The power of ideas and leadership in China's transition to a liberal society.

• Author: Zhang, Weiying

History and casual observations suggest that ideas and leadership are the two most important forces in all institutional changes. However, they have been absent or downplayed in conventional economic analysis of institutional changes. Conventional economics has exclusively focused on the notion of "interest" in explaining almost everything, from consumers' choices to public choices to institutional changes. In particular, institutional changes have been modeled as a game of interests between different groups (such as the ruling and the ruled), with the assumption that there is a well-defined mapping from interests into outcomes. (1)

In this article, I argue that this perspective of institutional change is fundamentally problematic because any institutional change cannot be well understood without taking into account two crucial factors: (1) ideas about the direction of the institutional change and (2) leadership under which the institutional change takes place. I will analyze China's economic and political transition to a liberal society by taking these two factors into account, explaining what happened in the past 35 years of the reform and predicting what will happen in the future.

I will analyze how ideas and leadership influence institutional change by adopting a simple two-dimensional framework. Ideas can be right or wrong. Leadership can be strong or weak. Thus, there are four combinations: right ideas with a strong leadership, right ideas with a weak leadership, wrong ideas with a strong leadership, and wrong ideas with a weak leadership. To facilitate the institutional changes into the right direction, the best combination is right ideas with a strong leadership; while the worst one is wrong ideas with a strong leadership. For example, Mao Zedong was a strong leader, but had wrong ideas about China's economic and social development, which led to a great disaster for the Chinese people during the period from 1949 to 1976. On the other hand, the success of China's economic liberalization since 1978 could very much be attributed to the right ideas and strong leadership of Deng Xiaoping and his successor Jiang Zemin. Deng and Jiang both had a somewhat strong belief in the market mechanism and entrepreneurship. They both were strong leaders to put forward their reform programs. However, Hu Jintao's regime from 2003 to 2012 was characterized with the combination of wrong ideas and a weak leadership. During this time, China's reform stagnated while many serious social problems emerged.

One plausible explanation for former president Hu's weak leadership is the path he went through in becoming president. He was the product of the Chinese political bureaucratic system, which is incapable of producing strong leadership required to embark on bold political changes. On the other hand, the new leaders of China, particularly President Xi Jinping, are not the direct products of the existing political bureaucratic system, due to their elite family backgrounds. As a result, they might be less constrained by such a system but are more entrepreneurial, having a clearer sense of mission, courage, and ability to lead. I thus believe that the next decade under President Xi's leadership presents a unique window of opportunity for China to make important institutional changes. China must not miss that opportunity.

The future of China's transition to a liberal society is dependent on the new leaders' ideas and leadership. Currently, China is trapped into six wrong ideas: (1) China's economic success in the past three decades comes from the "China model"; (2) economic success can continue without political reform; (3) current institutions benefit vested interests and any reform would harm those interests; (4) state-owned enterprises (SOEs) are the economic cornerstone of the Chinese Communist Party; (5) "political power comes from the barrel of a gun"; and (6) the more power government holds, the stronger it will become. I will elaborate on how wrong these six ideas are and why the new leaders must get rid of them in order to sustain China's economic success.

This article is organized as follows. In the next section, I will articulate why ideas and leadership are important in understanding institutional changes. Then, I will present a two-dimensional framework to discuss the effects of the four combinations of ideas and leadership on institutional changes. Following that, I will discuss how the ideas and leadership combinations manifested themselves in the first 25 years of the economic reform under Deng and Jiang's regimes (from 1978 to 2002), and under Hu's regime (from 2003 to 2012). I will then discuss the idea traps and the leadership challenges China faces today. Lastly, I will conclude by proposing how important it is to create an ideas market in advancing China's economic progress and in transitioning China into a liberal society.

The Importance of Ideas and Leadership

More than a century ago, the British economist Francis Edgeworth (1881) claimed that "the first principle of economics is that every agent is motivated only by self-interest." Edgeworth's claim succinctly summarized the fundamental assumption underlying the conventional economics that is still dominant today--that is, as rational agents, individuals know their interests and attempt to maximize them. Thus, every observed behavior can be explained or justified by self-interest maximization. Based on that assumption, ideas play no role in explaining individual behavior. While economics mainly focuses on explaining equilibriums and their stability, economists do apply this assumption to explain or predict institutional changes. In so doing, they model the institutional change as a game of players with different interests, such as the ruler vs. the ruled, the politician vs. the public, the employer vs. the employee, the landlord vs. the peasant, the capitalist vs. the worker, and so on. Under such modeling, the interests of every group are well-defined and every interest group makes choices to maximize its interests. Consequently, institutional change is nothing more than moving from the old equilibrium to a new equilibrium. Ideas and leadership are completely ignored in this model. (2)

While the interest-based model of institutional change is simple and has some explanatory power regarding the stability of the institution, it hardly explains why institutions actually change. My observations suggest that many of the institutional changes that happened in human history were not because one (or new) interest surmounted another (the vested interests), but rather it was because the new ideas surmounted the old ideas--or because ideas trumped interests. For example, the success of the Chinese socialist revolution led by the Chinese Communist Party was not because the interests of the workers/peasants surmounted the interests of the capitalists/landlords, but because the Marxist-Leninist ideology won over other ideologies. Moreover, whereas revolutions and reforms are often against the groups with vested interests, the important driving force for these changes often comes from the elite groups with vested interests. For instance, the founding members of the CCP were almost exclusively from the then elite families, including landlords, rich middle-class members, warlords, and intellectuals. Why did these elites stand up for revolution? The answer is that they came to accept a new ideology--Marxism-Leninism. Similarly, the important driving force of the French Revolution in the late 18th century was the aristocracies of the old regime (see Greenfeld 1992: chap. 2). The Enlightenment was nobiliary, and many of the Enlightenment intellectuals came from the aristocracy. Interestingly, the revolution for overthrowing aristocracy was in fact partly the result of the aristocracies' effort. Likewise, the reason why George Washington and his fellow members instituted the America's constitutional republic, or why Deng Xiaoping launched China's market-oriented reform, cannot be explained by their self-interest maximization, but because they adopted new ideas.

Meanwhile, history has also demonstrated the crucial role leadership plays in institutional changes. Almost all institutional changes are initiated by a small group of people, sometimes even by a single political figure. These people are missionary, visionary, passionate, risk-taking, and decisive. They have the ability and charisma to gather followers and to direct them. It is evident that without George Washington's leadership, the American political institution might have been very different; without Mao Zedong's leadership, China's revolution might have failed; and without Deng Xiaoping's leadership, China might have taken a very different road after Mao's death in 1976.

So why do ideas matter? It is because people are rational beings. As rational beings, we think, reason, and analyze before taking actions, and we act with a clear purpose. Every volitional action needs to be justified, and these justifications must be based on values and ideas. Human beings are different from other animals because we use values and ideas to guide our behaviors. As we all know, rationality is also the core assumption of economics. However, the rationality in conventional economics is often too narrowly defined as "instrumental rationality." In other words, rationality plays no role in choosing the ends. However, as Kant argued convincingly, the primary meaning of rationality is the selection of ends. Rationality should be the master, not slave, of passion. As people are social animals, we have various appetites, desires, and inclinations. As rational beings, however, we cannot just satisfy these appetites, desires, and inclinations regardless of the potential negative consequences. We must choose the ends (e.g., what desires to pursue) according to social norms and ethical principles. These norms and principles are...