Cheng Enfu and Hu Leming: A Critique of the New Institutional Economics Theory of Economic Development
New Institutional Economics (NIE) is a school of economic thought that emerged in Anglo-American countries during the 1960s, represented by figures such as Ronald Coase, Douglass North, and Oliver Williamson. It opposes the critiques of mainstream economic theory leveled by the American Old Institutionalist school, represented by Thorstein Veblen and others, as well as their practice of analyzing the generation and operation of institutions primarily through philosophical, sociological, and psychological methods. Instead, NIE attempts to utilize the theories and methods of neoclassical economics to explain the composition and operation of institutions, to elucidate the status and role of institutional factors in the operation of the economic system, and to seek a coupling of institutional analysis with neoclassical economics. Its aim is to establish an economic analytical system covering all important economic variables, including resources, technology, preferences, and institutions. Its fundamental content primarily includes property rights theory, transaction cost theory, contract theory, the theory of the firm, the theory of the state, the economic analysis of law, institutional change, and the new economic history.
Since the 1980s, NIE has been introduced into China, sparking widespread interest among Chinese scholars. Property rights theory, the theory of the firm, and institutional change theory have gradually become "hot topics" in economic research. Clearly, the rapid dissemination of NIE in China is inseparable from the historical context of the Reform and Opening-up [1] era. China's Reform and Opening-up is a process of systemic transformation for a giant economy, requiring the economics community to provide an "institutional explanation" for this complex process of change. The unique perspective and theoretical framework of NIE, which directly confronts institutional issues, undoubtedly resonated to a certain extent with this need of the domestic economic community. To meet the research needs of the domestic academic community regarding NIE, we compiled the book New Institutional Economics, the first edition of which was published in 2005. For this new edition (Cheng Enfu and Hu Leming, eds., New Institutional Economics, Economic Daily Press, 2022 edition), we have made appropriate revisions.
Excluding the introduction and appendices, the book consists of eleven chapters. Chapter 1 introduces property rights as a foundational concept and basic analytical tool of NIE. Chapter 2 provides a brief introduction to the NIE interpretation of the nature of property rights in terms of their meaning, content, and origin. Chapter 3 introduces the main content of transaction cost theory and contract theory, particularly incomplete contract theory. Chapter 4 introduces the use of transaction cost theory to explain property rights arrangements, their efficiency, and the evolution of property rights systems. We believe these four chapters constitute the basic theory of NIE. Chapter 5 introduces the NIE answer to "what is a firm and why does it exist," which, together with the analysis of corporate governance performance in Chapter 6, forms a relatively complete theory of the firm. Chapter 7 introduces the theory regarding the state as a "super-firm." Chapter 8 introduces the economic interpretation of legal systems in NIE. These four chapters are extensions and applications of the foundational theories of NIE. Chapters 9 and 10 introduce the theoretical models and historical interpretations of institutional change by North and others, representing the dynamization and macro-level application of NIE's basic theories. To scientifically grasp the theoretical content of NIE, Chapter 11 compares and critiques the basic theories of NIE with relevant Marxist theories. It concludes that while NIE has certain reference value, on the whole, it is not NIE but the theoretical paradigm of modern Marxist institutional economics that is more suitable for guiding China's economic reform and development. Compared with Western NIE, works such as Marx’s Capital and Lenin’s Imperialism, the Highest Stage of Capitalism long ago constructed a framework for Marxist-Leninist institutional economics, belonging to a truly scientific "economics of the real world." Meanwhile, modern Marxist political economy, both in China and abroad, has enriched and developed this theoretical system, enabling it to explain and resolve a series of issues in the development of domestic and international economic systems and economic civilizations more objectively and effectively.
Compared to neoclassical economics, NIE possesses greater explanatory power for the real world, and is thus called "real-world economics" by the West. Furthermore, in recent years, with the widespread application of game theory, econometric analysis, and mathematical modeling in the field, the issues of many NIE theoretical propositions being non-measurable or difficult to analyze quantitatively are gradually being overcome. However, NIE still hasn't become "the kind of economics that theoretical economics ought to have been," as it expected. This is certainly directly related to its theoretical structure and logic of demonstration, but even more so to its deep-rooted bourgeois ideological prejudice. NIE was deeply influenced by the Austrian School and flourished at the University of Chicago, which champions liberalism; it possesses very clear liberal tendencies and ideological biases, making it a typical representative of neoliberal economics. Revering private property rights, reposing faith in market forces, and advocating laissez-faire—believing that a prosperous society must be a laissez-faire market economy based on private property—is the unshakeable "golden rule" [2] of NIE. Regarding these issues, this book also performs the necessary identification and clarification from logical and ideological perspectives.
Neoliberal economics was once proclaimed a "panacea" for solving world development problems. However, practice has shown that the "freedom" of neoliberalism is in fact the "freedom" of monopoly capital, and the "prosperity" of neoliberalism is merely a "grand banquet" for monopoly capital. Implementing the economic concepts and policy programs of neoliberal economics can only cause immense disasters for world development. Since the 1980s, the result of Latin American countries implementing the neoliberal "Washington Consensus" has been persistent economic stagnation, deteriorating social conditions, and intensified social conflict. The average annual economic growth rate from 1992 to 2001 was a mere 1.8%, known as the "lost decade." Some Asian countries originally hoped to harvest greater development achievements by implementing the "Washington Consensus," but instead found themselves rapidly mired in severe economic recession, rapid inflation, soaring unemployment, and persistent political instability after the 1997 Asian financial crisis. The results of implementing neoliberal "structural adjustment" programs in Africa were equally abysmal. In the last twenty years of the 20th century, the average growth rate of GDP for the whole of Africa fell by nearly half compared to the preceding twenty years; in the 1990s, the per capita GDP of African countries even showed negative growth (-0.2%). The outbreak of the severe financial crisis in the West in 2008, the West's severe failure in pandemic prevention since 2020, the West's comprehensive sanctions against Russia in 2022, and the frequent illegal sanctions and provocations by the United States against China in recent years all indicate that, entering the 21st century, neoliberal theory and policy continue to seriously hinder the healthy development of various countries and the world economy, as well as the well-being of the broad masses of the people.
Since the Third Plenary Session of the 11th CPC Central Committee [3], China's Reform and Opening-up has realized a historic transformation from a socialist planned economic system to a socialist market economic system, continuing to write the miracle of rapid economic development and the miracle of long-term social stability, both rare in the world. Clearly, the reason China's economic structural transformation and development achieved such great success is by no means, as some scholars believe, because "the series of events leading China toward a modern market economy were not a purposeful human plan," or that the success of China's economic transformation is an "unintended consequence of human action," a result of the spontaneous expansion of the free market order, and an inevitable outcome of deepening privatization, marketization-only, and liberalization-only. Facts show that the key to the great success of China's economic transformation and development lies in the fact that the Communist Party of China has always persisted in combining the basic principles of Marxism with China’s concrete realities, profoundly summarizing both positive and negative experiences at home and abroad, establishing and improving the socialist system, and forming and developing systems for Party leadership and for economic, political, cultural, social, ecological, military, and foreign affairs. China’s national system possesses significant advantages, such as adhering to the centralized and unified leadership of the Party, ensuring that the people are the masters of the country [4], and adhering to the law-based governance of the country. To continue advancing Reform and Opening-up at a new historical starting point, we must firmly establish "four confidences" in the path, theory, system, and culture of socialism with Chinese characteristics [5], deepen our understanding of the laws of the socialist market economy, uphold the fundamental economic system in which public ownership is the mainstay and distribution according to work is the mainstay, remain vigilant against and prevent various neoliberal trends of thought from misleading China's Reform and Opening-up, and move firmly forward along the correct direction of establishing and improving the socialist market economic system.