Editor’s note:

At the 10^th meeting of the Central Finance and Economics Commission, common prosperity was included in the second century goal. Speaking at the Forum on Inclusive Growth in the New Development Stage, Weng Xi, the professor at Guanghua School of Management, Peking University, said achieving common prosperity requires a deep understanding of its sustainability, ambiguity, and complexity, and that it needs to be implemented into concrete and enforceable policies. He also introduced the purpose and future plans of the Peking University Guanghua Common Prosperity Lab, which hopes to promote the realization of common prosperity through good policy design, and to achieve both goals of improving efficiency and common prosperity.

Hello, I am Weng Xi from Guanghua School of Management of Peking University, and I would like to introduce to you the program of Peking University Guanghua Common Prosperity Action Lab.

The sustainabilty, ambiguity and complexity of common prosperity

At the Fifth Plenary Session of the 19th CPC Central Committee, visions for 2035 was set clearly, they called for a better life for the people and more obvious and substantial progress in the all-round development of people and common prosperity for all people.

At the 10^th meeting of the Central Finance and Economics Commission held on August 17 last year, common prosperity was included in the second century goal.

Achieving common prosperity requires a profound understanding of its nature, which ambiguous, complexed and requires long term effort.

Why is it so? You can see the following chart 1, which shows a development trend of the income share of the top 1% of income in some countries, including the United States, the United Kingdom, South Africa, Argentina, India and China, from 1920 to about 2015.

chart 1

For example, we can see that there is no definite trend in the share of the top 1% of income earners, but rather a fluctuating trend. And from 1920 to 1980, the income share of the top 1% of the population showed a significant downward trend.

However, in the last 40 years, this proportion has been increasing, and income inequality has become an increasingly prominent problem.

We can look at the following chart 2 and make a comparison with the previous chart, some other countries, including Germany, Italy, France, Sweden, Japan and other countries in the last four decades, the income distribution is relatively more equal. In fact, we know that the economic growth in some of these countries has been relatively stagnant during these forty years.

chart 2

Because of this, there will continue to be very heated debates among economists and various sectors of society about which growth model should be chosen over the past forty years and for a long time to come. Some economists believe that the world faces a serious challenge of inequality; but others emphasize economic growth because once it comes to how to promote common prosperity and reduce inequality, all kinds of extreme claims emerge.

Why is there such a debate? It involves a core theory in economics called creative destruction, which means that economic and technological progress itself is a binary force, both creative and destructive. For example, with the emergence of e-commerce, brick-and-mortar business will be destroyed, and this binary force leads to a part of the creative group to become a monopoly, and another part of the destroyed group to experience a decline in income.

As you can see, this dilemma may become even more problematic in the technological context of our time. One phenomenon that many economists have noticed recently is that the dramatic rise of monopoly power in the market has become a major feature of the global economy in recent years, with a significant impact on the pattern of income distribution.

When the productivity of both workers and entrepreneurs is unobservable, governments also have to design incentive-compatible labor income tax and corporate income tax policies respectively, but the difference with the traditional income tax system is that the optimal design at this point needs to consider the interaction between the two types of taxes, which will lead to a major trade-off between equity and efficiency.

For example, when monopoly power rises, the corporate income tax should be lowered to encourage entrepreneurs to increase output in order to reduce the efficiency loss caused by monopoly, but the rise in monopoly power leads to an income distribution pattern more favorable to the entrepreneurial group, which increases the corporate income tax from an equity perspective. So this leads to a dilemma in policy choice.

Common prosperity needs to be implemented into concrete and enforceable policies

Of course, we do not think this is an insurmountable problem. We can see below that the Peking University Guanghua School of Management launched the Common Prosperity Action Lab because we firmly believe that a good policy design can definitely improve people's inequality in all aspects of the economy and society without reducing the average living standard of society.

So our lab hopes to promote the realization of common prosperity through good policy design, and to achieve both goals of improving efficiency and common prosperity through the academic thinking embedded in the policy and the practice of the policy in reality. Of course, this also brings many challenges to economic theory. For example, when discussing policy design in economics, we need to set what the design goal of the policy is first, which is what we often call the social welfare function.

The usual social welfare function is a weighted average of the welfare of all people in society, but in the case of inequality the focus of concern is how to allow lower income groups to better share the fruits of economic growth, rather than concern about the income gap between higher income groups.

There is also the question of what kind of equality should be pursued. The existing literature emphasizes income equality, but some people think it should be equality of opportunity, that is, based on the fact that children from poor families who do not have access to good educational resources should be able to have equal opportunities and participate as well as children from rich families. All these need constructive thinking and progressive solutions.

Last year, the central government proposed the idea of the third distribution regarding common prosperity. The first distribution is market distribution, the second distribution is regulating income through government taxation and fiscal policies, and the third distribution encourages an atmosphere of care and concern for social things in the whole society, and promotes the general prosperity of society through individuals. The third distribution emphasizes moral forces beyond the market mechanism, which is not much discussed in the existing economics literature.

We firmly believe that by systematically revealing the behavioral decision-making mechanisms behind moral forces, it is entirely possible to explore a completely new solution to the inequality problem that will contribute to both reducing inequality and enhancing efficiency.

To conclude, an ambitious social vision needs to be translated into concrete and implementable policies. One of the advances in economics in recent years has been the gradual contraction of grand groups to project-based implementation, and the Lab hopes to do a little exploring in this area as well.

Purpose and future plans of the Peking University Guanghua Common Prosperity Lab

Whether a policy or a measure can be done well at the micro level needs to be found through continuous trial and experimentation before a better solution can be proposed. The establishment of Common Prosperity Lab is to seek how to better promote the fairness of income distribution and achieve common prosperity through theoretical thinking and practice of economics.

Therefore, our lab will explore action plans to promote common prosperity under the guidance of scientific theories and with rigorous econometric methods. With the joint support of Peking University and Guanghua School of Management, the lab will become an open research platform that combines resources from within Peking University and from all walks of life, which is co-created and built by multiple parties.

Regarding the next step of the Lab, the Lab's research will focus on the following areas, and creatively propose intervention policies for problems within these areas, implement experiments, evaluate and promote these areas.

First, digital technology, artificial intelligence and health issues of low-income people. Health is an important part of human capital. There are nearly 300 million people suffering from chronic diseases in China, with a larger proportion of patients in the low-income group, and this group does not have enough resources and ability to solve the disease problems, so that these problems will also be passed on to their children, forming a burden for them. Therefore, the lab hopes to solve this problem by combining motivational information and basic medical knowledge in some simple but effective ways. For example, through the means of artificial intelligence to monitor and supervise the condition of these chronic disease patients and urge them to take their medication better and on time, thus improving the health status of this low-income group and reducing their family burden, which can bring great socio-economic benefits.

Second, financial education. Many people in our low-income group not only have less financial wealth, but also have a lower ability to allocate their financial wealth. Innovative ideas need to be proposed, experimented and promoted for effective interventions to be designed through digital-age products, such as tablet computers and elderly cell phones, to guide, train and promote this group to use financial literacy to improve their living standards.

Third, consumer behavior. In today's age of information explosion, it is sometimes impossible to make wise judgments and make reasonable purchases with one's limited resources. Sellers sometimes want to exploit consumer psychological biases to make profits, while researchers want to make good use of people's behavioral and psychological biases to improve consumers' purchasing behavior. For example, if low-income parents knew that if their children ate more iron salts, they would be less likely to suffer from anemia, and their future growth and development would be improved, which would lead to greater socioeconomic benefits. We will need to explore through rigorous experimentation before finding out how these can be achieved in reality.

Another possible solution to cultivate people’s energy saving habits is to inform them of information about the energy saving of their neighbors, colleagues, and good friends, all of which need to be explored in the future.

Fourth, cultural values and behavioral patterns. The lab also hopes to conduct a series of experiments to explore in the area of cultural values and behavioral patterns. For example, we can explore certain ways to cultivate students' perseverance and other good qualities, which may be more meaningful for them to improve their grades. Cultivating comprehensive qualities, and developing long-term competitiveness rather than spending money to send children to various training institutions.

Another example is that some savings subsidies and guidance can be provided to the mobile population so that they can better overcome their self-control problems, cultivate self-control, and form good saving habits to improve their living standards.

Fifth, skills training and human capital development. The laboratory is also very concerned about skills training and human capital development. How to make the skills training of enterprises beneficial to their own productivity and profits, while at the same time enabling their own weakly endowed labor force to harvest more and newer skills, this also needs to be further explored in the future.

All of these aspects of the program are still being refined, and some of the ideas already have some successful studies and cases in the economics community. Through the exploration of the Common Prosperity Action Lab, we hope to fully collaborate with all sectors of government, business, and social organizations in these areas, and use the strengths and creative thinking of students to achieve, evaluate, and policy effects. In addition, promoting successful experiences on a larger scale and focusing on distribution so that people with different family backgrounds, regions, and gender characteristics can benefit from these constructive projects is a task that Guanghua has given ourselves in this new era and in front of the grand topic of common prosperity.

This concludes my report. Thank you!

About the speaker：

Weng Xi received his PhD degree in economics from University of Pennsylvania in 2011. Prior to that, he received his bachelor and master's degrees from Peking University, in 2004 and 2006, respectively. He is currently a tenured professor at Guanghua School of Management, Peking University. His research focused on microeconomic theory, in particular, game theory, information economics and organizational economics. His research has been published in top journals such asJournal of Finance,Management Science,Economic Journal,Journal of Economic Theory, International Economic Review, and American Economic Journal: Microeconomics.