8. The Nature of the Public-Owned Enterprise

See the introductory part of Barzel (1989), and also the Preface by Wang (1998), for the Chinese version of A Collection of Barzel’s Papers (1989).

The Theory of Rent Dissipation by Cheung (1970) argues that if public resources do not go against being used by free competition, it will definitely cause rent dissipation. However, here the foundation for anyone to use public resources through competition is not the private right as defined by law over the assembled property, but rather the “de facto right” as discussed in later sections. Fan and Zhang (1990: 25) propose that “the labor is not the owner of public property”; Rong (1996: 18) points out that public property “has a unique internal exclusivity”, namely the exclusive right of the collective will to go against the will of the individual, who is required by the public ownership not to steal, damage, abuse, or waste public property. Their common focus is on the provision of rights of public ownership in the sense of legal power.

The property rights include the right to trade, that is, the right to enter into a market contract. The exclusivity of property rights is important, but it is mainly for trade, not just for exclusive self-use.

The idea that a firm is a series of market contracts makes the statement of “the ownership of the firm” a paradox because it takes the ownership of at least two or more resources to form a firm, so “the corporate contract”, just like “a tenancy contract”, cannot only belong to either one of the contracting parties; and the market value of the same contract is different for different parties (Zhou 1996: 76). The non-contract-based POE that announces elimination of private ownership of the means of production seems to have only one ownership because all resources are owned by the public, so there is no second ownership. However, the main purpose of this paper is to show that this is only true in the sense of legal power.

Cheung (1983: 3).

Coase (1937: 6).

Coase (1937: 5).

The role of entrepreneurship is difficult to monitor and measure even afterwards. Except such institutional arrangements as a sharecropping contract, where the entrepreneur is allowed to share the residual claims, probably nothing else could “incentivize” entrepreneurs. (Zhou 1996: 76).

The selection of qualified entrepreneurs or company managers is important, but the effectiveness of such selection is inseparable from the overall market environment. As for the theory of Zhang (1995) that the financial capital owner of the firm should have the priority to choose the manager, this priority can only be correctly interpreted when it is placed in the market environment, especially in the markets of various factors. The shareholders and BOD usually select the GM once a year, but workers, technicians, and other input owners who enter into the firm can select their managers every day, and they can even select the “company boss” who chooses managers. They can withdraw from the firm at a certain exit cost, or stay in the firm to create trouble for their boss. Whether the financial capital owner will choose managers from the “leftovers” from other inputs owners depends on whether these “bosses” meet economists’ assumption that they are always rational. In the real empirical world, there are stories and stories of “bosses” destroying their financial capital to zero with their stubbornness, capriciousness, arrogance and dictatorship. We only assume that all “bosses surviving bosses are rational” when the competitive market will eventually oust all bosses who fail the survival test. In theory, I think Cui Zhiyuan’s “stakeholders” concept (1996) is meaningful for understanding Coase’s concept of “the firm as a set of market contracts”. But I just disagree with Cui on his argument that to acknowledge that company manager is responsible to all stakeholders is to “transcend the logic of private property rights”, because the foundation for stakeholders to enter the company as a contract is that they have the property rights over their respective resources (including human capital).

However, Cheung’s interpretation of Coase’s theory of the firm is often summarized in much of the literature as “the firm is organization that replaces the products market by the factors market”. The reason for the firm to exist is to use input contracts to get the right to use the resources through the owner’s alienation, while the owner could otherwise use the resources to produce products and sell them. However, the firm, as a profit-making organization as described by Coase, cannot replace any market, including the product market. If the product market is truly completely replaced, then the resource owner can no longer choose to be an entrepreneur to make the product in the market, he has no choice but to transfer the right to use the resource to other entrepreneurs, and then how to guarantee that this enterprise (of other entrepreneurs) will have a real competitive edge?

For the evolution of economics thoughts about the role of knowledge and other forms of human capital in economic growth, see Wang (1995). The author would like to thank Wang Dingding for his comments on the draft of this article, especially for his insight that “learning” is the most important component of human capital.

Zhou (1996: 73–74).

Zhang (1996) believes that the feature that “human capital is indivisible from the person” puts human capital at a disadvantage as compared with non-human capital: first, human capital cannot be mortgaged; second, human capital owners can get benefits by “slacking off” and “abusing” non-human capital. Therefore, he believes that the correct logical inference is “capital hires labor”, and he believes that “(non-human) capital owners should be given the precedence to be entrepreneurs” (Zhang 1996: 9–10). I believe if “reputation” is regarded as an intangible part of the human asset, then the statement “human capital cannot be mortgaged” is not necessarily true, because it would be rather too difficult to interpret modern companies if we throw away the market mechanism to price the reputation and only rely on the mortgageable financial capital. As for the tendency of “slacking off” and “abusing”, it seems to me that the problem cannot be solved by giving the non-human capital the priority to be the entrepreneur, for the same reason as Barzel (1977) points out the slave owner with the absolute priority cannot solve the problem of “slacking off” and “abusing” by slaves. The effective way to solve the problem is the market contract with incentives, rather than establishing the precedence of “capital” over “labor.”

Many economists advocating the POE reform propose that the introduction of the “profit” into the POE system can help the POE to increase productivity. In 1962, the famous “Liberman’s proposal” of the Soviet Union advocated highly simplifying the state plan for business indicators, and using the “profit” (uniformly approved sectoral profit level) as the main indicator for assessing enterprises. In the 1960s, Sun Yefang of China also made a similar proposal (see Wu 1994: 122–129). However, “profit” is the product of enterprise contract in the market transactions. When the POE system abolishes the market transaction, the so-called “profit” that is “uniformly approved” and directed by the central planning is not the “profit” in its original sense. In contrast, Gu Zhun’s proposal is not so compromised. He believes that “the mandatory plan and mandatory pricing system must be abolished to liberalize prices” in order to guide enterprises towards making profits” (see Wu 1994: 127).

This is the fundamental reason why the decisions on the growth targets, speed, priority sectors, and even key projects under the planned economy are often full of political struggle.

See Wang Dingding’s systematic interpretation of Hayek’s thought (1995, 1999).

In theory, the value of pensions and other funds appropriated from POEs can achieve value addition through investment into productive assets such that the individuals no longer need to worry about themselves in case of loss of productivity. However, the pooled funds are like another type of public passage. There must be incentives to ensure that these funds are well managed. Otherwise, they could as well be drained and depleted due to mismanagement. Empirically, if POEs cannot fulfill their welfare commitments, it will cause serious social unrest, and it may lead to the so-called “59-year-old phenomenon” (The phenomenon refers to graft and corruption of officials bordering retirement—Translator’s note).