1.3.1 The Nature of Regulation by Custom and Morality

As modes of resource allocation, regulation by market is usually called the "invisible hand" and regulation by government the "visible hand." So, is the third mode, regulation by custom and morality, an invisible hand or a visible one? We may approach this interesting question by analyzing the nature of these modes of regulating resource allocation.

The nature of regulation by custom and morality falls between that of the "invisible" and "visible" hands. Regulation by market is called the "invisible hand" because it is based on the mechanism of supply and demand, is by nature a form of spontaneous regulation beyond the will of people and the result of the continuous contest and interaction of two forces, namely, supply and demand. Regulation by government is called the "visible hand" because it is regulation by departments of government on social and economic life through the application of different measures, is by nature a form of man-made and conscious regulation, the result of administration's effect on economy, and its execution is based on laws, rules and policies. Regulation by custom and morality shares common ground with but also differs from the other two modes of regulation. Therefore, in terms of its nature, it falls between the "invisible" and "visible" hands: Just like the Way of Nature in Daoism, it is visible yet invisible; invisible yet visible.

The similarities between regulation by custom and morality and regulation by market are as follows. One: Regulation by custom and morality originates within the behavioral agents, who influence social and economic life in the light of the cultural traditions, moral beliefs and principles with which they identify, and bring about changes in resource use efficiency and allocation patterns. By contrast, regulation by government relies on an external force, namely, administrative power, to intervene in social and economic life, and to influence resource allocation and allocation patterns. Two: Like regulation by market, regulation by custom and morality acts in a spontaneous and gradual way to bring order to disordered resource allocation. By contrast, regulation by government attempts to establish order from the outset, an order that exists, unfortunately, only in the government's mind or plan, but not necessarily in real social and economic life. The outcome of regulation by government might be true orderliness or lack of it. It could even turn an orderly state into disorder.

Regulation by custom and morality and regulation by government are similar in that neither mode is separable from people's conscious behavior and both perform in social and economic life as a man-made means of guiding, adjusting or restricting resource allocation; unlike regulation by market, these modes of regulation can be changed if there is the will to do so. Of course, when discussing man-made guidance of economic life and resource allocation, the following difference between the two should also be noted: In regulation by government, the regulator is government, manifested as an external administrative power, whereas in regulation by custom and morality, the regulator is the agent personally or a group he identifies with and is a part of. That is to say, in regulation by government, guidance, adjustment and restriction are realized by an external administrative power, whereas in regulation by custom and morality, it is the members of society themselves who regulate socioeconomic life and resource allocation: it is they who restrict their own behavior.

Considering all those similarities and differences, we can say that regulation by custom and morality is similar to but not equivalent to the "invisible hand": Although it is not equivalent to the "visible hand," there are some points of similarity. Actually, it lies in the space between the two "hands." If each "hand" represents an extremity, where then is the location of regulation by custom and morality?

Regulation by custom and morality is sometimes closer to the "invisible hand" and sometimes closer to the "visible hand." In other words, it comes in many different forms. Why so? It is because this regulation is manifested by agents influencing social and economic life through self-or mutual-restriction, restrictions that come from the agents themselves, from identification with a group, from respect for and insistence on certain cultural traditions. On different occasions such restriction can take different forms and can be more powerful or less. These different forms and degrees of power can cause this type of regulation to keep shifting position, moving closer to invisibility or closer to visibility. Suppose the restricting power is stronger, for example taking the form of village rules, articles of associations, then regulation by custom and morality is closer to the "visible hand." When the restricting power is weaker, such as in self-discipline, or a group persuading one of its members, then this type of regulation is closer to the "visible hand." But beware: "Closer" does not mean "equivalent," and "closer" to one end is bound to mean "farther" from the other. Therefore, we may conclude as follows: No matter what form it takes or how strong its restricting power is, regulation by custom and morality always lies between regulation by market (the "invisible hand") and regulation by government(the "visible hand").

Among many ethnic groups, regulation by custom and morality often appears as a historical or cultural phenomenon: For example some groups practice cremation, others water burial, others interment and others sky burial. Every group thinks its own practice is better than other forms, in that it is a respectful send-off for the deceased, whereas all other practices are unthinkable. Can one actually say which practice is the most respectful? Since each group has its own unique customs and moral norms, it's hard to say; but respect for the dead is universally seen as essential and the only difference is the form that respect takes.

1.3.2 Forms of Regulation by Custom and Morality—Corporate Culture

Let us examine this question further.

Many researchers have turned their attention to how the corporate culture of an enterprise influences its production, operation and management. But the effect of corporate culture on social and economic life does not fall within the scope of regulation by market or government. Rather, corporate culture is both an expression of regulation by custom and morality and a result of it.

In the micro sense, the impact of corporate culture on resource allocation is firstly manifested in its influence on how each employee feels about the enterprise. Of all resources, human resource is the most precious, in terms of quantity as well as quality. Quality is manifested in aspects such as technical skills, range of knowledge, health condition and mental attitude. When the number of staff is fixed, the high quality of staff is a reflection of rich human resource. People often ask: What are the most important factors for developing economy and enterprise? Capital, technology and information are very important indeed. But capital needs people to raise and utilize it, technology needs people to develop and operate it, and information needs people to gather and process it. But in every one of these tasks, a good mental attitude is especially important. Without it, the roles of capital, technology and information cannot be brought into play. Accordingly, the most important factor for economic and enterprise development is people, people of enterprising and pioneering spirit. If a society's material wealth is destroyed, new wealth will rise to replace it provided that society still has people of enterprising and pioneering spirit. If it is pioneering spirit and not wealth that is lost, that wealth will wither away in the future, society fall into poverty, its economy incapable of recovery.

So, there is a direct correlation between an enterprise's ability to prosper and the quality of its human resources and of its employees' pioneering spirit. The spirit of the enterprise is embodied in every employee as is the quality of human resources, though this is more evident in some individuals than others. The major target in building a corporate culture is that the enterprise's pioneering and enterprising spirit be strongly expressed in every employee, forming a spiritual driving force. It is a reflection of the improved and enriched quality of its human resources. So, how is such a spirit formed and developed? It is not through regulation by market or government, although both can, up to a point, inspire people to pioneer new fields and make progress. The formation of such a spirit within an enterprise, apart from the related qualities that employees already have prior to joining it, relies mainly on educating its staff and on the influence of its cultural environment. In this sense, regulation by custom and morality plays a role far more important than the other two types.

An enterprise's employees form a group. The harmony of their relationship is significant to the performance and cohesion of the enterprise. If there is internal disunity, interpersonal friction, lack of harmony, maneuvering for position, departmentalism and back-biting, and unwillingness to listen and cooperate, the resource advantage of the enterprise cannot be leveraged. Moreover, the enterprise will be damaged as the result of lowered or even negative efficiency. An approach to solving this problem could be to put greater effort into management and into building the corporate culture. Firm but fair enterprise rules are helpful in defining the responsibilities of every unit and post, in order to raise the efficiency of the enterprise. The building of corporate culture is beneficial for harmonizing interpersonal relations within the business, improving cohesiveness and transforming negative factors into positive ones. Resource utilization and competitiveness can be improved thereby. Moreover, the influence of the cultural environment thus shaped can improve the quality of new starters and inspire them to be enterprising and pioneering. These things are the embodiment of regulation by custom and morality. They are also the fruits of such regulation.

As one form of regulation by custom and morality, corporate culture has some points of similarity with regulation by government, but the two are different in nature. Under the latter form, government uses regulatory techniques to influence supply and demand of products and labor, thereby influencing cost, price and profit. In this process, production factors are recombined and resource allocation patterns are changed. An enterprise can also recombine production factors and influence resource allocation patterns just as government does, but in developing its corporate culture the mode of regulation it takes is different from that of government. Three points are worth noting here:

One: When regulation by government starts to exert influence on the production and operation of an enterprise, the enterprise has actually been put in a passive position. If regulation by government is direct, the enterprise must accept such regulation irrespective of its own considerations. Even when such regulation is indirect, if it influences the production, operation, cost, price and profit of the enterprise, the enterprise must consider these influences, adjust its own actions and adapt to the changes caused by those influences. Corporate culture is different: because the factor influencing production and operation comes from a force within the enterprise—its employees' own efforts—the enterprise is in an active position. If a business does not value the development of its corporate culture, that culture will have little influence on its production and operation. Conversely, the more it values corporate culture and the better it builds it, the greater influence the culture will have on the enterprise's production and operation and the greater the likelihood of improved performance.

Two: Study of efficiency involves distinguishing three concepts: production efficiency, resource allocation efficiency and X-efficiency. Production efficiency indicates the ratio of output to input, reflecting an enterprise's utilization efficiency of production factors. Resource allocation efficiency refers to the rationality of resource allocation and its resultant efficiency: Rational allocation improves efficiency and irrational allocation lowers it. X-efficiency refers to the efficiency (or inefficiency) caused by reasons other than output to input ratio or resource allocation. X-inefficiency is a loss of efficiency for reasons as yet unidentified but have to do with insufficient effort on the part of individuals, interpersonal discord or employee dissociation with the goals of the enterprise. An enterprise has advanced facilities and its resource allocation is proper, it will still suffer from lower efficiency (X-inefficiency) if its workers lack enthusiasm and slack off in their duties, do not work for a single purpose but follow their own agenda. Regulation by market as the "invisible hand" can influence production efficiency and resource allocation efficiency, but has basically no effect on the formation or elimination of X-inefficiency. Exactly the same can be said of regulation by government as the "visible hand." The main thing that can influence, reduce or eliminate X-inefficiency is regulation by custom and morality, and corporate culture is a form of such regulation. Why can regulation by custom and morality do this when the other two forms of regulation cannot? It is because X-efficiency is linked to whether employee enthusiasm has been brought into play and whether interpersonal relations are harmonious. Such issues come within the scope of regulation by custom and morality, and more exactly, are the task of corporate culture.

Three: In the second section of this chapter we examined the various relationships and activities within the non-traded sector, noting that the effective agency here is regulation by custom and morality, not regulation by market or government. We should further note that although we have made a distinction between traded and non-traded sectors, the two can often influence each other and the activities of both have an economic and social impact. Regulation by market functions only in the traded sector, regulation by government also operates mainly in this area, not interfering with activities in the non-traded sector apart from defining boundaries for them by means of law. Only regulation by custom and morality plays a role in both sectors. As a form of this, corporate culture plays such a role as well, supplying what the other two modes lack. Hopefully, in building corporate culture, interpersonal relations in the non-traded sector will be harmonized and employee enthusiasm be brought into play, which in turn will exert positive influence on these same aspects in the traded sector. At the same time, developing corporate culture should help the enterprise shape its unique style, spirit and objectives, something that can only be achieved through regulation by custom and morality, not the other two modes.

The analysis on corporate culture clearly illustrates the special feature of regulation by custom and morality. In addition to corporate culture, community culture and school culture play a similar role in harmonizing interpersonal relations, encouraging an enterprising and pioneering spirit and restricting behaviors. As two other forms of regulation by custom and morality, they should also be given their due weight. vJvpgmU8XJjq1XVCef+G+gz6U5EXfMI4ErRxEL8mRbwgd8fpYeVHw42ZYzlF5adt