Yao Yang on Common Prosperity

Yao Yang, “How to Correctly Understand Common Prosperity”[1]
 
Introduction and Translation by David Ownby
 
Introduction
 
Yao Yang (b. 1964) is a professor at the China Center for Economic Research and Dean of the National School of Development at Peking University.  He is a respected scholar and prolific writer who has published on a variety of topics, in both Chinese and English (his CV is available here).  He won the 2009 Sun Yefang Economics Award, China’s highest award in economics, the 2008 and 2010 Pu Shan Award in International Economics, and the 2008 Zhang Peigang Award in Development Economics. 
 
I have been following Yao recently because while he has historically been identified with the New Left, in recent years he has developed an interest in Confucianism, and insists that the best way for China to “sinicize Marxism” is to re-engage with Confucianism.  In fact, he argues that China’s success during the reform and opening period was largely due to a reflexive return to Confucian values such as pragmatism and meritocracy, and that China needs to rethink Marxism on that basis.
 
The text translated here discusses Yao’s views of “common prosperity,” a topic that has been much in the news in the past few months.  The topic is associated with China’s central authorities’ crackdowns on tech tycoons, delivery platforms, celebrities from the entertainment world, private tutoring firms, among others, and has been interpreted both as a genuine effort to promote socioeconomic justice in a China where the gap between rich and poor remains enormous, and as yet another effort by Xi Jinping to consolidate his and the Party’s control over all facets of Chinese society (for a thorough and evenhanded discussion of common prosperity, see here).
 
Yao’s take on common prosperity is basically positive, and he pushes back against an overly “leftist” reading of the policy.  He argues that common prosperity is a logical follow-up to the anti-corruption and poverty alleviation campaigns, in the sense that they are all part of Xi Jinping’s efforts to clean up the relations between government and business and address the serious problem of inequality in Chinese society.  Yao’s primary concern, however, is to make sure that China not go too far in the direction of a heavy-handed redistribution of wealth that might undo China’s impressive progress since reform and opening.
 
Yao’s defense of markets and entrepreneurs, of Adam Smith and Jack Ma, strikes me as consistent with the “center-right” tone of much of Chinese establishment intellectual discourse these days.  The invisible hand works, Yao insists, and markets are absolutely necessary to allocate resources and fix prices.  Some entrepreneurs—in China and elsewhere—make vast sums of money, but popular anger at these one-percenters is grounded in popular ignorance—most of us don’t see the entrepreneurs that failed, and thus do not understand how the game is played and what the stakes are.  Of course some adjustments might be in order—maybe even property taxes—but Yao’s heartfelt plea is to let markets and entrepreneurs work their magic for the good of society as a whole.
 
Of course, markets and entrepreneurs do not exist to make society more equal, and inequality can be a problem, Yao admits.  But rather than address such problems though redistribution via taxes, subsidies, or basic-income programs, Yao prefers to reform China’s educational system, which currently ill serves the urban poor and rural youth, meaning that they are unable to develop their productive capacities.  Yao’s ideas are interesting and no doubt sincere, but they also sound a bit like Joe Manchin’s criticisms of Bernie Sanders.  In this text, Yao’s message is “teach a man to fish.”  In the final part of this talk, Yao pushes back against the idea that businesses and entrepreneurs should be obliged to engage in philanthropy.  Charity that is not voluntary is not charity, Yao insists—and it is hard to disagree.
 
The setting in which Yao delivers his message is strangely appropriate.  His text is in fact a lecture given as part of the Xinzhuang Classroom 辛庄课堂initiative.  This program was set up in the spring of 2021 by Peking University economics professor Zhang Weiying 张维迎 (b. 1959) in Zhang’s home town of Yulin, Shaanxi, with the help of the well-known entrepreneur Huang Nubo 黄怒波 (b. 1950), the 19th wealthiest man in China in 2019.  To quote from an article describing the initiative:  “The Xinzhuang Classroom has recruited more than fifty Chinese scholars in economics, management, and the humanities, as well as business entrepreneurs, to serve as instructors.  The initiative is dedicated to providing a unique high-quality training program and exchange platform for young and middle-aged entrepreneurs in China,” with the goal of bringing the drive and entrepreneurship that fueled the development of China’s wealthy east coast to inner regions that have perhaps lagged behind.  Yao Yang’s lecture is thus beamed from Beijing to the new facilities Zhang and Huang have had constructed, an example of the kind of voluntary charity Yao discusses in his talk.
 
Favorite Quotes
 
“What is common prosperity? Surely not killing the rich to help the poor.  We all lived through the era of extreme egalitarianism, when we all ate from the same ‘big pot rice.’ Whether you worked a lot or a little, or even if you did not work at all made no difference, so we were inefficient and nobody worked.  I read Zhou Qiren’s 周其仁 (b. 1950) report on Xiaogang village in Anhui. The output of Xiaogang Village in the first year after the introduction of the responsibility system was equivalent to the sum of the output of the Xiaogang People's Commune over the entire 25 years of its existence. If we say today that the idea of common prosperity is to kill the rich to help the poor, which would mean confiscating the property of the rich to distribute it to the poor, then to my mind, China's economy would ‘return to the pre-Liberation era overnight.’ I may be exaggerating a bit, but If you are results-oriented, at least you will agree that this approach is not sustainable. This is the proverbial ‘give a man a fish.’”
 
“For example, in poverty alleviation, the idea is to get rid of absolute poverty, which is really easy if you only look at the data for one year, because you can just give people subsidies, but the next year they’ll be poor again. Common prosperity ultimately means that we want to have a fairer society, but a fairer society does not mean a society where everyone is at the exact same level. We are a socialist country, and we should go back to what Marx and Engels said in the Communist Manifesto:  ‘The emancipation of the individual is the prerequisite for the emancipation of all mankind.’ What is the basis for comprehensive human development? You must first live and be productive. Our goal in pursuing common prosperity should be focused on improving the productive capacity of all people, which is the only way that common prosperity will be broadly meaningful and sustainable.”
 
“These days the word ‘exploitation’ often pops up on the Internet, which I think is dangerous. Factor-based distribution actually has an element of labor-based distribution included within it. Is capital the fruit of labor? Of course it is. You may have to go back a few generations to figure out where your house came from. It may be the labor of your grandfather’s grandfather that built the house you now rent out, and while it may seem like you am getting something for nothing and are simply profiting from capital, you did after all inherit something.  Especially for Chinese people, inheritance is very important. I don't think we can pass an inheritance tax in China because the whole country would be against it. The way the Chinese see it, the son and the father are part of the same family, it is natural for a father to buy a house for the son, and it is unreasonable to impose an inheritance tax on the son now. Let's not be fooled by what they do in the West.”
 
“Everyone is anxious about education in China, but to me, this anxiety is a luxury reserved to the middle class.  This is because the middle class has the right to speak, which means that we can hear their voices. Poor families gave up a long time ago. When I go back to my home village, people tell me that the authorities are now saying they want to reduce the burden on the children, which means that children should stay in school to study once school lets out in the afternoon. In rural areas like ours, children don't stay after school and they don’t have tutoring classes, so ‘reducing the burden’ in rural areas has become a way for schools to charge fees.  It’s an opportunity for schools to get people to pay to keep their children in school. My nieces and nephews have complained about the fees and don't want to do this fake tutoring. They gave up a long time ago.
 
“When we crack down on extracurricular tutoring, we are also cracking down on the poor. We all know that rich people can afford to hire private tutors. The average citizen can afford the tutoring we are cracking down on, but a private tutor costs 300 or 600 RMB (45-90 US$) an hour, which ordinary families cannot afford, so of course the gap between rich and widens yet again. Two of our professors at Peking University, Lei Xiaoyan 雷晓燕and Shen Yan 沈艳, did a study and found that after ‘burden reduction,’ there was a polarization in family investment in education. Another study done by a teacher at Peking University's School of Economics found that the more the government invests in education, the more inequitable the results are, because the vast majority of the money goes to good schools.  The government invests according to school rankings, with good schools getting more and poor schools getting less. A fair approach is to invest according to the number of students, and the amount of investment per student should be equal.” 
 
Translation 
 
I’m delighted to be able to talk to you about the theme of common prosperity. The Xinzhuang Classroom, founded by Zhang Weiying 张维迎and Huang Nubo 黄怒波, is a remarkable and very meaningful initiative to bring entrepreneurial training programs to the Loess Plateau region.[2] I feel very honored that Professor Zhang asked me to be one of the Xinzhuang Classroom teachers.
 
My topic for today is “how to correctly understand common prosperity.” 
 
The topic of common prosperity is of great concern to everyone. A number of things have happened in the past year or so which have been interpreted by some people as signaling basic changes in the government’s direction. My personal view is that these are more isolated events, including things like the Ant Group intervention and efforts to get a handle on the tutoring industry, and that some of what we read in self-published media on such topics is a bit over the top.
 
Since the 18th Congress of the Chinese Communist Party, held in November of 2012, those in power have displayed a consistent logic. They began with anti-corruption initiatives, to clean up the Party and to clean up the relationship between government and business.  Everyone knows about the new relationship between government and business which is to be both “close” and “clean.”  People in Zhejiang have been talking about this recently, and my impression is that these discussions go back to 2014, and that in fact it grew out of thinking inspired by what we found about government-business collusion in the anti-corruption campaign.  Next came poverty alleviation, the elimination of absolute poverty, and now comes common prosperity.  To me, this is a logical progression.
 
So the next thing we want to focus is on is how to achieve common prosperity, so today’s discussion is quite meaningful. 
 
What is common prosperity? Surely not killing the rich to help the poor. 
 
We all lived through the era of extreme egalitarianism, when we all ate from the same "big pot rice." Whether you worked a lot or a little, or even if you did not work at all made no difference, so we were inefficient and nobody worked.  I read Zhou Qiren’s 周其仁 (b. 1950) report on Xiaogang village in Anhui.[3] The output of Xiaogang Village in the first year after the introduction of the responsibility system was equivalent to the sum of the output of the Xiaogang People's Commune over the entire 25 years of its existence. If we say today that the idea of common prosperity is to kill the rich to help the poor, which would mean confiscating the property of the rich to distribute it to the poor, then to my mind, China's economy would "return to the pre-Liberation era overnight." I may be exaggerating a bit, but If you are results-oriented, at least you will agree that this approach is not sustainable. This is the proverbial "give a man a fish."[4] 
 
If any economist tells you something that does not line up with common sense, then it’s wrong, no matter how good it might sound.  What common sense is telling us now is that what we might call results-oriented equality is certainly not ultimately sustainable. 
 
We need to "teach people how to fish" and to focus on the fishing tackle. The goal of common prosperity, and the means of achieving common prosperity, must be to improve the productive capacity of low-income people, rather than transferring the income of high-income people directly to them. 
 
For example, in poverty alleviation, the idea is to get rid of absolute poverty, which is really easy if you only look at the data for one year, because you can just give people subsidies, but the next year they’ll be poor again. Common prosperity ultimately means that we want to have a fairer society, but a fairer society does not mean a society where everyone is at the exact same level. We are a socialist country, and we should go back to what Marx and Engels said in the Communist Manifesto:  "The emancipation of the individual is the prerequisite for the emancipation of all mankind.” What is the basis for comprehensive human development? You must first live and be productive. Our goal in pursuing common prosperity should be focused on improving the productive capacity of all people, which is the only way that common prosperity will be broadly meaningful and sustainable. 
 
In a meeting of the Central Finance Committee in August, someone proposed the concept of "three distributions." So at this point allow me to share with you the meaning of the "three distributions" and their respective focus. 
 
Let’s start with primary distribution, which is market distribution. 
 
I might start out by talking a bit about the Scottish Enlightenment, a topic my wife and have been quite interested in recently, which is why a few years ago we took a trip to Scotland in search of Adam Smith (1723-1790). 
 
Scotland used to be an independent country, and in 1709 it merged with England and became part of the United Kingdom. The Scots are a particularly pragmatic people, and at the outset did not want to merge with England, preferring to compete. Competition at the time meant commercial competition. At the end of the 17th century, the Scots established the Company of Scotland, which raised funds equivalent to half of Scotland's GDP at the time in the hopes of defeating their neighbors to the south by setting up a colony in South America to trade in tobacco, which ended in calamity.[5]  Unable to defeat the British, the Scots finally capitulated and, after a fevered debate, voted to join the United Kingdom in 1709. Thereafter, Scotland began to develop, joining the Enlightenment movement, which was already underway and produced a number of great thinkers. 
 
The Scots were a very pragmatic people, so their theories were also quite pragmatic, unlike Europe theories, which are more grounded in pure rationality. The Scottish thinkers all started from experience, from intuition, and their intuition told them that people have self-interest, and this self-interest had to be channeled in a positive way instead of becoming a destructive idea. 
 
Adam Smith was living in Glasgow, but the center of culture at the time was in Edinburgh, so Smith went to Edinburgh by mail coach every month to join in the discussions that were under way. He found the discussions quite inspiring, and he and the philosopher David Hume (1711-1776) became friends. Neither of them ever married.
 
Smith eventually decided that the market was the way to channel people’s self-interest, which became today’s theory of the invisible hand, which argues that each individual’s pursuit of their own self-interest eventually constitutes a benefit for society as a whole. In Smith’s era there was no concept of economics, and he was a moral philosopher. He ended up trying to argue that the market was moral, i.e., that the market could ultimately increase the welfare of humanity as a whole. 
 
Returning to the present day, the primary distribution we are proposing should be a factor-based distribution, which is different from the labor-based distribution we used when our model was that of the planned economy. Factor-based distribution means that no matter if you are labor or capital, as long as you input something and make a contribution, then you should be rewarded.  In the language of economics we say that your reward should equal your marginal output.  Your salary equals your marginal contribution, and the output of capital equals the rate of its marginal contribution.  Factor-based distribution should be the principle that we firmly grasp at the moment of primary distribution, otherwise we will make huge mistakes that could well be disastrous, as we saw in the days of the planned economy.
  
To my mind, there are two things about markets that are extremely important. 
 
The first is that markets should reward "competence" and "effort."  The more you contribute, the more you get, and this is not only related to effort, but also to ability and thus to intelligence.  The market rewards intelligence, something which many people disagree with, including many political philosophers and moral philosophers, and the radical left would argue that rewarding people based on intelligence is immoral. 
 
Factor-based distribution rewards ability, which conforms to Chinese culture and traditional moral beliefs. Aristotle early on conceived of the principle of proportionality. How do we understand justice?  Justice is proportional, meaning that the greater your ability and the more effort you put in, the more you should receive. Confucius and Mencius, and even the Mohists, proposed rewarding the worthy, and China has practiced a politics of meritocracy for the past two thousand years, one concrete example of which was the imperial examination system.  Of course, not everyone who passed the imperial examinations may have been capable, but this was the aim. The idea of elitism is in the blood of the Chinese people.
 
For example, we are now engaged in education reform, and many in the education world believe that elite schools should exist, and that the smart people should attend such schools. For example, the Chinese are the most vocal opponents of not allowing school choice in Bay Area high schools in the United States. The Chinese feel that this is how things should be, that my children should go to an elite school because they are hard-working and smart, while whites and Blacks are strongly against it and want equality. The Chinese have this tradition of meritocracy in their blood.
 
If a country doesn't have a little bit of meritocracy, it is doomed to fail. The United States has gotten to the point that we see even American scholars who are swayed by public opinion. I recently ran across a book written by a professor from Yale University[6] who argued that meritocratic elitism in the United States has gone too far, so the people have given up and anti-elitism is on the rise. I'm afraid this trend may afflict the United States for many years. But things in China are different. With a co-author I finished a book last year on Confucian politics, which is about meritocratic politics, discussed from a Confucian perspective.　　
 
The next thing markets do is to determine a price.　　
 
What is the point of prices? We economists say that, from the point of view of production, prices are equal to the marginal output of the factors employed, and from the point of view of consumer goods, they are equal to their marginal utility to the user.  Prices govern the efficient allocation of resources.  Without prices, how would we know where to invest? There would be no indicators. That is why it is the market that allocates resources most efficiently.
 
In light of this, “primary distribution” should be factor-based distribution. There is a lot of discussion in society at the moment to the effect that there are all sorts of problems with the primary distribution, including monopolistic industries, etc. We do not deny that monopolies cause income disparity, but in the vast majority of cases, the income disparity between industries also has its own reasons. This is true even in the financial industry, and there is probably a reason for this, even if the income of those working in finance in the U.S. is too high. 
 
These days the word "exploitation" often pops up on the Internet, which I think is dangerous. Factor-based distribution actually has an element of labor-based distribution included within it. Is capital the fruit of labor? Of course it is. You may have to go back a few generations to figure out where your house came from. It may be the labor of your grandfather’s grandfather that built the house you now rent out, and while it may seem like you am getting something for nothing and are simply profiting from capital, you did after all inherit something.  Especially for Chinese people, inheritance is very important. I don't think we can pass an inheritance tax in China because the whole country would be against it. The way the Chinese see it, the son and the father are part of the same family, it is natural for a father to buy a house for the son, and it is unreasonable to impose an inheritance tax on the son now. Let's not be fooled by what they do in the West.　　
 
Then there is the question about the high income of entrepreneurs. There are two issues here that we should think about. 
 
One is what we might call “survivor bias.” All we see are successful entrepreneurs like Huang Nubo. But behind Mr. Huang's wealth are countless failed real estate developers, who are invisible to us. We see that Jack Ma (b. 1964) is successful today, but who would have thought he would be successful when he came to a meeting at the China Center for Economic Research in 1998? Thousands of people have failed, and investors' money has gone down the drain, none of which we see. A large part of the entrepreneur's return is return on the risk he took, and return on the risk the investors took. 
 
Another thing is to have a social vision. We must have a social vision to understand entrepreneurs’ returns properly. For example, I calculated the return on Softbank CEO Masayoshi Son’s (b. 1957) investment in Jack Ma, and it came to 2,900%. If all you look at is Masayoshi Sun, than it does indeed look unreasonable, because he gave 20 million U.S. dollars to Ma Yun, and without doing anything else got a return of 2,900%. But from the perspective of society it is reasonable, because the probability of success of a company like Jack Ma is one in 2900. For society as a whole, the benefits and costs cancel one another out, and if there were no possibility of a great return, no one would make a huge investment. 
 
I very much believe what Prof. Zhang Weiying said, which is that entrepreneurs are gamblers, and investing is also gambling. If you win the bet, you get a return of 2,900%, and if you lose you get nada.  Society's view of entrepreneurs misunderstands both outcomes. First, they do not see the risks taken by entrepreneurs, and second, they do not see the contribution of entrepreneurs from a social perspective. In fact, the deleveraging we have been engaged in since 2018 has killed off a large number of private entrepreneurs, and I know several that lost everything overnight. Entrepreneurs worry about individual income tax, so they don’t take their earnings out of the business.  Once they do, they have to pay 45% in taxes.   Our marginal tax rates are too high, and once an enterprise goes bankrupt all of these assets go down the drain. No one talks about this kind of thing. The average entrepreneur doesn't want to talk about it because he failed and that failure embarrassed him. I suspect that no one has tried to calculate how much money entrepreneurs have invested and how much money they made from 1992 on—I think they probably more or less even out. If this is not the case, if entrepreneurs are earning more than they are investing, then there would be more people trying to be entrepreneurs.   So it’s proper that these amounts be about the same. This is what I want to say about primary distribution.　　
 
Secondary distribution is the thing to focus on in discussing common prosperity. 
 
The market is concerned with efficiency, and the market will also be of great help to social values. But human values are diverse. Envy is not unique to Chinese people, but is found in people all over the world. Look at the United States, where many Americans feel that distribution is unequal, and that the top 1% take too much. Equality is a value that all cultures uphold, but the path to equality is different, and some cultures will focus on process while others will focus more on outcome. Over the millennia, civilizations that were more concerned with process made more progress while those concerned with outcome did less well. 
 
In modern society, we have to consider the values that the market has not realized. Thomas Piketty’s book, Capitalism in the Twenty-First Century, has generated a lot of controversy, but the basic idea is difficult to ignore. The return on capital in a market economy is higher than the rate of economic growth rate, meaning that the true interest rate is higher than the true rate of economic growth rate, an idea for which there is both theoretical and practical evidence. 
 
From a theoretical perspective, if the rate of economic growth is higher than the rate of return on capital, then no one will save because everyone will think that they will make more money next year, which means they can use their increased income to pay back the loans they have taken out, which means they should go into debt and spend the money. But that's the paradox:  if everybody borrows and spends, then nobody saves and there's no more money to borrow. So the return on capital must be higher than the rate of economic growth. 
 
The empirical data is also consistent with this assumption. The long-term return on capital in Western countries is around 4%, while the rate of economic growth is 2-3%. In China, the return on capital was above 10% a few years ago, and the economic growth rate was around 10%, but now the return on capital is 7-8%, and the economic growth rate is 5-6%, which is also in line with the pattern. 
 
The consequence of this is that capital accumulation leads to higher and higher returns to capital as a share of GDP. If you have capital, you invest it, because the rate of return is higher than the economic growth rate, and the speed of capital accumulation will exceed the rate of GDP growth, the return to capital as a share of GDP becoming higher and higher. 
 
So the first problem is that the gap between the rich and the poor will widen, and the proportion possessed by the poor will shrink, which may eventually affect the productive capacity of the poor. Everyone may have noticed that I am talking about productive capacity. I personally think that if we want to talk about equality, the most important thing is equality of ability, and the goal of secondary distribution must be to achieve basic equality in people's abilities.  We can’t achieve absolute equality, but we can push things in that direction. 
 
The second problem is that market participants have different abilities;  this is what reality tells us, and levels of ability are indeed very uneven. This means that the ultimate distribution will also be uneven. So, we have to correct for the results of market distribution, but the purpose of this correction is to improve the ability of all people and do our best to move toward equality. 
 
The third problem is that the money you earn is not necessarily the result of your efforts, and may instead come completely from an opportunity society presented to you, which is what we call the social luck problem. Jack Ma himself has said that the reason why he could make so much money is because the Chinese retail industry was so poorly developed when he started out. This points to one of the two kinds of entrepreneurs that Zhang Weiying talked about, which are opportunistic entrepreneurs, who make money because society gave them the opportunity. So whether the wealth accumulated by people like Jack Ma, who made their fortune through social luck, if “fair” is a real question. But we can't completely negate Ma's wealth either, because he also put in a lot of effort, and when he started out he spent a lot of time going door to door convincing small business owners to use Alibaba's enterprise services.  This is where Alibaba started, and it remains one of their core businesses. 
 
As for the first and the third questions, that is, the fact that the market automatically creates a concentration of wealth, we can ultimately solve this through taxes, and that's exactly what we will do, for example through corporate income taxes, personal income taxes, and perhaps a property tax.  We are currently working through the details of this. 
 
I want to focus on the second issue, the ability of market participants. In fact, this is an issue that is not talked about very much in China. 
 
Still today, we call workers from rural areas “migrant workers.” Can't we just call them “workers?” Why do we have to add the word "peasant"?[7] 
 
As I said earlier, elitism has its advantages, and it is one of the strengths of Chinese civilization; however, there is something wrong with pushing elitism to an extreme. Elitism is in our blood, and unconsciously our system and policies are elitist.　　
 
We are urged to “not forget our original intentions,” and the most fundamental of these intentions should be what Marx and Engels said in the “Communist Manifesto,” which is to achieve the comprehensive development of all people. In today's society, the starting point for the comprehensive development of human beings is a good education. 
 
In today’s Chinese society, the era of outlaw entrepreneur 草莽英雄is over. There used to be township entrepreneurs, but now it is not possible. The era of the renegade is over. If a person has not gone to college, the probability of building a great enterprise is basically zero. In today's era, education is the first priority. 
 
According to official statistics, the high school enrollment rate has reached 90%, but this figure is surely exaggerated. Data from Peking University’s China Family Panel Studies[8] 中国家庭追踪调查tells us that, when we first looked into things in 2010, the average level of rural education levels was less than nine years, and now, a decade later, the average is just over nine years. This means nearly half of all children have not completed the nine years of compulsory education. Things may be better in urban areas, but the average in the city hasn't reached twelve years of education either. I'm talking about young people, not the entire population, but twenty and thirty year-olds. The gap between urban and rural areas basically remains the same. However, the gender gap has essentially disappeared. 
 
We're seeing data that say that roughly 8% of people born in 1985 still haven't completed primary school. We're also seeing a very rapid decline in intergenerational mobility right now. We are looking at the correlation coefficient between the education level of individuals and that of their parents for people born between 1930 and 1985. For people born in the 1930s, the correlation coefficient between their education level and that of their parents is around 0.6; for people born in the 1950s, it drops to 0.3-0.4, while for those born in the 1980s, it returns to between 0.5-0.6. We have gone in a big circle over the past fifty years, and educational mobility has returned to the level of the 1930s. 
 
When I was a student at Peking University, there were 35 people in my group 班, ten of whom came from really poor families, and two of whom were even orphans. Huang Nubo came to Peking University at about the same time as I did, and must know that many of the students at Peking University at that time came from rural families. At the first meeting on any of my big classes, where there are two or three hundred students, I always ask how many have parents who are really peasants, and no more than three people raise their hands. The elitism of Peking University is unbelievable, and there is no way for rural children to get into Peking University. 
 
The process of elitism begins in our primary and secondary schools, with super middle schools 超级中学and super elementary schools 超级小学being highly sought after. The one I hate most in Haidian is the Renmin University affiliated Middle School across the street from the Peking University affiliated Middle School.[9] I have a student who teaches at Renmin University, and her son went to the Renmin University affiliated Middle School and couldn’t get used to it.  He worked on his homework until midnight, and still couldn’t get it done.  My student is very conflicted about it and worries that the school is killing his son’s spirit. This kind of super middle school puts everyone in a panic.
 
I personally feel that primary and secondary education should be based on equal access and not on choice. It is difficult to become a complete person without a high school education. You are entrepreneurs, and if you hire a junior high school graduate, as soon as you meet him you know he is a junior high school graduate, because he is scared stiff; high school graduates are different, and much more vivid. When I pass around a survey at a factory, high school graduates fill it out in five minutes, junior high school graduates take ten minutes, and elementary school graduates cannot even understand the questions. 
 
Our university education system puts a double squeeze on rural children. First, the probability is that rural children do not go to a good college, and most of them go to third- or fourth-tier schools. Second, the tuition at poor universities are still high. Tuition at Peking University has been 5,000 RMB (800 US$) a year since 1997, when I came back to China.  This was considered high at the time, but today 5,000 RMB is nothing for the urban middle classes. For more than twenty years, the tuition of Peking University has not increased, but look at the tuition of third- and fourth-tier schools, which has soared, sometimes reaching 90,000 RMB (14,000 US$). This of course affects the education of children from rural families.
  
I have a nephew who tested into college in Nanchang, and tuition at the time was 20,000 RMB (3,125 US$).  He decided he couldn’t go, because it would add to his parents’ burden. So he went to Guangdong to get a job. I said that he had to come back and go to that university. He went to school, and now that he has graduated he is doing very well, having settled down in Nanchang, and last time I went home for a visit he picked me up in his car like a middle-class person. Don't believe all the nonsense people are saying about university education being useless, that too many people are going. University education is certainly useful. For everyone, it's all about finding the right place for yourself. There is a place for you in this world, and once you find it you will flourish. University graduates may need to take some time once they get out to find their way, but they ultimately do so. Going to college is still the most useful thing to do, and for the average person, it is almost the only way out. 
 
There is vocational education as well. Now we're doing tracking—in fact, we’ve been doing it for a long time but there has been more emphasis on it lately—and almost half of the students are tracked into technical schools.   In Beijing, basically there is no tracking, and the majority of children go to general high schools, but the quality of education in Beijing's vocational high schools is also very good, and receives a lot of support from society and from enterprises.   But if you go to poor places and rural areas, vocational education is the same as no education. Everyone thinks that vocational education is easier than general education, but in fact, it is harder. Vocational education needs to teach technical skills. Can teachers that come out of teacher training programs teach technical skills? No, they can't. 
 
There is a professor from Stanford University, who has been doing research on Chinese education for a long time, and went to Shaanxi province to do a survey.  He had middle school graduates take a test, and compared the results with those of first-year technical school students, who took the same test, and the technical students scored worse than the middle school students! The dropout rate in vocational high school is extremely high. 
 
Tracking squeezes rural children yet again. Everyone knows who goes to technical schools, and of course it is rural children and the children of the urban poor. 
 
Everyone is anxious about education in China, but to me, this anxiety is a luxury reserved to the middle class.  This is because the middle class has the right to speak, which means that we can hear their voices. Poor families gave up a long time ago. When I go back to my home village, people tell me that the authorities are now saying they want to reduce the burden on the children, which means that children should stay in school to study once school lets out in the afternoon. In rural areas like ours, children don't stay after school and they don’t have tutoring classes, so “reducing the burden” in rural areas has become a way for schools to charge fees.  It’s an opportunity for schools to get people to pay to keep their children in school. My nieces and nephews have complained about the fees and don't want to do this fake tutoring. They gave up a long time ago. 
 
When we crack down on extracurricular tutoring, we are also cracking down on the poor. We all know that rich people can afford to hire private tutors. The average citizen can afford the tutoring we are cracking down on, but a private tutor costs 300 or 600 RMB (45-90 US$) an hour, which ordinary families cannot afford, so of course the gap between rich and widens yet again. Two of our professors at Peking University, Lei Xiaoyan 雷晓燕and Shen Yan 沈艳, did a study and found that after “burden reduction,” there was a polarization in family investment in education. Another study done by a teacher at Peking University's School of Economics found that the more the government invests in education, the more inequitable the results are, because the vast majority of the money goes to good schools.  The government invests according to school rankings, with good schools getting more and poor schools getting less. A fair approach is to invest according to the number of students, and the amount of investment per student should be equal. 

How can we increase people’s earning power? I have a few suggestions. 
  
The first is to implement a ten-year compulsory education system across the boards. This is what I have been saying recently, and some developed areas, such as Zhejiang, already have twelve years of compulsory education across the boards. Compulsory education means that everyone attends, and the state pays for everything, schools can no longer charge fees or select the students they want, and high school students cannot choose what school to go to. This will reduce some of the anxiety everyone is feeling, such as the anxiety produced by the high school entrance exams, or the middle school entrance exams, and will reduce a lot of what is now wasteful learning. Chinese children have been completely domesticated by all of these tests, and if we keep going like this, even the smart people will wind up stupid, as everyone is damaged by the tests. When we were kids, pre-university education was ten years, and the year I went to college, they changed it so that primary and secondary schools were both six years. But we did all right, didn’t we? Ten years is enough.  In fact, in the current twelve-year system, the last two years are spent preparing for the exams, which is unnecessary. 
 
The second thing is to abolish school rankings. The allocation of funds should be based on the number of students, and we should not give more to good schools and less to bad schools. Of course this will difficult, and people in education will be the first to object, because they are used to seeing primary and secondary schools as places that sort the children out. 
 
The third thing is to raise the salaries of teachers in rural areas. Teaching assistants 支教[10] are unsustainable and do not teach well. They only do it for two or three years.  Some of them are padding their CVs, some of them are kind of lost, so they become a teaching assistant and get to see people worse off than they are, which maybe helps them to get a new outlook on life.  To improve education in rural areas, we still have to rely on regular teachers who are trained to teach. Then we have to improve salaries and attract the talent to work in difficult places. 
 
The fourth is the rotation of teachers. Beijing has started a pilot program. Many people oppose teacher rotation and have raised various objections, but didn't Japan do a good job with it?   It might be difficult, but just imagine that we change the teacher's work unit from a particular school to a school district.  Once the teacher belongs to a district instead of a school, most of the problems can be solved. It would be one way to level the playing field in terms of educational quality. The key here is still whether you recognize that the basis of primary and secondary education is access to an equal education, and not about sorting students by ability. 
 
Fifth, university tuition must reflect the quality of the university.  By definition, a university is good because of its faculty talent and research capacity, and not because the students are good.  Students apply to the school because it is good. Good students should not be rewarded yet again for getting into a good university.  The fact that you got into Peking University or Tsinghua shows that you have a high IQ, and you have already reaped one reward and cannot get a second break on tuition.  So, what about poor children who get into Tsinghua and Peking University?  Give them scholarships. Just like at Harvard, where if the household income of a student is less than $80,000 a year, they receive a full scholarship, and if household income exceeds $80,000 a year, the student pays full tuition.[11] So, this problem can be solved. 
 
Finally, we should encourage enterprises to work together with vocational and technical schools, and the government should give tax benefits to participating enterprises. We always say we want to learn from Germany, but we wind up copying the form and not the substance. For example, tracking in the German educational system starts earlier than in China, at the age of ten.  This is a controversial topic in Germany, and many people oppose it, but the strength of the conservatives in Germany is impressive. I went to Germany and saw that the companies were truly running technical schools, and I asked them how they managed the students. They told me that the students spend three days in a regular high school and two days in their internship at the company.  So these children receive a regular education as well as technical training, and after they graduate, most of them stay on at the enterprise to work, and later on have a chance is to go to a technical university. This reminds me of the Western Electric company I worked for in Xi'an, which at that time had a technical school as well as a university. German technical universities have to cooperate with big companies, and the companies install their laboratories in the schools. The company saves money, and less technical staff is required because university teachers help out; the university is also very happy because they get funding from the companies. This is the best model, and we should really study the substance of it. I don't know how many of our companies are currently collaborating with vocational schools or technical universities, probably almost none of them, right? We should encourage our companies to do this.　　
 
And finally, tertiary distribution. 
 
I don't think it's a good idea to talk about tertiary distribution, because we can’t really call it a distribution.  I’m talking about charity, which by its very nature is voluntary.  If we talk about these three distributions in the same breath, it will freak people out, because the meaning of distribution is generally taken to be something that is government-led, something that someone will manage. 
 
Many companies are competing to increase their charitable donations, which pulls down the general moral standards of our society.[12] Originally, such donations were seen as a sign of virtue.  When Huang Nubo rebuilt an old village, it was because it was something he liked to do. But if someone were to order Huang to rebuild one hundred villages, then he would feel very awkward. Once a noble thing becomes mandatory, it will damage the moral fabric of society. 
 
Charity is voluntary. Everyone should know that the ratio of donations in China and the United States are the mirror image of one another: 60% of charitable donations in the United States are from individuals, donated by ordinary people, while more than 60% of charitable donations in China are made by entrepreneurs. There’s a lot of silly talk on the Internet, to the effect that Chinese businessmen are heartless, and give to charity solely to preserve their reputation. Entrepreneurs are wealth creators, just like Zhang Weiying said, and those places with more entrepreneurs are more prosperous places. 
 
Since it is voluntary, charity is the icing on the cake. Therefore, we cannot talk about charitable donations in the context of common prosperity. I am firmly against this. We can encourage charity, but should not include it in the redistribution system. Talking about these three distributions together will lead public opinion astray. 
 
I think charitable donations can play two roles.
 
One is the kind of icing on the cake that can help the poor, and the best idea is to create some models and then promote them. This is the best, and it is teaching people to fish. For example, the alumni of our National School of Development have a charity committee, and they have been trying to find a sort of breakthrough that would permit a scaling up of charity. They finally hit on the idea of rural revitalization and plan to conduct workshops to train village leaders. As teachers, we are good at lecturing, so we can take advantage of a strong point of the National School of Development. They have carried out one workshop, and the response was good. Now Liu Yonghao's[13] 刘永好 (b. 1951) "New Hope" Charity Fund also wants to do this. So the idea is to do a good job conceiving charity projects that can be replicated, rather than doing charity purely for the sake of charity, in fact, higher-level charities are all like this. 
 
The second aspect is to support science and art. This is also important. Some cutting edge scientific research may not get financial support, especially in China's selection system, which leaves many young people without research funding or scholarships. Philanthropic support could be important.  Several entrepreneurs came together to set up the "Future Science Prize," the award for which is greater than the Nobel Prize, which is very good. We should also encourage the arts. In the U.S., the Library of Congress is supported by donations from the Rockefeller Foundation.[14]   The Rockefeller Foundation also supports hospitals, including some of our hospitals in China. The restoration of ancient villages that Mr. Huang has carried out is also a kind of support for art and culture. These are all things that our charities can do.
 
Do these things have a role to play in common prosperity? Of course they do, but they are just icing on the cake, not a solution to the main problem. To solve the problem of common prosperity, we still have to improve the primary distribution and the secondary distribution, and especially improve the earning capacity of all of our people.
 
That's all I have to say. Thank you all. 
 
Notes

[1]姚洋, “正确理解共同富裕,” published on Aisixiang on October 25, 2021.

[2]Translator’s note:  The Loess Plateau, also known as the “Yellow Earth Plateau,” is a region roughly the size of France located in Northwest China. 

[3]Translator’s note:  Xiaogang village 小岗村 suffered terribly during the famine caused by the Great Leap Forward, and was one of the first villages to experiment with reforming collective agriculture in the late 1970s.  Zhou Qiren is a prominent economist in China, often called the “father of rural reforms.”

[4]Translator’s note:  “If you give a man a fish, you feed him for a day. If you teach a man to fish, you feed him for a lifetime.”

[5]Translator’s note:  Yao Yang is referring here to the Darien scheme, a desperate attempt to compete with Britain (among other rivals) by establishing a colony in South America and constructing something like what would eventually become the Panama Canal, but which ended in disaster.  Yao’s description is quite cryptic, and I added details to make the passage clearer. 

[6]Translator’s note:  The volume Yao is referring to is probably Daniel Markovitz, The Meritocracy Trap:  How America's Foundational Myth Feeds Inequality, Dismantles the Middle Class, and Devours the Elite (Penguin, 2019).

[7]Translator’s note:  The literal translation of the Chinese word for “migrant worker 农民工” is “peasant worker.”  China’s household registration system, designed largely to keep peasants in their rural villages, made “peasant” into a status category, thus the term emphasizes this status rather than the fact that they have migrated to the cities to work.

[8]Translator’s note:  “Panel study” also means “longitudinal study.”  A literal translation is “Chinese Family Tracking Survey.”

[9]Translator’s note:  “Affiliated” or “attached” middle schools 附中have close relations with the universities with which they are affiliated/attached, part of an effort to ensure that the children of the educated elite receive an elite education.  Haidian is a Beijing neighborhood distinguished by a concentration of famous universities and valuable high-tech firms.

[10]Translator’s note:  Yao is referring to a program that sends teaching assistant to poor and backward areas.  There were some 23,000 such teaching assistants in 2020-2021.

[11]Translator’s note:  This does not sound right to me.  In 2013, students admitted to Harvard whose household income was less than $65,000 received a full scholarship, and families with incomes from $65,000 to $150,000 paid between zero and 10 percent of their income.  See https://nonprofitquarterly.org/harvard-initiative-to-attract-low-income-students-includes-free-tuition/.  Yao presumably means that Harvard offers need-based assistance, including tuition wavers.

[12]Translator’s note:  China’s high tech firms—and perhaps companies in other sectors as well—have been competing to make charitable contributions as a part of the policy of “common prosperity,” and to show a good face to the Party-State.  See  https://www.bloomberg.com/news/articles/2021-09-03/china-big-tech-s-charitable-donations-are-hurting-their-stocks.

[13]Translator’s note:  Liu Yonghao is a businessman involved in agribusiness and banking, in addition to charities and other concerns.  He was China’s 19th richest person in 2019.

[14]Translator’s note:  I’m not sure of Yao’s meaning here, so my translation may be off.  In Chinese, he says “美国的公共图书馆就是洛格菲勒捐赠出来的，把整个的美国的公立图书馆做起来了，这是非常伟大的事业。”  The Rockefeller Foundation has made donations to the Library of Congress, but the library was certainly not created by these donations.  See https://rockfound.rockarch.org/libraries-museums.