larger increase in the overall growth of the economy. In addition, other resources such as time, money and energy are diverted to fight legal suits and countersuits, leaving compromised quantities and qualities of resources available for channeling into productive activity like innovation. Litigation is also wielded to temper competition, slowing down the process of innovation, and the competitiveness of an economy on a global scale. It becomes tempting for the entrepreneur to sue others before he gets sued, leading to the culture of suing, therefore diverting substantial amounts of resources away.

Baumol also quotes Lindbeck’s observation that in order to become rich in high-tax societies, one has to rise above the current production system. This encourages “smart” speculative financial transactions without much or no contribution to the productive capacity of the economy; otherwise sets the hotbed for illegal business proceedings like black markets and drug dealings. These hamper an economy’s development, merely because the existing institutions, both formal and informal, do not make for an entrepreneur inclined to divert resources into productive activity. Such activities lead to a loss in GDP, slowing down economic growth. In the light of this, entrepreneurial activities can be destructive.
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Economics Reimagined
[1) What did you find most interesting about the program?
2) What did you find most objectionable? (don't say "it was too boring", use your head)
3) Based on your understanding of the (stereotypical) differences between sociologists' and economists' world-views, comment on the strengths and weaknesses of applying economics methods to study social problems.
4) View the comments at: www.radioopensource.org/econom...t-39840
Which comment did you find most interesting?]

1. 
What I enjoyed most about the program lies in gaining insight about the field of behavioral economics—something which I had hitherto not really been acquainted with.

It was also heartening to know about the different applications of the field—to the family, education choices, consumption choices, et cetera.

Knowing that Behavioral Economics goes beyond the deadened, model-constrained view, and takes into account other variables for a more holistic view, rather than the atomistic, market-structure view, makes for this field to be more magnanimous, figuratively. Borrowing from other disciplines like Anthropology, Psychology, Public Policy, Sociology, et cetera, I think that the field of behavioral economics has got considerable room for growth beyond the constraints of traditional Economics.


2. 
I think what was most objectionable, in my opinion, would be Diane Coyle’s comment that what distinguishes Economics from disciplines like Anthropology and Sociology, is that it is a science involving the application of the scientific method.

Yet, in spite of having Economics subjected to a lot of computer-inputed data analyses and the wielding of mathematical models, can it be classified as a Science like the Physical Sciences like Biology and Physics? In my opinion, at best, it can only be established under the umbrella of the social sciences like Sociology and Psychology.

The above disciplines, too, make use of the scientific method, such as hypothesis testing and subsequent rejection should the need to arise, in sync with Coyle’s description of Economics. Besides, one of the key goals of Sociologist Emile Durkheim back in the day, was to establish the field as a science, through a positivist approach.

Besides, Coyle has offered that with the current expanse of data and techniques rendered possible by modern technology, it is now possible for Economists to establish their discipline as a Science. She claims that there is currently knowledge available to address the issues. This seems to imply that in the past, no or little knowledge was available. Yet, an individual reading Sociology might know that the classical thinkers like Max Weber and Karl Marx had done vast amounts of comparative and historical analyses back in their epoch meticulously, without the help of computer-aided models. For instance, Weber had written volumes on comparative religion, economics, et cetera; with the aid of a plethora of historical records.

Yet, what really is the Scientiic method? And how rigorous can it really get? Especially with the problems of control groups and ethics, amongst many others stepping in. Even if the social sciences are debunked as not being value-free, can a Natural Science research necessarily be value-free, if the research topic itself is chosen by humans, and in that way, values already exist to influence the mind and subsequent progress of the research undertaking.

All in all, I feel that Coyle’s view is too economics-centric.


3. 
In spite of the Behavioral Economists’ claims that Economics can now be used to study anything about society, about what people do, their decisions, and how people interact, I still feel that what is lacking is an appreciation and incorporation of the role of institutions, the latter being defined as the rules of the game.

The analysis applied by the Economists still takes the view of social actors leaning more towards the atomistic than as a collectivist. Yet, when people come together in a group, individual whims and fancies are suppressed. Group processes like group think, group loafing and group polarization come into play. And given that society consists of individuals, and that the social is an important and imperative component in an individual’s life, the collectivist element, even in a society with a more independent rather than communal view of self, should not be played down.

With regards to the issue over why people choose one brand of cappuccino over another, an Economist interviewed argued that it goes beyond issues of demand and supply; and that what people choose to do can be predicted by the economic models. He also offered that the underlying assumption of rational choice and markets works pretty well most of the time. Yet, my personal view is that theories are at best, explanatory claims that can be used to justify anything with the disclaimers of limited validity and reliability, as with what is written in most reports, given that most issues and findings are relative rather than absolute.

Perhaps, Jesse Rothstein’s standpoint that the neighborhood is important with regards to education choice for one’s kids, does not necessarily require an Economist to point this out. This could even be part of culturally-transmitted knowledge, rather than an economically-rooted finding. There are people in Singapore who buy properties in certain neighborhoods specially to get into the top schools, given that distance is a factor that may determine whether or not one’s child gets a place. In the annals of Chinese history, there are folk stories that tell of the mother of the philosopher Mencius, who specially moved home thrice in a bid to establish the appropriate environment conducive to her child’s learning. At best, I believe that Rothstein’s study would be most useful as one that has the economic standpoint as its linchpin.

Coyle also states that with the data and methods avaliable these days, Economists are going back to the basics, like what David Hume and Adam Smith did in their epochs. Yet, I believe that it is important to note the the foci of the Behavioral Economists still lean towards their calculations and models, zooming in on forecasting; whereas the predecessors like Hume had a wider range of foci in their writings that include the Philosophy of Mind, History, Ethics and Epistemology; whilst Smith also dabbled in Political Philosophy.
I feel that the view of these Economists are pretty limited, even if they are starting to consider other variables and work synergistically with the input from other disciplines. What could better improve this field would be, not eschewing the focus of the training in Economics, to delve into issues in a more holistic light.

4. 
My favorite comment would be the one by silvio.rabioso, replete with philosophical insight, highlighting that Economics, especially Behavioral Economics has to deny the existence of free will. In order to predict human behavior, one has to postulate that the human being will act in certain ways under certain conditions. Yet life is a complex amalgamation of many different factors interplaying in different strengths and directions, straddling the polarities of certainty and unpredictability. In the light of this, can behavior really be predicted?

©P Neo, 2007
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