Advanced Theoretical Economics March 11, 2005

1
Advanced Theoretical Economics March 11, 2005 

• Prof. Chen Ping
• China Center for Economic Research, Peking
  University

2
Unsolved Problems and Forthcoming Papers

• Multi-level and group selection in biological and
  social evolution (micro re-examining Darwin
  theory)
• Population thinking in consumption smoothness and
  equity premium puzzle (macro fluctuation
  questioning Friedman, Modigliani, Deaton, and
  Prescott)
• Logistic wavelets in economic growth and
  re-education policy for persistent unemployment
  (growth challenging Solow)
• Product wavelets, investment time-window and
  financial crisis (finance challenging Fisher
  reformulating corporate finance)
• Protecting property right vs. protecting
  innovator, historical review of modernization
  process (institution challenging Coase)
• Equilibrium Illusions and Nonequilibrium
  development in Economic Dynamics (criticize
  neo-classical economics)

3
Ongoing Topics in Economic Research

• Re-examining representative agent models
  Consumption-smooth (life cycle, permanent income,
  random walk, unit root) model, Ricardo-equivalence
  , Equity premium puzzle, Growth (Solow, Lucas,
  Romer)
• Modifying homogeneous model in growth and
  corporate finance
• Studying nonlinear models nonlinear DD-SS curve,
  Krugmans target zone

4
New Directions in Fundamental Research

• New methods of time series analysis
  time-frequency, logistic wavelets, decomposition
  and eigenvalue problem in Hilbert space
• Evolutionary theory in biology, psychology, and
  economics altruism mechanism and multi-level
  selection
• Endogenous theory of financial crisis and
  financial integration
• The origin of boundaries of firm or sate

5
New Opportunity for New Economic Thinking

• Advancement of complexity science and an emerging
  unifying paradigm
• Failure of Washington consensus for transition
  economies and diversity under globalization gt
  revival of evolutionary economics

6
Washington Consensus (Neoliberalism, Market
Fundamentalism) by IMF WB (John Williamson 1990)

• Liberalization of interest rate, exchange rate,
  trade, and capital inflow of foreign investment
• Deregulation
• Secure property rights
• Privatization
• Fiscal discipline (hard budget constraints,
  balance budget)
• Redirection of public expenditure (health care,
  education, infrastructure, etc.)
• Tax reform (lower tax rate, broaden base

7
Mainstream Economic Theory behind Washington
Consensus

• Invisible Hand (Adam Smith, Friedman),
  governments have little or negative role in
  economy (Buchanan rent-seeking) gt cut tax,
  deregulation, privatization
• Efficient market, which is inherently efficient
  and stable (Arrow-Debreu, Frisch, Fama), price
  reflects all relevant information gt no chance for
  financial crisis, no need for innovation and
  entrepreneurship
• Microfoundations (Lucas, Prescott), no
  involuntary unemployment gt no need for macro
  stabilizing (fiscal and other) policies
• Property right (Coase), representative democracy,
  and rule of law is capable of creating market
  order and fair society gt history does not matter
  gt universal convergence gt shock therapy

8
Reform Sequence of Shock Therapy in Latin
America Eastern Europe former Soviet Union

• Set harsh conditions to get foreign aids
• Cut fiscal budget and social programs
• Liberalize exchange rate to import monetary
  anchor and liberalize interest rate
• Liberalize trade and capital movements
• Privatization and sell state assets
• Enforce property rights

9
Simple-Minded Policy Recommendations

• Milton Friedman (fable of cutting the tail of a
  snake)
• Jeffrey Sachs (budget deficit, foreign reserve,
  inflation rate)
• Andrei Shleifer (rapid privatization, coupon
  system, design investment fund of American style)
• Eastern Europe (wholesale import of EU legal
  system) and land counter-revolutionary measures

10
Policy Expectations and Promises

• Stabilize macro economy
• Stimulating private business and increase output
• Increase efficiency and decrease commodity price
• Attract foreign direct investment
• Increase national wealth and competitiveness
• Win overwhelm support for freedom and democracy
  of capitalism and globalization
• ???

11
Outcome and Implications

• Large output decline for a decade (Ukraine -60,
  Russia -40, Poland U-shaped 20) comparing to
  China (GDP grows 8 times in 25 years)
• Inflation spiral and huge currency devaluation gt
  asset stripping
• Large scale bankruptcy and unemployment, large
  decline of life expectancy, birth rate, and
  marriage rate gt large increase of poverty
  population
• Increasing foreign dependence gt dominating role
  of multi-national companies
• Rise of mafia economies and black market, drugs,
  prostitutes, and organized crime, rise of new
  Nazi
• Drag-down of Western powers gt increasing social
  burden and legal costs gt sourcing out gt rise of
  anti-globalization gt rise of terrorism gt return
  to arm race and regional alliance (Europe Union,
  ASEA, Latin North America)

12
Eastern Asia Experience and China Lessons

• Strong governments in developing national economy
  (export led growth policy, state control of
  interest rate and exchange rate, industrial
  policy)
• Gradual opening and selective FDI special
  economic zone
• Decentralized experiments in regulation and
  reform
• Mixed ownership and dual-track system in price,
  employment, and production

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Why different?

• Testing two economic perspectives
• Equilibrium/mechanic approach gt convergence
• Evolutionary/biological approach gt diversity
• Comparing economic systems
• Autonomous (non-profit non-government) economy
  (community, churches, cooperatives)
• Commanding economy
• Market economy

14
How to develop a new world order?

• A better world trading system
• A better international financial system
• A better global environments
• A better world order or coming crisis?