A new framework for understanding the wealth of nations is introduced.
In a new study, Harvard trained economist Wang Yi-Jiang argues that “to understand the conditions for the Smithian market to exist, one must first understand how the relative capacity for violence in a society shapes various economic institutions.” The fact is that market economies are rare and can only exist when there is a market-promoting government, which such a government can be created only when the relative capacity for violence in the society is delicately balanced. The study hopes to deepen our understanding of the market and explain why, despite the high social benefit of the market, so few countries have created a fair and effective government and established a market economy.
Wang is Professor of Human Resources Management and Economics at Cheung Kong Graduate School of Business. His paper, titled “The Wealth of Nations, A Further Inquiry into Its Nature and Causes,” provides a new framework for understanding the wealth of nations. His research is the first to use the involved parties’ relative capacity for violence as a unifying variable to explain how the wealth of nations is determined through mechanisms such as the Hobbesian war or the Coasian bargain, how the Smithian market emerges, and how a market-preserving government is created and preserved.
Since publishing on SSRN (Social Science Research Network, an international online platform that serves as a database for early scholarly research) on July 17, 2019, the paper has become the most downloaded paper on conflict studies and international relations and was recommended by SSRN in its Weekend Reads.
The paper highlights a number of key conclusions, including:
Wang believes that, by focusing on the supply-and-demand and the price mechanism, economists might have missed a mechanism that is more fundamental and more powerful: Violence. Different than other people who have previously studied the role of violence, Wang’s breakthrough is to explain how violence works through the intervening variable of the involved parties’ relative capacity for violence, which he uses FR to note. The resulting political and economic institutions would be very different if FR is tilted in favor of one social group against another and when it is balanced. In between these extreme cases there could be all kinds of possibilities giving birth to an institutionally diverse world.
Another point Wang emphasizes is that the value of FR is not fixed. It can be shifted by forces such as technology, income distribution, and demography, etc. It is important to understand that, as the value of FR changes, institutions following it changes too. What societies can do is to either manage FR to preserve the existing political and economic institutions, or be prepared for these changes.
Wang Yijiang is Professor of Economics and Human Resource Management at CKGSB, and is also Associate Dean for Academic Affairs. Before joining CKGSB, Professor Wang taught at the University of Minnesota and other places. He is also a research fellow at the William Davidson Institute of Transition Economics at the University of Michigan and a senior fellow at the National Center of Economic Research, Tsinghua University. He served as vice president of Chinese Economists Society of North America and Editor of Chinese Economic Review, a mainstream English economics journal with a focus on China.
This paper was uploaded onto SSRN on July 17, 2019. On July 29, it moved to the