Innovation-driven Development and Change of Perception
Author： Source： Date：2017-09-01
Editor’s notes: There have been hustles and bustles on China’s slowing economic growth. Professor Li first identified the growth pattern of China’s economy. In comparison between the period of industrialization and the information era that we are in today, he pinpointed the importance of a different mindset. Further, Professor Li exemplified the necessity to look beyond economic development.
Is the current economic growth reaching the turning point?
The first issue: current economic situation in China. According to the recent data published by the National Bureau of Statistics, we have seen quite clearly that the economic growth rate remains at the level of 6.7%, but we cannot take for granted that our economy is reaching the turning point. What is “the turning point”? It is where the current economic downturn will transform into long-term steady growth. Findings from our recent market surveys show that coal price and steel price have gone up. Therefore, many small coal mines have resumed production; and the steel sells better.
We should analyze how this occurred. It is mainly because the current reform of enterprises indeed requires de-stocking. In order to sustain their business, these enterprises must increase their reserves of means of production. Though the reserves of the means of production are supposed to be on the decrease, as long as the prices start to rise, the reserves will keep pace. As these means of production become more expensive, the prices of coal and steel rise up. This is a normal phenomenon at present. But it does not mean that we have reduced the downward pressure. After all, economic transition by no means can be accomplished in the short term. It usually takes a long time as there are quite a lot of work to do. That’s why I suggest that you not put “turning point” on your lip. Next year remains a time period for us to “seek progress while maintaining stability”, but there will be no visible improvements. Neither “U” shape nor “V” shape will occur. Rather, an “L-shaped” growth, which I believe is consistent with the actualities, is more likely to occur..
We are in a period of accelerated change where we have to change our perceptions.
Now let’s turn to the second issue--innovation. The twentieth century has passed. One of the most popular economic terms in the twentieth century and until now is “innovation”. It’s been a hundred years since Schumpeter put forward the concept of “innovation” soon after the beginning of industrialization. Schumpeter’s conception of “innovation” is right, and that innovation is needed. But now, things have changed. Let me give you a few examples.
Firstly, Schumpeter pointed out that innovation was the restructuring of the factors of production. This was true at that time, because it was right at the time of industrialization when the manufacturing industry played an important role. But he did not foresee the advent of the information age. The information age is inevitable in wake of industrialization. Nowadays, innovation is no longer the restructuring of the factors of production, but the restructuring of information both quantitatively and qualitatively. Solely relying on the restructuring of means of production, there will be no genuine breakthroughs without the proper grasp and analyses of the most updated information. This point has been widely shared in the information age. Could innovation comes into being simply because two factories merge into one? Well, that depends on your master of information and whether there is true new factors within in information.
Another example is that Schumpeter believed that entrepreneurs were innovators mainly in that they were able to apply inventories to the economy. And this is innovation. This viewpoint was right at that time, and there’s no problem at all. But with the advent of the information age, this viewpoint becomes outdated. The problem is that nowadays the three terms, “creativity, innovation, entrepreneurship” are connected together. In order for the economy to have innovation, there must be creativity first; but the first people who have creativity are not entrepreneurs but numerous young people who are making their entry into the market. Do not underestimate those cafes or clubs, where people share their creative ideas. Once thre is creativity, those who are able to spot investment opportunities out of these creative ideas are entrepreneurs. Now the trend is that innovation follows creativity. Some enterprises are the conservative stakeholders. It does not necessarily follow that every large enterprise can innovate.
Thirdly, Schumpeter believes that you must have capital to finance and make a plan before you can innovate, start new companies, and introduce inventions to new fields. This view is partially right, but inadequate as Schumpeter is not aware of the impact of the Internet age on the people. The Internet age makes the whole economy to run faster. Once you develop a new creative idea, someone who learns about it will readily invest in you. You no longer need to beg someone for investment as is the case in the past. In this regard, attention should be paid to the fact that things in the information age are different from the past.
To cite another example, an old Chinese saying of goes, “failure is the mother of success.” But is this idea right? Increasingly ineffective. Assume that you do not change the old mindset after your failure, you will be doomed to fail forever. And if you want success, you’ll have to change your mindset. Success is the mother of success, not that failure is the mother of success. This is a new idea to some extent. During the process of the emergence of new ideas, there’ll be countless new investors and new organizers. One success story will follow another until new ideas come out. This is also a new perspective.
After all, the situation today is different from what it was a century ago in Schumpeter’s time when a large number of young people were manual workers, and poorly educated. Today, things are different. A massive number of young and well-educated people flood into the innovation market or start their own companies in creative clubs and cafes. They are knowledgeable and able to discover many new problems in the meantime. Some have failed, but more are successful.
Today the whole economy is running much faster than that in the past. We are in a period of accelerated change, where we have to change our perceptions. Can you picture what China’s economy will be like in 50 years? The general direction is well spotted, so to speak, but the specific problems cannot be resolved because things change too fast. Would the consumption in 50 years be the same as the consumption pattern today? Would the investment in 50 years be similar to the consumption model today? And would the employment environment in 50 years be just like the case today? By that time, an employee may well work from home by contract with the enterprise. He has a computer with internet connection, and that’s enough. When the enterprise wants new software, he’ll develop it and make it happen. By that time, would people take cash with them like now? By that time, would people have to buy cars to travel around? A lot of things are changing. Losers and achievers come to the fore as well, and in this process, we must develop a new mindset.
We can say that in the future, the term “entrepreneur” may stop to exist, because there is no need of entrepreneurs in the future. What will be needed are leaders and foregoers. A new discovery comes with new leaders and foregoers. That’s it.
Therefore, innovation and starting new businesses are major issues in China. We need to change our perceptions and look deep into it. is the circumstances today are not the same as what Schumpeter depicted one hundred years ago.
The assumption of an economic man (homo economicus) is not enough, and the influence of the assumption of a social man (homo sociologicus) is growing.
As to the third issue, let’s talk about the assumption of social man and economic man. Classical economics attaches much importance to homo economicus, or economic man. The economic man is portrayed to be consistently rational, who generally consider his own economic interests and attempt to maximize utility as a consumer and profit as a producer. As a consumer, he is able to buy the greatest satisfaction at the lowest price. This is the concept of an economic man. So, an economic man has also been called a rational man, in classical economics. But now, it seems far from enough. This view is not exactly wrong, only that its scope is narrow. That’s why it has been constantly challenged by economists, one of whom is Keynes. Keynes believes that the animal instinct in people is rather visible when it comes to investments, and that people tend to make impulsive investment. This is where Keynes believes the inadequacy of the assumption of economic man lies in.
Veblen’s view is that people’s consumption is not entirely to fulfill their material desires, but for many other reasons. It could also be for their spiritual satisfaction, which is a new type of consumption for show-off. For instance, a man, who is not that rich, insists on riding the best carriage to pass through the streets. He does it so that people would see and exclaim “What a rich man!” He is content with it. Spending money gives him such satisfaction and pleasant feelings. As the saying goes, “Eating is done 100% for yourself, while dressing is done 80% for others.” As in this man’s case, he does that to make others see his happiness and to envy him. That’s the point.
Simon believes that the optimal choice is beyond reach, because there are too many variables and multiple goals. How can you possibly achieve the optimal results of a variety of goals at the same time? So people can only make suboptimal choice. When people buy things, especially when a woman buys a shawl or a coat, others ask her how it is. She says “Just so so”, because she can’t be particularly satisfied. She did not walk around or pick one from the products of many businesses, and she’s not aware there are better ones than hers. And even if she really wants to go to so many businesses to pick the best one, she’s afraid she doesn’t have enough time. When you buy a sewing needle, you want the sharpest one. So you go to the department store and see there is a shop where you can buy a needle. Since you want the sharpest needle, you’ll have to pick it by yourself. None would be such a fool as to bring a magnifier with her and take notes so as to pick the sharpest one among so many needles. It won’t happen. She doesn’t think the first needle is sharp enough. Neither does she thinks the second one sharp enough. And when she sees the third, “Well, fine! I’ll just take it.” She just makes a suboptimal choice by taking an alternative. When consumers are making suboptimal choices, how can there be rational people? So Simon proposed his theory of “bounded rationality”. This view is now widely appreciated.
As a matter of fact, in addition to an economic man, there is the theory of a social man in economics. A social man reckons on social problems. For example, there are two places for you to choose to invest in: A or B. A: low cost and high economic benefits, whereas B: high cost and low economic benefits. Generally, according to the assumption of an economic man, all will choose to invest in A because of the low cost. But why there are some people willing to invest in B? This requires further analysis. Why does one want to invest in B? One of the reasons why I invest in B is that it is my hometown where I have emotional attachments. So when I become rich, I choose to build a hospital, a school or a factory back in my hometown to increase the local GDP. This is an option..There is another option. I invest in B because I grew up and studied there, and at that time people looked down upon me. They saw no potential in me. Now that I have made a fortune today, I will build a factory or a library there to prove you wrong. This is a kind of mentality. It also defines a social man. In a third case, the reason why I choose to invest in B is that I once did something disgraceful in this place. For example, I didn’t pay off my debts when I left. I cheated on some people. I have a sense of guilt of my past. So I would have to invest there to make up for my past mistakes. This is also a social man.
Now we often talk about the reasons behind a firm’s development. The primary reason rests in the existence of a good corporate culture, and within which the cultivation of a sense of shared identity in its employees is the key. “Sharing happiness and sorrows” is not one notion. “Sharing happiness” and “sharing sorrows” are two different concepts. As far as an enterprise is concerned, the notion“sharing happiness” usually takes place when the enterprise is making progress, with good prospects and many dividends. How to allocate these dividends? There must be a functioning and rational system for allocation in order to avoid chaos. Enterprises can “share happiness” with this system. In contrast, “sharing sorrows” is more of a spiritual belief. There must be a belief backing such notion. “Sharing sorrows” by with the aforementioned system wouldn’t work. It’s not enough. For instance, when a factory has been running under deficit and its workers haven’t been paid for two or three months, no matter how hard you try to apply the system to convince them, it won’t work. However, if you have a good corporate culture, and all your employees in the enterprise have a spirit of “sharing sorrows”, they will make joint efforts to get through tough times together. Therefore, “sharing happiness” and “sharing sorrows” are different. This well proves the importance of the sense of a shared identity and social responsibility. China’s development must go beyond economic development in the future. The economic man assumption remains useful to some extent, but not enough. The social man assumption is increasingly influential. When we all have a sense of social welfare and a sense of social responsibility, our economy is bound to move into a new stage.
My speech ends here. Thank you!
Yining Li is the director of the office of Humanities & Social Sciences and honorary dean of the Guanghua School of Management of Peking University, member of the standing committee of the 12th CPPCC National Committee.
Speech delivered at the opening plenary of the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
Is the current economic growth reaching the turning point?
The first issue: current economic situation in China. According to the recent data published by the National Bureau of Statistics, we have seen quite clearly that the economic growth rate remains at the level of 6.7%, but we cannot take for granted that our economy is reaching the turning point. What is “the turning point”? It is where the current economic downturn will transform into long-term steady growth. Findings from our recent market surveys show that coal price and steel price have gone up. Therefore, many small coal mines have resumed production; and the steel sells better.
We should analyze how this occurred. It is mainly because the current reform of enterprises indeed requires de-stocking. In order to sustain their business, these enterprises must increase their reserves of means of production. Though the reserves of the means of production are supposed to be on the decrease, as long as the prices start to rise, the reserves will keep pace. As these means of production become more expensive, the prices of coal and steel rise up. This is a normal phenomenon at present. But it does not mean that we have reduced the downward pressure. After all, economic transition by no means can be accomplished in the short term. It usually takes a long time as there are quite a lot of work to do. That’s why I suggest that you not put “turning point” on your lip. Next year remains a time period for us to “seek progress while maintaining stability”, but there will be no visible improvements. Neither “U” shape nor “V” shape will occur. Rather, an “L-shaped” growth, which I believe is consistent with the actualities, is more likely to occur..
We are in a period of accelerated change where we have to change our perceptions.
Now let’s turn to the second issue--innovation. The twentieth century has passed. One of the most popular economic terms in the twentieth century and until now is “innovation”. It’s been a hundred years since Schumpeter put forward the concept of “innovation” soon after the beginning of industrialization. Schumpeter’s conception of “innovation” is right, and that innovation is needed. But now, things have changed. Let me give you a few examples.
Firstly, Schumpeter pointed out that innovation was the restructuring of the factors of production. This was true at that time, because it was right at the time of industrialization when the manufacturing industry played an important role. But he did not foresee the advent of the information age. The information age is inevitable in wake of industrialization. Nowadays, innovation is no longer the restructuring of the factors of production, but the restructuring of information both quantitatively and qualitatively. Solely relying on the restructuring of means of production, there will be no genuine breakthroughs without the proper grasp and analyses of the most updated information. This point has been widely shared in the information age. Could innovation comes into being simply because two factories merge into one? Well, that depends on your master of information and whether there is true new factors within in information.
Another example is that Schumpeter believed that entrepreneurs were innovators mainly in that they were able to apply inventories to the economy. And this is innovation. This viewpoint was right at that time, and there’s no problem at all. But with the advent of the information age, this viewpoint becomes outdated. The problem is that nowadays the three terms, “creativity, innovation, entrepreneurship” are connected together. In order for the economy to have innovation, there must be creativity first; but the first people who have creativity are not entrepreneurs but numerous young people who are making their entry into the market. Do not underestimate those cafes or clubs, where people share their creative ideas. Once thre is creativity, those who are able to spot investment opportunities out of these creative ideas are entrepreneurs. Now the trend is that innovation follows creativity. Some enterprises are the conservative stakeholders. It does not necessarily follow that every large enterprise can innovate.
Thirdly, Schumpeter believes that you must have capital to finance and make a plan before you can innovate, start new companies, and introduce inventions to new fields. This view is partially right, but inadequate as Schumpeter is not aware of the impact of the Internet age on the people. The Internet age makes the whole economy to run faster. Once you develop a new creative idea, someone who learns about it will readily invest in you. You no longer need to beg someone for investment as is the case in the past. In this regard, attention should be paid to the fact that things in the information age are different from the past.
To cite another example, an old Chinese saying of goes, “failure is the mother of success.” But is this idea right? Increasingly ineffective. Assume that you do not change the old mindset after your failure, you will be doomed to fail forever. And if you want success, you’ll have to change your mindset. Success is the mother of success, not that failure is the mother of success. This is a new idea to some extent. During the process of the emergence of new ideas, there’ll be countless new investors and new organizers. One success story will follow another until new ideas come out. This is also a new perspective.
After all, the situation today is different from what it was a century ago in Schumpeter’s time when a large number of young people were manual workers, and poorly educated. Today, things are different. A massive number of young and well-educated people flood into the innovation market or start their own companies in creative clubs and cafes. They are knowledgeable and able to discover many new problems in the meantime. Some have failed, but more are successful.
Today the whole economy is running much faster than that in the past. We are in a period of accelerated change, where we have to change our perceptions. Can you picture what China’s economy will be like in 50 years? The general direction is well spotted, so to speak, but the specific problems cannot be resolved because things change too fast. Would the consumption in 50 years be the same as the consumption pattern today? Would the investment in 50 years be similar to the consumption model today? And would the employment environment in 50 years be just like the case today? By that time, an employee may well work from home by contract with the enterprise. He has a computer with internet connection, and that’s enough. When the enterprise wants new software, he’ll develop it and make it happen. By that time, would people take cash with them like now? By that time, would people have to buy cars to travel around? A lot of things are changing. Losers and achievers come to the fore as well, and in this process, we must develop a new mindset.
We can say that in the future, the term “entrepreneur” may stop to exist, because there is no need of entrepreneurs in the future. What will be needed are leaders and foregoers. A new discovery comes with new leaders and foregoers. That’s it.
Therefore, innovation and starting new businesses are major issues in China. We need to change our perceptions and look deep into it. is the circumstances today are not the same as what Schumpeter depicted one hundred years ago.
The assumption of an economic man (homo economicus) is not enough, and the influence of the assumption of a social man (homo sociologicus) is growing.
As to the third issue, let’s talk about the assumption of social man and economic man. Classical economics attaches much importance to homo economicus, or economic man. The economic man is portrayed to be consistently rational, who generally consider his own economic interests and attempt to maximize utility as a consumer and profit as a producer. As a consumer, he is able to buy the greatest satisfaction at the lowest price. This is the concept of an economic man. So, an economic man has also been called a rational man, in classical economics. But now, it seems far from enough. This view is not exactly wrong, only that its scope is narrow. That’s why it has been constantly challenged by economists, one of whom is Keynes. Keynes believes that the animal instinct in people is rather visible when it comes to investments, and that people tend to make impulsive investment. This is where Keynes believes the inadequacy of the assumption of economic man lies in.
Veblen’s view is that people’s consumption is not entirely to fulfill their material desires, but for many other reasons. It could also be for their spiritual satisfaction, which is a new type of consumption for show-off. For instance, a man, who is not that rich, insists on riding the best carriage to pass through the streets. He does it so that people would see and exclaim “What a rich man!” He is content with it. Spending money gives him such satisfaction and pleasant feelings. As the saying goes, “Eating is done 100% for yourself, while dressing is done 80% for others.” As in this man’s case, he does that to make others see his happiness and to envy him. That’s the point.
Simon believes that the optimal choice is beyond reach, because there are too many variables and multiple goals. How can you possibly achieve the optimal results of a variety of goals at the same time? So people can only make suboptimal choice. When people buy things, especially when a woman buys a shawl or a coat, others ask her how it is. She says “Just so so”, because she can’t be particularly satisfied. She did not walk around or pick one from the products of many businesses, and she’s not aware there are better ones than hers. And even if she really wants to go to so many businesses to pick the best one, she’s afraid she doesn’t have enough time. When you buy a sewing needle, you want the sharpest one. So you go to the department store and see there is a shop where you can buy a needle. Since you want the sharpest needle, you’ll have to pick it by yourself. None would be such a fool as to bring a magnifier with her and take notes so as to pick the sharpest one among so many needles. It won’t happen. She doesn’t think the first needle is sharp enough. Neither does she thinks the second one sharp enough. And when she sees the third, “Well, fine! I’ll just take it.” She just makes a suboptimal choice by taking an alternative. When consumers are making suboptimal choices, how can there be rational people? So Simon proposed his theory of “bounded rationality”. This view is now widely appreciated.
As a matter of fact, in addition to an economic man, there is the theory of a social man in economics. A social man reckons on social problems. For example, there are two places for you to choose to invest in: A or B. A: low cost and high economic benefits, whereas B: high cost and low economic benefits. Generally, according to the assumption of an economic man, all will choose to invest in A because of the low cost. But why there are some people willing to invest in B? This requires further analysis. Why does one want to invest in B? One of the reasons why I invest in B is that it is my hometown where I have emotional attachments. So when I become rich, I choose to build a hospital, a school or a factory back in my hometown to increase the local GDP. This is an option..There is another option. I invest in B because I grew up and studied there, and at that time people looked down upon me. They saw no potential in me. Now that I have made a fortune today, I will build a factory or a library there to prove you wrong. This is a kind of mentality. It also defines a social man. In a third case, the reason why I choose to invest in B is that I once did something disgraceful in this place. For example, I didn’t pay off my debts when I left. I cheated on some people. I have a sense of guilt of my past. So I would have to invest there to make up for my past mistakes. This is also a social man.
Now we often talk about the reasons behind a firm’s development. The primary reason rests in the existence of a good corporate culture, and within which the cultivation of a sense of shared identity in its employees is the key. “Sharing happiness and sorrows” is not one notion. “Sharing happiness” and “sharing sorrows” are two different concepts. As far as an enterprise is concerned, the notion“sharing happiness” usually takes place when the enterprise is making progress, with good prospects and many dividends. How to allocate these dividends? There must be a functioning and rational system for allocation in order to avoid chaos. Enterprises can “share happiness” with this system. In contrast, “sharing sorrows” is more of a spiritual belief. There must be a belief backing such notion. “Sharing sorrows” by with the aforementioned system wouldn’t work. It’s not enough. For instance, when a factory has been running under deficit and its workers haven’t been paid for two or three months, no matter how hard you try to apply the system to convince them, it won’t work. However, if you have a good corporate culture, and all your employees in the enterprise have a spirit of “sharing sorrows”, they will make joint efforts to get through tough times together. Therefore, “sharing happiness” and “sharing sorrows” are different. This well proves the importance of the sense of a shared identity and social responsibility. China’s development must go beyond economic development in the future. The economic man assumption remains useful to some extent, but not enough. The social man assumption is increasingly influential. When we all have a sense of social welfare and a sense of social responsibility, our economy is bound to move into a new stage.
My speech ends here. Thank you!
Yining Li is the director of the office of Humanities & Social Sciences and honorary dean of the Guanghua School of Management of Peking University, member of the standing committee of the 12th CPPCC National Committee.
Speech delivered at the opening plenary of the 3rd Dameisha Forum. Opinions expressed here belong to the author and do not necessarily represent the position of SZIDI.
