The Science of Demand (12) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 4.  Mankind’s Selfish Nature

From the viewpoint of economic’s history of thought, “selfish” became a postulate by the end of the nineteenth century, after the rise of neoclassical economics. In this then new paradigm, calculus was widely used, “marginal” analysis propounded, and the concepts of “maximization” and “minimization” accepted. The principle of satisfying self-desires became the postulate of “constrained maximization”, or cost minimization. An abbreviated term, “selfishness”, is more commonly used.

Since its rise, neoclassical economics has gradually become more scientific. “Selfishness” has been treated by the profession as an objective postulate. Whether the nature of mankind is selfish or not therefore becomes irrelevant. Certainly, many economists today still cannot distinguish between value judgment and scientific dialectic, confusing affection with analysis, thus creating a big mess. On the other hand, economics can be highly admirable when value judgment (or subjective judgment) and objective analysis are superbly combined. The value judgments of economic gurus like Smith, Ricardo, John Stuart Mill are fascinating yet plain and clean enough for later generations to follow.

It is true that the scientific “selfish postulate” we use today is evolved from the subjective judgments of older generations. Two paragraphs in the 1776 classic work “The Wealth of Nations” of Smith are the most frequently quoted sayings in economics. Having read these time and again, every time I still find new inspiration and feel overwhelming vigor. This is what he wrote:

“But man has almost constant occasion for the help of his brethren, and it is in vain for him to expect it from their benevolence only. He will be more likely to prevail if he can interest their self-love for his favor, and show them that it is for their own advantage to do for him what he requires of them. Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of. It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest…

“Therefore, every individual endeavors as much as he can to employ his capital to render the greatest value. He generally, indeed, neither intends to promote the public interest, nor knows how much he is promoting it. He intends only his own security and his own gain; and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it.”

After chewing “The Wealth of Nations” for so many years, I believe Smith’s “selfish” viewpoint needs to be supplemented in two areas. First, Smith rightly pointed out that selfishness brings massive gain to the society as a whole, but belittled the damage that selfishness causes the society. The latter significantly involves the issues of transaction costs and property rights which are the foci of my research. Philosophically, the importance I place on the damage of selfishness can be said to be the main difference between this “Economic Explanation” and “The Wealth of Nations”. However, my main conclusion not only does not refute but in fact strongly supports Smith’s. On the other hand, since my view on selfishness is more comprehensive, relatively superior is my explanation on behavior.

My second point about Smith’s selfish viewpoint is that he did not mention human is born with selfishness. His implication was selfishness is forced out: not that human desires to be selfish, but human cannot be unselfish. This “survival of the fittest” viewpoint – so viewed in a number of issues in “The Wealth of Nations” – subsequently influenced Charles Darwin’s earthshaking work “On the Origin of Species”.

Alchian, my teacher, published in 1950 a seminal article “Uncertainty, Evolution and Economic Theory”, triggering a great methodology debate spanning almost twenty years. My “idiots and gasoline stations” example in Section 4 of Chapter I was inspired by this article.

Alchian’s argument was similar to Smith’s yet more forceful. The implication of Smith was that selfishness was due to the survival of the fittest; Alchian’s implication was that even for idiots who by definition could not be selfish, the same effect could be felt since after elimination, the behavior of the remaining idiots would inevitably be selfish.

Biologist Richard Dawkins published in 1976 an informative book “The Selfish Gene”, using numerous examples to prove that animals are born “selfish” which is hereditary and not alterable. This important book inspired a new science – bio-economics. Jack Hirshleifer, another teacher of mine, is a key advocate of this new science. He wrote to me more than ten years ago that this science was developing in great strides.

As noted above, there are four views of “selfishness”. Smith considered that was forced out; though Alchian consistently used “selfishness” as a postulate, he also considered that even idiots acting foolishly would have the same effect; Dawkins said it was hereditary. I myself have nothing invented about “selfishness”, but have always insisted theory had better be simple. My preference is treating selfishness as the postulate of constrained maximization. This is the tradition of neo-classical economics. Provided constraints are appropriately managed, there is no difference in explanatory power. 

The Science of Demand (11) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 3.  Selfish as a Restraint

To say a person would consistently make predictable choice – the first postulate in economics – is already a restraint. But a supplement is required: since this restraining force is insufficient, we need to incorporate other essential restraints. The second postulate is: the behavior of every individual is for self-interest! That is, every individual would, under constraints, maximize his self-interest. Irrespective of diligence, rest, deceit, donation … the starting point is all self-interest.

Postulate is not arguable, and whether mankind per se is selfish is irrelevant: of essence is not how mankind is (this is the domain of psychology, physiology, or philosophy), rather it is how we assume mankind is. A question then arises. If we say deceit, donation … are all selfish behavior, will all behavior become not refutable by facts or other behavior simply by this “selfish” reason? The original aim is to restrain behavior, yet in the end there are no restraints at all, so how can it be justified? This is a good question. The answer is: if we randomly say any behavior is selfish, like a tautology that can never be falsified, then this selfish postulate will be devoid of content and application. But if we can assert certain constraint to specify that under certain circumstances a person would for self-interest make a certain choice, and any change in this constraint will lead to an inevitable change in certain behavior, then this is a different story.

For instance, donating for no reason, or helping a friend, has no connections with self-interest and therefore cannot be explained. But if we say, under certain constraint, the cost of donation is relatively low, or the gain relatively high, then donation activity will increase. As such, this selfish postulate becomes greatly useful. I can quote a few examples. More than twenty years ago, the son of Deng Xiaoping, Deng Pufang, came to Hong Kong and raised more than HK$50 million in donations at one sweep. Yet my son has no such prowess. If the donors donated just for donation’s sake, then regardless of how incapable my son was, why did they mark the occasion instead of quietly sending checks to charities? Someone might argue that “anonymous” donors do exist. Yet why does donation activity increase when donation is tax-deductible? How does compassion arise? Where does the “cause and effect” in “kindness gets rewarded” come from?

Under what constraint will an individual believe in cause-and-effect retribution as well as hold aloft virtue and morality? Under what constraint will an individual be more compassionate? Under what circumstances will an individual, in search of fame, become more generous toward charity? I very much appreciate people like Sir Run Run Shaw who do their utmost donating to education – naming a university building as “Sir Run Run Shaw Hall” is fair and appropriate indeed. To say the starting point of Shaw’s endowment is for self-interest has no implication to belittle him at all. If I had his wealth, I would not be as generous as him. But if we abandon the selfish postulate, there are no other means in economics to explain Shaw’s endowments to universities are non-random but selective. Behavior is not without purpose; donation is no exception.

Suppose we allow exceptions to exist, and whenever a phenomenon that is difficult to explain is allowed to be treated as an exception, then economic theory will never be refuted by facts or behavior. As such, the entire economic framework will fall apart with none explanatory power at all.

The difficulty lies not in whether this selfish postulate is right or wrong, but in how to assert under different constraints that self-interest would lead to the co-existence of deceit and donation, two distinct behavior. I have said in Chapter I that the assessment and delineation of constraints are the most arduous topics in economics. Up to new we still have no satisfactory explanation about numerous human behavior (this is the interesting part of economics; a science that answers everything is about time to come to an end), the main reason being insufficient knowledge of constraints.

The Science of Demand (10) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 2.  Theory to Restrain Behavior

Let’s not forget that a theory with explanatory power must be refutable by facts. A non-refutable theory is not useful at all. Of equal importance, to predict behavior, behavior must be scientifically restrained. If behavior is not restrained at all so that it can behave in whatever way like a non-directional wind and no prediction will ever be wrong, the theory is then not refutable by facts.

Behavior must be restrained, like specifying under what circumstances a person will turn left instead of right. Only so can behavior be inferred and explained. Certainly, specifying turning right could turn out to be turning left. A theory with explanatory power is potentially refutable by facts but has not yet been refuted. This has been explained in Chapter I. Restraining behavior increases the possibility of refuting the theory. The more restraints there are, the more precise is the inference of behavior. But then the possibility of the theory being refuted gets higher. Science is therefore a risky game. The more restraints on human behavior the better, though they must not be extended to the territory of refuting the theory. Masters in science are courageous yet cautious enough to make bold assumptions alongside careful review, extending the arbitrary boundary of restrained behavior to the brink of just not refuting the theory.

The Science of Demand (9) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Chapter II.  Starting from Being Selfish

There must be a starting point in every debate, and science is no exception. If we have disputes over the starting point, science will be difficult to thrive. Therefore, in scientific development, participants have to comply with a self-evident rule: where a postulate or an axiom is specified, this basis is not arguable. Not that everyone has to whole-heartedly agree with these postulates or axioms. Whether assent or not is not essential, the essence is agreement on not arguing about the starting point. The rules of scientific dialectics are: “First do not oppose to my necessary starting point in theorizing, and let me logically derive from this starting point a set of theory. After testable or refutable implications have been derived, you will then have a basis for opposition. If testable implications are mercilessly refuted by facts, then I cannot but consider my postulates wrong.”

By the way, those postulates or axioms that are not arguable could be quite ridiculous and implausible. For instance, an important postulate in mathematics says: “If one plus one equals a number, that number is called two; and if two plus one equals another number, that number is called three …” Sounds a bit stupid, but without this postulate, we will never know that it is impossible to have another number between one and two. If we have disputes over this basis without any compromise, how could mathematical theories develop?

Let’s cite another example. In geometry, the definition of a straight line is the shortest distance between two points. Sounds like a hard-to-swallow joke, yet it is far less abstract than the postulate of “a point”. Geometry specifies: “A point is not measurable!” If a point is not measurable, how could there be a measurable straight line? Nonetheless, based on these controversial starting points, geometry enabled mankind to build pyramids in ancient times (although these postulates were not at that time clarified), to build Hong Kong’s Bank of China Building today. Our conclusion therefore is: postulates next to ridiculous could lead to amazing knowledge.

Section 1.  Choice Made by an Individual

The first postulate in economics is: “individual” is the basic unit in economic analysis. That is, when analyzing whatever economic issue, the starting point cannot be from a group of people, an organization, a society or a nation. The analytical unit must be an individual irrespective of macroeconomics, social welfare, or government planning.

No economic theory uses a collective group as the starting point. Regardless of how “macro” the viewpoint is and whether cited at the start of analyzing, if a theory is not based on an “individual” as the starting point, it is no commendable economic theory. That is, it is a must to use an individual as the starting point in analyzing macroeconomics. Certainly, there are economic theories using a group or an entire society as the starting point, but these have divorced from the basis. Occasionally we will hear comments like macro is more important than micro. These would only come from people with no foothold in economics. Macro is made up of the sum of units in terms of individual. The difference between macro and micro is merely whether the combination is big or small. In contemporary economics, the difference between macro and micro, in the eyes of certain scholars, is not according to the degree of combination but rather in accordance with the importance attached to money.

Using “individual” as an analytical unit disregards sex, age, or state of mind. Regardless of whether A is a genius or B is a fool, we consistently treat individual as an analytical unit. As to “individual”, it can be so identified by any observant person. Equally important, postulates cannot be easily altered. The postulate of “individual” is no exception. We cannot use individual as the starting point for certain issues and collective group as the starting point for others. For sure, certain issues concern a group and not an individual, but even when analyzing such collective issue, the starting point remains an individual.

Why is “individual” so important? The answer is all choices are made by an individual. Collective choice is the combination of individual choices. That is, even if an individual loses freedom under a totalitarian regime – without freedom given the circumstances – this individual has nevertheless chosen to give up freedom. In other words, there is neither absolute non-freedom nor absolute freedom in this world. Choice definitely is subject to constraints, yet this choice is made by an individual.

The first postulate in economics is that decision is made by an individual. The so-called decision is choice. It involves a non-trivial philosophy. Economics is a science inferring human behavior to explain phenomena. We profess that all human behavior results from choices. Whether the choice is smart or rational is not essential; of essence is we assume human makes choices. Neither is it essential that all human behavior is actually derived from choices, nor purely by chance without any aim; of essence is we consistently follow this postulate or axiom.

“Human makes choices” is a “convention” in economics. This convention is different from that in other natural sciences. In explaining the phenomenon of an object, physicists will not say the object’s behavior is the result of the object’s choice. In principle, it is not forbidden if physics says objects themselves make choices, though physicists have not done so. Any science has its own established starting point, and this starting point is not arguable. When the “individual makes choices” postulate in economics becomes widely accepted, all economic issues become an issue of choice. There are certainly grounds for the most important theory in economics – the price theory – to be called the choice theory.

In order to apply the choice theory to explain human behavior, it is a must to assume human behavior can be predicted. In a stricter sense, the first axiom in economics is that the behavior of every individual is derived from individual predictable choice. This is an axiom, a postulate in economics. Regardless of right or wrong, this is not arguable.