Economic Imperialism II

Author: Gao Xiaoyong, Editor-in-Chief
Publisher:
Publishing Date: 2005-06-01
Features: The term "economic imperialism" refers, of course, to the "invasion" of economics into the traditional domains of other social sciences. This invasion is not a whimsical or baseless venture but rather a genuine analysis of aspects that people had not previously considered, offering new insights and fostering the development of disciplines. A few years ago, one of our journalists interviewed many Nobel laureates in economics in the United States, approximately eight or nine of them. They all praised China for being on the right track, including prominent figures like Samuelson and Friedman, who held differing economic views. The Journal of Economics News was able to establish a unique position in both the theoretical and decision-making circles within China in less than two years, primarily due to the exceptional vision and organizational skills of its editor-in-chief. Gao Xiaoyong edited The Journal of Economics News, and his intention to discover and nurture young authors was reminiscent of Ronald H. Coase's role as the editor of The Journal of Law and Economics in the 1960s and 1970s. The limitations and effects were distinct. Coase elevated the journal, making it a cornerstone of new institutional economics. Gao Xiaoyong, without university support or advertising revenue, faced considerable challenges. The Journal of Economics News is the only economic commentary newspaper in China that does not publish commercial advertisements. In May 1994 and June 1998, the journal conducted exclusive transoceanic interviews with nearly twenty Nobel laureates in economics, a world-first achievement that garnered significant attention and praise from China's theoretical, journalistic, and decision-making circles. Over the past decade, The Journal of Economics News has made arduous efforts to popularize economic thought, encourage young enthusiasts of economics, and foster public interest and understanding of the discipline, showcasing its explanatory power over reality. Twelve years ago, Gao Xiaoyong founded The Journal of Economics News, inviting economists like us to contribute articles, particularly those 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 understand social phenomena, and advancing China's economic reforms 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 economics into the traditional domains of other social sciences. This invasion is not a whimsical or baseless venture but rather a genuine analysis of aspects that people had not previously considered, offering new insights and fostering the development of disciplines. The ability of economics to achieve this is linked to its unique analytical methods. First, economics is not, in essence, the "study of money," as some superficially perceive it to be. It examines human behavior—how people achieve the greatest results under the condition of scarce resources (including time) through changes in behavior and choices. In a certain sense, economics is a "behavioral effectiveness science," and its fundamental logic and analytical methods can be universally applied wherever human behavior is involved. Second, economics not only studies individual behavior but also the relationships between individuals. This is not particularly unique, as all social sciences examine the interdependent and mutually influential social relationships between people. However, in reality, the need for survival is the fundamental need of people, and all human activities depend on the consumption of resources and the distribution of income. Economic interests form the foundation of all interests, so understanding economic relationships can indeed provide deeper insights into issues studied by other social sciences.
For these reasons, economics appears "dominant," "assertive," and "preeminent." The concept of "economic imperialism" was, of course, initially proposed by economists to describe the expansionary trend of economics. As the term gained traction, it might lead people to misunderstand economics, thinking it is all-encompassing or that it is boasting of its capabilities. In reality, true economics as a science is very "humble" or even "modest." To put it more precisely, if someone truly understands economics, they would be humble, knowing that economics can explain and solve only a limited range of problems. First, how an individual makes choices and decisions is something only they can do. Even if an economist understands human behavior thoroughly, 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 (economics terms this "preferences"), ranging from tastes in food and clothing to ethical morals and ideological consciousness. Moreover, each person faces specific conditions—abilities, interests, family background, social relationships, and expectations about future changes in their own and the social environment—differing from one another. Therefore, even if economists know that individuals always act according to the widely accepted "axiomatic assumption" that people pursue the maximization of their interests, we still do not know what specific "interest" system each person is maximizing. Economists may provide more information and knowledge to make people's decisions more informed and correct, but that is all—they cannot replace the choices and decisions of each individual (both individuals and 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 many human behaviors, including marriage, divorce, crime, institutional reform, and the pursuit of equality, within the context of "economic imperialism." However, since the "goods" or "bads" involved in these behaviors do not have market prices (the transaction costs of pricing are too high), our quantitative analysis must stop here. Due to the individuality of preferences or utilities and the incomparability of utilities between people, we can only propose rough logical frameworks for social behavior as hypotheses but cannot conduct precise quantitative analysis or rigorously falsify these hypotheses.
Second, economics not only cannot replace individuals in making decisions but also does not intend to change people's values or ethics. Economics always takes the different values of individuals as its premise for analyzing economic and social phenomena and does not take changing people's values as its mission. 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 you can change your values and behavior choices under the influence of ethicists, politicians, priests, writers, or journalists, but that is not the mission of economics as a discipline. Economics only takes your specific preferences as its analytical premise. If you change, your new preferences become the premise, but economists do not intend to change your thoughts. Some people always want to give economics more missions, including changing people's moral concepts, which would turn it into "economic piracy," because that would be seizing what does not belong to you.
Someone once asked me, in a market economy, due to "repeated games," people who do not keep their word will eventually face punishment. If people realize this, they will be more trustworthy, 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 not keeping their word in a market economy is ultimately "not worthwhile" (they will be punished). In other words, it is still based on "calculation" that changes their behavior, not because they have "become better" and thus changed their behavior. Making people "better" is a very meaningful thing, worth every one of us striving for as individuals. But economics does not consider it its own core mission to study this. The core mission of economics is to change behavior through institutional and policy changes, such as punishing those who do not keep their word.
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 pursuing the maximization of their interests constitutes constraints on others pursuing their own interests. At the same time, everyone's effort to maximize their own interests must take into account the behavior of others as constraints (all of this is based on the axiomatic assumption of resource scarcity). Therefore, economics can use basic concepts like "equilibrium" to tell everyone that our so-called "maximization of interests" is actually "conditional extremum" and "unreachable," and that to reach this equilibrium point, everyone must compromise with each other. If you take too much of the benefits, others and other interest groups will "react," and in the end, your losses will be greater. For example, 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, with an unavoidable nature. However, given any society's ideology at any specific period (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 carry out necessary or reasonable income redistribution and social welfare support (what is necessary or reasonable? This is also not an easy question for economics, 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 also "not worthwhile" for the wealthy. While the wealthy paying a bit more in taxes for social welfare may be "worthwhile" for them in the long run within a certain range (please note that here, economics relies not on the "goodwill" of the wealthy but on their "calculation." Those who hope for the wealthy to "have a change of heart" should think about what they can do if people's consciences never change!).
Here, the "policy recommendations" economics provides to society are not "picking sides" but telling everyone that extreme income inequality is not good for everyone. However, overly radical public policies and social security systems, such as prematurely implementing the social welfare systems of developed countries, are also not good for everyone. We should avoid extremes and pursue a certain "sustainable equilibrium." However, if economics is asked to do more, its limitations become apparent. Due to the fundamental concepts economics relies on, such as "utility" and "preferences," being "individualistic," it is difficult to make accurate and scientific judgments about the social effects of public policies. In these matters, the only theoretical tools economics can use are the so-called "Pareto optimality" or "Pareto improvements."
Pareto optimality refers to a state where society has reached a point where it is impossible to make one person's situation better without making at least one other person's situation worse. We call this state "Pareto optimality." Clearly, this state, often mistakenly considered by some as a "best state," is actually just saying "we cannot make the situation any better" or, more precisely, it refers to: if any further changes are made, economists do not know whether the situation will become better, so they can only recognize this "easy-to-judge" situation 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" say that this reform has improved the overall situation of society, because we do not know whether the total increase in welfare for the 99% can compensate for the decrease in welfare for that one person. This is not because of anything else but because economics does not believe we can equate and compare the utility of the 99% with that of one person! Only if a portion of the new income generated by resource efficiency improvements during the antitrust process is fully compensated to the monopolist in a way they themselves approve (economists' approval does not count) can economics "recognize" that an improvement has been made, because the improvements economics can argue for are only Pareto improvements.
Therefore, what is called Pareto optimality is only what economics can confirm as "no better," and Pareto improvement is only what economics can confirm as "improved." Both indicate that as a science, economics does not have a say in all other many possible social states and possible social improvements that are not "unanimously agreed upon" and cannot be achieved without anyone opposing them (because no individual's interests are harmed)! Understanding this, we can see why, in public policy issues like antitrust, and in the provision of various public goods (note that institutions may be an important public good), there are so many vested interests blocking progress, and why there is such a debate with "everyone has their own reason," and no absolute truth or authority (primarily because economics cannot provide such truth or authority).
Because of this, economics has taken the path of political economy in the issue of public goods, analyzing the mechanism of public good allocation in politics, studying the decision-making mechanisms of public policies, and even the decision-making rules at the constitutional level, such as whether it is "unanimity" or "majority rule," direct democracy or "representative democracy," and so on. Here, we can understand why a good economist must be humble, because no economic decision can be made by the economist themselves! Private decisions or the decisions of a business must be made by the individuals involved. Public decisions, however, are made through a social process, involving many people (including politicians) and the research findings of many disciplines (sociology, political science, ethics, etc.). The contribution of economists is undoubtedly, but also only, part of it, and in many cases, it may be a very small part. A good economic policy recommendation must, of course, 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 (such as speaking from the perspective of a priest, or acting as a government without being appointed), you would instead be failing to play your specialty and fulfilling your core mission, thereby contributing less. However, when economists make policy recommendations, they 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.
However, after clarifying all the above issues, we must also say that economics cannot "be all things to all people," 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 analytical methods, meaning it is more "imperialistic" than other social sciences.