At the Fourth Annual Conference of Government and Economics, held virtually on April 26, 2022, audience members viewed a lecture from Liu Yuanchun on the repositioning of government in extraordinary times. What follows is a transcript of his lecture that has been translated from Chinese into English and lightly edited for clarity. Liu Yuanchun is the Vice President of Renmin University of China.

The topic of my speech today is the repositioning of government in extraordinary times. This is a big topic, but in the context of such overlapping factors as the pandemic, our economic slump, and the volatile global situation, we need a more systematic way to consider the positioning of government.

Now, of course, let's look at this from the perspective of human history. Every major economic crisis has caused an adjustment in the government's philosophy, leading to systematic changes in the boundary between the government and the market. The past few centuries in the history of the market economy have adhered to this truth. Governance by noninterference, with a small government and large market—this kind of positioning? Or to adopt a kind of active intervention policy and a big government and big market or small market arrangement? The markets are actually like a pendulum, swinging from liberalism to interventionism in accordance with cyclical economic crises. When each crisis ends, economic philosophy swings again in the direction of government intervention.

But we will see that after the US financial crisis in 2008, the world fell into a state of prolonged stagnation. Our thinking about government, about the function of the market, may have changed a lot from the past. In other words, a very important theme that I am going to talk about today is that this round of shifts in government philosophy has been more profound than the last few rounds, particularly with regard to the philosophical positioning of government and its basic functions. It is worthwhile for us to explore this further theoretically.

The first important point is that after the global economic crisis and the emergence of long-term global stagnation, we did not simply swing between neoclassical liberalism and Keynesianism, but rather toward traditional neoclassicism. The macroeconomic consensus was comprehensively rejected while Keynesian interventionism also presented a large number of challenges. These challenges were clearly manifested in several ways.

One is that there were a great number of innovations to the basic objectives, tools, and directions of macroeconomic policy. This was especially true for the introduction of extraordinary stimulus policies, quantitative easing, fiscal policy deficit financing, and asset purchases. We also saw high debt in the middle of the fiscal and monetary policy mix, low interest rates, and even the emergence of negative deposit rates. Indeed, this makes us think beyond some of the conventional tools of government and economics. The most heretical of these is Modern Monetary Theory (MMT).

So at present, is it better to reconstruct neoclassical economics, a basic theory for the whole of macroeconomics? Or should we improve it within the Keynesian framework? Or should we carry out some reconstruction of macroeconomics? Indeed, the mainstream economics community has been greatly divided and conflicted over such questions. In 2008 and 2009, many people said that we were in a state of crisis, so many basic ideas and common sense of the new consensus needed to be proven still applicable once the crisis was over. But as we have seen in the period from 2012 to 2018, we did not return to convention, but remained in a state of prolonged stagnation. This has led to some distrust of traditional tools, requiring new reforms in our government and the basic philosophy of policymaking.

The second important point is that the pandemic, stagnation, and deep economic downturn brought about by the 2020 pandemic have triggered a further reawakening of the function of government. One element of this new awareness is the necessity of social management, such as quarantine, during this time. Another has been the pandemic relief packages and economic bailout that we have needed because of the pandemic. One important point that emerges here is that we are not only facing market failure, but also social failure. So these two failures lead us to a need to comprehensively restructure the government's functions. That is to say, what is the positioning of a strong government in such an extraordinary period? And what kind of principles should we follow to build this strong government?

Since the pandemic is still spreading and the virus is still mutating, the model for fighting the pandemic is still evolving. At the same time, there are many debates as to the function of government and how it can create a new system to compensate for market failures and social failures. It has sparked a need for deeper thinking on these topics, and I think, at this moment, we should diligently sort them out.

The third important point is that, as we can see, this is a big era—one in which we will face technological innovation and changes to the global landscape. These two forces actually have different effects on the function of government. For example, the major shifts in the global landscape have led to great power competition and conflict, which are leading to the reconfiguration of the concept of the democratic state. The utopian vision that we wanted to surpass the nation-state and reposition the function of government in a global perspective—this type of thinking seems to be facing a sharp challenge.

So we will see trade wars, technology wars, talent wars, and financial wars brought about by de-globalization, brought about by each country using the power of its government to bring about a new round of this arrangement, causing industrial chains to become shorter and wider. Every country will strive for a smooth internal cycle in an extreme state, leading the government to act against the market. How can we grasp this counter-market action? A related and more extreme situation is that the geopolitical rivalry between major powers tends to evolve in a drastic way, and this leads to a result of war. We have seen this in the past few years in the outbreak of the Russian-Ukrainian war—a situation beyond our imagination. One of the important aspects of this situation is how we manage the world economy in such an extreme event, how we coordinate the regional layout, and how we reconfigure the economic strategies of some of our democracies.

So in fact, all three of these factors are completely different from what we would have in a normative state. Therefore, we see that the basic logic of government and market that we discussed during the Great Moderation, that is, the high growth, low inflation boom from 1984 to 2006, is basically not applicable in the current era. That is to say, we must discuss the positioning of government in such situations as pandemics, wars, national competition, and acute conflicts. This is a question that we must consider.

Of course, at the same time, the explosion of information technology, digital technology, and intelligent technology has also brought us to think about the theoretical boundary between government and market even in normal times. We will see that the emergence of information technology, digital technology, and especially artificial intelligence have solved some of the traditional problems of information asymmetry, however, they will also lead to new problems of the same nature.

Therefore, we will see that the visible hand of the government will be able to utilize a greater range of functions to explain and solve problems of information asymmetry. Many people will make the simplest of propositions: that under conditions of complete information, the government is omnipotent. In the case of information asymmetry, the government will fail. Many people argue that in the age of information, the age of computers, the age of IT, the government's information capacity is very powerful and the establishment of digital governance is likely to expand the boundaries of government dramatically. Indeed, many people say that the future era of intelligence is likely to be an era of all-powerful government.

Of course, the above argument is a difference in epistemology. That is, even in the digital era, the artificial intelligence era, can we fundamentally solve the problem of information asymmetry? We have solved some traditional information asymmetry problems, but under these new technological conditions, can we solve the problems with hidden information and intrinsic incentives? One possible conclusion is that the impact of information technology has expanded the boundaries of the market on the one hand, but also expanded some of the boundaries of the government on the other. It is not an either/or territorial waxing and waning, as traditionally thought, but rather could very likely manifest in a layered, superimposed form.

One simple example is platform regulation—in this field, it is very important to begin with a significant amount of government regulation. In the end, however, as a subject of the market, a platform enterprise has a natural advantage in regulating its corporate behavior and industry rules, while it also has endogenous incentives to do so. This reveals a problem. When it comes to the regulation of platform enterprises, on one hand, the government should further expand its scope, but on the other hand, platform enterprises should work to self-regulate their platforms and their industry. Thus we see that in the field of regulation, the boundaries between the market, social organizations, and the government are not simply adrift, but rather are integrated where they overlap. In the context of new technologies and the corresponding functions of various new tools and implementation models, we have seen revolutionary changes in the boundaries between government and market.

Returning to this era of the pandemic, changes in the geopolitical landscape, and the polarization of great power conflicts, we must realize that our current thinking about the functions of government requires a major transformation. There needs to be a shift from some of the discourses of the 1980s, 1990s, and the beginning of the new century toward some broader and deeper areas. I think this transformation can be found in points that we need to grasp from political philosophy, economics, sociology, and political economy. Rather than the simple explanation that the visible hand of the government was introduced due to traditional market failure, we should consider that there is a trade-off of costs between the visible hand and the invisible hand, which simply delineates the boundaries of the market.

In this process, we may need to use some new perspectives. First, the government and the market enhance one another and are fused together—we should use this perspective to understand the relationship between the government and the market. Second, we need to re-draw the basic political positioning and functional philosophy of government within a larger context, in a state where there are extraordinary events and the structure of the entire era is fractured.

This is what I would like to share with you today, please correct me if there are any points I could improve. Thank you.