Phenomenon and Regularity

Chapter 1: The Methodology of Science

Seated before my desk, with a pen in hand, I am recalling the achievements men have made in science. Science is a learning that gives systematic explanations to phenomena, which is very interesting. The saying that human is the paragon of animals is absolutely right; our brains are so well developed that all other animals are left far far behind. Expressions of emotion make arts, while analyses under reason become science. Human's emotion can mix up easily with reason. Therefore, judgment by science may get led by emotion, and then loose its conciseness; only on rare occasions can the result be remarkable and make us speechless. Yes, science can carry the beauty of arts. (Translator: no solid arguments for the "yes" so can be just ignored.)

Seeking beauty is human nature, so science can be artistic and have its beauty. But the kernel of science is definitely not arts, instead, it's focused on explaining phenomena. On the other hand, human is human and cannot be totally cold-hearted. When someone's science paper is said a work of art, it's just flattering, because no beauty can substitute explanation, which is the core purpose of science. Scientists are human, so we wouldn't expect them to have no emotion, but in science it can never be misused. The principle is simple: in scientific works objective analyses and subjective emotion can be combined and used together, but they must be set distinguishable; only in this way, words of emotion can be added to scientific writings and function as adornment to reduce their dullness.

In economics, to clearly separate subjective emotion and objective analysis is relatively difficult. It's no impossible, but compared to other natural sciences like physics and chemistry it's much harder. Economics is a science of explaining human behaviors. Nevertheless, economists are also human and cannot avoid mixing their values with their economics, sometimes they may even take their subjective likes and dislikes as the conclusions of science. So excellent economists share an ability of "forgetting themselves" when doing analyses. Those that are not talented in doing this must take more training.

Chapter 1, Section 1: Phenomenon and Regularity

My desk is beside window. Now it's late autumn. Outside the screen window, bamboos are shaking with the wind. Hong Kong is so crowded that it's hard to find a window outside which you can see a thick wood of bamboos. Poet Du Fu once said "In the boundless wood leaves are being shed shower by shower", people living in Hong Kong believe in it even they can never see such a sight, why? It's late autumn, but the bamboos here are still very lovely, then why? The temperature drop comes early this year, and the weather in early November is already very cold. Two months ago I saw some butterflies outside the window, now they are at nowhere. But I know they'd be back again next June. How can I be this sure?

The widow faces to the east. I write in the evening every day, so it has been years I don't watch the sunrise at my desk. Without seeing it, I dare to bet with anyone that in the morning I can see a sun rise outside the window. At the seaside, I know the sea water is salty, and the high and low of the tides is connected with the moon's wax and wane. When young I was a fishing master. At sight of the sea I recollect the happy days I fished. A fisher owes the fish, but he knows the character of them very well. When the moon is full and clouds cover the sky, it's the best time to fish yellowfin seabreams. This is the regularity.

Regularities of the nature are agreed on by any intellectual. So it is with human behaviors. Looking out the window, the community Zhifu developed by Hong Kong Land, a commercial property developer, and the low-rent village Huafu built by the government take either side. Anybody would agree without investigation that the latter is more crowded. Another community near my home called Biyao Bay is even less crowded than Zhifu. The higher-end the community is, the lower its population density would be. This is a regularity. On a closer hillside, there are a few wood houses. They are very simple, and of course unauthorized. Unauthorized buildings don't have land rights, thus are much cheaper than the ones that have. This is another regularity.

So no matter a phenomenon is about the nature or our human's behavior, there must be a regularity for it. In fact, we cannot find a phenomenon without any regularity, though some of them may require great efforts to discover. Every phenomenon has a regularity behind it, and it's so since time starts. We know some way must be followed, but we don't always know why it does so. After knowing there is a way there, we'd be driven by our curiosity to find out the why. We need an explanation, and here comes science.

The formation of science is based on five beliefs, which anyone interested in science must agree on. First, the existence of any phenomenon or behavior is by subjective judgment, and divergence on that is not allowed. That I say the sun is rising is my own judgment; if you don't agree and say it's coming down, then we can no more scientifically discuss the phenomenon. When I see it a flower, that you see must also be a flower; I say it's raining, you must also admit. This belief is the first condition of any scientific generalization. Of course, there are people don't agree on anything. They are just insulated from science.

The weird thing is, everyone's subjective judgments are incredibly easy to reach consensus. Though people may have different subjective views of a phenomenon, the existence of it is never hard to be all admitted. For instance, a man with color blindness agrees that there exist some color that he doesn't see; a deaf cannot hear but he'd never deny the existence of sounds.

That subjective judgments are backed by objective reality and can reach a consensus is a foundation of science. Any subjective thing that cannot form a common belief in the public is out of science. For example, in China supernatural power was often mentioned in the past, and believers can describe it very vividly, but people who deny it are also countless. I once saw in Beijing the most famous supernatural power performance, and it was so faked that I never believe its existence anymore. That supernatural power is out of science, is neither because I don't believe, nor many other people don't either, it's because nobody has ever convinced the unbelievers with rigid investigations. This is like some ones believe in God, the others don't, and nobody has ever succeeded in proving the existence of Him. I am not saying Christian or any other religion is meaningless, but they are just not science.

The second belief for science was mentioned previously: all the phenomena recognized by the public must have their regularities. For some phenomena, though, their regularities may require great efforts to recover or verify. Experience tells us, the regularity of a phenomenon never changes, so when a new phenomenon is observed, researchers will believe in the existence of its regularity no matter how hard it would be to find it out, and search for it with persistent efforts.

Why is the regularity of a phenomenon so important? The answer is: if a phenomenon has no regularity and happens totally random, we'd not be able to find its relationship with any other observations, the phenomenon is therefore not systematically explainable. A phenomenon with no hints before it happens and no evidences after it occurs, is pretty much like the ascent of Jesus, which cannot be talked with logic. Science is science only because no phenomenon in this world has not a regularity for it.

Then we have the third belief for science: anyone engaged in scientific research must believe that there is a reason for anything happened. Prediction (no foretelling) is the same thing with explanation. If we can predict that under certain conditions, due to certain reasons, a phenomenon will happen, then it's counted as explained. For example, fly's speed is much lower than that of a plane, but due to the gravitation discovered by Newton, a fly can fly forward in a plane. The theory used to explain a fly can move forward in a plane is the same one as used to explain outside the hatch the fly moves slower. (Translator: strictly speaking, the phenomena here are explained by the relativity of motions.) If there is no regularity for the speeds of fly and plane, or their speeds are not comparable under different settings, we wouldn't be able to explain the phenomena in or outside a hatch, not to mention the existence of science.

To summarize, subjective phenomena must be unanimously accepted by the public, there exist regularities behind, and each happening of them have a reason. These are the prerequisites of science.

Preface to the Original Edition

Preface to the Original Edition

One night in 1971, I came up with some idea so irresistible that I got up from bed at midnight, walked to my desk, seated, and wrote in English on and on for several hours. After handed to my woman secretary in the morinig for typewriting, it came out to be more than twenty pages with double spacing. I titled the manuscript The Theorem of Exchange and Market Demand. Now looking back, that should be the predecessor of the Economic Explanations I am writing today.

Since I was teaching in UWashington, Seattle, I had the chance to have several colleagues that were specialized in price theory take a look at the manuscript. After reading it, they all exclaimed, "it can be this simple, why the books never say like this?" How the books say is one thing, to have me agree is another, or else I wouldn't have to get up that late. For a long time, the supply and demand relationship and the so-called equilibrium price in past books were all based on the great nineteenth century economist Marshall's "scissors" theory. When I was a student, I never got what kind of pressures the scissors were under or what they were trying to cut. Later when I became a teacher, I still didn't get it during teaching and just threw some nonsense to the students; in the end, I had to establish my own analysis.

Colleagues at UWashington knew I had always revered Marshall, but that manuscript denied his scissors, so asked me whether I had changed my opinion on him. I said I was totally subdued by Marshall, he was my mentor, but his inspections of the real world were not deep enough, and there were redundancies in his theories, so many improvements could be made. I think Marshall is of real greatness, because his economic analyses have a complete framework, and in which there are contents. He was a top master, who combined predecessors' thoughts and with his talent established the framework, without which my generation would never have a clear overview. Therefore he really deserves it if I can add some amendments to the details and contents of the framework.

R. H. Coase that had great influence on me also worshiped Marshall as well. He knew well the slightest changes among different versions of Marshall's Principles of Economics. However, Coase was against the utility concept, the sayings of long run and short run, and equilibrium and disequilibrium as well, all of which were well known due to Marshall. Appreciation, admiration, and opposition, are actually well consistent in science.

Back to the aforementioned manuscript, a colleague at UWashington included it into his textbook and noted it was my invention. After an editor of the American publisher Prentice-Hall read it, he uncovered the original and brought me a contract to write an economics textbook. That was in 1973.

The publisher's conditions were very generous, and specified that no outline, no review would be required, I can write whatever I like. It was really a nice opportunity, but I responded I had never planned to write one. However, in 1973 the economy in Great Britain was a mess due to its oil issue and price regulations, inflation skyrocketed, and I was having two babies still in swaddle, so making some extra cash was indeed realistic. I then had the publisher leave the contract and promised to think about it. He wanted a title, I wrote down on a white paper: Economic Explanation. Till the end I never wrote a word.

UCLA in early 60s was not at any key position for economics. The weird thing was, my four graduate instructors of economics, Armen A. Alchian, Jack Hirshleifer, Karl Brunner, and Robert Baldwin, all emphasized hypothesis in explaining phenomena or behaviors. At the time, except for the Chicago School, only UCLA considered to explain phenomena is the focus of economics.

Learning, to gain knowledge, has to obey first impression as well. At UCLA there was an occurrence that's unbelievable even today. Rudolf Carnap taught freshman logic in the Department of Philosophy, and it was about the methodologies of validation in science. Being a master of logic philosophy, he has no equal through out the entire twentieth century! I didn't know that then, but since classmates with high grades all yelled to take his class, I just followed. When entering the classroom, I saw at the last row of the crowded hall there was seated an old fellow. It was the professor Karl Brunner of the Department of Economics. This made me realize the course was a gold mine, so I began to be diligent. It was 1960, when Carnap was at his 69.

The term economic explanation stemmed from Carnap's teaching. His course was a clear lecturing of "explanation"; in it "scientific explanation" was mentioned many times, and the unsurmountable theory of knowledge was very gracefully introduced. With a wise man's guidance, learning can be so enchanting.

As the term suggests, Economic Explanations is to explain phenomena or human behaviors scientifically from the perspective of economics. In science's category, there'd always the final question: why? And the problem of "how" should be dealt in the scope of engineering, while "is it good" in ethics. In science we never ask the questions of "how" or "is it good".

It was no secret that I spent at least half of my time studying "welfare economics" during my first year of graduate school at UCLA, and published a prize-winning paper that I actually dislike. It was on something about "is it good". After I took my teaching post in Hong Kong and started commenting China's economic reform in Chinese, I've made a bunch of suggestions. They were about "how". Though I was quite clear I had actually no influence power at all, that I still tried to make the suggestions must be due to some human nature, so no one shall be unsettled about it. Proudly, I was always ble to make clear distinctions among different problems and never confounded.

The current book, Economic Explanations, is about "why".I began to think economics should focus on this "why" problem since 1963. At the moment, I had had Alchian's course for a couple of weeks, and then decided to take my own path in doing economics. I thought I could only make my contribution on this "why" problem.  And it was proven correct. For thirty years, I have been indifferent to outside responses to the suggestions that I made about "is it good" or "how". If I took social reform as my duty, I'd never be still alive today, as so much disappointment can be really killing.

That I'd be connected with the term "economic explanation" seemed destined. In 1982 it was "Economic Explanation" that I chose as the speech title of my inauguration in Hong Kong. In 2000, Beijing was going to publish the Chinese translation of some selected papers I had written in English. When the translator asked about the title, I suggested it be Economic Explanation.

The Economic Explanations written here stemmed from my 1989 column serialized on Hong Kong Economic Times. After twelve issues, the June Fourth Student Movement broke out in Beijing; and my mother fell on street (not in Beijing) and was heavily injured, so I had to stop and later never worked up enthusiasm to continue it.  Though there were only twelve issues, readers responded that they were the best of mine ever. In the following eleven years, the ones that asked me to go on with it were uncountable. I guess I might have the twelve issues too well written. Hope this time's comeback won't make the readers disappointed.

I must declare first, this Economic Explanations is never a textbook. Students studying economics can read it, and should read it, but since I don't follow norms, students may get in trouble if they use my anwsers for exams. Economics that everyone knows doesn't need me to write.

But don't mistake that I'd break norms deliberately. It's because I need focus on explaining real phenomena that some norms have to be broken. Though economics is an empirical science and aims at explaining phenomena, economists that write in that way were few. In fact, my knowledge on economics were learnt from my friends and teachers. And my contribution is just to clean out the useless, and then reorganize the remaining. Referred cases are mostly from my own observations. I love to explain the real world with simple theories. The world is complicated, without simple theories, the chance that we can explain it is zero, and this is my belief.

Though I tried to be simple, reading Economic Explanations is never effortless. This is because to make a good explanation, simple theory has to be deeply wielded. For example, the law of demand, if price falls the demand will increase, that everyone knows with economics elected in his middle school, is just repeated in different ways through out the entire book, though the term mostly appears in only Volume 1. Since it bears a lot of variations, one must comprehend it thoroughly before using it. So the readers need be prepared: a plain idea may cost me thousands of words if I deem it important.

There are two other reasons that make reading this book demanding. First is the choice of topics, as I won't step back from any tough one. I choose a topic according to its interestingness and importance and never to its easiness. Second is I decide not to use any chart or equation. Adam Smith, the founder of economics, can publish his 1776 Wealth of Nations without a single chart, why can't I do that?

His book is the greatest economic magnum opus of all ages, imitating him is definitely an honor. Today's difference is, though no charts will be used, the names of those curves still have to be mentioned. Readers with knowledge of economics will easily know what I'd be indicating. As for laymen, the curves can be ignored if they are never seen before. Reading the narrations shall be sufficient. And just don's assume its following topics are not comprehensible if you don't understand a section or a chapter. If you do meet something incomprehensible, please jump to somewhere else of the book.

Economic Explanations were published on a newspaper that sells at any Hong Kong newsstand, so definitely it's written for the common people. This is a tradition from Smith as well. I do wonder, whether today's economics, in which math equations outnumber words, can be delivered successfully in old ways. Let me take a try.

Steven Cheung

November 1, 2000

Preface to the Mainland Expanded Edition

Preface to the Mainland Expanded Edition

The first version of A. Marshall's Principles of Economics came out in 1890. Including it, there were 8 versions in total, with the last issued in 1920. The "version" mentioned here means actually edition with content changes, not reprints. Scholars studying Marshallian thoughts love to trace differences of each version, where are changed and why Maestro Marshall did that.

My own Economic Explanations were published in three volumes: Volume I The Science of Demand (first published in May, 2001); Volume II The Behavior of Supply (first published in March, 2002); Volume III The Choice of Institutional Agreements (first published in November, 2002). Versions after that were actually reprints and not a single change was made. In another word, per the Marshallian tradition, my three-volume Economic Explanations has only one version as of today.

So this revised Mainland Edition is the second version. After nearly ten years, a bunch of places requires revision, improvement or addition. Among the ten years both people and things have changed a lot, and I have had some advancement in the thinking of economic explanation, especially on economic institutions, which has been largely deepened. Revising this Mainland Edition is a huge project, Volume I and II will have minor and abundant changes, respectively, while Volume 3 will be a lot. I had considered for a very long time before I made such a plan and decisions, but when writing this preface to the Mainland Expanded Edition the revision hasn't started yet. I need compose this preface first, letting my thinking has a good start, and then I become able to make sentence-wise, paragraph-wise, page-wise, section-wise, and chapter-wise revisions.

That I mentioned Marshall's great work is because it was the economics of a century ago, an important milestone of the Great Britain tradition, and the foundation I valued the most. My own Economic Explanations stems from this; although bunches of changes have been made, it still shares the same spirit. Of course in my own opinion the changes are improvements, and others may not agree. Student readers must find a chance to read the original works of Marshall and make comparisons with this Mainland Edition Economic Explanations, to check if the way I choose to develop is still the one I picked before. I believe it is. 

One friend once told me that my economics is very orthodox but not main stream anymore. He is probably right, but why does this happen? Others do have the freedom to grow their thoughts at will, but is it really possible that people develop Marshall's foundation into different theories that are nearly irrelevant? Or maybe the new stars in these four decades didn't study Marshall at all? 

Well, it's quite pleasing that I've made predictions far more accurate than today's main stream! What's more, when I explain phenomena or behaviors I never divide the micro and the macro, never consider from the so-called monetary point of view, and the variation and potential I've demonstrated makes such categorizers still children (a smile on my face). This is the power of the knowledge that stems from Adam Smith and Alfred Marshall's traditional path. 

Prediction and explanation effect beforehand and afterward; in science they are a same thing, though. Prediction (or inference) requires observable test conditions, and a theory that outlines behaviors; if test conditions change, the prediction must be revised. Foretelling is totally another thing, which I don't understand at all. Once you student readers have learnt economic explanation, you know economic predictions immediately. 

From 1969 I decided to take my own path, to read others' work as little as possible and prefer thinking independently. But before that I had been a very good student, keen to traditional theories and heavily influenced by my teachers and friends. In classical economics I had my stress on Adam Smith, David Ricardo, and John Stuart Mill; neoclassical on Marshall, Mrs. J. Robinson, and Irving Fisher. In the 1960s, there were eight teacher and friends influenced me, and they all valued Marshall's foundation very much. In my alma mater UCLA the four were: Armen A. Alchian, Robert E. Baldwin, Karl Brunner, and Jack Hirshleifer. In UChicago there were another four, and I had already had their influences before I were there. They are R. H. Coase, Aaron Director, Milton Friedman, and George J. Stigler. With this unique school experience, I must have really been favored by fortune.

Not only valuing Smith and Marshall, the above eight but also paid great attention to economic explanation. In fact, by the leading quote from Marshall, we can see he appreciated economic explanation a lot. According to Marshall's recall, from 1867 to 1875 he often visited factories to observe the operations of industrial production. Such observations from the real world, along with his unbeatable talent, brought forth the Principles of Economics. Friedman was right, "Marshallian economics has contents!" He must intend the real world observations. However, Marshall seldom made explanations via real world validation. Actually, in those days the outstanding Great Britain tradition of economics treated real world investigations without sufficient care, which is really mysterious. Because of this, they didn't have enough material for hypothesis validations. As a follower, it's solely to feed validations for me to make all the amendments to theories of these wise.

In 1930s, Arnold Plant of LSE (London School of Economics and Political Science) was enthusiastic in real world investigations. This man influenced his student R. H. Coase. My own enthusiasm for such investigations was not influenced by Coase, as I had already written The Theory of Share Tenancy before I knew him. I was actually influence by my teacher Alchian. When advising my Share Tenancy, he didn't give me a break on referencing facts and documents, for he believed I was a rough diamond and he need treat me tough! 

In 1967 I arrived at UChicago, and found the library there was the best I had ever met. Any book you cannot find there, they would quickly borrow it from other libraries. Therefore I played a game of footnote tracing there for several months, especially on the works by A. C. Pigou, the great English economist. The game went like this: after you see a footnote on some book A that says the fact or material can be referred to another book B, you go to the book B and it says the reference is from some other book C, then you turn to the book C and continue. My results suggested, most of the facts stated in the works doesn't have solid proof and some of them are even purely faked. Thus I came up with an opinion: the most foolish scholars are the noble ones that try to explain things that never happen. After that I became uninterested in ordinary books, select only the authors that I think trustable, and believe in my own observations with greater weight. My habit of running in streets and alleys for observations started ever since. 

In the summer of 1969 I returned Hong Kong for a vacation, and began visiting factories (mainly looking into piecework) and frequenting courtrooms and rooftops (for the investigation of rent regulations in Hong Kong). The experience not only brought me original knowledge to the real world, but also made me feel most of the economic theories I had worked hard to learn were useless at all. Countless actual phenomena cannot be explained. How could that be possible?! At that time my price theory, which I had taught at the graduate school of UChicago, was recognized by friends in the circle,  how can I not even explain those everyday experiences? Such embarrassments can never happen in natural sciences. 

After thinking I came up with two solutions. One was to give up economics and choose some other career; and the other was to overhaul the theories I had learnt to make them accommodate real world phenomena. By running in streets and alleys I gained rich perfections in both theories and concepts, and it took only several years before they can generate charming explanations. Before that 1969 summer I had had enough study in traditional theories, therefore to grow my own thoughts, I felt quite ease for my time spent on street and alley experiences.

Today I have no doubt in the explicability of economic theories. The world is complex, though, I have reduced economic theories into a single Demand Theorem. On the other hand, one must grasp concepts deep enough to allow for any variations, as other so-called concepts are only transforms governed by laws of human actions. As for those theories classified into micro, macro or monetary, the fundamental is the same -- they are all knowledge about human decisions under certain constraints. What is seen on streets and alleys might no be worthy of mention, but after expansion they could be important macro phenomena. One must know enough phenomena of the real world, because the reduction of theories and grasp of concepts can only be achieved through comparisons with and validations of different phenomena. 

As stated previously, the lab for economics is the entire real world, it's quite tough and one has to keep sustained observations of it. I am over seventy years old and still in it. But I believe this three-volume Economic Explanations can save the junior scholars twenty or even thirty years of time. It should be able: I once took many wrong paths and wasted a lot of time; by eliminating this and eliminating that, I've gathered the theories and concepts that today I take as reliable.

For any knowledge, there can be bunches of paths to take. So is it in doing economic explanation. Some experts thinks my explanations are not explanation, reversely, I can say as well theirs are not. To take my way or the others', or even create one's own, students please consider.

And please don't study only mine. At the starting stage students should check the others' theories; but be swift, like collecting firewood when it starts to rain. Remember, the major purpose of economics is to explain real life facts, however the investigation itself to make facts detailedly clear may require a lot of time and efforts, sometimes I even have to get myself in real businesses. On the other side, if one indulges himself in fundamental or technical developments, once he finds they are of no use, it might be too late. It's difficult to do economic explanation not only because facts are hard to find out, but also most so-called theories are just rubbish.

The three-volume Economic Explanations focused on the theories and concepts that I think are the most useful, and the reasons why I obsoleted some theories and concepts popular in the circle were also explained. It was a path that an old man had gone through, and by reading Economic Explanations you students are taking a walk with this old man. It's a through path, but not the only one. Quite characteristic in science, isn't it? 

Early in 1970s, colleagues like Douglass C. North, Yoram Barzel, John S. McGee in UWashington, Seattle thought I had the capability to completely reform economic theories and encouraged me to to that. At the moment all of us were unsatisfied with the explicability of economics, but no one expected the forthcoming tool of explanation introduced by the circle would be the gaming theory that we abandoned in 60s. Unfortunately, gaming theory is among the ones that cannot be validated with facts. (Translator: I  totally disagree with such an opinion on gaming theory. It does yield predictions that can be validated.)

In 1982 I left UWashington and returned Hong Kong for teaching. With the Economic Reform all over the Mainland in my eyes, I began to publish my works in Chinese. In 1989 I wrote Economic Explanations on the Hong Kong Economic Times, and after twelve issues my mother fell on the street and was heavily injured, so I had to stop to look after her. When I continued my writing on Apple Daily in 2000, my mother had passed for eight years. 

From the 80s Coase had been increasingly unsatisfied with the development of western economics, and repeatedly urged me to found my economics in China. I was not a reformer, and didn't believe I had any influence power. But after the three-volume Economic Explanations were published in 2002 in Hong Kong and uploaded to the Internet, readers that downloaded it, printed it, bound it and read it were countless. I was aware the three volumes can still be greatly improved, especially the third volume The Choice of Institutions. In 2007 I drafted The Economic System of China per Coase's invitation, and climaxed my understanding of institutions to a level nobody had ever reach. China's economic development had taught me so much.

During the years thinking over The Economic System of China, I felt, that Coase wanted me to found economics he likes in China and later it could be spread to the western world, was not dreaming or illusionary at all. In the Mainland, there are so many readers interested in economics and brilliant students are countless, while the westerns begin to learn Chinese as well.

Smith's Wealth of Nations published in 1776 still has readers today. Counting works with an everliving reader span, this is the only one. Karl Marx's Capital has a reader span of 110 years, which is really terrific, and China's development has made a contribution. Next to it should be Marshall's Principles of Economics: first edition came in 1890, but readers of it after 1965 are countable. So that's seventy-five years. My three-volume Economic Explanations should be counted since 2000, and if in 2075 there are still students reading it, Coase's wish shall come true. 

Steven Cheung

March 19, 2010