The Science of Demand (17) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 4.  Game Rules and the System of Property Rights

Like any kind of sport, competition arising from scarcity has to have game rules. Without rules there is no way to decide winners from losers. Without winners, there is no objective to compete. Athletics has rules, tennis has rules. If there are no rules at all, success or failure cannot be determined. Even when competing under the law of the jungle, the rule is the winner survives while the loser dies.

From the perspective of economics, the relevant rules in people’s daily competition are laws, disciplines, customs, etc. Similar to the rules in sports, these rules restrain competitors from behaving in certain ways under certain circumstances. That is, in a society’s economic competition, the rules, be they laws, disciplines or customs, are all restraining instruments to delineate rights among people. Such delineation of rights is precisely the system of property rights. In Volume III I will expound that when the system of property rights is viewed from a different perspective, the arrangement to restrain competition is the arrangement of contracts. This will be later discussed.

The system of property rights is the rules of competition, which is also a constraint to restrain competitive behavior. The rules are ever-changing if we try to differentiate them in detail, with private property rights being only one of them. It is possible to generalize the system of property rights into a few broad categories, and systematically analyze the impact of the change in each category on human behavior. This is an issue of institutional economics, which I will elucidate in Volume III.

“Property” is no simple word. From the viewpoint of economics, property is a competitive economic good. This is somewhat different from its definition in law. In law, property generally refers to an asset (especially real estate); but in economics, it means not only an asset, but also a consumer good. Scarcity is an element that consumer good and real estate have in common. Both are competitive, and both are economic goods.

As insightfully said by Alchian, the three words property, competition and scarcity are synonymous. Readers should ponder thoroughly about this “synonymous” viewpoint until recognizing that in the society, competition is a ubiquitous concept. Without understanding this generalized “competition” concept, do not expect any significant achievement from studying economics.

The Science of Demand (16) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 3.  The Nature of Competition

In Robinson Crusoe’s desert island, a one-man economy, competition does not exist. Certainly, there may be other animals competing with Crusoe for food, yet there is no competition among people. Competition in economics refers to competition among people – all economic postulates are designed for human, and the majority of behavior to be explained is competition among people.

In Crusoe’s one-man economy, there are free goods as well as economic goods. In striving for more of a certain economic good, Crusoe has to forgo certain option. In order to eat one more fish, he has to take less rest; to chop more wood for warmth, the option forgone is less apple plantation; to consume more wheat this year, the option forgone is having less next year. Indeed, even on a desert island, Crusoe has to face the reality of insufficient supply. With the existence of economic goods, an option has to be forgone. Just like all of us, he has to make a choice, too. The difference is: in Crusoe’s economy, competition among people does not exist.

In a one-man economy that has no competition, economics is indeed trivial. We can apply economic theory to explain Crusoe’s behavior, and a complete set of explanation, if simply stated, only requires two to three hours – even in-depth analysis will take no more than two to three days. Let’s imagine, in Crusoe’s one-man economy, there are neither markets, prices, currencies, inflation, unemployment, nor laws, police, politics, not to mention arms, middlemen, contracts, institutions, etc. Without all this, economics cannot be any difficult.

It is true that the complications and difficulty of economics are entirely due to having one extra person in Crusoe’s economy. A world with two or more people becomes a society – this is the most clear-cut definition of “society”. Economics becomes interesting due to the existence of “society”. We can also look at it this way: more than 99% of the complexity of economics is due to us not living in a Crusoe’s one-man economy, but in a multi-person society.

Let’s follow the progression of this reasoning. An economic good is “more is better than less”. In a society, a person wants more of a good, and other people likewise want more of that good. With demand outstripping supply, competition is thus inevitable. The definition of competition refers to the demand for an economic good comprising the demand of more than one person. Such examples are aplenty in the society in which we live. Undeniably, free goods – such as fresh air – do exist in the real world, though there are less and less of them.

It is not that easy to find non-competitive economic goods. In principle, in a society, an economic good is not necessarily subject to competition, though examples are few and far between. More than sixty years ago, I was studying in Hong Kong’s Wanchai College. When our fellow students went to see a movie, they were anxious to collect a brochure distributed by the movie theatre about the storyline of the movie – commonly called “movie plot”. Old (outdated) “movie plots”, having numerous students striving to keep to themselves, were scarce and all had a price. For those less readily available, several Hong Kong dollars was required to exchange. In those days, such an amount was my pocket money for a whole week. Under competition, old “movie plots” became economic goods. After a few years, the enthusiasm for collecting “movie plots” suddenly died down, with the students growing weary of them and eventually abandoning them. The only exception was a student surnamed Lee who was so obsessed with the “movie plots” that he kept on collecting. Therefore, for this eccentric student, though there was no competition for old “movie plots”, it was an economic good (more is better than less). This was a rare example of an economic good having no competition in a society. Times have now changed, and movie theatres in Hong Kong no longer print nor distribute “movie plots”. I have not seen student Lee for fifty years, and have no idea how he managed his whopping piles of “movie plots”.

In a society, there is competition for almost every economic good. There is therefore competition every day. Every one of us competes day and night. Having accustomed to it since childhood, we may not be conscious of its omnipresence. The breakfast that we eat is won by competition. When one person eats more for breakfast, someone else has got to eat less. In competition, one “gains” while the other “loses”. This is the case for breakfast, for lunch, for the bed we sleep in. The same is true for catching a bus, studying in school, sunbathing on the beach, watching television at home, etc.

It is difficult to find non-competitive behavior among people in the society. Strictly speaking, “no competition” hardly exists in economics. Certain sub-par economic textbooks say that competition does not exist under a monopoly or a patent. However, monopoly and patent merely suppress one kind of competition, while at the same time increasing competition of another kind. For instance, people will have to compete in order to get a monopoly or a patent; and under a monopolized (or patented) market, people will devise similar products or substitutes to compete for profit.

In a society that has no market, competition will also keep emerging one after another, though the forms of competition are different. The law of the jungle is competition, so are power struggle, back-door transaction, ranking by seniority, hierarchical privileges, etc. The message is clear: whenever more than one person demand for the same economic good, competition inevitably exists.

The Science of Demand (15) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 2.  What is Scarcity?

“More is better than less” is the definition of economic good, as well as the definition of “scarcity”. That is, all economic goods are scarce, or inadequate. How come “inadequate”? If fresh sea breeze and bright moon among mountains are indeed “unprohibited to procure, inexhaustible to consume” per Su Dongpo, that is of course adequate. As such, breeze and the moon can only be free goods – though in the real world, fresh breeze and bright moon are so rare and valuable that they have long become economic goods. In a stricter sense, the so-called “inadequate” does not necessarily relate to quantity supplied. For instance, non-rotten eggs number more than rotten eggs, but non-rotten eggs are inadequate while rotten eggs are too many. Good eggs, subject to strong demand, are inadequate; whereas rotten eggs, shunned without any demand, are way too many.

If a good has no demand, there would not be such thing as “have is better than have-not” in the world. If supply is unlimited, “more is better than less” will then be out of the question. “Scarcity” is caused by limited supply when there is demand. When quantity demanded is increased, even with more supply (still limited though), people may still feel inadequate; with lower demand, limited supply may be considered adequate. That is, the degree of scarcity is determined by relative demand.

The supply of a scarce good – an economic good – cannot completely meet people’s demand. Consequently, such a good will become “more is better than less”. Since more is better than less, in order to get more, people will be willing to forgo a little option. Unwilling to forgo any option in order to get more of a good, the good cannot be said to be “more is better than less” – logic does not allow us to oppose to this view. Therefore, whenever someone is willing to forgo an option for more of a good, such a good is scarce, inadequate, and an economic good. In the market, the option we forgo is price. We can thus say that every good with a price is scarce and inadequate. In some societies – like certain extreme communist societies – market does not exist. There are no prices, but sacrifice is still needed. Hence we can also say that goods without prices can also be economic goods. As long as they are scarce – and since they are scarce (and since people would strive for more), sacrifice is inevitable.

The Science of Demand (14) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Chapter III.  Scarcity and Competition

Using theory to explain behavior, behavior must be restrained by theory – this is a basic principle. The method in economic explanation is the same as any other empirical science: on one hand, we use certain generalized behavioral postulate, axiom or theorem to restrain behavior; on the other, we assert certain constraints or conditions to restrain behavior. This two-pronged approach allows us to infer human behavior under certain specified circumstances. With changes in conditions, human behavior will change accordingly. In order to be refutable by facts, this inference must be definite – if not definite, how can it be “falsified” or refuted? For those people who have mastered this kind of restraining theory, their prediction of behavior can be admirably precise.

Two postulates were mentioned in Chapter II: (i) any behavior of an individual is his personal choice, and this choice is predictable; (ii) under constraints, every individual will consistently maximize his self-interest. In addition, there are other postulates to restrain behavior. We will analyze these in Chapters IV and V. For the time being, we will switch to another topic – scarcity and competition – two indispensable concepts in economics.

Section 1.  The Definition of Goods

“Good” has a broad meaning. Not only can it be construed as a product or a commodity, but also service, friendship, reputation, air, cleanliness, tranquility, lover, love, etc. Any item that we possess, whether tangible or intangible, if better than nothing, is a kind of good – “have is better than have-not” is the definition of goods in economics. From an individual viewpoint, one’s own child, a fresh sea breeze, a bright moon among mountains, are all “have is better than have-not”; a pretty face, a trustworthy reputation, a charming voice, warm memories, the ability to think, etc., are all goods.

Goods can be divided into two broad categories: economic goods and free goods. The definition of goods is “have is better than have-not”, and out of “have is better than have-not”, a majority are “more is better than less”. “More is better than less” is the definition of economic goods. The “better” in this definition is an objective measure. Suppose we divide five taels of gold into two portions, one with 3 taels and the other 2 taels. When people are free to choose, and the 3-tael portion is chosen, gold is an economic good. With comparison, the one chosen is counted as better. Whether it is good or bad, or healthy, is irrelevant. Therefore, “better” here has neither the content of subjective nor value judgment.

Economic goods, being “more is better than less”, have innumerable examples in the real world. Gold, silver, wine, abalone, ginseng, shark’s fins, fish’s maw, fruits, vegetables, clothes, food, housing, transportation, travelling, leisure, family fun, etc., are all economic goods, since having more of them is better than less.

Out of all the goods, a minority belong to “have is better than have-not” but not “more is better than less”. Given the supply of these goods exceeds demand, no additional value is generated even if there are more of the goods, hence “more is better than less” does not hold. Not many of these goods exist, the most cited example being air. In unpolluted areas, air is inexhaustible. No one would strive for more air. Though essential, air can only be said as “have is better than have-not”, but not “more is better than less”. Air therefore belongs to a free good instead of an economic good. That said, in a highly polluted area, fresh air is much needed. Under such circumstances, fresh air is no longer a free good but an economic good.

The Science of Demand (13) - Unofficial Translation of Steven Cheung's 经济解释 - 科学说需求

Section 5.  Conclusion

Though there are reasons to believe selfish is human nature, is truth, is unalterable, from the viewpoint of economics, this truth is not significant. Of significance is treating selfishness as a dialectic postulate, disallowing any argument on this starting point. How commendable is this postulate in explaining human behavior depends on whether this or other additional postulates could derive certain refutable implication, which can then be objectively tested against facts. In this game of scientific dialectics, due to logical restrictions, we cannot say mankind is sometimes selfish and sometimes unselfish, which would otherwise render us logically unable to derive any refutable implication.

With this approach, the selfish postulate does have amazing explanatory power. In the future some genius may devise a more useful postulate to replace selfishness. We currently, however, do not have a better choice, thus have to stick rigidly to this selfish postulate. This is not stubborn, but a rule set by the methodology of science.

Supposing human nature is selfish (only God knows if it is right or wrong) and unalterable, then the system and policies set by an “ideology” based on alterable selfishness are doomed to fail. This is the past experience of China. Less and less people in the world today believe in this “unselfish ideology”, though that is still being exploited by some selfish people to further their own power and personal gain.

There is yet another interesting question. Assuming the selfish nature of mankind is indeed alterable, and the transformer has God’s capability, how will mankind be transformed? Saying that mankind can be altered to being unselfish does not say how mankind ought to be. Like a cucumber? Like a computer? Like Frankenstein? I am not sure if our readers have any brilliant ideas. My intuition is even if a person were like an angel with no selfish genes, that person might be more horrifying than a selfish person.

“Self” or “private” in Chinese culture has none commendable implication: “packing belongings away and fleeing privately”, “deals done privately”, “self-interest”, etc., all carry derogatory connotation, while “caring about the public good without thinking about oneself” carries positive connotation. After opening up to reforms for more than thirty years, China has experienced unbelievable growth. “Private” enterprises are called enterprises operated by “ordinary citizens”, since “self” and “private” are still inappropriate. What about in the West? “Private” is valued. I have not investigated why there is such a big difference from Chinese culture. As earlier said, “selfish” here is an abbreviation of “constrained maximization” which is a postulate. No value judgment is involved, hence whether selfish is good or bad is irrelevant.