Since
economics cannot determine the good from the bad, what does its paradigm
include? The answer is, the economics paradigm includes three fractions.
First,
when the relevant constraints or game rules (i.e., the system of property
rights or the delineation of rights among people) are known, we can infer which
competition criteria will be adopted. This is a complex issue often difficult
to manage, but if researchers are willing to pay the price, there is always a means.
This is an area in empirical economics that can easily tell the masters from
the mediocrities.
Real-world
phenomena are like chess games that every game is different. Constraints are
ever-changing, so no analysis can be all inclusive. Key constraints that are
relevant have to be singled out for simplification. But what count as
“relevant” and “key”? The analyst cannot make any rash judgments nor pick
randomly, since in so doing desired conclusion can be reached as he pleases. In
other words, the choice of constraints needs to be restrained, and such
restraint requires theoretical underpinning. This is a more in-depth
methodology-related issue which will be discussed in Volume III when analyzing price control.
Second –
this is the easiest fraction of economics – when competition criteria are
ascertained, economics can surmise how human will behave, how resources will be
allocated, and how wealth or income will be distributed. As mentioned earlier,
different criteria will lead to different behavior along with different winners
and losers (income distribution). Quarter-allocation and queuing up to buy
belong to this fraction.
In fact,
leaving aside the development in the last forty odd years, this fraction is the
only laudable area (non-value judgment yet with explanatory power) in Western
economics in its history spanning over two hundred years. Economics is
traditionally divided into two main categories: the so-called income
distribution and resource allocation (or resource use). Today’s economics textbooks
still employ such an approach, very often erring messily.
Most of
the analyses of income distribution and resource allocation in traditional
economics are based on the criterion of market price. This criterion can only
exist under a private property system. In other words, though the brilliant
analyses in traditional economics are able to explain income distribution and
human behavior, their scope is nevertheless limited. The game rules restrained
by private property rights are barely a subset of myriad rules. Even if we
learn by heart the common economics textbooks of the highest level, the scope
within which they can be applied to explain the real world is only tiny.
Rigidly learning by memorizing textbooks may not even know roughly the right
path of economics, let alone getting well acquainted. Science has to be learnt
and applied in a flexible way, so has economics in particular.
Though the
majority of traditional economic analyses using market price as criterion are
narrow in scope, it does not mean that different competition criteria cannot be
applied in economic analysis. Over the past forty odd years, the so-called new
institutional economics has indeed been attempting to extend fundamental
economic principles to multifarious criteria. Unfortunately, since the
gentlemen undertaking the endeavors invented too many “castle-in-the-air”
concepts, contravening the principle of “invisible means non-testable”, the
result has been chaotic. Different competition criteria no doubt produce
different effects, yet the same theoretical basis can be applied. So long as
the competition criterion has been determined, it is not hard to predict the
behavior of income distribution and resource allocation. That is, once the
relevant game rules (constraints) are clarified and competition criteria
ascertained, it will not take a master more than a few days to infer the
resultant behavior, with accuracy similar to that in natural science.
The third
fraction of the economics paradigm – to explain how game rules are established
– is the most difficult. Why on earth do we have communist system? Why was
there rent control in Hong Kong? And since game rules are directly related to
competition criteria, this part also includes explaining how competition
criteria are determined. Why are staff quarters of the University of Hong Kong
allocated by a point system? Why did China in the past assume a hierarchical
system?
How are
different systems of property rights established? Why are laws different at
different times in different places? What is a state? Why do we have states?
Why do some states have constitutions and some do not? Why were there people’s
communes in China? These are all profound questions.
It is
astonishing that sometimes economic issues considered by economists to be
enigmatic are regarded as extremely trivial by people who know nothing about
economics. The latter enjoy talking endlessly on these issues, though their
“explanations” are not at all scientific. If you ask Hong Kong’s legislators:
why did the so-and-so bill get passed? As is usual with politicians, they would
eloquently express their views. But if we analyze their “theories” in detail,
we will generally arrive at four conclusions: (1) what they say are ad hoc theories that have no generalized
explanatory power; (2) what they say are tautologies devoid of content; (3)
what they say are their own value judgments that are no science; (4) they only
talk nonsense.
Friedrich
Hayek did spend substantial time explaining this third area of economics
paradigm, albeit achieving little. Over the past forty years, theory of the
state has become a hot topic in economics, with participants including James
Buchanan, George Stigler, Gary Becker, Douglass North, Harold Demsetz, Yoram
Barzel, etc., yet not much was achieved, either. Certainly, their other
researches do bear fruit. I myself established in my little book “Will China Go Capitalist?” a theory on
political system. Self-satisfied, yet only Coase and Barzel value this theory.
Published in 1982, this theory accurately surmised China’s systemic
transformation. Even more self-satisfying is my 2008 publication of “The Economic System of China”.
“Economic Explanation” integrates my knowledge in
this field over the past fifty years. This third fraction of economics paradigm,
being the most difficult in economics, has been my main focus for three decades
since I was forty-five. I specifically targeted this fraction while writing Volume III “The Choice of Institutional Arrangements” eight years ago. When
reviewed today, certain areas are not satisfactory. Inspired by China’s reform,
my knowledge in this fraction has expanded. With a little luck, maybe my
substantial editing this time could successfully master this third fraction.
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