Volume 3, Issue 1 -

China has made significant progress since 1978 in expanding the market, but that progress is threatened by the failure to limit the state. The critical challenge facing the Chinese Communist Party (CCP) and its leadership is to widen the range of choices open to individuals by promoting what Milton Friedman, in his 1988 memorandum to General Secretary Zhao Ziyang, called “free private markets.” Free markets require well-defined private property rights protected by a just rule of law. China has a robust private sector and private property rights are now recognized by law, but the state sector and state ownership continue to play a strong role in directing economic life.

It was 1968 and I was studying economics with Armen Alchian at UCLA. It was my first year as a graduate student and Armen was teaching the Microeconomics course to all the first year grad students. While I had an undergraduate degree in economics, Armen was the first professor I had that made it fun and fascinating. To him, economics was the science of human behavior and not a bunch of mathematical mechanisms called a market. In the middle of this year, my military draft number was up and I was called to join the U.S. Army. However, my draft board gave me the choice of Army or college teaching. I asked Armen for some help and he wrote letters for me to various colleges, including California State College in San Luis Obispo. With only my masters degree, I was offered the job at Cal Poly and taught there for 3 years, until I was too old to be drafted into the military. I called Armen and told him I wanted to return to graduate school but I did not want to live again in Los Angeles. Where should I go? Without any hesitation, Armen said, “Go to the University of Washington and follow Steve Cheung wherever he goes. Take every course he teaches and listen carefully to everything he says.”

I met Steve in August 1968 when he and I were assigned as office mates in the old Social Science Building of the University of Chicago. Steve was visiting Chicago, finishing up his book on sharecropping – we had many talks about it – and I was just starting as an assistant professor. Of course I learned in the first half hour of our friendship that Steve was a star in photography, in kite flying, in ping pong, and in Chinese checkers…and economics! Well, he was – I can testify to the economics and the photography (he once told me that he thought in English as an economist but in Chinese as a photographer); and I did once catch sight of him playing a mean game of ping pong. I was dazzled by the Famous Chicago Department, but Steve got me going in a slightly different – and very UCLA – direction, leading me to work on enclosures and open fields in England.

We are delighted to be present today to share in the celebration of Steven Cheung’s 80th birthday. We bring best wishes from several others who could not be here – Yoram Barzel, Chris Hall, and Douglass North. Congratulations to Steve and thanks to Linda for this special occasion. Steve, congratulations on your keen observation, your broad experience, and the impact of your ideas. Our subject today is Steven Cheung’s advice to economists: that personal observation and real-world business experience can lead economists to greater insights and fewer errors. In his own words: “The world is my laboratory and I want to see things with my own eyes.” We certainly could use better economics. Is Steve right? And if he is right, how to implement his advice?

It is an intimidating challenge, both emotionally and intellectually, to write something of enough worth to celebrate the 80th birthday of Steven Cheung and to honor the memory of Professor Ronald Coase. Both are serious scholars. Coase was a devoted scholar; nothing interested him other than academics. Steve has much wider interests, ranging from photography, calligraphy, to art collection. Nonetheless, both are adamant reformers and determined to change economics. They have set an intimidating standard.

Steve Cheung has been a pioneer in the research of marriage using economic approach. In this paper, I shall describe his influence on marriage research in general and on my career in particular. Since Gary Becker had exerted a parallel influence, I will also discuss his impact as well.

I examine the sharing economy using a contractual approach pioneered by Cheung (1969, The Theory of Share Tenancy: With Special Application to Asian Agriculture and the First Phase of Taiwan Land Reform . Chicago: Chicago University Press). Progress in information technology that reduces transactions costs leads to the emergence of rental contract to supersede outright ownership, especially among goods and services in which search and monitoring costs had been major trade barriers. I present evidence that ridesharing indeed significantly lowers wait times. Trust cannot explain the economic success of some sharing economy companies (e. g., Airbnb, Uber) but not others (e. g., SnapGoods). Sharing power drill, the poster child of the sharing economy, is an economic failure because the major trade barrier is transportation rather than transaction costs. Changes in transaction costs lead to changes in contractual arrangements. In the case of contractual choice between ridesharing platform and drivers, findings about drivers’ characteristics and contract details are consistent with the theory of share tenancy. My analysis also sheds light on the current debate on the employment status of driver-partners.

There are fixed costs in production. One has to assemble rents earned in production lines to cover them. There are also fixed costs in consumption. Consumers assemble surpluses to cover them. In either case, rent assemblage could either be a quantity solution, a quality solution, or a combination of both. Once a fixed cost is committed by contract, it becomes historical. Yet compared to the option of paying this fixed cost all over again, increasing those quantities or qualities, which do not further increase this fixed cost, is less costly. The Law of Demand therefore implies the quality and/or the quantity solutions. The quality solution, as provided by the Alchian-Allen Theorem, is but a special case: where an increase in quality is the only viable solution under some specific real world constraints.

Contracts, as a form of institutions, have an influence on efficiency. Other conditions being the same, different contracts lead to different efficiency. Unlike property rights which require compulsory implementation by law, contracts rely mainly on the contracting parties’ voluntary implementation due to the fact that they are reached by two or more contracting parties in unanimity. Therefore, in cases where property institutions cannot be altered fast enough due to political or ideological reasons, reforms can be achieved by the modification of contracts, which result in similar effects at a lower cost. This is the case for China’s reforms, especially in agriculture: the land ownership in rural areas— collective land property rights have not changed in name, but the contracts between farmers and the state, or the collectives, have changed tremendously to bring about remarkable economic growth. In a more general sense, it has happened once and again in human history when property institutions—judicial institutions—cannot be changed due to political or other reasons, or due to brutal bloodshed or war in prospect. Therefore, as an option, the change of contract exists as a more common, and unconscious but effective form of institutional change.

Urbanization is a process in which separated and dispersed property rights become concentrated in a specific location. This process involves a large volume of contracts to redefine and rearrange various property rights, producing various and high transaction costs. Efficient urbanization implies the reduction of these costs. This paper studies how efficient urbanization reduces transaction costs in the real world, based on a series of contracts rather than the coercive power. Specifically, this paper shows that Jiaolong Co. built a city by being a central contractor, which acquired planning rights by contract, and signed a series of tax sharing contracts with government, farmers, tenants, and business enterprises. These contractual arrangements greatly reduced the transaction costs and promoted the development.