von Wieser Lecture

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von Wieser LectureHayek in China20 April 2007
PrahaPCPE

• Boudewijn Bouckaert
• University of Ghent
• Centre for Advanced Studies in Law and Economics

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Hayek in ChinaYouth Memories
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Introduction On Abstract and Concrete Order

• Major Austrian contribution to political economy,
  especially Hayek notion of abstract order
• Attention to this distinction because it is
  yardstick of evolution towards freedom and
  progress in world
• Abstract order connection between abstract
  categories of action (pattern explanation)

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Introduction On Abstract and Concrete Order

• Abstract order often through coordination of
  action, not governed by rules ( main field of
  economics, science of unintended consequences)
• P.ex. Rise of prices fall of demand
• P.ex. Rise of corporate tax exit of most mobile
  factors of production

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Introduction On Abstract and Concrete Order

• Abstract order also through rule guided behaviour
  (field of law and institutions)
• P.ex. Rule of contractual compliance abstract
  order of offer-acceptance-compliance
• P.ex. Rule of tort law abstract order of
  damages and compensation (internalisation)

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Introduction On Abstract and Concrete Order

• Science of abstract order allows prediction, but
  limited to abstract patterns of action (therefore
  not liked by concrete planners)
• P.ex. Rise of price drop in demand difficult to
  predict exact quantity
• P.ex. Imposition of contractual compliance rule
  prediction of more contract compliance but not
  which contracts, which compliance acts

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Introduction On Abstract and Concrete Order

• Notion of abstract and spontaneous order strong
  argument for limited government no need for
  government-driven concrete planning of actions of
  citizens
• Main task for government is providing
  side-conditions for abstract order to function to
  the benefit of most by relentless and
  undiscriminated enforcement of abstract rules,
  necessary for the abstract order to function

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Introduction On Abstract and Concrete Order

• Abstract rules and complementary institutions
  property, contract, tort,litigation system,
  protection agencies not given evolves within
  cultures cultural path dependencies
• Abstract order argument for political
  unification style EU side-conditions for an
  abstract order can be provided by cooperation
  between different independent political firms
  (p.ex. Law of legal conflicts, bottom-up
  unification by restatements)

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China 1949-1979 the imposed and concrete order

• Chinese communist system concerning industry
  quite similar to Soviet system central planning
  and squeeze of agricultural sector
• Agriculture/country side remarkable differences
  deserves special attention because development
  towards abstract and spontaneous order starts here

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China 1949-1979 the imposed and concrete order

• 1949-1958 collectivisation of land around
  cooperatives(APCs) forced pooling of
  land(output// input of land and input of labor
  from 1956 // input of labor)
• 1958 Great Leap Forwards communes (10 000-80
  000 people subdivided by brigades 1000-2000
  people output 60 free supply,40 labor)
• From 60-79 again 60 labor and private plots
  allowed
• 1979 communes abolished and household
  responsibility system introduced

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China 1949-1979 the imposed and concrete order

• Commune-system lasted only 19 years two decades
  is not enough to affect deeply Chinese family
  farming system when HHRS was reinstated could
  fall back on social capital of Confucian familial
  coherence
• Contrast with SU 1930-1991
• Private knowledge and individual
  responsibility,initiative and incentives were not
  lost

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China 1949-1979 the imposed and concrete order

• Start position in evolutionary process toward
  abstract order in 1979
• vast and imposed concrete order concerning
  industrial system(SOEs) especially in urban
  areas
• Multitude of non-imposed (natural) concrete
  orders, more or less autarchic or only integrated
  in limited market orders of villages and small
  regional markets

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China since 1979 by trial and error to the
abstract order

• Initial situation of 1979 triggered off gradual
  evolution towards a large abstract order based on
  abstract general rules
• Chinese communist leadership did never abandon
  its belief in collectivist management of country
  but reforms were driven by aim of economic
  growth instead of equality and creation of
  socialist man (legitimation of political monopoly
  of communist party)
• Reforms show pattern of coëvolution reforms
  trigger off unintended consequences triggering
  off new reforms

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Development of private enterprise

• In China private enterprise result of
  privatization result of gradual transformation
  of new collective enterprises (TVEs) into
  genuine private enterprises
• Initial center of development CBE small
  brigades,country-side based enterprises max.
  employed 8
• 1977 Third Plenum of 11th Central Committee
  promotion of growth limit is abolished
• 1984 CBE become TVE legal framework TVE

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Success of TVE 1979-1993

• Different types of firms. Evolution of shares in
  Chinese economy

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Success of TVE 1979-1993

• TVE run by local bureacrats profits have to be
  reinvested or spent to local social
  infra-structure for the rest free to set prices
  and look for markets
• TVE seen by CCP as a dynamic element in
  collectivist structure
• TVE in fact unit within an emerging abstract
  market order extending over the whole of China

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Structure of TVE

• TVE property rights very unclear (no real
  shareholders, no residual claimants)
• Explanation TVE has to survive in hostile
  collectivistic business environment
• Socialist banks reluctant to lend to capitalist
  firms
• Local bureaucrats from grabbing to helping hand
• Weak rule of law
• TVE is phenomenon of bureaupreneurship free
  entrepreneurs as actors in abstract market order
  disguised as functionaries in concrete planned
  order

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Evolution towards private entreprise

• 1994 leadership of CCP saw inconveniences of
  TVE, especially combination of administrative and
  business functions urges for separation of it
• Also reforms in bureaucracy and banking sector
  (privatized), result is shift to private sector

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Evolution towards private entreprise
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Abstract Rules Property

• Spontaneous abstract order(market) and abstract
  rules-system (law) often in co-evolutionary
  relationship characterized by unintended
  consequences
• China partial abstract order(TVE-market)
  clashing with the rest of structure but leading
  to reforms in official rule-system
• Sometimes opposite p.ex. Papal Revolution and
  introduction of Roman law in the West unintended
  consequence more market evolution

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Abstract Rules Property

• Property Order system of rules and institutions
• In China legal property order unclear and weak
• Rural population no alienation, no mortgage,
  weak protection against taking
• Law is weakly implemented no independent
  judiciary not party driven perceived as another
  layer in bureaucracy
• Nevertheless de facto property protection first
  towards assets of TVE, now towards assets of
  private firms

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Abstract rules Property

• De facto protection of property how?
• Cadre evaluation system bureaucrats-promotion
  most important criterion GDP-growth in
  circonscription
• Local autonomy raising and spending taxes
• Princeling-system children of party-veterans and
  bureaucrats preferential treatment as managers of
  new firms (TVE,private firms)
• Result alignment of interests of bureaucrats
  with respect for property

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Abstract Rules Contract

• Contract formalisation of exchange actblood
  vein of market
• Rules of contract abstract (contractual freedom,
  contractual compliance,contractual liability,
  good faith execution)
• Within planned economy contract law are
  regulations how two arms of bureaucracy should
  cooperate

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Abstract Rules Contract

• Evolution towards abstract order
• Autonomy of action given to local bureaucracies
  and enterprises resulting in intense and complex
  interaction
• Reliance and compliance first on informal base
  guanxi
• Informal reliance and compliance also in
  capitalist legal order with formalised contract
  law (tit for tat and repeat playing,p.ex.
  empirical study Macauley)

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Abstract Order contract

• In China contract law
• 1981 Economic Contract Law
• 1985 Foreign Contract Law
• 1987 Technology Contract law
• Very unclear not very enforceable
• Only in 1999 Unified Contract Law reflecting
  classical principles of contract law

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Abstract Rules Contract

• Reliance and compliance mostly based on
  guangxi buddyship committment lt friendship
  gtpartnership social ties based on frequent
  face-to-face-interaction also stimulated by
  family ties

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Abstract Rules Contract

• Identification of contractual partners
• Social networks 47.1
• Advertisement 47
• Government sources 6.6
• Identifying Suppliers Customers
• Business associates 41,4 42.9
• Trade conferences 12.9 18.6
• Advertising 11.4 14.3
• Self-initiative 10 10
• Government 8.6 10
• Friends 8.6 10
• Trade associations 5.7 11.4
• Competitors - 21.4

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Abstract Rules Contract

• Dispute resolution largely based on
  negotiation// World Bank 2001 87.1 in
  relationship client and 93.2 in relationship
  suppliers
• Trade associations (government set up)67.1
  member but only 4.3 information on
  creditworthness and 4.3 contribution to dispute
  resolution

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Abstract Rules Contract

• Dispute resolution gradual evolution towards
  more civil cases annual growth of 8.3 in
  1983-2001( criminal only 4.7)
• Enforcement Nanjing Court
• Automatically implemented 3.8
• Implemented sucessfully 55.5
• Failed 18.5
• Conclusion within planned order contract only
  limited element in the margin of system growth
  of horizontal informal contractual order based on
  guanxi now more and more formalized

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General Conclusions

• Historical Chinese reform process is major shift
  in history
• Until 1000 AD-Sung-dynasty advanced and market
  driven economy
• 1000-1300 AD Mongul occupation
• 1300-1900 AD protectionist system Ming and Manchu
• Marxist revolution even more disruption
• Market evolution one billion people in camp of
  market economy ( Europe the opposite?)

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General Conclusions

• Theoretically
• 1. Coëvolutionary character by changing some
  elements in system accumulative process of
  unintended consequences constructivist
  imposition of liberal institutions is not always
  necessary
• 2.Importance of grown values and order guanxi
  and Chinese family
• 3. Paths to freedom are multiple hope for future!