Economic Imperialism III

Author: Gao Xiaoyong
Publisher:
Publish Date: 2005-07-01
Features: Gao Xiaoyong edited The Economics News, and his intention to discover young authors without prejudice mirrored R.H. Coase's role in editing Journal of Law and Economics in the 1960s and 1970s. While their approaches had different limitations, Coase successfully transformed the journal into a cornerstone of new institutional economics. Xiaoyong, lacking university funding or advertising revenue, faced significant challenges. —Excerpted from Professor Zhang Wucai's Good Articles Are a Game of Chess
The term "economic imperialism" refers to the "invasion" of economics into the traditional domains of other social sciences. This invasion is not whimsical but rather involves analyzing aspects previously unexamined, offering new insights, and fostering disciplinary development. Economics achieves this through its unique analytical methods.
First, economics is not, as some superficially perceive, merely "counting money." It studies human behavior—how individuals, under the scarcity of resources (including time), can achieve the greatest effects through actions and choices. In this sense, economics is a "behavioral effectiveness science," and its fundamental logic and analytical methods are universally applicable wherever human behavior is involved.
Second, economics examines not only individual behavior but also interindividual relationships. While this is not unique to economics, as all social sciences study the interdependent and mutually influential social relationships between people, survival needs are fundamental. All human activities rely on resource consumption and income distribution, making economic interests the foundation of all other interests. Therefore, understanding economic relationships can provide deeper insights into issues studied by other social sciences.
This is why economics appears "dominant," "assertive," and "preeminent." The term "economic imperialism" was initially coined by economists to describe the expansionary trend of economics. However, its widespread use may lead to misunderstandings, suggesting economics is all-encompassing or self-aggrandizing. In reality, true economics as a science is "humble" or even "meek." More precisely, if someone truly understands economics, they would be humble, knowing its explanatory and problem-solving capabilities are limited.
First, individual choices and decisions are inherently personal. Even if an economist comprehends human behavior thoroughly, they cannot make decisions for others. This is because the fundamental concepts of economics—such as "happiness" or "pain," "utility" or "cost"—are entirely "individualistic." Each person has a unique set of evaluation standards and value systems (economists call this "preferences"), ranging from dining tastes and clothing preferences to ethical morals and ideological consciousness. Moreover, each person faces distinct circumstances—abilities, interests, family backgrounds, social relationships, and expectations about future changes in their environment. Thus, even if economists know that individuals always act according to the widely accepted "axiomatic assumption" that people pursue maximum benefit, they cannot determine the specific "benefit" system each individual seeks to maximize.
Economists can provide more information and knowledge to make decisions more informed, but that is all. They cannot replace individual (personal and corporate) choices or decisions! Economists do not even have the right to judge others' decisions as right or wrong, because they fundamentally do not know the preference system that underlies the decision.
This "individual specificity of preferences" leads to significant limitations in economics' quantitative analysis and "scientific falsification." Using abstract concepts like "preferences" and "utility," economists can formulate "theoretical hypotheses" about the basic laws of many human behaviors, including marriage, divorce, crime, institutional reform, and the pursuit of equality. However, since the "goods or bads" involved in these behaviors lack market prices (transaction costs for pricing are too high), quantitative analysis must stop here. Due to the personal nature of preferences and the incomparability of interindividual utilities, economists 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 individual decisions but also does not aim to alter people's values or ethics. Economics always takes different people's value systems as its premise for analyzing economic and social phenomena, rather than attempting to change them. Whether you prefer sour or sweet, traveling or drug abuse, whether you care only about yourself or also about friends and the nation—these are merely your personal preferences and value judgments. While you might change your values under the influence of ethicists, politicians, priests, writers, or journalists, that is not the mission of economics as a discipline. Economics only treats your special preferences as its analytical premise. If you change, it treats your new preferences as the premise, but economists do not intend to alter your thoughts.
Some people always want to assign economics more responsibilities, including changing people's moral values, thereby blurring the line between economics and "economic banditry," as they are seizing things that do not belong to them.
Someone once asked me: In a market economy, because of "repeated games," untrustworthy people will eventually face punishment. If people recognize this, they will become more trustworthy, so the moral ethics of credit in a market economy will improve. Does this not show that economics is related to morality, and that economic operations can change moral ethics? But if you think carefully, so-called commercial credit is not because people have changed their moral ethics but because they realize that untrustworthiness in a market economy is ultimately "unprofitable" (punished), meaning it is still based on "calculation" rather than "moral improvement" that changes behavior. Making people "better" is a meaningful and worthwhile effort for each of us as individuals, but economics does not consider it its primary task. The primary task of economics is to change behavior through institutional and policy changes, such as punishing untrustworthy people.
Third, based on these two limitations, economics' role in public policy issues is also limited. Economics can indeed contribute to public policy issues because one of its tasks is to study interindividual relationships and how an individual's pursuit of maximum benefit constrains others' pursuit of their own interests. Conversely, each person's effort to maximize their own interests must take into account the constraints imposed by others pursuing their own interests (all based on the axiomatic assumption of resource scarcity). Therefore, economics can use concepts like "equilibrium" to tell everyone that our pursuit of maximum benefit is actually "conditional extremum" and "unreachable," and that to reach this equilibrium, everyone must compromise. If one group gains too much, others and interest groups will "push back," ultimately causing greater losses for that group.
For example, social equality. Under market economy conditions, the general logic is that as long as there is equal opportunity, legal competition, no fraud, no privileges or corruption, wealth gaps can only be attributed to innate differences, postnatal efforts, or luck, making them unavoidable. However, given any society's ideology at any point in 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 necessary or reasonable income redistribution and social welfare support (what is necessary or reasonable? This is also a difficult 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, making it "unprofitable" for them. Meanwhile, if the wealthy pay slightly more in taxes for social welfare, it may be "profitable" for them in the long run (note that here, economics relies not on the wealthy's "goodwill" but on their "calculation." Those who hope for the wealthy to "have a change of heart" should consider: if people's consciences never change, what can you do?!).
Here, the "policy recommendations" economics offers society are not "picking sides" but rather 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, are also not beneficial. We should avoid extremes and pursue a "sustainable equilibrium." But if economics is asked to do more, its limitations become apparent. Due to its reliance on fundamental concepts like "utility" and "preferences," which are "individualistic," economics finds it difficult to make accurate and scientific judgments about the social effects of public policies. In these matters, economics' only theoretical tool is the so-called "Pareto optimality" or "Pareto improvement."
Pareto optimality refers to a state where society cannot improve the situation of at least one person without worsening the situation of another. Thus, this often misleadingly labeled "optimal state" is merely a statement that "we cannot make the situation better anymore," or more precisely, it means: any further changes may make the situation better, but economists do not know if they will. Therefore, they must classify this easily identifiable 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—suffers a loss, economics cannot "justifiably" claim that the reform has improved the overall social situation, because it does not know whether the total increase in welfare for the 99% can compensate for the monopolist's loss. 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 one person! Only if a portion of the additional gains from resource efficiency improvements during antitrust, which the monopolist considers "fully compensated" (economists' approval does not count), is transferred to the monopolist, can economics "recognize" that an improvement has been achieved. The improvements economics can argue for are only Pareto improvements.
Thus, Pareto optimality is merely what economics confirms as "unreachable optimality," and Pareto improvement is the only improvement economics can confirm. Both demonstrate that as a science, economics has no say in other many possible social states or improvements that are not "unanimously agreed upon" and cannot be achieved without anyone opposing them (because no individual's interests are harmed). Understanding this helps explain 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 and conflicting arguments, with 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, analyzing the political mechanism for public good allocation, studying the decision-making mechanisms of public policies, and even examining decision-making rules at the constitutional level, such as "unanimity" versus "majority rule," direct democracy versus "representative democracy," etc. Here, we can see why a good economist must be humble, because no economic decision can be made by an economist alone! 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.). An economist's contribution is undoubtedly, but also only, a part of the whole, and in many cases, a small part.
Good economic policy recommendations must follow economic logic because it is your specialty, your unique perspective for explaining the world. If you want to discuss issues from the perspective of another discipline (e.g., speaking as a priest, or arbitrarily assuming the role of the government without appointment), you would actually be failing to leverage your expertise and fulfilling your primary role, 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.
Having clarified these issues, we must also say that economics cannot "dominate everything," and other social sciences may be even less capable of doing so. Ultimately, due to the characteristics of its analytical methods, economics is still slightly more scientific, has stronger explanatory power, and can explain a broader range of problems—meaning it is still more "imperialistic."