In track
events, speed determines winners from losers. Speed is the criterion in
determining winners in track events. If such events have no rules specifying
what behavior constitutes foul play, then the criterion of speed cannot be
easily established. By the same token, without rules, the criterion of strength
in weightlifting cannot be easily set. In chess games, the more intelligent
wins; in snooker, the winner belongs to the player with sharp eyes, better
skills, and better hand control – these criteria are brought about by the
relevant game rules.
The
contest (competition) in economics is no different. In a free market, the
highest bidder gets the good. Market price therefore becomes the criterion in
determining winners from losers. The rule that leads to this market price is
the private property system. This is Coase’s and Alchian’s central thinking.
The
economic analysis of market price has long been focused on how price is
determined. Only in the hands of Alchian this price concept finally got
blossomed. He said: “What price determines is far more important than what
determines price!” This statement alone advanced our knowledge of the world by
a great stride. Price is a criterion in determining winners, and private
property rights is the rule in determining this criterion. Since both of them
had made a few inspiring statements, Coase and Alchian are known as the
founders of property rights economics.
There is a
direct relationship between the rules of the game and the criterion that
determines winners: the former determines the latter, and the latter determines
the economic operation of a society. An interesting question arises. Is it
because of the need for a certain criterion that leads to the emergence of a
rule, or people requiring certain rule that brings about the emergence of a
criterion to determine the winner? The sequence seems hard to resolve at a
glance.
I consider
criteria come before rules, since what criteria determine is the issue that
mankind tries to resolve by competition, but rules merely facilitate the
establishment of criteria. Speed is the center of attention in a track event,
but the rules of this game are merely to facilitate the determination of “the
faster wins, the slower loses”. The examination result criterion at school is
for assessing whether students have put in their efforts in studies, while
examination rules are merely for facilitating the fair winning of those with
higher knowledge (this intended objective is of course not necessarily
achieved). Facilitated by a private property system, market price not only
determines winners and losers, but also those with higher productivity win.
Readers will have a more in-depth understanding when I analyze rent dissipation
in Volume III.
As noted
earlier, the criteria for determining winners will determine the economic
operation of a society. On one hand, the distribution of wealth or income in a
society is determined by the criteria of competition. Criteria are aplenty, and
under different criteria, each individual has different chances of winning. For
people who are good at running a business or production, the criterion of
competing under a private property system is to their advantage. Some people
are adept in politics. Under a non-private property system, they can put their
political shrewdness to good use. There are also people who do not know how to
adjust to ever-changing market operations but are good at routine work. Using
years of service as a criterion would benefit them a lot.
On the
other hand, since competition criteria have a decisive impact on income and
enjoyment, under different criteria, human behavior will differ accordingly.
Let’s use the example of the highest bidder gets the good. If a person aims to
profit in the market, he will work hard to produce, invent new products,
streamline operations, or find ways to reduce costs, etc. However, if goods
have no market price but are only rationed, people would instead choose the
“back door”, or employ political means to seek an official post, etc.
I can use
two allocation-of-property examples in Hong Kong to demonstrate the motto of
“criteria determine a society’s economic behavior”. We know Hong Kong’s free
property market applies the method of “the highest bidder gets the good” to
determine winners. Those who are able to afford and willing to pay high enough
prices or rents can buy or rent their favorite properties for their own use.
Regardless of the payer’s age, appearance, political skills, education, there
is no preferential treatment as long as the required price is not paid.
But in the
University of Hong Kong, lecturers’ quarters are allocated using a point
system. Department heads have six points; those who are married have six
points; those having one child get six points, having two children get twelve
points; one year of service gets two points, so having worked for eight years
gets sixteen points. The total score is the criterion used to determine the
sequence of allocation and the size of the quarter. Regardless of how learned a
lecturer is, or how outstanding his research results are, if his score is not
high enough, he will sure lose out in the competition for staff quarters.
The above
point-scoring criterion in the allocation of quarters is very similar to the
way quarters were allocated to cadres in the early days of China’s reform. The
reason being the constraints in the University of Hong Kong are very similar to
a state-run system. The assets of the University of Hong Kong are not private
property, but belong to the public or the government. From the perspective of
property rights, the system in the University of Hong Kong is a kind of “common
property”, and its quarter-allocation criterion bears no relationship to the
market price of the quarters. The main difference between the University of
Hong Kong and mainland China in former times is that the “common property”
system in the University of Hong Kong is limited to the matters of the
university only, whereas the common property in former mainland China was
generally stretched to the whole nation.
From the
above examples of property-allocation by the market and by the University of
Hong Kong, we can obviously find that since the criteria to determine winners
are different, winners and losers under the two systems are people of different
categories. A person with unique business acumen gains no particular advantage
in the University of Hong Kong, while a person with more kids carries none
priority rights in the market. On second thoughts, we realize that when
criteria are different, human behavior differs accordingly, hence production
efficiency is also different. The quarter-allocation system of the University
of Hong Kong encourages lecturers to get married early, have more children, and
serve longer terms in the university. Allocating under the criterion of “the
highest bidder gets the good”, on the other hand, encourages behavior to
produce for making profit, to reduce costs and to save up, etc.
In
economics, “wastage” is no simple concept. This concept will only be explored
in detail in Volume II. Here I will
only introduce a “wastage” concept, as per ordinary textbooks, which is
relatively easy to understand though not entirely correct. In general, wastage
refers to the existence of other means, or other ways of asset allocation, that
can increase the society’s wealth or income, but these “other” means are
somehow not adopted.
From the
above definition of wastage, among the numerous competition criteria, only one
criterion leads to no wastage. This non-wasting competition criterion is market
price. A few examples can illustrate this point. In queuing up to buy, using
the criterion of “first queue first buy”, one has to forgo time. Time spent
idly queuing up instead of in production brings no gain to anyone in the
society, hence the value of such time is wasted.
Let’s go
back to the point-scoring system to allocate quarters in the University of Hong
Kong as another example: a lecturer in the University of Hong Kong can gain
higher points provided he has more children, or continues in office for a
longer time. Therefore, when hesitating (the so-called “marginal” situation)
whether to have more children, or to switch job, gaining more points to have a
nicer apartment will become a deciding factor. It is wastage when those
originally not planning to have more children give birth to more children,
since the points themselves do not represent the value of any product, and the
choice of having more children is only “coerced” by the objective of gaining
higher points.
Using age
as a criterion in allocation will encourage people to employ all means to
falsify their age, or increase their intention of getting old in the shortest
time. In a survival-of-the-fittest society that uses force to determine
winners, people will be induced to invest in weapons. Many years ago, gold
mines were discovered in the freezing state of Alaska. With the gold rush,
local rules were then set that whoever got to a mine first on a day would have
excavation right of that mine for that particular day. Consequently, people
rushed to invest in breeding sled dogs as strong and as fast as possible. All
this behavior constituted wastage.
The only
competition criterion that leads to no wastage is market price. “Highest bidder
gets the good” is the only criterion that induces people to increase production
in exchange for their needs. More effort spent on production to profit means a
higher chance of winning, and such production contributes to the well-being of
the society. Therefore, this market price criterion does not lead to wastage.
Ever since
the early 1970s, I have been calling the aforementioned “wastage” viewpoint rent
dissipation, as its nature is similar to the rent dissipation in high seas
fishing. In fact, when I was writing “The
Theory of Share Tenancy” in 1967, I had conceived such an idea in its Section 4 of Chapter VI, though the perspective was a bit different. This is a
complex, crucial and fascinating analysis which I have been working on for more
than forty years. Details will be discussed in Volume III.
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