Chapter 5: The macro-control system on the consumption market – Consumption and Management

5

The macro-control system on the consumption market

Early economic theory emphasized that market regulation and control is performed by an ‘invisible hand’. The ‘invisible hand’ was proposed by Adam Smith (1723–1790), the 18th century English economist, in his book The Theory of Moral Sentiments. Initially the phrase meant that individuals consider only their own interests in their economic lives and are driven by an ‘invisible hand’: only through labor division and market effect can the purpose of national prosperity be achieved. Later on, it was interpreted as meaning that the government should not interfere with national economic development, which should depend on social demand. This kind of social demand is considered an ‘invisible hand’ for regulating the market.

The successors of Adam Smith conducted precise analysis to uncover the perfect competitive market mechanism in the form of equilibrium theory. Under the condition of perfect competition, the production scale is small and all the enterprises are managed by business owners. Independent producers do not influence the product market price, and consumers use currency as ballots to decide the quantity and quality of products. Producers aspire to maximize profit, and consumers aspire to maximize utilities. Price freely reflects the changes in supply and demand, and its function is to allocate scarce resources on one hand and distribute commodity and labor services on the other. Through the ‘invisible hand’, entrepreneurs earn profit, workers obtain wages that are decided by competitive labor force supply, and landowners acquire rent fees. Supply automatically creates demand and savings and maintains equilibrium with investment. Through free competition, the whole economic system reaches general equilibrium. In dealing with international economic relation, free and unrestrained principles are followed. Government does not regulate foreign trade. The ‘invisible hand’ reflects the economic reality of free competition at the primary stage of capitalism.

Under normal conditions, the market will maintain healthy operations with its internal mechanisms, wherein the main foundation is the rationality principle of economic man and rational selection under the control of the rationality principle of economic man in market economic activities. These selections gradually form the price mechanism, supply mechanism, and competition mechanism of the market economy. These mechanisms are just like an ‘invisible hand’, which governs how individuals practice market law.

Market mechanisms operate on the basis of the rationality principle of economic man. In the economic mechanism of the market economy, consumers make purchase decisions based on the principle of maximization of utility and producers make marketing decisions on the principle of maximization of profit. Between demand and supply, the market guides resources to allocate resources effectively according to the natural fluctuation of prices. The market is just like an ‘invisible hand’, which drives producers and consumers to make their respective decisions under the mutual interaction of the price mechanism, supply and demand mechanism, and the competitive mechanism.

Is what Smith said true?

The ‘invisible hand’ emphasizes the free regulation of economic development, but in the first worldwide economic crisis, it’s just this ‘invisible hand’ that leads the capitalist private economy into a capitalist monopoly and ultimately a destructive world economic crisis. In 2007, a sub-credit crisis broke out in America, which also resulted from the negative effects of the ‘invisible hand’. This phenomenon proves the severe historical limitations of Adam Smith’s theory.

The theoretical study of all the economists from Adam Smith to Marx, Keynes, and Samuelson unanimously start from production research and their research chain is production – distribution – exchange – consumption; the research shows that production decides everything. However, this kind of theory inevitably leads the economy into recession when used to guide economic development. Therefore, the construction of a macro-control system must be reinforced; so it is with the management of the consumption market.

Section 1 Macro consumption and regulation and management of living consumption-centered macro market under state-led economy

The formula chain adopted in the general theory on consumption in the study of political economics is consumption – scientific research – production – distribution – exchange – consumption; the research on gross social consumption starts from the origin of human living consumption and involves study on a series of contradictory relations and laws of overall scientific research, production, distribution of gross social wealth, and consumption during the commodity exchange, as well as the ultimate realization of the consumption process. The conclusion is that human living consumption is the origin and power source of any economic system. The state-led economy centers on living consumption, which is the responsibility of state superstructure.

The relationship between scientific research and production consumption of living consumption and social consumption

Scientific research and production consumption of living consumption are among the most important consumptions, and their core, because food, clothing, housing, and travel are the most basic human consumptions. During the development process of the demand of living consumption, selfcontradiction is also generated: the natural contradiction of demand exceeding supply and supply exceeding demand; during the development process, the contradiction between the development of social consumption (including public living consumption and the consumption of the superstructure itself) and development of living consumption also emerges. The reason is that the improvement of the level of human living consumption depends on the development of productivity of a consuming society and the development of productivity of the consuming society will give priority to the development of secondary industry, which consumes production; this is the basis of development of productivity of a consuming society. In this way, the production consumption of living consumption and social consumption can gain rapid development and human beings’ ever-increasing demand on living consumption and social consumption can be satisfied; that is the contradiction existing in the development process. The state will also implement living consumption-centered macro control under a stateled economy for the financial market and economic law so as to give play to the advantages of the financial market and natural (free) economic laws and avoid the destruction of their negative effects.

In order to achieve a strategy centering on living consumption, import and export trade will also be vigorously promoted so different countries can exchange the needed products and supplement one another’s preference and demand so as to jointly develop the level of living consumption. Meanwhile, social consumption must be vigorously developed to ensure people live and work in peace and contentment and continuously satisfy their ever-increasing material, spiritual, and cultural consumption demands. It is required that the superstructure will coordinate and solve the contradictions among three important consumptions, develop productivity in a consumption society, and promote overall financial and economic development and progress in social civilization.

Establish centers for collecting market information

Market information collection and research centers must be established for the three important consumptions of the state to provide valuable and accurate information for decision-making at the state level.

Information content (comprehensive domestic and international information) includes:

• living consumption and its classification information, scientific research, and production investment information of living consumption as well as the proportional relation between the two

• the proportional relation between high-grade enjoyment living consumption and scientific research and production consumption, and its development predication

• the status quo of the development of the new scientific research technology and potential information

• information of fundamental scientific research combined with production

• technological property rights during the technological protection period, invalidity time, and market status quo information

• the proportional relations between the scientific research and production consumption investment in basic industries of a society, scientific research, and production consumption investment in social consumption and scientific research, and production consumption investment in living consumption

• the status quo of overall proportional relation between direct living consumption and household income proportion between basic social construction investment and people’s living consumption and investment in social consumption

• the proportion between investment in social infrastructure and investment in research and production of basic raw materials, as well as its influence on living consumption

• the proportion of imports and exports that account for the investment and production of three important domestic consumptions

• international market classified competition status, including:

 market demand status of developed countries

 demand status of developing countries

 potential market expectation

 strategy to enter international market

• the allocation and competition status of resource consumption market

• the development status and development potential of the high-tech level

• proportional demand and supply relation market predication of living consumption and scientific research and production consumption

• proportional demand and supply relation market predication of social consumption and scientific research and production consumption

• a prediction of the equilibrium between the improvement of people’s living consumption level and scientific research and production consumption capacity

• a prediction of the influence of an improvement of people’s living consumption level on social consumption

• a prediction of the influence on living consumption of the state’s excessive investment in scientific research and production consumption and basic construction and production consumption as the basis of social consumption.

Grasp, guide, control and adjust production consumption investment at the macro level

Means of macro control and management include:

• taxation policy control

• financial control of production consumption and investment

• administrative control of production consumption and investment

• control of means of resource allocation

• market management and control

• legal management and control, such as antimonopoly laws.

The macro control of the market that centers on social consumption under the state-led economy can also serve the purpose of promoting rapid development of the economy; however, this inevitably leads to the occurrence of political, financial, and economic crisis, and even war, which can endanger the safety of other countries and people in other countries as well as the interests of the nation and its people. For example, the recessions in pre-World War I Germany, Japan and the Czarist Russia Empire and pre-World War II Germany and Japan were all caused by economic regulation and control, which was centered on social consumption under a state-led economy.

If a government can focus on living consumption, the rapid economic development can continuously improve people’s material, spiritual, cultural, and civilization consumption level and cannot endanger the safety of the country and other countries, or the interests of the people.

Section 2 Purpose, means, and factors of national macro control of market financial and economic law

The three important consumptions affect the economic development in a circular and spiral way and create the law of market finance and economy regulated by nature, which is referred to as a free market regulation economic law. It has gigantic force, and promotes human cultural development and continuous progress. But it has some embedded contradiction, generating negative effects. Who is going to influence regulation and control? It is the state. The state intervenes by using its power in the law of natural market regulation, referred to as the ‘law of national intervention in the economy’, resulting in the ‘law of macro control of the market economy’.

The national superstructure represents the economic foundation, the productivity of a consumption society and the production relations, and also the fundamental interests of all citizens in a nation. Therefore the government must adjust and control the development of the market economy in accordance with economic law.

So what is the purpose of state regulation? The author holds that there are six main purposes:

• price stability

• full employment

• developing productivity of a consumption society to enhance economic growth

• the balance of international payments

• constant improvement of people’s living consumption level (material and spiritual)

• constant improvement of the comprehensive national strength.

The national economic macro control, from a historical point of view, generally falls into three types of situations:

• Classical economic control. The classical economics and the new-classical economics are of the view that market itself is the best way to regulate economic activities. Through this ‘invisible hand’ the ‘Pareto optimality’ of resource allocation can be achieved.

• Keynesian regulation. In the 1930s, after the second world financial crisis, Keynesian economics stressed government means and government behaviors as an important means to regulate economic activities, and government intervention became a major policy of the mainstream economics. From the beginning of the US government’s intervention in the economy, the economic developed Western capitalistic countries began to follow suit.

• The variation of the market conditions and economic activities. This occurred in the 1970s, under the influence of a series of economic events, especially the failure to control. The United States first introduced a series of measures such as deregulation. Before reform and opening up in China – when implementing the planned economy – macro control was realized mainly by means of executive orders. Though some success had been achieved, the negative effect was overwhelming.

After years of constructing a socialist market economy in China, the macro-control system improved daily, and the macro-control system with the Chinese characteristics has taken form, and mainly applies economic and legal measures as means of macro control, supplemented by necessary administrative means. In the early 1990s the successful realization of a ‘soft landing’ for China’s national economy, and in 1997 China’s success in overcoming the difficulties and challenges of the Asian financial crisis, helped China acquire precious experience, and also helped its macro-control system gradually mature.

The author believes that this macro-control system mainly consists of six purposes, three means and 20 factors (which will be explained below). The three means are economic, legal, and means. The economic means are the economic policies formulated by the government. The legal means are the economic regulations established by the government. And the administrative means are the economic orders issued by the government.

With the economic means the government carries out macro control of the national economy by way of regulating the economic lever of consciously depending on and applying the law of value. The economic lever is the form and tool of value, which controls the social economic activities, including price, tax, credit, and wages at the macro level. As the economic means, the financial policies mainly include such tools as budgeting, taxation, bonding, and payment transfer to adjust economic structure and social distribution. Financial policy mainly means that the central bank and supervision departments reinforce supervision of the financial industry via implementing currency policy and comprehensively such means as interest rates, exchange rates, discount rates, reserves against deposit, and public market businesses to regulate the currency supply, stabilize the currency value, and promote economic growth. The overall objective and requirement of the macro control planned and promulgated by the state are the basis for constituting fiscal policy and currency policy. State planning is an important means for macro control, which is comprehensive, predicative, and strategic.

The legal means are the use of legal forces, through economic legislation and justice and the application of economic law, whereby the government regulates the economic relations and economic activities to achieve the goal of macro control. In a sophisticated market economy system, generally speaking, basic national policies are fixed by law at first; then the medium and long-term development plans and specific policies are promulgated on the basis of law. The means of macro control are mutually coordinated to achieve the macro-control task and goal, wherein, the legal means act as the basic mode of macro control and other control means are carriers. Legal means adopt legal measures to fix and standardize the economic means and administrative means to ensure the legality of various means of macro control.

Legal means of macro control have safeguard functions and guidance functions, which are non-substitutable by other control means. The specific embodiments are as follows:

• First, the legality of the forms adopted by macro control is assured by adopting legal forms to convert macro-economic decisions into realistic economic orders and putting the macro control into the legal track so as to provide legal guarantee for realizing macro control and standardizing the national macro-control behaviors.

• Second, the economic efficiency of macro controls is guaranteed because the legal means adopted by macro control aim at the market economy and it will abide by the requirements of the law of value on the market economy to obtain internal rationality.

• Third, the compulsoriness, stableness and directness of macro control are guaranteed. Law has compulsory effectiveness; any company or individual will abide by the law or be punished. In addition, there are many regulatory stipulations, which are fixed in the form of law, and the relatively more stable and formal legal acts will not be changed frequently.

During the process of developing a market economy, legal means will play more and more important roles in macro control, and macro control has become the main means of government in performing economic management functions, and the law which has the property of macro control has become the core of the economic law system.

One of the important characteristics of the development of a world economy lays in the strategic nature of economic development, which should be further reinforced, and contemporary countries place very important emphasis on macro control in the regulation of the national economic activities. Just as some economists analyze, the macro control of Western countries has changed from the previous ‘making up market deficiencies’ to ‘building the future of the country’, which greatly improves the status of laws and legal means for macro control. In China, government investment and management system is gradually giving place to a macro-control legal system. The law of macro control is becoming the core of the economic law in China. Related macro-control legal means are also becoming the core means during the implementation of economic law in China.

In China, along with the establishment of a socialist market economic system and further deepening of the economic system reform, the mode of direct state intervention in the micro market with forcible means is gradually converted into the mode that the state adopts economic and legal means to regulate the aggregate relation of macro-economic activities. At present, China has stipulated a Budget Law, an Individual Income Tax Law, a Law on the Management of Tax Revenue Collection, a Land Management Law, a Government Procurement Act, a Banking Act, a Commercial Banking Law, an Audit Law, a Price Law, a Foreign Trade Law, a Security Act, a Statistics Act, and so on. The promulgation of these laws and regulations provides legal guarantees for the national macro control and promotes the effective allocation of resources.

Administrative measures make use of compulsory orders, directions, regulations, and other administrative measures to adjust economic activities through administrative organs to achieve the goal of macro adjustment. The administrative measure has authoritative, vertical, free, and fast characteristics.

The main elements of macro control performed by the state are discussed below.

Fiscal policy

Fiscal policy has four elements: tax policy, the profits of state-owned enterprises, other revenues, and government expenditure policies. The state influences the level of the national output primarily by controlling tax revenue and expenditures, but the methods for doing each is different.

In China, a proactive fiscal policy has been implemented for many years, and the effects are excellent. Relevant departments have clearly claimed that proactive fiscal policy will gradually fade out in the next few years. The author thinks there is still long-term room for development in China and other developing countries. The problem right now is that national saving is mainly centralized in banks, which are the main channel to transfer savings into investment. However, in recent years because of a high rate of non-performing loans, in order to guard against financial risks, they cannot greatly expand loans. Therefore, the pace of investment and financing system reform should be accelerated, the methods and tools for transferring savings to investment should be expanded, and the proportion of direct financing should also be expanded in order to solve China’s problem of a slow increase in social investment.

Monetary and financial policy

This policy plays an equally important role in macro-economic policy, belonging to the basic means of government regulation. The implementation of monetary and financial policy is mainly achieved indirectly by the central bank’s control of monetary supply. In China, the official capital bank and main securities and financial companies have made great adjustments. The financial companies should be dominated by the official capital in any country; otherwise, it would be irresponsible for the whole national.

Revenue policy

Income policy is primarily the policy used to control the increase in wages and prices, including consultative and mandatory implementation. Revenue policy is the most controversial of all the measures. Some economists are critical of this policy, holding that revenue policy cannot settle substantial problems, but can undermine the automatic regulation mechanisms of the market, and even distort economic relations and do harm to the efficiency of the market. The scholars who cling to this policy believe that even though there are flaws in revenue policy, it can be used to satisfy temporary, momentary needs without paying a heavy price. Here, we should clarify a basic point that the people’s living consumption is the core of the three important consumptions; living consumption power is decided by comprehensive income and consumption consciousness. To improve the capability of living consumption thus bring about consumption is the source power of economic development.

Foreign trade policy

The foreign policies applied by the countries that insist on the implementation of trade protectionism are mainly tariff barriers, exchange rates, foreign exchange controls, and foreign trade controls; however, those that adhere to freedom of trade, to a varying degree, apply these policies too, but mainly by the government’s proper to intervene in the foreign trade market, and even joint intervention. The purpose is to maintain the balance between import and export trade and the stability of the foreign exchange market as well as the balance of payments.

In addition to the factors discussed above, there are some other indispensable factors:

• to control and allocate land territory, marine territory, and airspace resources

• to decide the direction of capital flow

• to use labor resources reasonably and formulate allocation policy

• to use national resources reasonably

• to collect corporate profit tax reasonably

• to develop productivity of consumption society vigorously

• to guarantee the monetary supply

• to establish sound law and regulations for managing economic activities

• to reallocate social wealth reasonably

• to establish a reasonable security system for all kinds of funds

• to vigorously develop education and scientific research

• to greatly improve the people’s consumption power

• to formulate social welfare and security policy in a reasonable way

• to develop import and export trade vigorously

• to formulate a reasonable employment policy

• to formulate reasonable population and fertility policies.

Only by applying these factors accurately can the productivity of a consumption society be better developed, human living consumption and social consumption be guaranteed, and people’s increasing needs of consumption for material and spiritual culture be satisfied. The three important consumptions affect economy dynamically to develop in a circular and spinal way; the 20 factors of the state-led macro-control market economy rules are also dynamic. They highlight balance – the regulations and laws highlighting balance are going forward in the course of movement. This kind of law is not at people’s will. Only through good use of these 20 factors and conformity to these kinds of regulations and laws can economic development be controlled.