A market economy is better than a planned economy, which is a consensus we have reached over the past few decades. However, once we decided to develop a market economy and set our sights on the world, we found that not all market economies are doing well, and there are actually good and bad market economies.
There are two types of government in a market economy
Whether the market economy is good or bad depends on the role of the government in the economy. We see that there are two kinds of governments in the market economy: one is the “government that supports the market”; the other is the “government that destroys the market” or “the government that kills the market”, that is, the government through various interventions, or The market is destroyed, or the imminent market is smothered in the bud.
Different governments will produce different market economies. Looking at the economies of countries around the world, we find that the government that supports the market is a limited and effective government. The government that destroys and stifles the market is either an unlimited government (that is, an omnipotent government) or an invalid government.
So how to achieve limited and effective government? Historical experience shows that the rule of law is a crucial institutional foundation for limited and effective government. We can even say that in modern society, the rule of law is the best institutional arrangement currently practiced by people that can maintain a limited and effective government. So the rule of law is at the heart of what we’re talking about about how to achieve a good market economy.
It should be noted that the concept of the rule of law is very broad, not just a matter of economic development. But here we focus on the relationship between the rule of law and the economy, what kind of market economy and what kind of government do we need, and how to apply the rule of law to create such a market and government.
The rule of law to shape markets and governments
Neoclassical economics initially studies the efficient allocation of scarce resources and analyzes the role of the price mechanism in it. Later, people found that price is important, but the effect of economic operation depends not only on price, but also on deep-seated property rights. For example, property rights are very important to people’s incentives. If there is no good property rights system, people will not have incentives to invest and work, even if the price is correct, it is useless, and even the correct market price cannot be formed at all. Looking further into property rights, one discovers the importance of the rule of law and the law. With or without rule of thumb, different legal systems will lead to differences in the definition, enforcement, protection of property rights, the implementation of contracts, and even the market order.
It is not a special phenomenon in China that economists study the rule of law. In the past few decades, many outstanding economists in different fields around the world have used qualitative or quantitative methods to explore the impact of law and the rule of law on economic development from different perspectives. This is a common problem worldwide.
Economists may not have as much knowledge of laws, jurisprudence, and their historical evolution as jurists. But economists have some strengths when they study the rule of law and the role of law on the economy. The analytical framework, perspective, and analytical tools of modern economics help to deepen the analysis of the problem. Economics analyzes problems from the perspective of cost-benefit, and it is easy to understand the trade-offs that should be made between different options, because any choice will have an opportunity cost. For example, whether to supervise through the court or through the administrative supervision department, it is necessary to compare the costs and benefits of the two mechanisms and make a trade-off. Such analytical methods do have consistency and do not tend to go to extremes. Many economists’ research on law and economics has had an important impact on the field of economics and law. With the increasing exchanges between economists and jurists, the relationship between economic development and the rule of law has received more and more attention in theory and practice.
Three Forces to Promote the Construction of the Rule of Law
The rule of law will not be achieved automatically, and the building of the rule of law needs a driving force. Like any institutional change, the power to promote the construction of the rule of law first comes from the interests of stakeholders, including the interests of the so-called “economic man” and the government. It is easier to understand that the rule of law will benefit the economic interests of individuals and businesses. The rule of law economy places special emphasis on restraining the government’s behavior. Why does the government have the enthusiasm to build the rule of law? In fact, the rule of law will also improve the interests of the government, which includes many aspects: first, the rule of law can promote sustainable economic development, thereby increasing government tax revenue; second, the rule of law promotes social stability, which is also in line with the government’s goals; third, the government consists of many regions , Department of officials, the rule of law is conducive to the supervision and control within the government. Therefore, a government based on the rule of law will better promote economic development, which will be beneficial to the long-term interests of the government as a whole.
The second force driving the construction of the rule of law is external pressure. After China’s accession to the WTO (World Trade Organization), it is in the environment of economic globalization. The rules of the WTO are the rules of the rule of law. In this environment, the rules of the game for the entire economy are completely different from what they used to be. External pressure is not only important for small countries, but also for big countries like China. Although big countries have more room for maneuver in international affairs than small countries, the losses caused by violation of the rules are also large. Therefore, external pressure is a force to promote the construction of the rule of law.
The third force driving the construction of the rule of law comes from knowledge, which is a force that cannot be ignored. Academics and the media are important components of knowledge creation and dissemination, and the two are interactive. The media transmits information, but it does not just transmit information, it also plays the role of creating knowledge. Therefore, academics and the media work together to advance knowledge.
While interests are powerful intrinsic drivers, the power of knowledge cannot be underestimated. For example, people often think that the rule of law binding themselves (including the government) is always to their disadvantage. actually not. The knowledge gained from theory and practice will tell people that such constraints are beneficial to the so-called “economic man” and the government itself in the long run. Therefore, in order to understand where your interests really lie, you cannot do without knowledge.
China’s past experience of reform and opening up shows that the combination of internal interests, external pressure and knowledge will enable China’s reform to move forward step by step.
Original text: The original text was published in Beijing Daily (page 09 on February 28, 2022)
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