Economic Imperialism. Volume 2

Author: Gao Xiaoyong, Editor-in-Chief
Publisher:
Publish Date: 2005-07-01
Features: Twelve years ago, Gao Xiaoyong founded The Journal of Economics News and invited us economists to contribute articles, particularly encouraging us to write essays and that provided in-depth yet accessible analyses of various phenomena based on economic principles. Over the past decade, such articles have played a role in popularizing economics, helping people better understand social phenomena, and promoting economic reform and development. This has allowed Gao Xiaoyong to compile these articles into a six-volume collection titled Economic Imperialism.
The term "economic imperialism" refers, of course, to the "invasion" of traditional domains of other social sciences by economics. This invasion is not whimsical or baseless but rather capable of analyzing aspects that were previously unexplored, offering new insights and driving disciplinary development. The reason economics can achieve this is closely tied to its unique analytical methods.
First, economics is fundamentally not, as some superficially perceive it, the "study of money." It examines human behavior—how individuals, under the scarcity of resources (including time), can achieve the greatest effects through changes in behavior and choices. In this sense, economics is a kind of "behavioral effectiveness science," and its basic logic and analytical methods can be universally applied wherever human behavior is involved.
Second, economics studies not only individual behavior but also the interactions between individuals. While this is not unique—other social sciences also explore the interdependent and mutually influential social relationships between people—it is in reality that survival needs are the fundamental requirements of humans. All human activities rely on the consumption of resources and the distribution of income, making economic interests the foundation of all other interests. Therefore, understanding economic relationships can indeed provide deeper insights into issues studied by other social sciences.
For these reasons, economics appears "dominant," "assertive," and "prevalent." The term "economic imperialism" was originally coined by economists to describe the expansionary trend of economics. However, as it gained traction, the term might lead to misunderstandings, suggesting that economics is all-encompassing or that it boasts of such capabilities. In truth, true economics as a science is very "humble" or even "meek." To put it more precisely, if someone truly understands economics, they would be humble because they would recognize the limited scope of what economics can explain and solve.
First, how individuals make choices and decisions is something only they can do—even if an economist has a thorough understanding of basic human behavior—they cannot make decisions for others. This is because the fundamental concepts economics relies on—"happiness" or "pain," "utility" or "cost"—are entirely "individualistic." Each person has their own unique set of evaluation standards and value systems (economists call this "preferences"), ranging from small things like food preferences and clothing tastes to larger issues like ethics, morality, and ideology. Moreover, the specific conditions each person faces—abilities, interests, family background, social relationships, and expectations about future changes in their own and the societal environment—are all different.
Thus, even if economists know that individuals always act according to the "axiomatic assumption" that people seek to maximize their interests, we still do not know what specific "interests" each person seeks to maximize. Economists can provide more information and knowledge to make people more informed and thus make better decisions, but that is all—they cannot replace the choices and decisions of each individual (whether individuals or enterprises)! Economists do not even have the right to judge whether others' decisions are correct because they fundamentally do not know what preference system the other person is based on!
This "individual specificity of preferences" leads to significant limitations in economics' quantitative analysis and "scientific falsification." We can use abstract concepts like "preferences" and "utility" to formulate "theoretical hypotheses" about the basic laws of human behavior, including issues like marriage, divorce, crime, institutional reform, and the pursuit of equality, as part of economic imperialism. However, since the "goods or bads" involved in these behaviors do not have market prices (transaction costs of pricing are too high), our quantitative analysis must stop here. Due to the individuality of preferences and utility and the incomparability of utility between people, we can only present rough logical frameworks for social behavior in the form of hypotheses but cannot conduct precise quantitative analysis or rigorously falsify these hypotheses.
Second, economics not only cannot replace individual decisions but also does not intend to change people's values or ethics. Economics always takes the different values of individuals as the premise for analyzing economic and social phenomena and does not consider changing people's beliefs its responsibility. Whether you prefer sour or sweet, traveling or drug abuse, whether you care only about yourself or also about friends and the nation—all these are just your personal preferences and value judgments. Perhaps under the influence of ethicists, politicians, priests, writers, or journalists, you can change your values and behavior choices, but that is not the mission of economics as a discipline. Economics only takes your unique preferences as its analytical premise. If you change, it takes your new preferences as the premise, but economists do not intend to change your thoughts.
Some people always want to assign economics more missions, including changing people's moral concepts, which would turn economic imperialism into "economic banditry," because that would be seizing something that does not belong to you. Someone once asked me, in a market economy, because of "repeated games," people who lack integrity will eventually face punishment. If people realize this, they will be more honest, so in a market economy, people's credit morality will improve. Does this not show that economics is related to morality, and that economic operations can change people's morality? But if you think carefully, so-called commercial credit is not because people have changed their credit morality but because they realize that dishonesty in a market economy is ultimately "unprofitable" (punished), meaning it is still based on "calculation" that leads to behavioral changes, not because they "became better" and thus changed their behavior. Making people "better" is a very meaningful thing worth every individual's effort, but economics does not consider it its own core work. The core work of economics is to change behavior through institutional and policy changes, such as punishing those who lack integrity.
Third, based on these two limitations, economics' role in public policy issues is also quite limited. Economics can indeed contribute to public policy issues because one of its tasks is to study the relationships between people and how the behavior of one person seeking to maximize their interests becomes a constraint on others seeking to maximize their own interests. Meanwhile, each person's effort to maximize their own interests must take into account the behavior of everyone else as a constraint (all based on the axiomatic assumption of resource scarcity). Therefore, economics can use concepts like "equilibrium" to tell everyone that our so-called "interest maximization" is actually "conditional extremum" and "unreachable," and to reach this equilibrium point, everyone must compromise with each other. If you take too much advantage, others and other interest groups will "," and in the end, your losses will be greater.
For example, regarding social equality. Under market economy conditions, the general logic is that as long as there is equal opportunity, legal competition, no deception, no privileges or corruption, the emergence of wealth gaps can only be attributed to innate differences, postnatal efforts, and opportunities—making it unavoidable. However, given any society's ideology at any given time (which is an "exogenous" constraint condition for economics), if the wealthy group completely ignores the consequences of widening wealth gaps leading to increasingly tense social relations and refuses to implement necessary or reasonable income redistribution and social welfare measures (what is necessary or reasonable? This is also a question economics finds difficult to answer, and here economists must be very humble!), society may eventually descend into turmoil or even civil war. The conditions and environment for the wealthy to accumulate wealth will change, which is "unprofitable" for them. Meanwhile, if the wealthy pay a bit more in taxes for social welfare within a certain range, it may be "profitable" for their long-term interests (note that here, economics relies not on the "goodness" of the wealthy but on their "calculation." Those who hope for the wealthy to "have a change of heart" should consider that if people's consciences never change, what can you do?!)
Here, the "policy recommendations" economics provides to society are not about "picking sides" but about informing everyone that extreme income inequality is not in anyone's interest. However, overly radical public policies and social welfare systems, like those in developed countries, that are implemented too early are also not in anyone's interest. We should avoid extremes and pursue a certain "sustainable equilibrium." But if economics is asked to do more, its limitations become apparent. Since economics relies on fundamental concepts like "utility" and "preferences," which are "individualistic," it cannot compare or measure interpersonal relationships, making it difficult for economics to make accurate and scientific judgments about the social effects of public policies. In these matters, the only theoretical tool economics can use is the so-called "Pareto optimality" or "Pareto improvement."
Pareto optimality refers to a state where society has reached a point where it is impossible to improve the situation of at least one person without worsening the situation of another. This state is called "Pareto optimality." Clearly, this condition, often mistakenly used by some as a "best state," is merely a statement that "we cannot make the situation any better." More precisely, it refers to: if any further changes are made, economists do not know whether the situation would become better, so they must classify this easily identifiable state as "optimal!"
Perhaps a social reform, such as antitrust, could improve the welfare of 99% of the population. However, according to economics' "Pareto standard," as long as one person—the monopolist themselves—is slightly worse off, economics cannot "justifiably" claim that the reform has improved the overall situation of society. This is not because of anything else but because economics does not believe we can equate or compare the utility of the 99% with that of the one person. Only if a portion of the additional gains from resource efficiency improvements during antitrust is "sufficiently compensated" to the monopolist (as recognized by the monopolist, not by economists) can economics "recognize" that an improvement has been achieved. The improvements economics can argue for are only Pareto improvements.
Thus, what is called Pareto optimality is merely what economics can confirm as "unreachable better," and Pareto improvement is the only improvement economics can confirm. Both indicate that as a science, economics has no say in most other possible social states and improvements that are not "unanimous" or cannot be achieved without anyone opposing them (because no individual's interests are harmed)! Understanding this helps us see why, in public policy issues like antitrust, as well as in the provision of various public goods (note that institutions may be an important public good), there are so many vested interests and conflicting arguments, with no absolute truth or authority (first because economics cannot provide such truth or authority).
Because of this, economics has taken the path of political economy in the context of public goods, analyzing the mechanism of public good allocation, studying the decision-making mechanisms of public policies, and even the decision-making rules at the constitutional level, such as whether to use "unanimity" or "majority rule," citizen voting or "representative democracy," and so on. Here, we can understand why a good economist must be humble because any economic decision is not made by the economist themselves. Private decisions or corporate decisions are made by the individuals involved, while public decisions are the result of a social process involving many people (including politicians) and the research findings of many disciplines (sociology, political science, ethics, etc.). The contribution of an economist is undoubtedly, but also only, a part of it, and in many cases, it may be a very small part.
Of course, good economic policy recommendations must follow the logic of economics because this is your specialty, your unique perspective for explaining the world. If you want to discuss issues from the perspective of other disciplines (e.g., speaking from the perspective of a priest, or acting as a government without being appointed), you would actually be failing to leverage your expertise and doing your job properly, thereby reducing your contribution. However, when making policy recommendations, economists must also be aware of the existence of other perspectives, other disciplines, and other logics, regardless of whether you believe those logics are logical or not.
But after clarifying all the above, we must also say that economics cannot "dominate everything," and other social sciences may be even less capable of doing so. Economics, after all, is more scientific and has stronger explanatory power and a broader scope of explainable issues due to its methodological characteristics, meaning it is more "imperialistic" than other social sciences.