Metabolic Growth Theory:

Rises and Falls of Civilizations in Learning Competition

Ping Chen
Center for New Political Economy, Fudan University, Shanghai, China
Email: pchen@ccer.pku.edu.cn
Drafted on June 14, 2012

Abstract
Both exogenous and endogenous growth theories in neoclassical
economics ignore the resource constraints and complex patterns in world
history. The logistic model of growth and species competition model in
population dynamics provide an evolutionary framework of economic growth
driven by technology wavelets. Culture diversity can be characterized by
different attitude in facing risk and uncertainty. The theory of learning by
doing is a static view of knowledge accumulation. Our model of learning by
trying and learning by imitating provides a biological perspective of
knowledge metabolism and creative destruction. The rise of East Asia and
China offers a new development strategy based on helping hand and mixed
economy.

Key words: growth theory, logistic wavelet, learning competition, knowledge

metabolism.
JEL: C30, E37, D83, L50, O00

1. Introduction
The rise of East Asia and China after WWII and the decline of the West
since 1970s is a historical trend, which is hard to explain within the
neoclassical framework of growth theory. Both exogenous and endogenous
growth theories in neoclassical economics ignore the resource constraints and
complex patterns in world history. The logistic model of growth and species
competition model in population dynamics provide an evolutionary
framework of economic growth driven by technology wavelets. Culture
diversity can be characterized by different attitude in facing risk and

uncertainty. The theory of learning by doing is a static view of knowledge

accumulation. Our model of learning by trying and learning by imitating
provides a biological perspective of knowledge metabolism and creative
destruction. The rise of East Asia and China offers a new development
strategy based on helping hand and mixed economy.
This article is organized as the following. Section 2 provides some basic
facts on uneven growth in the world economy that reveals the limitation of
neoclassical economics, including the exogenous growth theory (Solow 1957)
and the endogenous growth theory (Romer 1987). Section 3 and 4 develops
the logistic growth model and two species competition model respectively
(Chen 1987). The resulted Logistic wavelet provides a new base mode for
metabolic growth. Section 5 introduces culture factor in learning competition.
Its application on complex patterns of civilization competition describes
learning uncertainty and strategic choice between risk-taking and riskaversion (Chen 2005). Section 6 discusses the cause and consequences of the
rise of East Asia and China and their impact to mainstream economic thinking
(Chen 2008, 2010). Section 7 gives the conclusion in terms of evolutionary
perspective in growth theory.

2. Uneven Economic Growth and Limits of Neoclassical Growth Theories

The Solow model of exogenous growth predicted a convergence trend in
economic growth based on the assumption of constant returns to scale (1957)
while the Romer model of endogenous growth claimed a divergence trend
based on increasing returns to scale in knowledge accumulation (Romer 1987,
Arrow 1962). However, observed pattern in world economy is more complex
than equilibrium models in neoclassical economics (see Table 1 and Table 2).
We can see that the US had highest growth rate in 1913-1950, Japan in 19501970, and China in 1970-2010.
It is known that the rise of the West was driven by resource expansion
under colonialism (Pomeranz 2000). In terms of per capita arable land, East
Asia including Japan and China has less resource comparing to the Western
countries (Table 3). Adam Smith theorem states that division of labor is
limited by the market extent (Smith 1776), which also depends on resource

limit (Stigler 1950). How can we understand these facts in terms of economic
growth theory? We will address this issue in the next section.

Table 1. Historical Statistics (1913-2001)

Annual average compound rate of GDP growth
-------------------------------------------------------------------------------------WEuro

EEuro Asia

US

Japan fUSSR China

1913-50

1.19

0.86

0.82

2.84

2.21

2.15

-0.02

1950-73

4.79

4.86

5.17

3.93

9.29

4.84

5.02

1973-2001

2.21

1.01

5.41

2.94

2.71

-0.42

6.72

-------------------------------------------------------------------------------------Source: Maddison (2007) at http://www.ggdc.net/Maddison/

Asia data excluded Japan

Table 2. Uneven Growth in Globalization

(Annual average growth rate of Real GDP per decade)
--------------------------------------------------------------------------------

Period

1970s 1980s 1990s 2000s

-------------------------------------------------------------------------------

China

6.2

9.3

10.4

10.5

Japan

3.8

4.6

1.2

0.7

US

3.2

3.2

3.4

1.6

Germany

2.9

2.3

1.9

0.9

----------------------------------------------------------------------

East Asia

4.4

5.5

3.3

4.0

L. America

6.1

1.5

3.2

3.1

E. Europe

4.4

2.3

-2.0

4.3

W. Europe

3.1

2.3

2.1

1.1

Australia & New Zealand

2.8

2.9

3.6

3.0

World

3.8

3.1

2.8

2.5

-----------------------------------------------------------------------------(Source: UN Statistics)

Table 3. Cross Country Comparison in 1993 (Madison1998)

--------------------------------------------------------------------------------------------Region Arable Land (%) Population (millions) Arable land per capita (ha)
-------------------------------------------------------------------------------------------China
10
1178
0.08
Europe
28
507
0.26
US
19
239
0.73
fUSSR
10
203
0.79
Japan
12
125
0.04
India
52
899
0.19
Brazil
6
159
0.31
Australia
6
18
2.62
Canada
5
28
1.58
----------------------------------------------------------------------------------------

3. Logistic Model of Limited Growth with Resource Constraints

Malthus realized the resource constraints in population growth which
inspired Darwins theory of natural selection. The simplest model of limited
growth is the logistic model as the following:

dn
k n( N * n)
dt

(1)

Here n is population or output, N * is the resource limit or carrying

capacity, k is population or output growth rate.

The market extent N * is a function of existing technology, population

size, resource limitation, and cost structure.
The logistic curve has a varying economy of scale. The model has a
dynamic increasing return for f '' 0 when 0 n 0.5N * and dynamic
diminishing return for f '' 0 when n 0.5N * . For a model of asymmetric
growth, the reflection point may not be the middle point. In contrast, the
production function in neo-classical microeconomics has fixed returns to scale.
Therefore, the neo-classical theory of firm is not capable of describing
economies of scale and market-share competition.

The logistic model is also called Verhulst equation in theoretical ecology.

Its discrete-time version is the simplest nonlinear model that may generate
deterministic chaos (May 1973). Its solution is a S-curve. The graphic patterns
of unlimited (exponential) growth and limited (logistic) growth are shown in
Fig.1.

M a lt h u s vs . V e rh e ls t G ro w t h
30

25
E x pog
L o g is

X(t )

20

15

10

0
0

10

15

20

Fig.1. Unlimited (exponential) vs. limited (logistic) growth.

The logistic curve can be observed from sector industrial data, such as the
output ratio to GDP in the US automobile industry in Fig.2.
R a t io o f To t a l A u t o S a le t o G D P
5

ra t io (% )

Fig.3.109Output
Ratio to GDP
for the
US Automobile
Industry.1 9 6 0
00
1910
1920
1930
1940
1950

1970

Fig.2. The output ratio to GDP in the US automobile industry. Data

Source: Carter (1997).

4. Competition Model and Metabolic Growth

Schumpeters concept of creative destruction in technology advancement
can be described by species competition model in population dynamics. Its
simplest version is two-species competition model or the Lotka-Volterra
model (Pianka 1983).

d n1
k1 n1 ( N1 n1 n2 ) R1n1
dt

(2a)

d n2
k 2 n2 ( N 2 n2 n1 ) R2 n2
dt

(2b)

Where n1 , n2 are population (or output) of species (technology or

product) 1 and species 2; N1 and N 2 their carrying capacity (or
resource limit); k1 and k2 their growth (or learning) rate; R1 and
R2 their removal (or exit) rate; is the overlapping (or

competition) coefficient in resource competition ( 0

1 ).

The equations can be simplified by introducing effective carrying capacities

Ci N i

Ri
.
ki

When = 0, there is no competition between the two species. (2a) and

(2b) turn into logistic equation. One modification is introducing the learning
rate and removal rate for modeling learning process.
Technology metabolism may have two consequences: old technology
replaced by new technology under condition (3a) or old and new technology
co-exists under condition (3b).

(N2

R2
R
) C 2 C1 ( N1 1 )
k2
k1

(3a)

C2 1

C1

Here 0 1

(3b)

When two technologies co-exist, their equilibrium output is smaller than

their carrying capacity (4a, 4b, 4c). The cost of creative destruction can be
measured by unrealized (excess) capacity.

n1*

C1 C 2
C1
1 2

(4a)

n2*

C 2 C1
C2
1 2

(4b)

(C C ) 2
1
(C1 C 2 ) n1* n2* 1
(C1 C 2 )
2
1

(4c)

A numerical solution of Eq.(3) is shown in Fig.3 (Nicolis and Prigogine

1977). Without competition, the growth path of species 1 would be an S-curve.
However, the realized output of technology 1 looks like an asymmetric bell
curve. We call it the logistic wavelet, which is a result from the competition of
new technology. The envelope of the aggregate output has both growth trends
and cycles that mimic the pattern of a macroeconomic index.
Logistic Competition
2.5

population

1.5

0.5

0
0

100

200

300

400

500

time

Fig.3. Metabolic growth characterized by technology

competition in Eq.(3). The old technology (blue dashed

line) declines when new technology (green dot and dash

line) emerges. The uneven growth cycle can be described
by the output envelope (red solid line), which is the sum
of their output of competing technologies. Here, = 0.4,

C2 / C1 2 . The units here are arbitrary.

We may characterize technology advancement or industrial revolution as

emergence of a new technology with a higher resource ceiling or a larger
market extent.
Several implications can be drawn from complex dynamics in Fig.3.
First, wavelet model is a better mathematical representation for technology
advancement than noisy shock in neoclassical economics, since technology
development is an uneven trajectory with accumulation of knowledge, not a
random shock without clear direction. The time scale of logistic wavelet
varies from a product cycle of several months to a Kondratieff long wave of
several decades, depending on the questions asked in history.
Second, both business cycles and growth cycles observed from macro and
financial data can be decomposed into a series of technology wavelets (Chen
1996a, 1996b), which resemble the rise and fall of technologies, industries,
powers, or even civilizations.
Third, mathematical representation reveals the nature of underlying
dynamics. Random pulse and harmonic cycles are linear mathematical
representation, while wavelet is nonlinear and non-orthogonal mathematical
representation. Any living system is characterized by finite time and space.
Therefore, wavelet representation is a proper tool to describe business cycles
as a rhythmic organism, which is the core idea of Marshall (1920) and
Schumpeter (1939).
Fourth, wavelet model provides a theoretical framework for government
role. Government action is essential both at the starting stage (R&D sponsored
by public when technology is below take-off threshold) and declining stage
(public assistance in re-education and transition when old technology replaced
by new technology) of the logistic wavelet. In contrast, equilibrium growth
theory is characterized by unlimited smooth growth driven by small random

shocks, which obscures the dark side of creative destruction such as

persistent unemployment, excess capacities, financial crisis, and recurrent
wars.

5. Risk Attitude and Culture Diversity in Learning Strategy

One striking feature in neoclassical economics is no room for culture
diversity and strategic choice. The concept of risk aversion is a static feature
without dynamic uncertainty. For example, the financial risk is characterized
by the variance around the mean of returns; there is no asymmetry between up
and down deviated from the mean.
In our competition model, we introduce another kind of risk attitude: the
risk facing an unknown market or technology uncertainty. Both Frank Knight
and Keynes emphasized the role of uncertainty, which is different from risk in
the sense of static statistics. Schumpeter's concept of entrepreneurial spirit is
critical in facing evolutionary uncertainty rather than static risk. Competing
corporate cultures are characterized by their risk attitude in facing a challenge
or opportunity.

5.1 Learning by Imitating and Learning by Trying: Risk-Aversion and RiskTaking Culture
The culture factor plays an important role in decision-making and
corporate strategy. However, the debate on human nature is pretty subjective,
since there is no operational definition about the selfish or altruistic behavior.
We do know that there is a great variety in the degree of "individualism" or
risk-taking among different cultures. Both risk-aversion and risk-taking
strategies can be observed when competing for an emerging market or new
technology (Fig. 8). Clearly, learning by doing is an accumulation process in
existing technology (Arrow 1962). In a new market, knowledge comes from
learning by trying, which is a trial and error process in evolutionary
perspective (Chen 1987). The alternative strategy is learning by imitating or
following the crowd. The risk-taking and risk-aversion attitude in facing a
new market or technology can be visualized in Fig. 4.

(a). Risk-aversion behavior.

(b). Risk-taking behavior.

Fig 4. Risk-aversion and risk-taking behavior in competition for

market share and technology advancement.

From Fig. 4, we can see that different culture has different rational behind
their risk attitude. When facing an unknown market or unproved technology,
risk-taking investors often takes the lead and venture to maximize the
opportunity, while

risk-averting investors prefer to wait and follow to

minimize the risk, a critical question is: Which corporate culture or market
strategy can win or survive in a rapidly changing technology or evolving
market? To answer this question, we need to integrate the culture factor into
competition equation (2).
The original logistic equation describes a risk-neutral behavior by
assuming a constant removal rate. We introduce the behavioral parameter a
by given the nonlinear removal rate as a function of the learner's population
ratio (Chen 1987):

R( r, a,

n
n
) r(1 a ) Where 1 a 1 .
N
N

10

(5)

We may consider the constant r as a measure of the learning ability or

degree of difficulty in studying a new technology.
The factor a is a measure of risk orientation. If a 0 , it is a measure of
risk-aversion or collectivism. When few people enter the new market, the exit
rate is large. When more and more people accept the new technology, the exit
rate declines. If a 0 , it is a measure of risk-taking or individualism. When
varying a from minus one to plus one, we have a full spectrum of varying
behavior, from an extreme conservatism to an extreme adventurism

5.2 Resource-Saving and Resource-Consuming Culture

The equilibrium rate of resource utilization is:

n*

r
)
Nk
ra
(1
)
Nk
(1

(6)

na*0 na*0 na*0

(7)

From Eqn. (7), the resource utilization rate of the conservative species
*
*
( na0
) is higher than that of the individualist species ( na0
). The individualist

species needs a larger subsistence space than a conservative one in order to

maintain the same equilibrium size n * . Therefore, individualism is a
resource-consuming culture while collectivism is a resource-saving culture
(Chen 1990). This difference is visible between Western individualism and
Oriental tradition. Cultural differences are rooted in economic structures and
ecological constraints. Resource expansion is a key to understanding the
origin of a capitalist economy and the industrial revolution (Pomeranz 2000).

5.3 Market extent, resource variety, and economy of scale and scope
In an ecological system with L species, resource capacities are
N1 , N2 ,..., N L . The economy of scope and scale can be described by a system

of coupling logistic-type equations. Here, the market extent is represented by

11

the resource capacity N i , while the scope of economies is described by the

number of species L . The division of labor can be characterized by the
coexistence of competing technologies.
Let's start from the simplest case with only two species with competing
technologies and cultures (Chen 1987):

d n1
an
k1n1 ( N1 n1 n2 ) r1n1 (1 1 1 )
dt
N1

(8a)

d n2
a n
k 2 n2 ( N 2 n2 n1 ) r2 n2 (1 2 2 )
dt
N2

(8b)

Here n1 , n2 is the new technology adopters in species one and species two
respectively. We also take 1 for simplicity.

We may solve Eqn (8) in the similar way in solving Eqn. (2). The
replacement condition and the co-existence condition are (9a) and (9b)
respectively:

(1
C2

a 2 r2
)
k2 N 2

C1

for species 2 replace species 1.

r2
k2
ar

(1 2 2 )
ar
r

k2 N 2
(1 1 1 ) N 1 1
k1 N 1
k1

(9a)

N2

(9b)

5.4. Competition Scenario between individualism and collectivism

Based on Eqn. (9a) and (9b), we found out rich dynamic patterns that can
be observed from historical competition.
What would happen when an individualist species competes with a
conservative one? If two species have equal resources ( N1 N 2 ), then, the
conservative species will replace the individualist one. If we compare (9a)
with (3a), a latecomer from a conservative culture has a better chance to beat
the individualistic leader even if C2 C1 when 1 and 0 a2 1 . This is

12

the story of how Japan and China caught up with the West in 1970s and 2010s
respectively. Conservative culture can concentrate its resources in a "catchingup" game. The industrial policy plays a critical role in the rise of East Asia and
China. The success or failure of an industrial policy depends on the
government ability to concentrate strategic resource to emerging technology, a
typical feature of learning by imitating or catching-up game.
Therefore, the only survival strategy for an individualist species in
competing with a conservative one is to explore a larger resource or learn
faster. If we consider entrepreneurship as a risk-taking culture, then we may
reach a similar conclusion to Schumpeter's - creative destruction is vital for
capitalism in the competition between socialism (collectivism) and capitalism
(individualism). Once innovations fail to discover new and larger resources,
the individualist species will lose the game to the conservative in the existing
markets. This picture of changing economic powers is radically different from
the permanent divide between early-movers and late-comers in endogenous
growth theory. In another words, the future of the West depends on their
continuing ability to innovate. Once the West slows down in innovation, the
East will catch up soon.

6. Lessons from Rise of East Asia and China

There are many discussions on the lessons from rise of East Asia and
Japan. The World Bank report on East Asia Miracle raised the issue of the
active role of government, especially the role of industrial policy (World Bank
1993, Stiglitz 1996). However, after Asia financial crisis and Japans lost
decade of 1990s, mainstream economists rarely mention Japan miracle again.
Rise of China in past three decades raises more serious challenge to Westcentered economic thinking. Few western observers predicted the possibility
of Chinas rise during economic transition, since China has more
disadvantages in global competition than other developing countries. For
example, Chinas population is two times of all developed countries combine.
Chinas arable land, material resources, and human capital are much less than
the US, Europe, and Russia. China is a large continental country. Its average
distance to sea is much larger than Japan and Asia tigers. Near 90% of its
territory is mountain area so that Chinas infrastructure is more difficult than
13

developed countries. China has no colonial history and western-type legal

system. Historically, China did not import western system like Japan or East
Europe in modernization process. How to understand the cause and
consequences of the rise of East Asia and China is a serious challenge to
economic thinking.
Conventional factor analysis attributes high growth in East Asia and
China to high saving rate, which leads to high investment rate. The question is
why saving rate in East Asia is much higher than the US and Europe?
Sociologists and anthropologists pointed out culture difference between
western consumerism and eastern nation-building spirits. We prefer to
elaborate economic analysis in depth.
The beauty of mathematical simplicity and the danger in policy
implication can be seen from the mathematical formulation in neoclassical
growth theory. The Solow model of exogenous growth describes
technological progress as the error term in econometric analysis. This
formulation implies a random shock in RBC model of business cycles (Solow
1957, Kydland and Prescott 1982). Theoretically, both macro and finance
theory in neoclassical economics treat technology progress as random shocks
in a diffusion process, where is no room for competition and uncertainty. The
endogenous growth theory led by Romer (1987) and Lucas (1988) was an
optimization model based on a representative agent. The Cobb-Douglas
production function has fixed returns to scale, which rules out varying return
to scale during different development stages and the rise and fall of great
powers (Rostow 1960, 1990, Chen 1987). Its linear dynamic nature also
excludes nonlinear ecological constraint that is crucial in global warming.
There are several implications in neoclassical growth theory that are
behind the so-called Washington consensus (Williamson 1990, Chen 2006).
First, the optimization model in macro growth theory has a strong
implication

of

laissez-faire

policy,

which

was

an

extension

of

microfoundations framework in new classical business cycle theory. However,

confusing growth features with development mechanism has a dangerous
message that developing and transition economies can be guided by market
forces alone without active government action (Lucas 1988). Under the
knowledge accumulation and diffusion process, the development mechanism
14

is a one-way street of information flow from rich to poor countries without

uncertainty and conflicts. Therefore, the best development policy is
liberalization and privatization so that foreign capital and western institutions
could freely move into poor regions. This is a main argument behind shock
therapy and the Washington consensus (Sachs 2005, Williamson 1990).
Second, the concept of knowledge capital is dubious because of its stock
nature in accumulation without living nature of birth of new knowledge and
the death of obsolete knowledge, which is the root of recurrent unemployment
and growth cycles. The top-down design approach sounds similar to a
commanding approach in market oriented transition. The severe decline of
East Europe and former Soviet Union during transition in 1990s and the
tremendous costs in current financial crisis originated in the US in 2008 are
natural experiments, which reveal the danger of equilibrium thinking in
economic policy (Chen 2006, 2009). The rise of East Asia and China provide
historical lessons for new thinking in economics. We will emphasize the
following aspects based on our theory of metabolic growth.
First, ecological constraint is central for market share competition. The
western mode of division of labor based on labor-saving and resourceconsuming technology is not sustainable in the long-run.
Second, culture diversity is rooted in pluralistic strategy to adapt to a
changing environment and available resource. The diffusion process of
scientific knowledge is universal under globalization. But application of
scientific knowledge for problem-solving is an adaptive process based on trial
and error. Therefore, government could play a varying role during different
stages of technology wavelets.
Third, rise and fall of technologies and powers is a permanent feature in
modern economy. Interruptive change and conflicts between old and new
technology and associated interest group is inevitable. In this regards,
visionary leaders and bold entrepreneurs play a strong role in growth and
development.
We will address these issues in light of historical experiences in East Asia
and China.

6.1. Asian Experience: The Helping Hand and the Active Role of
15

Government
We consider the region of East Asia and China as a general East
civilization, which is contrast with West civilization including the northern
America, Europe, and western offshore in Oceania. They have several features
in common.
First, the East civilization has much higher population density and lower
resource/population ratio than the West civilization. This is the historical roots
of the East mode of division of labor based on resource-saving and laborintensive technology and the West mode of labor-saving and resourceintensive technology. The West mode was succeeded in the second wave of
industrial revolution while the East mode may succeed in the third wave of
knowledge revolution (Toffler 1980).
Second, East Asia countries have strong tradition of active governments
emerging from war and hydraulic engineering (Wittfogel 1957, Fukuyama
2011). This is a historical base for effective industrial policy and nationbuilding process.
Third, Confucius culture in education and governance has strong influence
in East Asia countries. This tradition accelerated the learning and imitating
process in East Asia and China, in comparison with Latin America and Africa
countries.
In addition to World Bank recommendation on active role of governments,
we have a longer list of what governments can do in modernization process.
Both World Bank (1993) and Washington consensus (1990) agreed on the
following government agenda:
Macro stabilization,
Education and infrastructure investment
Social safety net
World Bank (1993) specifically emphasized the role of industrial policy
(Stiglitz 1996), such as METI (Ministry of Economy, Trade, and Industry) in
Japan. Governments could take measures to encourage saving, export,
technology transfer, cheep credit, and attracting FDI, etc.
One controversial issue is the government support to large familycontrolled business conglomerates in Japan and South Korea, such as Japans
keiretsu and South Koreas chaebol. These large firms emerged as strong
16

global competitors in world market as well as big domestic players in political

affairs.
We will add one more factor to East Asian experience: land reform in East
Asian countries after WWII greatly improved the efficiency of agriculture
sector, which also provided better education for majority population. Latin
America and Southern Asia countries have tremendous burden in
modernization when large portion of land is concentrated in few landlords.

6.2. China Lesson: The Mixed Economy and Decentralized Experiment

China did benefit from East Asian experience of development. Three
development strategies are learn from East Asia: Export-led industrial
development was learn from Japan; Chinas SEZ (Special Economic Zone)
was learn from Industrial Parks in Asian Tigers, selling land user right was
learn from Hong Kong.
However, China did much better than East Asian countries in the three
aspects:
First, Chinas open-door policy and reform addenda are completely
determined by internal decision-making, which is independent from
international pressure and organizations, such as IMF and World Bank. That is
why China government could deal with Asian financial crisis and 2008
financial crisis much better than other countries in the world, including Japan,
Korea, US, and EU countries.
Second, Chinas high growth already lasted three decades in a large
country with one fifth world population. There are 150 million rural workers
moved to coastal cities without generating large conflicts and war. These
figures are much larger than the successful western story of colonial
expansion, slave trade, and two world wars along with West-centered
globalization.
How can we explain these facts in terms of metabolic growth theory and
evolutionary dynamics? How could China simultaneously achieve both
prosperity and stability?
My simple answers focus on two lessons: the mixed economy and the
coordination role of visionary governments.
First, Chinas mixed economy is more balanced than the West typed
17

welfare economy and more stable and competitive than privatization process
in East Europe and former Soviet Union. For example:
Chinas dual-track price reform with regulated price for existing
production and flexible market price with newly increased production created
learning space for SOE (State Own Enterprises ) and growing space for
private enterprises, which ensured both social stability and market creativity.
Chinas market is more open and competitive than developed and East
Asia economies. There are more than hundred companies compete in
automobile, home appliances, computer, and cell phone industries with
various types of ownership, including private, state, collective, multi-national
companies, not like big three auto companies dominating in the US auto
industry. Their roles are complementary in domestic and global market: Multinational corporations take the lead in technology and management, small and
medium private firms provide large share in employment and export, TVE
(township and village enterprises) bridge the gap between rural and urban
industry, state companies provide strong basis for strategic industry and anticyclic adjustment policy.
The collectively own land provides low-cost social insurance for peasants.
Public land ownership creates an additional source of public financing
that is crucial for infrastructure investment. Therefore, Chinas rapid growth is
mainly financed by domestic saving, not by foreign debts.
Chinas huge transfer of technology and human capital from defense
industry to civilian industry also paved the very foundation for technology
advancement and global competiveness.
Second, Chinas economic reform was led by government innovation in
organization restructuring and economic policy.
Chinas reform was not started by top-down design like shock therapy,
but decentralized experiments such as family contract system, which was
discovered by local officials and its success was imitating by other regions.
Regional competitions not only greatly encourage local innovations, but also
effectively diversify transition uncertainty.
Chinas reform of state sector was started by breaking-up state
monopolies, which was much better than privatization monopoly without
breaking them up in Russia.
18

About 50 million state workers were laid off without social instability or
large financial burden, since governments supported several channels for
workers re-education and transition.
China prevented government capture by interest groups by official
rotating system, i.e. officials are periodically rotate between rich and poor
regions, or between central ministry and local governments; so that their
experiences would bridge the conflicts created by division of labor and
coordinate regional efforts in a world of uneven development.
China created new rule of official selection, i.e. competition by deeds
rather than competition by words. All levels of government officials are
subject to open competition, including recruit talents from abroad.
Chinas experiments in economic reform and political governance may
create a new way to answer current problems prevailed in the western society,
such as excess individual freedom leads to excess consumption and
environment crisis; parliament democracy is dominated by interest groups that
effectively block any reform efforts in facing financial crisis and industrial
revolution; and legal framework designed by the past winners for protecting
status-quo but discouraging new innovations.
Certainly, evolutionary process is full with uncertainty and surprises. Our
observation and discussion only serves a catalytic function, not a final
judgment.

6.3. Impact and Consequences of Rise of East Asia and China

We may speculate on future impact and consequences created by the rise
of East Asia and China.
First, development course would change from western type backwardlooking consumption including big auto, big housing, welfare entitlement and
military spending to eastern type forward-looking investment in infrastructure,
technology, education and health.
Second, rule of game in globalization would be changed from invisible
hand to helping (regulated) hand. Competition policy is more important than
protecting property right. Anti-trust policy is the key to prevent the American
disease or the next financial crisis (Chen 2009).
Third, world balance is changing: West-centered globalization has
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evolved into a multi-centered globalization, including at least big three

regional markets (North America, EU, East Asia and Pacific).
Fourth, economic thinking is changing, methodological individualism, i.e.
Newtonian paradigm, would gradually yield to methodological collectivism,
i.e. Darwinian paradigm; economic theory will shift from static framework to
evolutionary framework.
This international conference is witnessing this great transition.

7. Conclusion
Neo-classical economics laid down the starting base in mathematical
modelling and econometric analysis. However, the founders of neoclassical
economics choose wrong models for economic theory. The optimization
approach is modelling on Hamiltonian mechanics in conservative systems.
Diffusion process alone is not capable of explaining origin of division of
labour and growing complexity. Economic systems are dissipative open
systems in nature (Nicolis and Prigogine 1977, Chen 2010). Therefore,
nonlinear population dynamics and chemical reaction model is better for
evolutionary dynamics, which is demonstrate in this article. Optimization
model is a self-centre model without explicit competitor. Population dynamics
provides a better base function of logistic wavelet to describe technology
advancement.
Equilibrium paradigm is dominated in neoclassical economics, which
created a utopian of a laissez-fair market. Lessons from the Great Depression
and the current Grand Recession told us that governments are integrated part
of the mixed economy. Technological progress is a destructive creation that is
associated with both innovation and instability. A new science of complexity
will devote more effort for studying nonlinear dynamics and non-equilibrium
mechanisms, which are new tools for better understanding economic
development and social evolution.

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