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  • Steven N. S. Cheung (张五常)
    Born : October , 1935Gender : Male

From 1959 to 1967, he studied Economics at UCLA and prepared a PhD dissertation. From 1967 to 1969, he did postdoctoral research at the University of Chicago, analysing share tenancy and variable rural land resource allocation, and was hired as an assistant professor after impressing Milton Friedman in a debate.


In 1969, he moved to the University of Washington where he taught until 1982. Under the advice of several friends, including Ronald Coase, he returned to Hong Kong as a professor in University of Hong Kong to support the economic reforms of China.

Unlike modern mainstream economists, Cheung's analysis does not rely on advanced mathematical techniques but solely on the two basic building blocks of price theory: one is the axiom of constrained maximisation and the other, the law of demand (one that already incorporates the law of diminishing marginal returns). One of the constraints which he emphasizes most is transaction cost (or better termed institutional cost).

His theory of share tenancy has enhanced the understanding of contractual arrangement, which was largely ignored by neo-classical economists. According to Cheung, sharecropping is not necessarily exploitative. It will achieve the same efficient allocation as labor markets under competition and zero transaction costs (Cheung, 1968). In the presence of transaction costs, sharecropping can be efficient by lowering the monitoring costs of wage contracts and increasing risk-sharing benefits relative to rent contracts (Cheung, 1969).

This implication is revolutionary; sharecropping was perceived as an inferior arrangement for years. After the publication of The Fable of The Bees, our perception of externalities is no longer the same: as long as corresponding property rights are clearly delineated, OR transaction cost is zero, externalities can be internalized through private negotiation/contract arrangement without government intervention.

In 1983, Cheung published probably his most important journal article, "The Contractual Nature of the Firm". While a firm cannot be defined easily, Cheung interprets it as a kind of contractual arrangement being used to replace the market (i.e. price mechanism) to reduce transaction costs (e.g. the cost of price searching). Cheung once stated that when he finished writing the article, he knew that it would become a work that will last generations, and still be read a hundred years later. Thus, "[he] beheld the sky and laughed."

Outside of the academic world, Steven Cheung is most well known for his numerous writings directed at a popular audience, especially the Chinese public. He is also known for his famous wit; in 1969 he wrote an article "Irving Fisher and the Red Guards", published in the renowned Journal of Political Economy, arguing ironically that the activities of the Red Guards in China stemmed from their use of a "refined concept of capital". Unbeknownst to the readers, the article was written under considerable emotional pain; his close friend, the table tennis champion Rong Guotuan, had just committed suicide after being tortured by the Red Guards.

Cheung maintained a lifelong friendship with former mentors Ronald Coase and Milton Friedman, the latter of whom officiated his wedding.[1] He accompanied Friedman in his numerous tours of China, and was present when Friedman met with Chinese leader Zhao Ziyang to discuss economic reforms.

Cheung was also an avid photographer. He took the most iconic photo of Milton Friedman, which was featured on the cover of Friedman's treatise Capitalism and Freedom.


1969 The Theory of Share Tenancy

1982 Will China Go Capitalist?

Cheung's contribution to economics and China's economic development can be roughly grouped in the following areas,

  • New Institutional Economics

1. how different kinds of contractual arrangement affect transaction costs, which are often ignored by neoclassical economists

2. realizing the importance of transaction costs (as Cheung often mentions in his writings, if there is no transaction costs (the original starting point assumption by Coase), there is no difference in using different institutional arrangements (e.g. market or government)).

3. the nature of the firm (a government, to a certain extent, is a firm and can be more efficient than the market in some areas),

  • Methodology

1. emphasis on economic explanation (according to Cheung, economic explanation is the ONLY objective of the study of economics);

2. the analysis of relevant and observable real world constraints: Adam Smith's tradition,

3. downward sloping demand curve: Neoclassical tradition,

4. theories must be potentially refutable but not yet refuted (Cheung considers many mainstream concepts not observable, leading to the non-refutable nature of many theories (such as utilities, welfare))

5. focus on capturing the underlying and relevant constraints to explain economic phenomena that might seem odd and strange on the surface.

  • China's economic development

1. Considerable influence among the Chinese speaking population (most of his works after 1982 are written in Chinese);

2. Prediction of China's institutional reform (which, in general, has been quite accurate)

3. Analysis of the deficiencies in the Chinese state owned enterprises

Notable Works|Publications

Doctoral thesis

· 1969 The Theory of Share Tenancy, University of Chicago Press. Reprinted in June 2000 by Arcadia Press.

Selected books for general audiences

· 1988 Orange Sellers Say, Sichuan People's Publishing House

· 2001 Economic Explanation, Arcadia Press, Reprinted in December 2002 by Arcadia Press

o Book I, The Science of Demand

o Book II, The Behavior of Supply

o Book III, The Choice of Institutional Arrangements

· 2007 The Economic Structure of China, Arcadia Press

· 2010 Currency Strategy Thesis, Arcadia Press

· 2010 New Orange Sellers Say, Arcadia Press, Reprinted in May 2011 by Arcadia Press

· 2011 Economic Explanation (2nded.), Arcadia Press

o Book I, The Science of Demand

o Book II, Income and Cost

o Book III, Price Taking and Price Searching

o Book IV, The Choice of Institutional Arrangements

· 2014 Economic Explanation (3rded.), Arcadia Press

· 2017 Economic Explanation (4thed.), Arcadia Press

o Book I, The Science of Demand

o Book II, Income and Cost

o Book III, Price Taking and Price Searching

o Book IV, The General Theory of Contract

o Book V, The State Theory and the Theoretical Structure of Economic Explanation

Selected journal articles

· 1968 "Private property rights and sharecropping", Journal of Political Economy, Vol. 76, Issue 6, pp. 1107–1122.

· 1969 Transaction Costs, Risk Aversion, and the Choice of Contractual Arrangements, Journal of Law and Economics, Vol. 12, Issue 1, pp. 23–42.

· 1970 The Structure of a Contract and the Theory of a Non-Exclusive Resource, Journal of Law and Economics, Vol. 13, Issue 1, pp. 49–70.

· 1972 Enforcement of Property Rights in Children, and the Marriage Contract, Economic Journal, Vol. 82, Issue 326, pp. 641–57.

· 1973 The Fable of the Bees: An Economic Investigation, Journal of Law and Economics, Vol. 16, Issue 1, pp. 11–33.

· 1974 A Theory of Price Control, Journal of Law and Economics, Vol. 17, Issue 1, pp. 53–71.

· 1975 Roofs or Stars: The Stated Intents and Actual Effects of a Rents Ordinance, Economic Inquiry, Volume 13, Issue 1, pp. 1–21.

· 1977 Why are better seats 'underpriced' , Economic Inquiry, Volume 15, Issue 4, pp. 513–522.

· 1982 Property Rights in Trade Secrets, Economic Inquiry, Volume 20, Issue 1, pp. 40–53.

· 1983 The Contractual Nature of The Firm, Journal of Law and Economics, Vol. 26, Issue 1, pp. 1–26.

· 1995 Economic Interactions: China vis-a-vis Hong Kong, Contemporary Economic Policy, Vol. 13, Issue 1, pp. 1–9.

· 1996 A Simplistic General Equilibrium Theory of Corruption, Contemporary Economic Policy, Vol. 14, Issue3, pp. 1–5.

· 1998 Deng Xiaoping's Great Transformation, Contemporary Economic Policy, Vol. 16, Issue 2, pp. 125–35.

· 1998 The Curse of Democracy as an Instrument of Reform in Collapsed Communist Economies, Contemporary Economic Policy, Volume 16, Issue 2, pp. 247–49.

Main Opnions

specializes in the fields of transaction costs and property rights, following the approach of new institutional economics.

He wrote many books (in Chinese) commenting on China's modernization programs from an economic point of view. In the 1980s, Cheung predicted and strongly supported an economic transformation of China as a market economy. However, in that decade, China went through serious inflation, leading to strong economic, political and social tensions.

However, after 1992, China continued to reform economically. Steven Cheung claimed that most of his predictions have come true. One of his major ideas, the replacing of state-owned enterprises by private enterprises, turns out to be very consistent with the direction taken by Chinese political leaders and policy makers.

Later on, after the leaders of Shanghai began economic reforms, he predicted that it would immediately become one of the financial centers of the world, surpassing Hong Kong. The prediction was met with heavy skepticism, but turned out to be correct in some respect. As of 31 January 2015, Shanghai Stock Exchange overtook the Hong Kong Stock Exchange in terms of market capitalization. However, Shanghai has yet to catch up with Hong Kong in terms of financial infrastructure, and Shanghai's dream of overtaking Hong Kong has yet to be fully fulfilled.


Nobel Prize winners like Ronald Coase and Joseph E. Stiglitz have acknowledged intellectual provocation by Cheung in their respective Nobel lectures. While referring to Cheung's "brilliant, valiant attempt" to prove that sharecropping does not matter to the incentives of the workers, Stiglitz credited Cheung's "unreasonable assumptions, especially concerning information" for motivating him to develop the theories of the role of information in economics.

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