Academy Fellow

Professor Xiaokai Yang passed away at 49 (= 7 by 7) minutes past 7 am on 7 July 2004.

Born in China in 1948, Xiaokai Yang was imprisoned soon after the commencement of the notorious Cultural Revolution in 1966. In 1968, while still a late teenager, he wrote an influential article critical of the government 'Whither China?' which earned him fame as well as ten years in jail. After gaining his freedom in 1978, he quickly attained qualifications equivalent to a master's degree despite the absence of formal training. He also published in China many papers and two books (on economic cybernetics and mathematical economics) over the period 1981-5.

In 1983, at the age of 35, with the recognition and help of the wellknown Professor Gregory Chow in the USA, Xiaokai went to do his PhD in economics at Princeton University. Declining the easy option of completing the degree in two years doing some topic in econometrics, Xiaokai embarked on his ambitious project of rebuilding the core of economic analysis, using modern mathematical analytical tools to formalise the classical economic thinking on the role of division of labour in promoting economies of specialisation, productivity, economic growth, and the evolution of economic organisation. After completing his dissertation in 1987 (degree obtained in 1988), he spent one year at Yale University doing postdoctoral studies. He then joined Monash University in 1988 as a lecturer upon my recommendation. He was quickly promoted to a senior lectureship (1989) and readership (1993). Also in 1993, upon the nomination by Professor Alan Powell and me, Xiaokai Yang became a Fellow of the Academy of Social Sciences in Australia. In 2000, he was appointed to a personal chair at Monash.

At Monash, apart from publishing important papers in leading journals including American Economic Review and Journal of Political Economy, Xiaokai collaborated with me in rewriting his PhD thesis as a monograph. This was published in 1993 as Specialisation and Economic Organisation in the 'Contributions to Economic Analysis' Series by North-Holland. Though co-authored with me, the major contribution is certainly Yang's.

When I introduced Xiaokai to people, I quite often mentioned his ten years in jail. More than once, he asked me not to mention this. I disagreed with him. In fact, I admired his courage in writing 'Whither China?' as much as I admired his scholarly achievements. Perhaps this is related to the fact that when I was in high school in Penang, I was also heavily involved in clandestine student movement led by the Communist Party of Malaya. Though my political belief changed by at least 90 degrees later, I am still proud of my willingness to undertake something endangering personal safety for the good of the society, though based on misguided beliefs.

Yang's willingness to sacrifice for the good of others was also manifested by his publication of numerous articles in Hong Kong, Taiwan, and Mainland China on his rather radical views (now radically right-wing, in contrast to the radically left-wing inclination of 'Whither China?') on economic and political reforms in China. Among his many proposals are the privatisation of land ownership, free enterprise (replacing the permission system by the registration system for establishing firms), and democratisation. One may disagree with his views but no one can question his originality and his far (and early) sightedness. Many of his earlier proposals have later been adopted by the Chinese government. His later proposals have also received widespread attention and will certainly be influential for a long time to come. Honestly, while I agree with and admire many of his arguments, I also found some of his views, such as the effective denial of the existence of important external effects like pollution that makes the market not perfectly efficient, far too right-wing to be credible. Yang had views often radically different to others. For example, while most people emphasise democracy and science, he emphasised freedom and republicanism. Personally, I do not quite know what republicanism means apart from the absence of a king or queen. After I read his writings, I told myself, 'Oh! This is what republicanism means!' However, afterwards, I soon forgot what republicanism meant. When I saw him, I quite often had to ask him to enlighten me all over again.

For another example, most people emphasise the advantages of being a late developing country but Yang emphasised the disadvantages. Most people are optimistic about the continuing economic growth of China, but Yang was concerned that the lack of deeper reform of the political system would make long-term growth impossible. Yang was very familiar with the English history establishing the constitutional democratic system, including the struggle for power between the parliament and the king, the Magna Carta, the great revolution, the rule of Oliver Cromwell, the restoration, and the honourable revolution. He was also familiar with various arguments on why the industrial revolution took place in England and not in other countries and the insights within these arguments for the development and reforms of China. Up until days before his death when he was no longer able to write himself, he asked a former student to scribe an article, 'The relationship between economic development and political monopoly and the 16 th Congress' on the Web, expressing his concern that these insights held implications for China – particularly relating to the importance of institutions, the limitation of imperial power, protection of private property, and free enterprise.

The most important contribution of Yang, at least from an academic point of view, is his formalisation of classical economic thinking in newly formulated ways, and the extended analysis then possible. After the neoclassical marginalism revolution, economists focus mainly on the problems of resource allocation, largely ignoring the classical insight on the importance of division of labour. This is partly due to the fact that specialisation involves all-or-nothing choice not easily treated by marginal analysis. One chooses to be a full-time engineer or psychologist rather than choosing how many hours studying engineering and how many hours studying psychology. Yang developed a simple framework capable of analysing such choice of different 'corner' solutions and the network of such division of labour for the whole economy through trade, employment, emergence of firms, urbanisation, industrialisation, etc. Since an individual must consume many goods, specialisation requires trade which involves transaction costs. Thus, the central trade-off is between the economies of specialisation and the additional transaction costs. The lowering of transaction costs through technical advance and/or institutional improvements thus contributes to productivity through the economies of specialisation facilitated by the division of labour. The new framework can be used to analyse many economics problems. As the reviewer Smythe in the Journal of Economic Literature (1994) described the 1993 book: 'This is an ambitious book. Although its authors claim their objective is merely to increase the variety of microeconomic frameworks, it ranges across topics in trade and growth, urban economics, comparative systems, industrial organisation, and even macroeconomics. It argues for a complete reorientation of microeconomics away from problems of resource allocation toward problems of economic organisation. … This is an interesting and original book. Its motivation is sound, and its fundamental insights are compelling. … a refreshing new approach to microeconomics, one that has the potential to address many issues that have long resisted formal treatments'.

Professor James Buchanan found the new framework of Yang so important that he obtained a National Science Foundation grant to run a workshop on 'Economics Beyond the Neoclassical Limits' on 2-9 June 2002. Yang was invited to give lectures on the new framework to graduate students and economists in the USA. Similar workshops were subsequently organised at Fudan University in Shanghai in July 2002, Monash University in February 2003 and Hunan University in October 2003. Further workshops have been scheduled for 2004-05 at Renmin University, Beijing and at Academia Sinica in Taiwan. Also, referring to Yang's work, both at a seminar in March 2003 at Monash University and the lunch before, Buchanan explicitly said that in his view 'the most important research in economics in the world' was at Monash.

Even after having been diagnosed with late lung cancer in September 2001 and given a life expectancy of 3-6 months, Yang worked hard in establishing the Centre for Increasing Returns and Economic Organisation at Monash University, a new journal Division of Labour and Transaction Costs, a book series 'Increasing Returns and Inframarginal Economics', and the Society for Inframarginal Economics. His former students and co-authors as well as many other researchers will certainly continue to develop his new framework of analysis.

Xiaokai Yang is survived by his wife Xiaojuan (Jean) Wu, daughter Xiaoxi, and sons James and Edward.

Yew-Kwang Ng