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John Ross: Neoclassical Models not suited to China


Source: Chinese Social Sciences    Published: 2016-9-20



John Ross is a British academic, journalist, blogger and economic commentator who worked as the director of Economic and Business Policy for Ken Livingstone when he was the mayor of London. The first non-Chinese citizen to be appointed to a full time post at the Chongyang Institute for Financial Studies, Renmin University of China, he now serves as a Senior Fellow at the institute. His book The Great Chess Game? A New Perspective on China’s Destiny has become an Amazon China’s top-selling book on economic policy since its publication in April this year.

The first time that the author met John Ross was during the summit of the T20, short for “Think 20,” held during July 29-30 in Beijing, which provided a forum for scholars, think tank representatives and government officials to engage in meaningful discussions of global economic governance in preparation for the G20 summit held in September in Hangzhou, China. During the closing ceremony of the T20 summit, Ross delivered a speech on global governance. In recent days, CSST had an opportunity to interview Ross to get his perspective on the recently concluded G20 summit as well as the prospects for China-UK ties and the study of Chinese economics.

CSST: Do you think the recent G20 summit in Hangzhou represents the fulfillment of China’s goal to promote integrated and innovative economic growth? What’s your take on the results of the summit?

Ross: I think the G20 summit was a big success in terms of China setting the international economic agenda. China also took some significant steps toward its goal of the G20 playing a more strategic role in global economic policymaking.

There were also several successes of Chinese diplomacy. For example, the United States tried to manufacture an artificial crisis through its provocations in the South China Sea. However, almost all countries, with the partial exception of Japan, ignored this and instead wanted to proceed with peaceful economic development in Southeast Asia, which is China’s agenda.

However, the international economic situation remains difficult. The US economy has slowed significantly—from 3.3 percent GDP growth in the first quarter of 2015 to only 1.2 percent in the second quarter of 2016. The G20 was a success, but there will be challenges in the coming period because of the negative trends in the international economy in the main world economic centers: the United States, the European Union and Japan. Therefore, China will have to take further steps in international economic leadership.

CSST: After the G20, what are the growth points for the world economy, especially China’s, in the short term and long term?

Ross: The two major growth points in the global economy are China and India—together, they now account for much more of world growth than the G7.

Within China, the main task is to move progressively from mid-level technology and mid-level value-added economic sectors—where China is very internationally competitive now—to higher technology and value-added sectors. But it is objectively impossible to make such a transition quickly. It is a task to be completed over the next 10 to 20 years.

However, by international standards, China will make the transition to a “high-income” economy more rapidly. I believe it will achieve “moderate prosperity” by 2020 and “high income” status by World Bank international standards within 10 years.

CSST: What impact on China’s relationship with the United Kingdom will the recent visit of the Lord Mayor of London Jeffrey Mountevans have, in your opinion?

Ross: Brexit is an incorrect and utopian economic policy that will damage the British economy. Therefore, there are no steps that Britain could take to make Brexit successful. The only question that remains is “How much will it damage the British economy?” Hopefully, as the disastrous consequences of leaving the European Union become clear, the project of Brexit will be abandoned. If not, then the only question is how to limit the damage to the British economy.

If Brexit is carried out, London will remain an important financial center, but the UK economy will become less important for China as Britain is a small economy compared to the European Union. The Lord Mayor of London will obviously attempt to limit the damage to China-UK ties of Brexit.

CSST: What new approaches would you advocate for economics? Do you feel the discipline should move from neoclassicism to a more holistic and diversified approach?

Ross: My approach to economics has always been to solve practical problems—to identify economic trends for companies to base themselves on when entering foreign markets as well as predictions for trends in the economy to allow the decision-makers to set the transport budget because this is highly influenced by the numbers in employment, the return on investment on large infrastructure projects and so on. For such work, precise statistical analysis and knowledge of factual trends in the economy is required.

Based on my experience of seven years in China, I think the weakest part of Chinese economics is failure to seriously use factual data. This naturally does not apply to all economic writing, but numerous articles have appeared that have no factual basis whatsoever and frequently make statements that contradict the facts.

Also, I am rather astonished to read articles in the Chinese media using data that are over 20 years out of date and have been officially replaced by international statistical bodies, such as OECD, UN and US statistical services. This might appear a technical question, but it is actually vital—if a ship does not have an accurate chart, it is in serious danger of crashing and if China does not have the most accurate methods of studying trends in the economy, it cannot make economic policy in the most accurate way.

This lack of serious knowledge of and use of factual data reflects the influence of the US neoclassical school, which disdains factual analysis because it does not conform to its conclusions. US neoclassical economics is a type of “economic theology” or “economic mysticism” described by the Austrian British economist and political philosopher Friedrich Hayek in his Monetary Theory and the Trade Cycle: “Empirical studies, whether they are undertaken with… practical aims in view, or whether they are confined merely to the amplification, with the aid of special statistical devices, of our knowledge of the course of particular phases of trade fluctuations, can, at best, afford merely a verification of existing theories.” This approach of neoclassical economics is, of course, the opposite of the Chinese dictum of “seeking truth from facts” or the practice of any serious science in which improvements in factual knowledge frequently lead to revolutions in theory.

CSST: You often mentioned that the economics of productivity is central to understanding the forces driving world economic growth.

Ross: Yes. Economics of productivity is essential to the economic decision-making of China and the world at large. And the framework for productivity measurement actually underwent several periods of transition. The traditional approach of the American economists Simon Kuznets and Robert Solow has been replaced by the new framework presented in the OECD manual Measuring Productivity.

Professor Dale Jorgenson has summarised this in his book The Economics of Productivity as follows,

“The early 1970s marked the emergence of a rare professional consensus on economic growth… Kuznets summarized his decades of empirical research in Economic Growth of Nations (1971). Solow’s book Economic Growth (1970)… contained his 1969 Radcliffe Lectures at the University of Warwick.… ”

“Solow’s neo-classical theory of economic growth, especially his analysis of steady states with constant rates of growth, provided conceptual clarity and sophistication. Kuznets generated persuasive empirical support by quantifying the long sweep of historical experience of the United States and 13 other developed economies.”

However: “With the benefit of hindsight the most obvious deficiency of the traditional framework of Kuznets and Solow was the lack of a clear connection between the theoretical and the empirical components… ”

“The initial challenge to the framework of Kuznets and Solow was posed by Denison’s magisterial study, Why Growth Rates Differ…. ”

“Denison departed from the identification of labor input with hours worked by Kuznets and Solow. He constructed constant quality measures of labor input, taking into account differences in the quality of hours worked due to the age, sex and educational attainment of workers…”

“The notion of efficiency or ‘total factor productivity’ was introduced independently by George Stigler (1947) and became the starting point for a major research program at the [US] National Bureau of Economic Research… ”

“The most serious challenge to the traditional approach to productivity measurement was presented in my 1967 paper with Griliches, ‘The Explanation of Productivity Change’.”

“Griliches and I departed far more radically than Denison from the measurement conventions of Kuznets and Solow. We replaced NNP [Net National Product] with GNP [Gross National Product] as a measure of output and introduced constant quality indexes for both capital and labor inputs… ”

“The BLS (1983) framework was based on GNP rather than NNP and included a constant quality index of capital input, displacing two of the key conventions of the traditional framework of Kuznets and Solow.”

“However, BLS retained hours worked as a measure of labor input until 11 July 1994, when it released a new multifactor productivity measure including a constant quality index of labor input as well…. This index was incorporated into the BLS measure of output… ”

“The approach to growth accounting in my 1987 book with Gollop and Fraumeni and the official statistics on multifactor productivity published by the BLS in 1994 has now been recognized as the international standard.”

In my opinion, improvement of factual and statistical studies is therefore essential for the improvement of economic studies in China in business schools and outside. This will inevitably lead to Chinese economics moving away from US neoclassicism and towards Marxism as the latter is based on economic facts. The latter was stressed in several speeches by Chinese President Xi Jinping, including on the 95th anniversary of the founding of the CPC.


John Ross is a Senior Fellow of Chongyang Institute for Financial Studies, Renmin University of China.

Key Words: China   G20   RDCY  

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