Economic Analysis and Value Judgment

Chapter 3, Section 6: Economic Analysis and Value Judgment

As is said, the criteria of competitions determine the economic operation of a society. Among all the discussions on "criteria", some belong to economic analysis, while the others are actually about subjective or ethic problems, and thus have nothing to do with objective analysis. The two must be clearly distinguished.

As we all know, under different victor criteria, the winners or losers would usually shift. Therefore, some people prefer one criterion, while some others prefer another. Such preferences fit into the scope of economics. Take examination as an example, some students prefer essay questions as they are good at argument, while some others require multiple choice questions so they have a better chance of winning. All individual choice behaviors are the objects of economic analysis.

Yet which criterion is better, or how a criterion benefits social welfare, are problems of ethics or value judgment, and irrelevant to objective analysis. For example, as I've stated, taking market price as the victor criterion doesn't waste, because that would lead to increased production, while the other criteria all have certain level of waste. However, I never say increased production is good or waste bad. What's good or bad can only be decided by personal value judgment, or only God knows. (Translator: The distinction is fairly easy: ethics or value judgment seeks a unified standard of "better", a "better" that's gonna apply to at least one more person besides oneself, while analysis of economics doesn't.)

Previously the people's communes of China led Chinese people to the edge of starvation, why was it so is a problem for economic analysis, but whether living on the edge of starvation is good or bad, is then a subjective judgment. Economics can explain human behaviors, and can inform us under which constraints people would become living on the edge of starvation, but it doesn't judge right or wrong. By "no judgment", I mean economics doesn't do that, and don't mean economists don't do that. Never forget that, economists are also human and thus have their own value judgment. If I say hunger and cold is bad, that's a subjective assertion, from the standpoint of a human, instead of objective economic analysis. I certainly have the right to make such a subjective judgment, as I have a human's rights, but this right never requires any training in economics.

I can express my value judgment, and the others can express theirs as well, but whose is better, only God knows. Expression of value judgment doesn't require any prior training of analysis. You think blue is good-looking, while I say red, then who can make a decision that satisfies both of us?  You deem government's support of education good, while I think it's bad, then we aren't gonna be able to reach any conclusion even after hundreds of years of argument. That's because the views of good or bad, love or hate, cannot be objectively agreed upon via scientific analysis.

If I say hunger and cold is not good but bad, many would agree. That's just because most (almost all) of us don't like themselves to be in hunger and cold. People agree because they have the same value judgment, instead of because there exists an objective analysis for that. Economics can explain why people would be in hunger and cold, or with the support from government what would happen to education, but it never judges good or wrong.

As is mentioned, economists are also human and thus have their value judgments. Yet, when doing analysis, they may intentionally or unintentionally bring in their value expressions about certain effect is good or bad. Objective analysis and subjective judgment can appear together. It's no big deal, although sometimes the readers or listeners may get confused. What's really important is, people dealing with economic analysis must separate subjective and objective distinctly, and never allow subjective judgment interfere with objective analysis. That's to say, if an economist twists his analysis intentionally or unintentionally because he deems government  support to education good, so that the analysis breaks away from logical norms, then that'd be an inexcusable mistake in science.

Sometimes economists may haven't say anything about good or bad, yet outsiders think they have. For instance, I've said market price can promote production, and many readers think I deem market price as a good criterion, which I have never said. The readers think I did, because themselves think production increase is good. Of course, when writing for newspapers, to avoid dullness, I sometimes make my judgments of good or bad. Nevertheless the focus of this book is objective economic explanation.

Some readers think I believe in and have special preference to market. I do trust in the capabilities of market, while I also know there are things that the market is incapable of. Yet my personal value judgment is against market, and I hate communist system as well, because I can hardly stand out under either of the two. What I really prefer, is to allocate social wealth according to study and exams, as I am really distinguished under any exam criterion. It's really sad, that nowhere of this world allocates wealth or beauties via exams. (Only God knows, the imperial examination system in old China did effect wealth allocation, but I guess I shall never have my chance to win!)

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.

Game Rules and Property Rights Systems

Chapter 3, Section 4: Game Rules and Property Rights Systems

Like any sports, the competition aroused by scarcity also has its game rules. No game rules, no way to judge who wins. No winner, then no need to compete. Athletics has rules, so does tennis. Without the rules, victory or defeat cannot be decided. Even in the competition that strong prey on weak, there is a rule that winner lives and loser dies.

From the perspective of economics, the game rules for daily man vs. man competitions are laws, disciplines, customs, and etc. Just like the ones in sports games, these rules regulate and prohibit participants' certain behaviors during competition. That's to say, in social economic competitions, laws, disciplines, or customs, whichever it is has a mandatory method to define individuals' rights. Such definitions of rights form the property rights systems. In Volume 3 I will explain that, an arrangement to constrain competition is actually a contract arrangement, which is another angle to view the property rights systems.

(Translator: The ultimate game rule for competition is always violence. Although individuals have almost the same natural capabilities, the formation of collectives, or societies, brings about every possibility. Two shall triumph one, yet three may lose to two. With the development of motion and communication technologies, the distribution of violence converges towards monopolization, where individual's violence is negligible before the monopoly, no matter it's a democratic legal system or an autocratic military government. Soft violences, like credit discrimination or cooperated isolation that appears in disciplines or customs, rely on the violence monopoly as well, for example, a bad credited person cannot revenge the people that don't trust him, as he would get punished by a legal system. Upcoming discussions are all based on a monopolized utilization of violence.)

The systems of property rights are the game rules for competition, and a type of constraints on competitive behaviors as well. If discriminated cautiously, these rules are actually quite different. Private property rights is just one of it. It's even possible to classify all the systems into several categories and systematically analyze how the variation of each category would affect human behaviors. As are the contents of institutional economics, they will be detailed in Volume 3.

The word "property" is not simple. From the perspective of economics, property is economic good with human competition, which is slightly different from its legal definition. Legally, property usually means assets (especially lands and buildings); yet in economics, other than assets, it includes consumables as well. What consumables have in common with lands and buildings, is that they both are scarce and competitive.

Alchian made it perfectly that "property", competition, and scarcity, are indeed synonymous. Readers must spend more time pondering on this "synonymy" until they fully understand in our society competition is ubiquitous. Without grasping this general concept of competition, one can never achieve anything in economics.

Essence of Competition

Chapter 3, Section 3: Essence of Competition

The desert island that Robinson once lived on is a one-man world, there competition doesn't exist. Although there'd be animals to compete with Robinson for food, there is no man vs. man competition there. In economics competition means the one between man and man — all postulates of economics are for man and most behaviors that economics explains are competition behaviors.

In Robinson's one-man world, there exist free goods, and economic goods as well. To get more of an economic good, Robinson must pay certain sacrifice. To eat one more fish, he need cut rest time; to collect more wood for fire, he need reduce apple planting; eating more wheat this year means eating less next year. In a word, on the island, Robinson faces short supply, not everything is free good and sacrifice is required, therefore like us he need choose among options. The only difference is: there is no man vs. man competition for Robinson.

In that one-man world, economics is fairly easy. We can use economics to explain Robinson's behaviors, and the whole explanation, if simplified, won't last more than two or three hours — for a thorough analysis two or three days would be surely enough. Just imagine, in Robinson's one-man world, there is no market, no price, no currency, inflation, or unemployment, and no law, police, or politics, not to mention arms, intermediary, contract or institution. Without these, economics can't be any deeper.

So the complexity and profundity of economics is all because one more man entered the one-man world. When there are two or more people in a world, they become a society — this is the clearest definition of "society". The joys of economics all stem from the existence of such "societies". We could even say: more than ninety nine percent of the complexity of economics is because we live in a world of more than one man.

Let's keep moving our reasoning on. An economic good must be better more than less. In a society, when one wants more of the good, others may want more as well. When monks are many and the gruel is meager, competition is inevitable. Competition is defined as more than one person demands an economic good. In the society we now live in, such goods are everywhere. Free goods, like fresh air, do exist, but the number is getting fewer and fewer.

In a society, economic good without competition is not easy to find. In principle, in a society an economic good doesn't have to be under competition, but examples are so few that one may need rack his brain to identify just one or two. More than sixty years ago I was attending the Wan Chai College in Hong Kong, fellow students then liked to fetch a cinema-issued brochure, called "show bridge", that briefed the story on show, when they entered a cinema. Because many students collected the brochures enthusiastically, old (out of date) "show bridges" became scarce and started to have price, some hard to get were even traded for several Hong Kong dollars. At the time several dollars meant one week's pocket money for me. Old "show bridges" became an economic good and had competition. After several years, the hobbies for collecting "show bridges" vanished, and students started to dislike and throw them away. But there was this student named Ting who loved "show bridges" so heavily that he didn't stop his collection. So for this weird student, old "show bridges" were an economic good (better more than less) but had no competition. This is one rare case that I know when an economic good has no competition. Time changes, today cinemas in Hong Kong don't issue such "show bridges" any more. I haven't met the student named Ting for fifty years, don't know how his piles of "show bridges" would eventually become.

In a society, nearly every economic good has competition. And the competition keeps going day after day. As everyone of us has been having competitions from morning to night and from young to old, we might be so accustomed that we don't even notice they are actually everywhere. The breakfast we eat is won through competition, as when one eats more someone else must eat less. In each competition someone "gains" and the other "loses" (Translator: quantitatively). Breakfast is so, lunch is, the bed for sleeping is, taking transit bus, going to school, sunbathing on the beach, watching TV at home, etc., all of them are!

So to speak, in a society we can hardly find a behavior without competition behind. "No competition", from the viewpoint of strict economics, can rarely be justified. Some unintelligible economic textbooks, when talking about monopoly and patent right, assert there'd be no competition. Yet the real fact is, monopoly and patent right only suppress one type of competition, some other type is surely enhanced at the same time, though. For example, people may strive for monopoly or patent right during competition, yet in a monopolized (or patented) market, they can still compete through similar or substitutable products for profit.

In a society without market, competitions are all around either, and they just take different forms. That strong prey on weak is competition, power struggle is, back-door dealing, seniority ranking, stratum privileges, etc., they all are forms of competition. The principle is quite clear: any time more than one person demands the same economic good, there exists competition.

What is Scarcity

Chapter 3, Section 2: What is Scarcity

"Better more than less" is how economic goods are defined, and that defines "scarcity" as well. That's saying, all economic goods are scarce and insufficient. What then does "insufficient" mean? If the breeze from a river and bright moon in mountains are, like Su Dongpo the Poet said, inexhaustible, they are sufficient (Translator: the poet lived almost 1000 years ago). In that way, they can only be free goods — although in today's real world breezes and bright moon are no longer easy to get and thus have become economic goods. Strictly speaking, "insufficiency" doesn't have to be linked with the quantity supplied. For example, there are more good eggs than bad ones, yet good ones are insufficient and bad ones are excessive. Good eggs are greatly needed and thus insufficient; bad ones are disliked by everyone, so even a few are already excessive.

If a good is not demanded, there'd be no "better some than none" for it; and if supply of the good is not insufficient, there'd be no "better more than less". So "scarcity" happens only when a good is demanded and its supply insufficient. When demand increases, more supply (still limited) remains scarce; if demand decreases, limited supply may become abundant. That's to say, scarcity is determined relative to demand.

A scarce item — an economic good — is something whose supply cannot meet people's demand. So the item is better more than less. As it's better more than less, if one wants more of it, he must pay a certain sacrifice. If nobody is willing to pay a sacrifice for more of the item, it cannot be counted better more than less, which is logically inarguable. Therefore, any item, that there is someone willing to pay a sacrifice for more of it, is scarce and insufficient, thus an economic good. On the market, the sacrifice we need pay is price. So we can conclude anything that has a price is scarce and insufficient. In some societies — like extreme communist society — there is no such a market and thus no price for a good, but sacrifice doesn't vanish. Therefore we have another assertion: an item without a price can possibly be economic good as well, and scarce of course — as is scarce (people want more), some sacrifice is inevitable.

Definition of Goods

Chapter 3: Scarcity and Competition

To explain behaviors with a theory, the theory must install constraints to those behaviors — this is a basic principle. The methods of economic explanation are the same as those of any other empirical science: on one hand, we have some general postulates, axioms or laws; on the other hand, we install test conditions or circumstances that constrain behaviors. With both of them, we can imply under certain conditions how people would behave; and when the conditions vary, the behaviors change as well. To be refutable, the implication must be definite — if not definite, how can it be "wrong" or refuted? When someone has these constraints well mastered, the applications of them would be at his will, and the implications can be stunningly accurate.

In Chapter 2 we talked about two postulates: (1) any behavior of a individual is by his choice, and the choice is predictable; (2) under constraints every individual always maximizes his self-interest. Other than these, we have some other constraining postulates and will analyze them in Chapter 4 and 5. At this point we need interrupt the topic, as scarcity and competition, two indispensable concepts in economics, require explanation first.

Chapter 3, Section 1: Definition of Goods

The word "goods" has many meanings. In addition to be interpreted as product or commodity, it can represent service, friendship, reputation, air, cleanness, serenity, lover, love, and etc as well. Everything better some than none, no matter tangible or not, is a good — "better some than none" is the economics definition of goods. From each individual's point of view, biological children, breeze from a river, or bright moon in mountains, are all "better some than none"; beautiful face, credible reputation, pleasant voice, sweet memory, ability of thinking, etc., are all goods.

Goods have two categories: one is economic goods; and the other is free

goods. In all the goods that are defined as better some than none, a major part are better more than less. "Better more than less" is how economic goods are defined. In such a definition, "better" shall be objective. Suppose we split 250 grams of gold into two shares, one 100 grams and the other 150 grams, and let people choose, if the 150 gram share is chosen, gold is then an economic good. The chosen share of a comparison always means better, and it doesn't matter whether the share is really beneficial or not. Therefore, here "better" has nothing to do with subjective or value judgment.

Better more than less are economic goods and they are countless in this world. Gold and silver, grapes and wine, abalones and shark fins, fruits and vegetables, clothings, foods, houses and cars, tours and rests, family love, etc., are all economic goods, as each meets better more than less.

Among all goods, a minor part are better some than none but not better more than less, as the supply of them exceeds demand, and any addition makes no use. Goods like this are not plenty, among them air is the most frequently cited one. In areas where air is freshing, the supply of air is unlimited, and nobody would strive for more than needed. Although air is necessary for man, it's only better some than none and not better more than less. Air is therefore a free good instead of a economic good. But when an area is crowded and the air there is stale, the need of more fresh air becomes realistic. Under this circumstance, fresh air is no longer a free good, it's now an economic good.

Conclusion on Selfishness

Chapter 2, Section 5: Conclusion on Selfishness

Although there are reasons that we shall believe selfish is human nature and unmodifiable, yet from the perspective of economic science this really doesn't matter. What's important is selfishness is treated as a postulate and we shall not argue on that starting point. Whether such a treatment is viable in explaining human behaviors, depends on whether the refutable implications derived under this constraint together with some others can pass the tests against facts. In this game of scientific dialectics, we cannot deem human selfish sometimes while not the other times, because that would mean we cannot derive any refutable implications.

Handled in this way, the postulate of selfishness does exhibit amazing explanation power. Probably in the future some genius may propose another one that replaces selfishness but functions better. As of today we haven't had such a thing, so the postulate of selfishness still has to be sticked to. This is not stubborn, it's just some rule of scientific methodology that we need follow.

If human nature is selfish (yes or no only God knows) and can't change, then should any ism be based on human selfishness can be modified, its system and policies would definitely fail. It's the experience of past China. Nowadays in this world, believers of such a selflessness become fewer and fewer, yet they still usually get exploited by some selfish guys for strengthening the latter's power and interest.

There's another important question, which is: if human's selfish nature could be modified, and the modifier omnipotent, what would he change human into? To say that nature modifiable doesn't tell us what man should be. Like a melon and cabbage? Like a computer? Or Frankenstein? I don't know what the readers would think of it. I just intuitively feel that a man as selfless as an angel would actually look more frightening than a selfish one.

In Chinese cultural tradition, the word "private" ("si" in Chinese) never means anything good: to carry something and escape privately (xie dai si tao), to give and take privately (si xiang shou shou), to seek private interest only (zi si zi li), etc., are all belittling usage of "private". After thirty years of reform and open-up, great progresses have been achieved in mainland China, yet private enterprises are intentionally called "citizen" enterprises, where the usage of "private" is avoided. How about in the western world? There "private" is respected. Why there is such a big difference between the two is elusive to me. For the translation of "private" into Chinese, by no means can I find any other except for "si". As is said, the selfishness here only means "to seek maximum private interest under certain constraints", which, as a postulate, has nothing to do with personal value at all.