Criteria of Competitions

Chapter 3, Section 5: Criteria of Competitions

In an athletic game, it's the running speed that decides who wins. So speed is the victor criterion. But if the game has no rules to define what behaviors are prohibited, the criterion of speed would no longer function. Similarly, without game rules, the weight criterion in weightlifting wouldn't function as well. Chess games are won by intelligence; billiards are won by vision, techniques and hand control — all these criteria are guaranteed by respective game rules.

So is it for economic competitions. In a free market, the one offering the highest price wins, so price becomes the victor criterion. The game rules that give rise to this criterion are the private property rights system, which is the core of Coase and Alchian's thoughts.

For a long time, price analysis in economics had focused on how price is determined. Once the concept of price came into Alchian's hands, it gained a new life. He asserted: "what a price determines is far more important than how the price is determined!" This one sentence suffices to advance our knowledge of the world. Price is a victor criterion, while private property rights system is the set of game rules that lead to this criterion. That Coase and Alchian are honored as the founders of property rights economics, is because each has said some alike enlightening words.

Game rules and victor criteria are directly connected: the former determines the latter, and the latter determines the economic operation of a society. An interesting question is, was the birth of some game rules due to people's need of a certain criterion, or did people's need of certain game rules inevitably lead to the emergence of a victor criterion? At first sight, it's hard to tell which came earlier.

I think first came a criterion and then the game rules. Why? It's because a victor criterion settles the problem people need to solve via competition, while the game rules only assist the functioning of the criterion. Speed is the core of an athletic game, and the rules of this game only assist in judging who is really faster. School's score criterion of examinations is used to verify whether the students have put in efforts in their study, while the exam rules just fairly ensure the one with better knowledge can win. Price no only decides the victor, but also implies the one with higher productivity wins, while the private property rights system plays only an auxiliary role. You students shall be able to have a better understanding of this relationship after reading my analysis of rent dissipation in Volume 3. (Translator: It's fairly easy to understand that the price criterion came earlier. Exchange can occur without any property rights system, because on one hand both participants would benefit, and on the other hand the characteristic of information serves as a protection when there is no such from a law system. For example, you have something useful and hide it, then it's nearly impossible for the others to know you have it if you don't signal them, not to mention to know where it's hidden. With the assistance of a property rights system, exchanges just occur more frequently.)

As mentioned above, victor criteria determine the economic operation of a society. On one hand, the distribution of wealth or income of social members are decided by competition criteria. Criteria have many types, and under different criteria, the chance to win for a same person varies. For the people that are good at business running or goods production, the victor criterion of private property rights is the most helpful. For some others that have superb political tactics, non-private property system suits them the best. There are still some others that don't know how to cope with the operation of a frequent-changing market but can work honestly and industriously, then seniority would be the top criterion.

On the other hand, because victor criteria decide people's income and enjoyment, under different criteria their behaviors would change accordingly. Take price as an example. To gain profit in a market, one has to work hard, or invent new products, or formulate efficient management, or search for information that reduces cost, etc. But without the price criterion and incomes are allocated by rationing, competition participants would then choose "back-door dealings", or play political tactics, or try to become an official, etc.

Here the adage "criteria determine the operation of social economy" can be illustrated by two real cases on housing allocation in Hong Kong. As is known to all, the free market of housing properties in Hong Kong takes price as its victor criterion. Those that can and are willing to offer high enough a price or rent, can purchase or rent the housing they like for personal use. No matter how old, how beautiful, how skilled in political tactics, or how learned one is, he can't take the benefit if not paying the necessary price.

But within the University of Hong Kong (HKU), teacher housing is allocated according to points. Being a department chairman is 6 points, being married is 6 points, having one child is 6 points, having two is 12 points, one year of working is 2 points and eight years would then be 16 points. The total points is the criterion used to determine the order of housing allocation and the size allocated. It doesn't matter how learned a teacher is or what level his research has achieved. No enough points, no chance of winning an allocation.

As a matter of fact, the point criterion used for housing allocation in the University of Hong Kong is very close to that used for allocating housing to cadres at the early stage of China's reform, they are almost identical. The reason is, the constraints HKU has and China's state-owned property system share many similarities. The housing properties of HKU are not private but public, or government-owned. From the perspective of property rights, the mechanism employed by HKU actually belongs to a "shared property rights" system, in which the allocation of housing has nothing to do with market price. The difference between HKU and past mainland China is that the "shared property rights" system in HKU only works for the matters of the university, while that of past mainland China was generalized and spread to the entire nation.

From above two cases about the housing allocations in the market and HKU, we can easily see, under different victor criteria the winners are different. A man with sharp eyes in business wouldn't make any difference at HKU, while one with many children wouldn't enjoy any priority in the market. If we go deeper, we can know, under different criteria people's behaviors differ, therefore the efficiency of production would be different as well. The criterion used by HKU in housing allocation encourages more children, early marriage, and long term service to the university. The higher price criterion, instead, encourages hardworking, cost reduction, and saving, etc.

In economics the concept "waste" is not simple. Only until Volume 2 will we have a deep discussion about it. Here I only introduce the waste concept that appears in common books but is actually not quite right. Generally speaking, waste means there are other approaches, or allocations of resource usage,  that can increase the wealth or income of a society, but due to certain reasons these approaches haven't been taken.

According to the above definition, among all countless competition criteria, only one has no waste. This only one is market price. Several examples can illustrate the point. Queuing up to make purchase, which takes first-come first-served as criterion,  need pay the cost of time. As the time is used for standing and waiting instead of production, that generates no benefit for anybody, so the value of the time is wasted.

Another example, let's get back to the point criterion for HKU's housing allocation mentioned above: a teacher at HKU can get more points by giving birth to more children or teaching longer. Then at some hesitation point (so-called "marginal"), to give birth to more children or to seek an alternative employment, would be decided by the consideration of earning better housing points. If someone doesn't plan to have that many children but gives birth to them as well, that's a waste, because the housing points doesn't mean anything about product value, yet the decisions of giving birth to more children are right "coerced" by increasing his points.

Using age as a competition criterion would encourage people to misrepresent their ages, even that costs a lot of money and energy, or to idle their time away and crave for a speeded aging. In a society that strong prey on weak, force is the victor criterion and thus investments in weaponry are strongly encouraged. Many years ago, gold mines were discovered in frozen Alaska, and a game rule was set up among competitors that the one winning the speed contest to a gold mine, would be entitled the privilege to mine gold for a day at right that gold mine. Because of the rule, people poured money on their sled dogs to make them as strong as possible. All these behaviors are wasteful.

The only unwasteful criterion of competition is, market price. That higher price wins is the only criterion that makes people work harder to exchange for what they need. To work harder for money means a better chance of winning a competition, while this additional work is beneficial to the society. So market price doesn't lead to waste.

All above "waste" opinions were deemed by me since the early 70s as rent dissipations, because characteristically they are the same as the rent dissipation of fishing on high seas. In fact, when writing the Theory of Share Tenancy in 1967, I had already had a similar idea in Chapter 6, Section 4. I've spent about forty years on these complex, important, and interesting analyses, and will have them detailed in Volume 3.