Steven N. S. Cheung


Steven N. S. Cheung : biography

December 1, 1935 –

Steven Cheung is highly respected for his deep devotion to his research. In order to understand real life phenomena, he personally endeavored in numerous economic activities, such as cultivating fish farms, selling citruses, inspecting the petroleum industry, and haggling over the price of antiques. He has criticized the isolation of most economists from real life problems.

Academic career

Born in Hong Kong in 1935, he fled to China in 1941 due to the Japanese occupation of Hong Kong. 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’s 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. 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.