[Sohu.com]Liu Yuanchun: Return to the Most Basic Starting Point of Academic Thinking to Conduct Cutting-edge Research

On April 28, 2018, the 2nd “China Credit Tech & Inclusive Finance Forum” 2018 was held in Beijing. The forum was jointly organized by the National Academy of Development and Strategy (NADS), Renmin University of China (RUC), the financial technology research center of the National Institution for Finance & Development (NIFD), China Fintech 50 Forum (CFT50) and China Chengxin Credit, and received academic support from the International Monetary Institute (IMI) of RUC. The theme of the forum was “Boosting the Development and Safety of Inclusive Finance with Technology.” Liu Yuanchun, Vice President of RUC, attended the event and delivered a speech.

In his speech, Liu Yuanchun pointed out that the three key words in the current era are sci-tech innovation, financialization and inclusive development. These three key words have brought about a series of complex economic and social phenomena, and posed many challenges to the practical and theoretical circles. The most important of these is the change of the perception of traditional economics and finance towards resource allocation. The traditional assumption of diminishing returns to scale has been greatly surmounted. Once the increase in scale returns becomes a common phenomenon, the market structure will undergo a fundamental change. The perfect competition model will evolve into monopolistic competition, oligopoly, and even complete monopoly. The new application of modern science and technology in the economic and financial fields has generated cost models, pricing models and resource allocation models that are fundamentally different from classical concepts. With this change, whether or not we should seek new theoretical basis for inclusive finance is an issue we should focus on. Liu hoped the experts and scholars attending the forum could think with the most basic theory and logic besides discussing policy issues and practical issues. This relates to our practice and development confidence.

The following is a transcript of Liu Yuanchun’s speech:

Distinguished Chairman Li Yang and dear guests, I feel very pleased to welcome all of you here on behalf of NADS, RUC. Mr. Li Yang has already made a series of elaboration on the three most important words in our era. We will see several very important core points in the development of the 21st century: the first is our sci-tech innovation, the second is the so-called financialization, and the third is the inclusive development that we are talking about. The combination of these three key words has formed a series of very complex economic and social phenomena, and has also brought about a vigorous economic movement. In this economic movement, how to re-learn some of the resource allocation laws and understand some of the risk pricing models has caused a series of challenges to our practical and theoretical circles. In these years, we have seen a series of new developments in “technology + finance,” such as Internet finance, technology finance, and a series of new concepts; but at the same time, a series of new issues have also evolved. Among these new issues, a most important one we saw is the new risks brought about by our new transaction patterns. The series of bubbles caused by the new risks have forced everyone to re-learn the essence of modern finance. That’s why the most important theme of the supply-side structural reform our government started to call upon in the year before last was that finance must return to entities. This is a very important proposition. The core behind this proposition is what finance is really about. Of course, an important issue that is being considered by colleges and universities is to what extent our current science and technology, especially modern science and technology with information technology as the main part, have changed the perception of our traditional economics and finance towards resource allocation. This is the most important issue. If we can’t explain some crazy phenomena with the simplest theory, then we have reason to ask questions about a series of new phenomena we are currently facing, their explanations, and a series of possible problems.

So, in the field of economics, we will see several very important reflections. The first one is the research conducted by a group of professors such as Varian on the revolutionary change in the entire structure of economics brought about by information. This change is that the traditional assumption that we have talked about, especially the assumed concept of diminishing returns to scale in the production function, has been greatly surmounted. As the boundary of declining economies of scale has been greatly expanded, we are faced with increasing returns to scale in many aspects. Once the increase in scale returns has become a common phenomenon, we will see a fundamental change in the market structure. This is an evolution from the perfect competition model in the original classical practice into monopolistic competition and even oligopoly and perfect monopoly. This will lead to a problem, that is, we will have a new understanding of the competition model of modern globalization and global financialization. Therefore, we will clearly see that since the 1990s, the open strategy, competitive strategy and financial strategy adopted by the United States have failed in terms of their strategic intention for a very important reason, that is, global competition has become different from the market competition model formed during the first and the second industrial revolutions. This is the reason why the formation of the Chinese model we see has a fundamental basis. Therefore, we will see that under the conditions of a socialist market economy, we have used some of our corner overtaking methods to create conditions for this type of increasing scale returns to flourish in all fields. Therefore, we have achieved results in many fields through our platform economy, large-scale establishment and production, and large-scale innovation. Of course, this also includes the financial sector. So, we will see that the phenomenon of corner overtaking in some financial fields has already appeared, although the problems are also endless.

What exactly is the basis of these problems? If we refer to the results of the research made by the group of American scholars, some of the traditional borders have changed in our entire economic phenomena. The change of border is that technology has resulted in a significant expansion of the border of increasing returns to scale, causing oligopolistic competition and new types of trade strategy-based competition to have a solid foundation. Therefore, we sometimes need to re-learn the foundation of the Chinese model. Of course, a corresponding element to this is the financial field. Do our Internet finance and inclusive finance have a solid theoretical and strategic foundation in the new era? Do they still have to follow some of the traditional classical logic? Or, should we reconstruct some of our strategies under the new pricing principle and based on the new cost formation model? Of course, we can also assess what the national strategic foundation is. In particular, the trade conflict between China and the United States Mr. Li spoke just now is actually a conflict between the two strategic patterns. From the conflict between the two strategic competition patterns, where can we see the presence of the most basic economic theory and financial theory? Our current feeling is that it is reflected in the cost model, pricing model and resource allocation model produced by the new application of modern science and technology in the economic and financial fields because these models are fundamentally different from the classical concepts. The cost models, pricing models, and resource allocation models that are produced have some fundamental differences from our classical concepts. This has led to a series of new phenomena and new competition. So, I would love to invite the most top-notch experts in the industry today to discuss our inclusive finance and the mutual integration between technology and finance as well as its possibilities. As these discussions take place at the platform of our colleges and universities, I hope our experts may, besides conducting cutting-edge practical and policy discussions, return to some most basic premises ideologically and reconsider some of our strategies according to some most basic concepts. It is our most important challenge and also the most important step for our practice and development confidence to understand the theory clearly and grasp the most basic logic. So, I think we should continue to have this forum. Given what Mr. Li mentioned earlier that NIFD will provide long-term funding for this research, I think RUC and NADS and our National Institute for Development and Strategy should also cooperate with our partner think tanks and agencies to study modern cutting-edge issues and return to the most basic starting point of academic thinking. Thank you all.