The Scope of Economics

Chapter 3, Section 7: The Scope of Economics

Now that economics doesn't judge good or bad, what exactly does it do? Well, the scope of economics includes three parts.

First part, when constraints or game rules, e.g. definitions of rights, are known, we can predict what the victor criterion would be. Problems of this part are  complex and difficult, but with great efforts made the task can always be accomplished. In fact, that could be the easiest way to distinguish virtuosos and mediocrity of empirical economics.

Worldly affairs are like chess games, every one is new, so are the constraints of  economics, and no analysis can cover everything. Important relevant constraints must be identified and simplified. Yet what's "relevant" and what count as "important" shall not be at the analyzer's will, or else the conclusions of analysis can be easily manipulated. In other words, the choice of constraints must be restricted, while the restriction requires theoretical guidance. That's a deep question about methodology, we will discuss it when analyzing price regulation in Volume 3.

Second part, which are the easiest of economics, is when the criterion of competition is identified, economics can predict how people would behave, how resource would be used, and how the wealth or income would be allocated. As is said previously, different criteria would lead to different behaviors, and winners or losers (allocation of income) would shift accordingly. Housing allocation and queuing for purchase, etc., belong to this part.

As a matter of fact, all the meritorious results of more than two hundred years of western economics, except the recent forty years, are of this part. The partitioning into the two so-called categories of income distribution and resource allocation is a tradition of economics. Today's books of economics follow the tradition, yet the pity is they usually make it so wrong.

Traditional economics, the analysis of income distribution and resource allocation, are mostly based on market price as the victor criterion. This criterion only works under private property rights system. That's to say, although traditional economic analysis can explain the distribution of income and human behaviors, its scope is quite limited. Private property rights system is only part of the inexhaustible variety of game rules in this world. With orthodox textbooks of economics learnt, no matter how advanced they are, we can only explain a small part of all worldly affairs. Have textbooks well memorized and following a stereotype routine never ensures any little bit chance of accomplishment. Science must be creatively learnt and applied, even more so is economics.

Traditional analysis of economics are mostly based on the criterion of market price, thus limited in scope, but it doesn't mean the economic analysis with other victor criteria are insolvable. During the past forty years, the so-called new institutional economics has been trying to extend the basic principles of  economics to a variety of new victor criteria. Sadly the result is only a mess, because the practitioners of economics had recruited too many castle-in-the-air concepts that violate the "invisible is untestable" principle. Certainly, different competition criteria would mean different effects, but a same theoretical foundation can just be easily applied. If we identify what's the criterion of competition, the prediction of income distribution and resource allocation would be really straightforward. In other words, once relevant game rules (e.g. constraints) made clear and the criterion of competition pinpointed, it would only take a couple of days to have all competition behaviors sorted out, as precisely as is in any natural science.

The third part in the scope of economics is the hardest. It's to explain how the game rules come into being. Why is there shared property rights system in this world? Why is there rent regulation in Hong Kong? Since game rules are linked directly with competition criteria, this part of economics has to explain how the competition criteria are determined as well. Why are the teacher housing of HKU allocated by points? Why was seniority used in past China?

How did different systems of property rights come into being? Why do laws change with time and location? Why are Hong Kong's legislative procedures different from those in Taiwan? What is a nation? Why do we need nations? Why is there constitution in some nations while not in the others? Why did people's communes occur in past China? All of these are profound questions.

Oddly enough, some economic problems profound to economists may seem very plain in some laymen's eyes. The latter likes to brag on these problems eloquently, yet their "explanation" indeed has nothing to do with science. If members of the Legislative Council of Hong Kong are asked, "why is the legislation passed?", they'd usually sprout eloquent speeches. But when we carefully examine their "theories", we'll reach one of the four only results: (1) what they say is ad hoc theory, which has no general applicability; (2) what they say is tautology and has no information; (3) what they say is their personal value judgment that has nothing to do with science; (4) what they say is only nonsense.

F. Hayek once spent great efforts to explain problems of this part of economics, but with only little success. Over the last forty years, the theory of state has been a hot topic, and many scholars, including J. Buchanan, G. Stigler, G. Becker, D. North, H. Demsetz, Y. Barzel, etc., were involved, yet no major achievement has ever been scored. Certainly, on other topics they did quite well. I once created a theory of state, which I feel satisfactory, in my booklet Will China Go Capitalist, however only Coase and Barzel treasured it. Published in 1982, this theory accurately predicted the reform that'd happen in China. Nevertheless, for myself, another work China's Economic System I published in 2008 is actually more satisfying.

Economic Explanations is a summation of fifty years' gains the author has had in a learning, and the most difficult third part of economics talked here is all the author's research focus after he turned forty-five, which has been twenty years so far. The Volume 3 Choice of Systems written eight years ago was right for this part, yet looked back today many developments in it were quite unsatisfactory. Enlightened by China's reform, I have had many improvements in related thoughts. Hope this time I can be lucky enough and successfully take this third part.