Yao Yang, "The New Cold War"

Yao Yang, “Is a New Cold War Coming?” interview with Beijing Cultural Review, published on April 28, 2020.[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.  He is generally identified with China’s New Left, and has worked with scholars such as Wang Shaoguang 王绍光 (b. 1954) and Hu An’gang 胡鞍钢 (b. 1953).

In the interview translated here, Yao responds to a number of wide-ranging questions about the possibility of a “New Cold War” developing out of the tensions between China and the rest of the world produced, or at least exacerbated, by the coronavirus.  As in the case of other texts I have worked on for this series, I was most impressed by the sober tone of Yao’s remarks.  Although I had expected a more triumphalist reaction based on China’s “victory” over the virus, Yao, like many other Chinese intellectuals, is deeply concerned about the challenges facing China as the world copes with the eventual aftermath of the crisis. 

First, he thinks it is extremely likely that a new ideological Cold War is indeed coming, and that Western powers will orchestrate a joint attack on the “Chinese system” to muddy the waters about what went wrong in the fight against the coronavirus.  Yao finds this manifestly unfair, but instead of engaging in ad infinitum denunciations of the West, he urges Chinese scholars to prepare a White Paper honestly outlining what happened in weeks following the initial discovery of the virus (Zhao Yanjing calls for much the same thing). To him, the ideological fixation in the West on democratic versus authoritarian systems is at the root of the problem, and he basically calls on China to stop calling itself Communist and start calling itself Confucian once again—while noting that this is easier said than done—so that everyone can have a discussion about what works and what doesn’t instead of about who’s right and who’s wrong.  There is a fatalistic tone to Yao’s remarks, who notes sadly that he has lost all faith in the US media (Yao did his Ph.D. in the US, at the University of Wisconsin-Madison) and  that Trump has managed to turn virtually all of American public opinion against China.  It is hard to disagree with Yao on this point, although Xi Jinping and his Wolf-Warrior diplomats have made their contribution as well to the decline in Sino-US relations.

Despite this fatalism, Yao remains optimistic about the future of China’s economy, arguing, as did Huang Qifan, that political and economic logics may well diverge in the post-pandemic world.  In other words, while the West may pillory China for its authoritarian system, those with money to invest and products to manufacture may find that China remains a good place to do business, despite all the Western bluster about economic nationalism.  Time will tell, of course, but does anyone really believe that Trump has a plan to repatriate American industry and displace China from its position in world supply chains?  Or that even if he did, the West will have the huge amounts of money to spend on this vast undertaking after the debacle of the pandemic?  Who is going to need a Marshall Plan, and who is going to pay the bill?    

Translation

Beijing Cultural Review :  We have noticed that during the coronavirus pandemic, many Western media and politicians have not been particularly friendly to China.  Do you see a situation like the following on the horizon:  because of the pandemic, the Western world comes to believe that there is a basic confrontation[2] between Chinese and Western institutions and values, which will lead Westerners to set aside some of their own conflicts of interest and come together to carry out a thoroughgoing ideological challenge to China?  In other words, beginning with the demonization of the China virus, will there be a broad mobilization throughout Western society leading to a “new Cold War?”  Does this possibility exist?

Yao Yang:  I think this possibility is very likely, and to a certain degree we already find ourselves in the situation of a New Cold War.  There are two basic reasons for this.

The first is the need for Western politicians to play the blame game 甩锅.  The first outbreak of this virus was indeed in Wuhan, and we made some mistakes in our response at the beginning.  But when we look back on things now, a slow response in the early stage seems to characterize the response of every country.  But at least beginning from January 23, Western countries knew that human transmission of the virus was possible, yet for about a month and a half they took no measures at all.  Even when the situation became extremely critical in Italy, other countries continued to do nothing until the huge outbreak in mid-March.

But once China started to act, it quickly brought the virus under control and was the first to emerge from the epidemic.  Rational people in the West agree that China’s control of the virus was extremely successful.  But now, some politicians in the West, seeing that how serious the epidemic is their countries, have started to blame China, saying that China didn’t tell them early enough.  This makes no sense.  At the very least, beginning from January 23 they should have taken measures in their own countries.  The US stopped flights from China, but why did they take no anti-virus measures within the country?

In fact, the thinking of some government officials in the West was probably at lot like that of officials in Wuhan at the beginning.  These officials surely hoped they could get the virus under control without taking such extreme measures.  The cost and social impact of closing down a city is huge, and this kind of decision is hard for anyone to take.  The next thing is that now Westerners want to make this into a “systems” question, saying that the reason that China could carry out such drastic control measures is because China is not a democratic society, and this is where the power and capacity to do this came from. 

Once the pandemic is over, it is quite likely that the West will have a new viewpoint of China’s political system, and it is entirely possible that the West will unite in a fundamental challenge to the Chinese system.  This will be a very big challenge for China.  The West will not discuss China’s role in beating the virus or the aid China gave internationally, but will instead latch onto the question of China’s system and then unite on this pretext to attack China and demand reparations.  Politicians in several Western powers have been talking about this, and this will likely be a huge challenge we will eventually have to respond to.

Right now, I think that Chinese scholars—particularly prominent scholars—should step up and identify clearly, from a theoretical perspective, the philosophical basis of the Chinese political system.  What are its strengths?  What are its weaknesses?  In a word, we should positively explain the working logic of the Chinese system, we should transcend the antagonistic dualism of authoritarian governments versus democratic governments, and analyze the Chinese political system factually from the perspective of government capacity. 

BCR:  The liberal camp lead by England and the United States seems to have a historical habit in dealing with its competitors, which is to demonize their opponent from an ideological perspective and then mobilize their society to carry out a cold war.  But everyday people in the West saw with their own eyes the effectiveness of the Chinese response in controlling the virus and the Chinese government’s concern for the people and sense of responsibility.  Will this be a problem for the Western politicians attempting to carry out a Cold War against China because of the coronavirus?  Because it looks to me like the resources and reasons that would justify this mobilization are lacking.

Yao Yang:  Everyday people in Western countries pay no attention to China, and before the outbreak of the virus, very few people knew what was happening here.  Nor do they know much about how China controlled the virus.  I used to have a certain faith in the mainstream media in the US, and thought that their reporting on China was relatively fair.  But since Trump came to power, I find that media stories and discussions of China have completely changed, and this includes people that were friendly to China and many China scholars…I used to think that in a democratic country like the United States, a president could not change the way everyone thinks, nor could he change the direction of public opinion, but this is what Trump did, he changed the direction of public opinion, and especially changed the overall American view of China. 

From another perspective, the pandemic in the US is extremely serious, and tens of thousands of people have died, but the American people do not seem all that worked up about it.  In a country with elections, if the government did what it was supposed to do, and still a lot of people died, then that’s it, the people just accept it.  It is precisely this kind of political and social culture that allows American politicians to say straight out how many people are going to die.  Something like this would be impossible in our system.  The people would never accept it.  From the perspective of Chinese tradition, the government is supposed to have a nearly limitless responsibility for the people. 

But it’s not necessarily like this in a electoral system like that of the US, where the government’s responsibilities to the voters are limited.  The focus is on accountability and not responsibility, so as long as the government has done what it is supposed to do, then even if people die it was something out of their control, and the people can’t complain.  Trump might even come to be seen as the hero of the fight against the virus, even though he did nothing and left everything to the governors.

In such circumstances, when politicians try to mobilize American society and the American people to oppose China, the media will usually not mount any opposition, and will not denounce Trump for doing this.  The American media has an unwritten rule, which is that Americans and foreigners are treated differently.  They might call Trump every name in the book on the nightly news, but 70 or 80 percent of politicians and the media agree about China.  For example, Pelosi and Trump can’t stand one another, but their views of China are almost identical.
 
BCR: If there is a possibility that a new Cold War will develop out of the pandemic, then this raises the question of how we should respond.  In our response, should we first think about our explanation?  What we are going to say?  Next, should we think about to whom we are going to offer our explanations?  In the past, and even today, China has been bad at explaining itself to the rest of the world. 

Most of the Chinese intellectual world has bought into the story of the clear antagonism between authoritarian dictatorships and elected democracies, and has been unable to construct our own discursive system.  In the Mao era, we had the dictatorship of the proletariat and the rest of Marxist discourse, but now most of this has lost its power of persuasion.  You just said that we should not fall into the antagonistic discourse that pits the democratic model versus the authoritarian model, so what should we say in our response to Western efforts to make trouble?

The second question is, who do we talk to?  Speaking to the West, and especially to Western elite groups, may not serve any purpose, because they have already made up their minds and will not listen to our arguments.  So should we try to reach Western people at large, while at the same time trying to reach mid-range and developing countries?

Yao Yang:   Let me first answer the second question, which is a question of how to do something; the first question is more basic, and requires a longer response.  I said a few minutes ago that there is a great possibility that we will enter into an ideological new Cold War, but there is still time to pull back from the brink.  From China’s perspective, we should put together a comprehensive explanation or a White Paper about the Wuhan virus situation, in which we recount straightforwardly what happened between the end of December and January 23, saying what we did and why we made mistakes.  We should state clearly that during this period we did indeed drag our feet and weigh the pros and cons, but did not purposefully engage in a cover-up.  On January 3rd we notified important countries about the virus and began to put measures in place, but ultimately we had to close the city, a decision that was extremely difficult to make.  We have to explain the process clearly.  Explaining the process clearly and admitting our errors and delays will pull the rug out from under the West.  If they still don’t accept it, then there’s no way to convince them. 

The next step is to explain what we accomplished in the fight against the virus in Wuhan.  For example, one great achievement is that not one of the 40,000 medical personnel who came to help Hubei was infected, which is a miracle.  There is also the superior coordination and mobilization capabilities that we demonstrated during the epidemic prevention process.  Also our recent revision of the statistics, because there were errors in the earlier, more chaotic periods.  In sum, I feel like if we hurry and produce a White Paper, we can take back the initiative.  But recently some media in China have been expressed extremely nationalist sentiments, which is terrible.  We can’t be like Trump, who will say anything.  This is our short-term response.

The long-term response is for people to build China’s own discursive system.  But the first thing to do when you are rebuilding a discursive system is to throw out the old system.  Like you just said, the discourse of class struggle is no longer appropriate for today.  My feeling is that if China wants to stand up before the world, then the Chinese Communist Party must return to China.  The great revival of the Chinese nation is the CCP’s goal, which means that it must return to Chinese tradition.  But this kind of theoretical transition is extremely difficult, which has brought us to this awkward situation where even we don’t believe much of what we say.  The first thing to do is to iron out the theory; this is the most fundamental question and the crux of many of the issues we are facing today. 

So my proposal is that we return to the Chinese tradition, and especially to the Confucian tradition, because Confucianism was the most important philosophy informing how we governed the country.  To my mind, Confucian thought is just as good as liberal thought, and our goal is not to defeat liberalism, but instead to say that what we have can be as good as what you have.  If we explained our current system from a Confucian perspective, I think it would go over a lot better.

BCR:  If the new Cold War can be avoided, then for China, the decisive thing to a great degree will be how we define and carry out our policy toward the US.  If at present we treat Americans as the enemy, this will only push the Americans to use all their national strength to treat China as their enemy, which is clearly not a wise strategic choice.  The Chinese government is very clear on this point, and at present is still doing all it can to make common cause with the US, to provide more developmental space for China.  But humbling yourself in the search for unity might not be the right thing, and people might ignore you.  Do you not think we could achieve some kind of unity through fighting back?  

Yao Yang:  The Sino-US relationship is already competitive, and our attitude should be to seek cooperation even in the process of struggle.  The US has already defined China as a competitor.  China has never adopted this position, but I don’t see why not.  We can admit that the US-China relation is currently in a state of competition in terms of ideology, geopolitics and science and technology, and we must respond to this competition.

Yet we should tell Americans that in spite of this competition, there is still room for cooperation between the US and China, for example in the fields of commerce and global order.  I have always felt that the second round of the Sino-US trade negotiations is a golden opportunity.  The US broke the World Trade Organization, which has ceased to function, but the US still wants to negotiate with China, and the rules coming out of those negotiations will in fact become the template for reform of the WTO, which will mean that we have participated in setting international norms.  For this reason, I feel like we should not see the China-US trade war as a simple story of the US wanting to defeat us, and instead we should adopt a more dynamic attitude and should negotiate and cooperate with the US, which will help us slowly enter into a territory where the rules are defined.

So even if we say that China and the US have entered an age of a new Cold War, this new Cold War remains different from that between the US and the USSR.  In the Cold War between the US and the USSR, there was basically no cooperation, while at present there remain very many areas in which we can collaborate with the US, in addition to commerce, anti-terrorism, and aid to developing countries, there can also be cooperation within the US-China relationship.  To my mind, this kind of US strategy would be a fairly good one for the future. 

Where are the Chinese Economy and the International Economy Headed in the
Post-Pandemic era?

BCR:  China has basically got the coronavirus under control domestically, and the core focus of our current work should now be on quickly restoring economic and social life.  Because of the shock of the virus, the world economy has to a certain degree already fallen into crisis.  This economic crisis was caused and conditioned by the crisis of the pandemic, but the economic crisis has its own rules.  At the outset we thought that once the pandemic was over, the economy would restore itself, the well-known V-shaped curse.  But in fact it now looks like the economy is following its own path.  How do you see the relationship between the crisis of the pandemic and the economic crisis?  Could the economic crisis separate from the pandemic and develop on its own?  To my mind this prediction would go a long way to seeing how the new Cold War between the East and the West will play out.

Yao Yang:  Let’s first talk about China.  The situation in China is somewhat unexpected.  With the exception of Beijing, all of the other cities are basically opened up, and the people’s livelihood should return to normal, but people still don’t want to go out and spend.  Once a behavior changes, it takes a long time to return to its pre-change state.  In the first quarter, total retail sales fell 19%, the greatest drop in any of the indicators.  This is why our economy has not produced a V-shaped curve, and maybe the best we can hope for is a U-shaped curve.  The scariest outcome is L-curve, which I hope will not occur. 

The way things look now, it will be impossible to completely eradicate the coronavirus in the short term, in which case I think the government has to make a judgement call:  future virus control work will need to enter a stage of routine management.  I would propose that moving forward we hand over the management of the coronavirus to the public health department, and all other departments should return to their usual work instead of remaining on the war footing as we were until quite recently, where all government agencies were fighting the virus and most of the efforts of government leaders were devoted to the same thing.  Internationally, whether, once the virus is over, people will be like the Chinese and hesitate to spend is hard to say.  Maybe some people will be a bit less risk averse than the Chinese, and once the virus is past they’ll be happy to return to normal.  This possibility exists.

But we have to pay special attention to the American economy.  In fact, even before the outbreak of the virus, the US economy already showed signs of a financial crisis.  In the last few years, the US has already entered a dead end where economic growth relied on increasing the money supply.  The crucial problem has been the declining rate of technical progress.  America continued to seek after rapid economic growth, but the rate of technical progress was at 2% while they wanted it to be at 3%, so what do you do? They issued more currency, but there was no inflation, so where did the money go?  It all went to the financial sector, leading to the accumulation of a lot of risk.  Lots of people compare China’s M2 with the US M2, but this is wrong.  We should include broader currency measures (such as M3 and M4)[3] which are much larger in the US than in China.  The total financial assets of the United States add up to several trillion dollars, while its GDP is only 20 trillion dollars, so the risk to the US economy is also greater than that to China.  Since the beginning of the pandemic, the Federal Reserve has begun to increase liquidity and is implementing unlimited quantitative easing. Although it saved the stock market, it has no effect on the economy and will only continue to increase the probability of a US financial crisis.

So my feeling is that once the pandemic is over, the US economy may recover in the short term, but in the longer term the risk of a financial crisis is greater, not lower.  Of course there is no way to know when the crash will come.  In the future, we may see the emergence of vicious cycle like the following in the US:  every time the stock market drops by a certain amount (maybe below 20,000), the Fed will intervene to hold it up.  This might work for awhile, but in the long run this is clearly “drinking poison to quench your thirst 饮鸩止渴,” sacrificing the future to the interests of the present. 

So in terms of the long-term economic competition between China and the US, I have great confidence in China, because the capacity we have accumulated remains available, and our government has actively emphasized innovation and manufacturing, which means we will not have the problem of the hollowing out industries that plagues other countries. This is where our competitive advantage lies.

BCR:  The US economy has already entered a recession.  Will it slide into a depression over the next few years?

Yao Yang:  The pandemic itself will probably not cause a depression.  If we compare with the Great Depression beginning in 1929, it lasted an extremely long time, at least four years according to the shortest reckoning, but in fact much longer than four years.  Had WWII not occurred, the capitalist world would have been unable to climb out of the Great Depression.

The current recession surely won’t last that long, but the depth of the current crisis has already greatly exceeded that of the Great Depression.  The US has not yet released data for the first quarter, but I fear the decline may be 20% or so, and the data for the second quarter will be about the same, levels that the 1929 crash did not reach.  And as I just said, in my view, the constant rescue tactics employed in the US can also bring about a collapse greater than that of 2008.

BCR:  The IMF previously predicted a decline of 3% in the world economy, which you seem to view as too optimistic.  Why is that?  As the pandemic breaks out in more and more countries, the global industrial chains, and well as global supply and consumption, have all taken a fatal blow. What impact will this have on the global economy?

Yao Yang:  First, as for the reason I find the IMF forecast too optimistic, China’s economy declined 6.8% in the first quarter, the second quarter is likely to be negative as well, and whether we can get back on track in the third and fourth quarters depends on whether consumption can rebound and whether our new infrastructure can contribute.  Looking at things in this way, it is not going to be easy for China’s economy to return to normal this year.  European and North American countries may see declines of greater than 5% this year; other countries matter less in a world context, and will probably see negative growth as well, so it looks like the entire world economy may be down 5% this year.

As for supply chains, they will surely be disrupted in the short term, but from a longer term perspective the impact will be less important.  This is because the division of labor in the industrial world is already largely fixed, and changing this division of labor incurs huge costs.   Moreover, the coronavirus is a world-wide pandemic, so there is no safe country to which you could move industry.  So in my view, there will not be great changes, which does not rule out smaller changes and adjustments. 

Yet despite these adjustments, China will not necessarily suffer, because China was the first country to emerge from the pandemic, China’s manufacturing capacity was the first to recover, and is now approaching 100%.  At this point, many countries have yet to return to work and supply chains are still disrupted, a situation that will push China to make up for industry shortcomings elsewhere.  Some people are saying that supply chains are going to see a great transformation, that they will leave China behind, but I don’t see this happening.  Instead, my feeling is that having gone through the pandemic, China’s position in world supply chains will be strengthened.

BCR:  At present in China there are two views of how to respond to the crisis.  One sees the pandemic as a wake-up call, and that China should build closed, internally-linked supply chains, and in the future should follow a path of self-sufficiency and self-reliance.  This way of thinking is what you called “economic nationalism.”

The other viewpoint argues we cannot go against globalization, which is the same reason that supply chains will not abandon China.  So we should continue to promote globalization, under the flag of a “new globalization” in which, guided by “One Belt-One Road” and in the spirit of the common destiny of mankind, we will seek to built a pluralistic, inclusive, win-win global order.  They argue that this is the developmental path that best accords with China’s basic interests.  What is your view of these two standpoints?

Yao Yang:  First, we cannot do what the first viewpoint proposes, nor do we need to.  In terms of low-value products, we have already built a closed system, and you can manufacture anything you want to in China.  At the higher-value level, we can’t do this.  Take computer chips as an example.  As for chip design, China has no problem, and chips made by Cambricon and Huawei are world class, but our chip manufacturing is not good.  The two big problems China is facing on this front are:  first, we lack laser etching 光刻机 for making printed circuits; second, our yield rate 成品率 is inferior, and to improve it will require a long period of trial and error.

Aside from being unable to do it, there is no need to.  Even if the US limits supply to us, they won’t cut it off completely, and even limits on chips keep being pushed back.  This means that the US has a hard time deciding to really cut off supply to China, because China’s chip market is huge, and abandoning it means losses for the US.  So again, there is really no need to do this.

In addition, if we choose this path, we open the door to other countries doing the same thing.  If we practice economic nationalism, this will only encourage other countries to practice economic nationalism, which in the long run is extremely injurious to our interests.

BCR:  Is it possible that, as you just said, a new Cold War develops after the pandemic, leading to the breaking up of supply chains so that countries have no choice but to develop their own, and to practice economic nationalism?

Yao Yang:  I don’t think so.  It is possible that the US and other Western countries coordinate a bit more in terms of security, and limit supplies of security-related items to China.  But to my mind, the idea of cutting off China completely is a step too far.  Were this to happen, China could retaliate.  It is hard to say who would lose the most in this scenario, and it is not necessarily the case that American losses would be less than Chinese.  To take a simple instance, if we cut off supply of rare earth metals to the US, they could no longer manufacture some of their high-end munitions, which they would never accept.

BCR:  At present, most people are agreed as to the basic way to restore the Chinese economy, which is to introduce more proactive fiscal and monetary policies to stimulate economic growth.  There is not much disagreement about this.  But there are differences in terms of specific details.  At present, the mainstream view is to still insist on the supply-side structural reform as the leading factor, while at the same time taking demand into account; at the same time, we need to focus on upgrading our industrial structure, including the new infrastructure mentioned above, which is all about emerging technologies and the infrastructure of emerging industries.  But some scholars argue that we can’t plan so far ahead, and the our current priorities should be to preserve the economy, preserve the people’s livelihood, preserve employment, and preserve small and medium enterprises, which would mean providing financial support, or even supplying cash to the people.  What is your view of this?

Yao Yang:  The first way of looking at this is long-term, but right now the most important thing is to find a way to quickly get out of the present predicament, given the seriousness of the recession in which the entire economy finds itself, which is the second-worst decline after that of 1960.  As Keynes said, in the long term, we all die.  Emergency relief is the key right now, given how many people have lost their jobs, how many small and medium enterprises have closed.  These are the most important questions.  We first need to bring the economy back to life, and only then worry about the rest.

There are three ways to save the economy.  First, issuing currency to stimulate demand, but increasing currency right now is not very useful, because it will only go to enterprises.  But now demand has declined a great deal, which means that many companies aren’t receiving orders for goods, so they are not motivated to go to the banks to take out loans.  So at present, monetary policy serves only as a confidence stabilizer, , especially confidence in the stock market, and its role is quite limited.

The second is to build infrastructure, which is our usual method.  Building infrastructure can increase demand.  But this time it is a bit different, because the losses incurred by the coronavirus have been heaviest for small and medium enterprises and the common people, and building infrastructure won’t help them--new infrastructure's ability to absorb employment is quite low.  If we want to use new infrastructure to help the economy of small and medium enterprises and the common people, then we can only rely on the trickle-down effect, which means waiting on the spillover effects generated by the big enterprises that are building the infrastructure, which always requires a year or two.  In sum, new infrastructure can play a role in economic recovery, but it will not have a direct impact on the people and enterprises that need it most.

Thus I propose that we use the third method, which is to increase consumption.  If we want to directly increase consumption, should we directly give out money or coupons 费券?  I think we should use both.  For people with low incomes who have lost their jobs, we directly give them money as a form of aid; at the same time we can distribute coupons to the middle classes, to encourage them to go out and spend.  If everyone starts spending, then the economy of small and medium enterprises will perk up, and the multiplier effect will kick in.  Thus a one yuan coupon might lead to five yuan of spending, which can quickly revive consumption. 

As for the adjustment and upgrading of industrial structure, I think the epidemic has already helped us carry out the adjustment, because inefficient enterprises died out.  In the past, whenever the economy was in trouble, we always said we needed to make structural adjustments, but as I see it, even if you don’t make the adjustment the economy will do the same thing automatically.  When the economy is bad, prices go down, and inefficient firms can’t survive and close their doors.  The functioning of the economy has its own laws.  It’s like when a person catches a cold, which, from the perspective of Chinese medicine, renews his vital substance 精气.  A bad economy does the same thing, it changes the lifeblood, getting rid of what needs to be gotten rid of.  The coronavirus will have the same effect, and inefficient enterprises will disappear, leaving the more efficient ones.

The Pandemic Crisis and Theoretical Renewal

BCR:  There is still the last big question.  The arrival of a crisis is often the moment for theoretical innovation.  From a macroeconomic perspective, after the 2008 financial crisis, many commentators argued that existing macroeconomic theory was unable to describe the world economy emerging after the crisis, as there were developments that the former economists had never dealt with, and existing theories could not explain the new trends.  Now another great crisis has arrived, which means another moment of theoretical innovation, like that after the Great Depression of the 1930s when Keynesianism became a new guiding economic thought.  From what you have observed, has there been any theoretical innovation in the field of Chinese economics?  Including the “socialism with Chinese characteristics economics” promoted by the central authorities, do you see any advances?

Yao Yang:  I personally don’t do macroeconomics, but I greatly approve of Paul Romer’s criticism of this field,[4] which is that macroeconomics ignores monetary questions.  The Chicago School, and especially the theories put together by Robert Lucas, Jr.,[5] considers only money’s literal quantity and not its nominative quantity.  So there are no crises in their model, because crises are always caused by nominal fluctuations, especially financial crises.  Their crisis theory is what they call the real business cycle theory, which uses so-called external shocks to explain economic fluctuations, but this cannot explain the economic crises we have experienced, and even less financial crises.  At present, American economists and macroeconomists are working on this question, trying to bring in the monetary questions, but this is extremely difficult, because for the current macroeconomics model to do with will require defining the nominal quantity with a relatively concise theoretical model, which is quite difficult.

So I encourage young Chinese scholars, especially those working in macroeconomics, to take up this kind of exploration, but it is really not easy at all.  In economic theory, our innovations are extremely limited.  In the field of macroeconomics, it’s basically a blank slate, and to date we have produced no model that can accurately describe the Chinese macro economy.  There are naturally a lot of reasons for this, one of which is that when Chinese central authorities craft policy, they consider a great many factors, missions and goals.  Another reason is that the influence of Western models is too great, and Chinese macroeconomists have not thrown them off.  I think the next generation of economists might rethink these questions as they mature.

From another perspective, my field is political economy, and my hunch is that after this pandemic, political economy might become popular again, especially in discussions relating to institutions and systems.  To my mind the pandemic might have brought about a change, which is to make everyone understand that systems are not black or white.  In economics and politics, we have always thought that systems are black and white.  For example we have talked about so-called inclusive and non-inclusive systems, in which China’s was surely seen as a non-inclusive system.  After the pandemic, the West might see things differently.  For example, Fukuyama acknowledged that China’s campaign against the virus was successful, but he used a technical explanation, arguing that the success of failure of efforts to fight the virus turned on government capacity and popular confidence in the government.  China happens to be quite good on both of these fronts, which allowed it to get the virus under control fairly rapidly.  And in fact if we continue in that direction then eventually we might take a step toward breaking through the binary opposition between democratic and dictatorial systems, and research in political economy might take a step forward. 

There have been some innovations in the field of political economy in China, but the political aspects of political economy have to deal with national differences, and it is quite hard from Chinese scholars to make themselves heard internationally.  This may take awhile.  Of course, Chinese scholars have the responsibility to continue to work on this.
 
Notes

[1] "对话姚洋：“新型冷战”要到来了吗?" 文化纵横, 04-28-2020, available online at https://kknews.cc/news/kkx6jzp.html.
 
[2] PK in the text, abbreviation of internet  gamer slang for “player killing,” which means showing off one’s skill by killing the opponent’s avatar.

[3] Translator’s note:  M1, M2 and M3 are measurements of the money supply. M1 includes money in circulation plus checkable deposits in banks. M2 includes M1 plus savings deposits (less than $100,000) and money market mutual funds. M3 includes M2 plus certain deposits in banks.  M4 includes bank accounts and not just notes and coins in circulation.  Yao’s basic point is that the huge amount of liquidity in the current US economy, together with a largely unregulated financial sector, creates risks that are not present in China.
 
[4] Paul Romer (b. 1955) is an economist at NYU who won the Nobel Prize in Economics in 2008.  His essay on “The Trouble with Macroeconomics” is available here https://paulromer.net/trouble-with-macroeconomics-update/WP-Trouble.pdf.

[5] Robert Lucas, Jr. ( b. 1937) was a leading member of the Chicago School of Economics.