Introduction

In this chapter we will define a solution for noncooperative and for almost-noncooperative games (both two-person and n-person). In Section 5.17, we defined a (strictly) noncooperative game as a game in which no agreement between the players has any binding force: Thus any player is free to violate any agreement even if he obtains no positive benefit by doing so. In contrast, we defined an almost-noncooperative game as a game in which the players are bound by any agreement that they are making as long as they cannot obtain any positive benefit by violating it, though they are free to disregard any agreement if they can achieve a positive gain (however small) by doing so.

Accordingly, whereas in a cooperative game any possible strategy n-tuple (and any possible probability mixture of such strategy n-tuples) will be stable once the players have agreed to adopt it, in a noncooperative or almost-noncooperative game only strategy n-tuples satisfying certain special stability requirements – which we call eligible-strategy n-tuples – have sufficient stability to be used by rational players. A strategy n-tuple can be eligible only if it is an equilibrium point or a maximin point (see Sections 5.12 and 5.13). As we have argued, in a strictly noncooperative game a profitable equilibrium point will be eligible only if it is a strong equilibrium point or a centroid equilibrium point, while in an almost-noncooperative game a profitable equilibrium point is always eligible.

Sure prospects and risky prospects

In Section 1.3 we briefly summarized the main results of individual decision theory (utility theory). In this chapter we will discuss these results in more detail. Recall that we speak of certainty when any action that the decision maker can take can have only one possible outcome, known in advance. We speak of risk or uncertainty when at least some of the actions available to the decision maker can have two or more alternative outcomes, without his being able to discern which particular outcome will actually arise in any given case.

More particularly we speak of risk when the objective probabilities (long-run frequencies) associated with all possible outcomes are known to the decision maker. We speak of uncertainty if at least some of these objective probabilities are unknown to him (or are not even well defined).

For example, I make a risky decision when I buy a lottery ticket offering known prizes with known probabilities. In contrast, I make an uncertain decision when I bet on horses or when I make a business investment, because in the case of horse races and business investments the objective probabilities of alternative outcomes are not known.

To describe the expected results of any given human action under certainty, risk, and uncertainty, we are introducing the concepts of “sure prospects”, “risky prospects”, and “uncertain prospects”. We are also introducing the term “alternatives” as a common name for sure prospects, risky prospects, and uncertain prospects.

In the preceding chapters I have tried to propose a precise definition – or more exactly a family of precise definitions – for the concept of rational behavior. In the case of individual pragmatic decisions I have argued that rational behavior can be defined in terms of utility maximization, or expected-utility maximization, in accordance with modern decision theory (and modern economic theory). In the case of moral decision I have suggested the utilitarian criterion as the appropriate rationality criterion, involving maximization of the average utility of all individuals in the society.

Finally, in the case of game situations I have argued that we need a concept of rational behavior yielding a determinate solution (i.e., a unique solution payoff vector) for each specific game. For various classes of cooperative and of noncooperative games I have suggested a number of solution concepts, all related to the Nash-Zeuthen bargaining solution, to the modified Shapley value, and to their various generalizations. Though the solution concepts suggested for different game classes have differed in specific detail, all have been based on the same general rationality postulates. My discussion, however, has been restricted to what I have called “classical” games (i.e., to games with complete information, either fully cooperative or fully noncooperative in character, and admitting of representation by their normal form) – even though, as I have shown in other publications, one can extend this analysis also to certain classes of “nonclassical” games (e.g., to games with incomplete information [Harsanyi, 1967, 1968a, 1968b; Harsanyi and Selten, 1972]).

CONSTRUCTIVE APPROACH

Disregard of one's personal identity – a model for moral value judgments

In Section 1.3 we divided the general theory of rational behavior into individual decision theory, ethics, and game theory. In Chapter 3 we summarized the main results of individual decision theory, following Debreu [1959], Herstein and Milnor [1953], and Anscombe and Aumann [1963]. In this chapter we will review the main results of our own work in ethics and will discuss a related result by Fleming [cf. Harsanyi, 1953,1955, and 1958; Fleming, 1952]. Most of these results were originally developed for the purposes of welfare economics but will be discussed here from a more general ethical point of view. The remaining chapters of this book will deal with game theory.

People often take a friendly (positive) or an unfriendly (negative) interest in other people's well-being. Technically this means that the utility function of a given individual i may assign positive or negative utility to the utility level as such of some other individuals j, or to the objective economic, social, biological, and other conditions determining the latter's utility levels. The question naturally arises: What factors will decide the relative importance that any given individual's utility function will assign to the well-being of various other individuals or social groups? We have called this question the problem of dominant loyalties (Section 2.3). This question obviously requires a rather complicated answer.

The relevance of the past

The economic policy and performance of the People's Republic has been shaped by certain characteristics growing out of China's long history, the country's stage of development, and the 1949 revolution. In a fundamental sense China's economic development since 1949 is the product of both continuity and change. As revolutionary as the changes have been in the past twenty-five years, the actual course of development can be much better understood against the background of China's heritage.

One of the most crucial questions is what elements of the Chinese experience inherited from the past may have fostered or hampered China's economic development. Clearly there are no simple answers to this question. Moreover, the answers given would depend on whether one were exploring the problem in prospect – that is, before rapid and sustained development was started – or after it was fully and visibly underway for a certain period of time. Thus the assessment of the role of China's heritage in the country's economic development would almost certainly be quite different and much more pessimistic seen from the perspective of the 1930s as compared to that of the 1970s.

Similarly, an informed observer appraising the prospects for economic development and modernization in Asia from the vantage point of 1840 might have picked China – rather than Japan – as the most likely candidate. China was a vast empire more populous than Japan, much better endowed with mineral resources and large internal markets. Even in terms of social and political institutions, China might have appeared to be in the better position.

The gains from trade

As shown in the preceding chapter, China's economic growth since 1949 has been very impressive by the standards of China's past development and compared with the pace of expansion of presently industrialized countries in the nineteenth century. It has also been quite rapid, although not exceptional, in comparison with the post-war growth tempo of other underdeveloped countries. It is evident that in terms of two major criteria – stability, analyzed in Chapter 5, and growth, examined in Chapter 6 – the performance of the Chinese economy must be rated highly for the last quarter century.

Foreign trade has played a marginal but very significant role both in maintaining stability and in contributing to growth. Grain imports during the agricultural crisis years of the early 1960s helped to alleviate food shortages, particularly in the cities. Thereby they also helped to contain inflationary pressures, especially at that time, but since then as well. Imports of machinery, transport equipment, complete plants, and other capital goods fostered China's industrialization, modernization, and technological progress, and in this way contributed to China's economic growth. The course and changing structure of foreign trade can also serve as a very useful indicator of stability and growth in ways that will be explored in this chapter.

Before proceeding with this analysis, one needs to ask why do countries engage in international trade. Are there gains from trade? International trade clearly creates greater dependence on the rest of the world. Does it also yield substantial benefits and, if so, what are these?

Significant potential gains accrue to an economy that takes advantage of the international division of labor and specialization across national boundaries.

Introduction

China's economic performance – based on the criteria of growth and stability – and the elements shaping it were appraised in the preceding chapters. The role of the past in conditioning ideological pre-dispositions, in imposing resource constraints, and in shaping institutional arrangements was explored in Chapter 1. This legacy combined with the prevailing ideology defined the goals and to some extent the policy and institutional instruments chosen for their implementation. This in turn required a far-reaching transformation of economic institutions to assure a high rate of resource mobilization and control over resource allocation. The latter issues were explored in Chapters 3 and 4.

To what extent can the combination of ends and means, objectives and instruments, used by the Chinese in the course of their economic development during the last quarter of a century be characterized as a distinct development model? What are the key elements of this model and is it transferable either as a whole or in part to other underdeveloped areas? These are the questions to be explored here based on the different strands of analysis in the earlier chapters.

It would be misleading to think of the Chinese development model as a static, frozen, unchanging system. On the contrary, as was indicated in Chapter 2, the Chinese have experimented with three or possibly four models since 1949. The original First Five-Year Plan strategy based on a more or less Stalinist development pattern was gradually modified through a process of trial and error until it evolved into the model associated with the 1970s, that is, the period since the Cultural Revolution.

The general planning framework

The primary task of an economic system is to develop institutions and means through which the tastes and preferences of decision makers can be translated into a specific mix of goods and services produced. This requires decision making mechanisms for what is to be produced and in what quantities, how it is to be produced and distributed, and to whom. However, economic systems differ in terms of who makes the decisions and how they are made. They also function within vastly differing historical contexts, cultural and political settings, and stages of economic development. All these variables will affect the character of demand for goods and services and the technical and production capacity of the economy to satisfy it.

Some of the issues relating to the environmental setting of the economic system, such as technical backwardness and political and ideological setting, were dealt with in the first two chapters. Therefore in this chapter the means by which decisions concerning resource allocation are made, who makes them, and how they are implemented will be analyzed.

Three hypothetical economic-system models were outlined in broad-brush terms in Chapter 2 (see pp. 38–40). Somewhat the same ground will be covered here, but from a more specific and operational point of view, especially as it relates to resource allocation in particular sectors. As far as China, or indeed any living socialist system, is concerned only two of these three hypothetical models are applicable: those based on physical and on price planning. In fact, as will be shown below, in China resources are allocated both through the bureaucratic command system and through the market mechanism.

Economic objectives and goals

The immediate task facing the Chinese Communists in 1949 was to restore and rehabilitate a war-disrupted, inflation-torn, fragmented economy. Given the legacy of the past with its economic backwardness and population pressure, what were the objectives of industrialization in China, and what were generally the long-run economic objectives of the new regime? This is the broad issue to be addressed first in this chapter. The instruments and appeals used to motivate workers, cadres, managers, and peasants to pursue and implement these objectives will then be considered. The relative importance assigned to these appeals and the character of the incentives mix was changed from time to time as indeed was the priority allotted to different – and at times competing – objectives. These shifts in priorities and incentives produced policy changes and differing development strategies that are analyzed in the second half of this chapter.

If we examine the post-war experience of most underdeveloped countries we find that the urge for development derives from two closely inter-related sources. On the one hand, this urge is powered by a desire to reduce international inequalities and gradually close the standard of living gap between highly developed and low-income economies. On the other hand, the development urge derives from a felt need to close the economic, military, and political power gap between the more industrialized and less developed countries. In a very real sense, we are witnessing the operation of a powerful international and all-pervasive “demonstration effect”.

The Communist leadership that came to power in 1949 has launched China on the path of modern economic growth within a socialist framework. Seen from the vantage point of 1975, the objectives postulated by the new leadership were not confined to rapid industrialization and economic growth. Rather, economic growth was combined with a commitment to improve income distribution, assure full employment free of inflation, and promote development with honor through a policy of self-reliance, that is, by minimizing or obviating China's dependence on foreign countries.

The pursuit of these objectives posed a number of dilemmas, both as to ends and means. Some of the objectives may be competitive rather than complementary at particular points in time. Decisions thus had to be made on which goals are more important and which less important, and trade-offs had to be defined. Different leaders and groups in Chinese society and polity attached differing weights and priorities to particular goals, and this then became a source of policy tensions within the top ranks of the Chinese Communist leadership. Similar differences arose as to the methods by which these goals should be pursued, particularly as to how much reliance should be placed on material rewards and incentives as compared to normative and psychic appeals. These issues are explored in some detail in Chapter 2.

The extent to which these objectives were actually attained in the past twenty or twenty-five years is assessed in the last four chapters of this book.

Given the development strategies and economic policies described in the preceding chapter, how were these implemented? What institutional devices and forms of economic organization were developed to provide state organs with the degree of central control required to translate policies into operational programs? These are the questions to be examined in this chapter. First the changing system of property relations will be described, then the forms of enterprise organization in agriculture and industry will be analyzed.

The system of property relations

The vast revolution that encompassed China was reflected in far-reaching changes in property relations, patterns of economic organization, and income distribution. In the process, the Party – through its cadres and the army – mobilized popular support to dispossess the dominant property-owning classes in the countryside and the cities through a series of major campaigns. This shift in ownership from the private sector to the state and collectivized sector was to give the government primary and virtually exclusive control over the allocation of resources, and that was one of its principal purposes in economic terms. This transfer was closely associated with a redistribution of income from the private to the public sector on the one hand and within the private household sector from the rich to the poor on the other.

Four different forms of ownership have been present in China since 1949. These four forms are: (1) state, public, or government ownership of enterprises and of the means of production or, as stated in official terminology, “ownership by the people as a whole”; (2) joint public–private ownership of the means of production; (3) private ownership; and (4) cooperative ownership.

The setting

Chapters 5 to 8 deal with the different aspects of China's economic performance shaped by the factors discussed in the earlier parts of this book. In a fundamental sense, one could view China's economic development as a dialectic process based on a continuous confrontation and interplay between scarcity rooted in the country's economic backwardness and ideology shaping the new regime's goals and objectives. Scarcity and ideology were both, to a greater or lesser extent, conditioned by the legacy of the past explored in Chapter 1. At the same time, ideology and the aspirations arising therefrom influenced the development strategies examined in Chapter 2. All these then molded the system of economic organization described in the two subsequent chapters.

Expressed in Marxist terms, this development process could be considered the product of both the base and the superstructure, that is, the mode of production and the relations of production on the one hand, and of ideas, cultural style, motivation, and revolutionary will on the other. The effectiveness of these inputs from the past, from ideology, and from the system of economic organization can thus be expressed by measuring its impact on economic stability, on growth and structural change, on international economic relations, and on income distribution.

Within this analytical framework, the degree of economic stability attained in China was appraised in the preceding chapter. Therefore, here we will examine how rapidly the economy grew and some of its most significant growth characteristics. This appraisal will be based on an analysis of aggregate and per capita GNP trends and changes in GNP composition.

The historical roots

As shown in preceding chapters, the Chinese Communist leaders dedicated themselves to transforming China into a modern socialist state. They had certain images of what the broad contours of that future state might be. These images were shaped by their ideology and world view on the one hand and by the realities of China's economic backwardness on the other. Both the ideas and the economic realities were to a large extent the legacy of the past. Therefore, one of the key problems facing the new leaders was how to build an economic system best adapted to attain their goals and objectives given the conditions inherited from the past. These were the issues addressed in Chapters 3 and 4.

Having constructed this economic system, what were its performance characteristics? How effective a vehicle did it turn out to be in pursuing and implementing the new regime's objectives? It is clear from the preceding chapters that to attain their goals, Chinese leaders pursued a high investment–growth strategy of development. Such a strategy was bound to generate inflationary pressures. Yet, as will be shown here, these pressures were contained very effectively. How this was done and what factors contributed to this outcome will be examined in this chapter.

With worldwide inflation and deep recession characterizing the mid-1970s, we are much more concerned about economic stability than we were some years ago. Policy makers and economists rather complacently assumed that they had at their disposal effective instruments for controlling inflation and unemployment in market economies.