Economists play vital role in China's reform
Hu Shuli says economic theories may seem removed from the real world, but they play an important role in China's economic development
China is stepping up reform efforts in the run-up to the third plenary session of the Communist Party's 18th Central Committee next month. Perhaps it is no coincidence that this is happening soon after the Nobel Prize in economics was awarded to three US scholars: Eugene Fama, Lars Peter Hansen and Robert Shiller. Their financial market theories are highly relevant to China. In particular, Shiller's warning of "irrational exuberance" is most well-known in China.
As noted by one of the Nobel Prize adjudicators, the test of reality was important. To understand how the financial markets work, we must pay attention to the theoretical innovations and empirical results of the three scholars. This is especially true when China is trying to strengthen the regulatory framework for the financial market.
Their Nobel Prize win was no surprise; given their achievements, it was a matter of time.
Fama's "efficient market hypothesis" has been included in textbooks; Hansen's statistical method to evaluate asset prices has been widely applied in the real world; and Shiller, a professor at Yale University, is well known for advocating "behavioural finance". Thus, awarding the Nobel Prize in economics to the three scholars recognises the important role of finance in the modern world.
However, since the award, some press reports have said the theories put forward by Fama and Shiller contradict each other. Fama upholds his "rational" hypothesis while Shiller explains the types of human behaviour that could not be explained by a "rational" hypothesis. It seems that either one, or both, are wrong.
But this stems from misconceptions about the nature of economics. Fama's efficient market hypothesis is a normative theory applied to finance, while Shiller's irrational exuberance concept was based mainly on empirical research. The two economists explain financial markets from different perspectives, but their theories have allowed us to better understand the workings of the financial market.
Some critics do not think these so-called "foreign theories" are useful to China. Some even sneer at Chinese economists. They think economic theories tend to be frivolous. Moreover, according to the political tradition of "big government" in China, the leadership tends to take the advice of government officials.
We should be alert if the two trends converge, especially when decision-makers attribute the economic success over the past decades, and recovery from the global financial crisis, to a "strong government" while being unwilling to carry out reforms based on modern economic theories.
If this happens, we will not be able to cope with challenges ahead.
Looking back at China's contemporary history since 1949, we find periods when China's economy faced difficulties and even the risk of collapse when economics and economists were ignored, as well as periods when the economy managed to get out of the woods and become prosperous when modern economics and economists were respected.
Economics has been flourishing in China since the introduction of the open-door policy. Many economists have given advice on reforms and government policies for the benefit of the country.
When the economy was in transition, economists provided strong intellectual support. This was seen during the economic reform plans put forward in the 1980s; during the 1992 reforms towards a market economy; again in 1994 with reform of the public finance, banking and foreign exchange systems; and more recently with the massive reform of state enterprises in the late 1990s.
All these reforms were successful, not only because of decision-makers' decisiveness and open-mindedness to third-party views, but also because of economists' efforts to take risks and find the truth.
Now China's economy is at the crossroads again. High-speed growth is over and a medium-to-slow growth stage has set in. However, we have made no substantial progress in switching our mode of development.
Meanwhile, fiscal and financial risks are looming large. Ecology and resource costs have risen sharply. These challenges have suggested the need to expedite all-round reforms, especially in the areas of land systems, monopolies, financial liberalisation and factor price.
New opportunities are emerging for economists to contribute their talents. They need a bigger platform that allows them to freely express their opinions and offer their advice.
The past 30 years have seen growth in the number of economists in China who are trained in modern economics and conversant with how the Chinese economy works. But they still have a long way to go, especially in terms of independence. Academic freedom is essential for the growth of economic theories.
This article is provided by Caixin Media, and the Chinese version of it was first published in Century Weekly magazine. www.caixin.com