There are
similarities among “other things”, “test conditions” and “constraints”, though
there are significant differences in perspective. We might as well use the law
of demand to further explain.
A
downward-sloping demand curve from left to right (sloping downward from left to
right is a law) restrains the relationship between price and quantity of a
good, both of which are variables. “Other things” refers to all the variables
other than these two, of which we allow some to change and disallow others. We
have analyzed the choice between variables and invariables in the previous
chapter. To be supplemented here is that certain variables bear no relationship
to the good under analysis. We should ignore these irrelevant ones.
The term
“test conditions”, seldom used in economics, is what I borrowed from scientific
methodology in the study of logic. From the perspective of the law of demand,
test conditions, only a minor subset of other things, refers to the conditions
required to yield an implication that can be empirically tested. As discussed
in Chapter I, an implication or a
hypothesis, if not refuted by facts, can be said to have explained the facts,
and can also be said to have predicted the occurrence of facts. However, such
prediction requires certain conditions: according to the law of demand, for a
logically-yielded hypothesis, under certain circumstances, the occurrence of A
will lead to the occurrence of B. The circumstances described here are the test
conditions.
Though the
term “test conditions” is seldom used in economics – economists like to use
“other things” or “constraints” – this is what I prefer. The perspectives of
these three in evaluating the implication of a theory are different, yet I
consider the perspective of test conditions the clearest among the three.
There is a
critical test in empirical science. To explain facts or behavior, we can have
many different hypotheses. Supposing there are two different hypotheses in
front of you, you can test one of them first and then the other. Or you can
ponder long and deep to formulate one or several test conditions, which when
asserted, only one of the two hypotheses can be logically supported by facts or
phenomena. That is, if test conditions are smartly chosen, testing can yield
the following result: one hypothesis being right means the other hypothesis
must be wrong. This, termed critical test, is the most fascinating and
admirable in empirical science. To explain human behavior, instead of
investigating into constraints, if a critical test is formulated from the
perspective of test conditions, more may be achieved from less effort. An
illustration will be provided In Section
4.
“Constraints”,
referring to all the conditions that restrain behavior, are the most commonly
used in economics. With regard to the law of demand, constraints include not
only other relevant things, test conditions, but also price. In terms of
testing a hypothesis or an implication, the perspective of constraints is not
as acute as that of test conditions. But if the issue is magnified, the
perspective of constraints is relatively superior. Alchian’s preference in
starting from the constraint of property rights has had far-reaching impact on
me; his credence that the constraint of property rights is identical to that of
competition enlightened me all of a sudden. The prowess of Coase, on the other
hand, is to generalize all constraints into costs.
There are
not many principles or postulates in economics as a whole. If you follow the
guidance of a master, you will realize how simple these principles are, and
where their main points lie. The problem is, when these principles are applied
to explain behavior, their level of difficulty will increase substantially. In
general, their difficulty lies in three areas. Though earlier discussed, I will
systematically repeat them here.
- Constraints in the world – restraining every individual to maximize
self-interest – are very complicated. Constraints cannot be randomly
assumed but must exist in the real world. We need to simplify, yet
constraints after simplification must be essentially congruent with
reality. On the other hand, since constraints are innumerable, whether
they are relevant or irrelevant to a phenomenon has to be clearly
differentiated – such “differentiation” cannot be arbitrarily done but has
to be restrained by theory.
One example can illustrate
the difficulty in investigating relevant constraints. By economic reasoning,
when a government subsidizes education, adopting a voucher system is a
commendable solution. Many people in fact believe that Hong Kong ought to
implement such a system. However, the chance of implementing it is often
considered slim. Why is that? To say that is due to opposition by pressure groups
is certainly correct, but under what constraints can their opposition be so
powerful? Naturally, in explaining why a voucher system is not adopted in Hong
Kong, one demand curve plus constraints are sufficient. Demand curve is simple
yet constraints are difficult – that’s where the difficulty lies.
- Testable implication – the occurrence of A will lead to the
occurrence of B – the A and B here, or other relevant variables C, D,
etc., must be observable in the real world. Quantity demanded in the law
of demand is an intended variable that is non-factual. In other words, the
law of demand itself is not testable. While applying the law of demand, we
have to vary constraints to logically derive an implication that can be
empirically tested. That is, we must derive certain implication so as to
logically circumvent the perplexity of the abstractive quantity demanded.
To achieve this, the assertion of test conditions poses a mounting
challenge.
- We have already discussed the choice of change or non-change of
other things (variables). If you assume certain other variables unchanged,
how can you be sure they indeed do not change? You could do extensive
research and then use statistics to control variables that are to change
or not to change. Alternatively, you could ponder long and deep to
formulate some test conditions. As soon as these conditions are confirmed
to exist, other things or variables need not be our concern any more.
Doing so is another challenging task.
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