I then recalled a two-page paper written by AnthonyBottomley，published in 1963.19 The author argued that pastures in Tripolitania were highly suitable for lucrativealmond growing，and yet because of common ownership
【18】Coase，“The Nature of the Firm,” op.cit.Cheung，“Trans-action Costs，Risk Aversion，and the Choice of ContractualArrangements,” Journal of Lawand Economics（April 1969）,pp.23-42.
【19】Bottomley，“The Effects of Common Ownership of LandUpon Resource Allocation in Tripolitania,” Land Economics（February 1963）.
the land was used for cattle herding.20 I have alwaysbeen doubtful that there have ever existed valuableresources subjected to unrestrained common exploita-tion，but assuming this to be true，dissipation of land rentis implied.What then，would be the transaction/institu-tion costs incurred in the use of the land for commonherding in Tripolitania？The answer is the land rents dis-sipated! In my 1974 article on price control，I argued thedissipation of rent is a transaction cost.21 In theTripolitania example the same conclusion is more diffi-cult to draw，but on two counts the land rents dissipatedwould indeed be transaction/institution costs.First，rentdissipation does not exist in a one-man economy; sec-ond，cost is the highest-valued option forgone——in thiscase the land rents of almond tree cultivation forgone.By definition，the transaction/institution costs of convert-ing pastures to almond cultivation，must，in total，not beless than the rent dissipated，for otherwise the conversionwould have occurred.The implication followed is that ifwe are able to identify specific changes in these costs,then institutional change could be predicted.This is pre-cisely what I did in 1981，when predicting that Chinawould go “capitalist”.
It is clear from the above observations that if private
【20】In Cheung，“The Structure of a Contract.”op.cit.，Inoted in addition “that the cost of policing investment in a tree,perennially ‘attached’ to the common land，is high，whereas cat-tle are driven home at night.”
【21】Cheung,“A Theory of Price Control,” op.cit.
property in land exists in Tripolitania and almond tree sare grown，three results would follow.First，land rentswould rise and transaction/institution costs would fall ––this fall represents a deduction，and in our example it isthe former partially replacing the latter.Second，the typeof transaction/institution costs would change，althoughthese costs will never reach zero.Finally，under ourbroad notion of using contractual arrangements torestrain competition，one type of contracts is replaced byanother type.This latter is in my viewthe true meaningof institutional change.
The above approach may seemnewand unfamiliareven to people working on neo-institutional economics,but it is essential to understanding economic reforminChina during the past 30 years.In particular，the knowl-edge I have gained on transaction/institution costs and oncontractual arrangements are mainly the fruits of learn-ing fromthe experience of China.
It is unfortunate that institutional change or changes incontractual arrangements do not always reduce transac-tion/institution costs or increase rent.AdamSmith’sviewthat land-tenure arrangements evolved to improveefficiency is not always correct.22 Disastrous arrange-ments have cropped up on many occasions during the20th century alone，and I sometimes harbor the thoughtthat mankind may one day eliminate themselves by their
【22】See Cheung，The Theory of Share Tenancy（Chicago:University of Chicago Press，1969），pp.32-34.
own doing in this direction.It is extremely difficult toadvance an economic theory of massive self destructionbased on the postulate of individual optimization,although I have attempted to do so on several occasionselsewhere.23 The Dark Side of the Force，as my teacherJack Hirshleifer entitled one of his books，may wellexplain the popularity of game theory in the profession.I myself do not subscribe to that approach，because Ibelieve that economic explanation requires above all thespecification of observable changes in constraints.Fortunately，for China’s economic reforms，the darkside of the force has yet to play a significant role.Whatever the future holds，at long last a great andancient civilization is emerging froma long，dark eco-nomic tunnel.As I said，this paper attempts to answer the question: What has China done right to produce the spectacular performance we all observe？
Ⅳ.Evolution of the Responsibility Contract
Let me emphasize again: The central issue of China’seconomic reforminvolved the conversion from asystem of delineating rights via comrade-ranking to a system of delineating rights in terms of property.This is the sameas saying the methods used to restrain competition were changed.
【23】张五常，《从全球暖化说人类灭亡》，二○○七年二月二十二日；《世界末日好文章》，二○○七年三月八日。 二文皆于《壹周刊》发表。
Or using the broad concept of contracts discussed earlier，the contractual arrangements used torestrain behavior were changed.The contracts in ques-tion are not the usual market contracts we know，butthey are contracts nonetheless as they stipulate whatindividuals may or may not do when they compete insociety.
