Economic Imperialism: A Collection of Selected Articles from Economic News (Volume 3)

Author: Gao Xiaoyong
Publisher:
Publish Date: 2005-07-01
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 that reveals insights previously unexplored, leading to new developments in the disciplines. The ability of economics to achieve this is closely tied to its unique analytical methods.
First, economics, in its essence, is not, as some superficially observe, merely "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. Therefore, 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 among people. However, in reality, the need for survival is the most fundamental human need, and all human activities rely on the consumption of resources and the distribution of income. Economic interests form the foundation of all other interests, so understanding economic relationships can indeed provide deeper insights into the issues studied by other social sciences. It is precisely for this reason that economics appears "dominant," "assertive," and "preeminent."
The concept of "economic imperialism" was originally proposed by economists to describe the expansionary trend of economics. However, as the term gained traction, it may have led to misunderstandings about economics, suggesting that it is all-encompassing or that it boasts of such capabilities. In reality, true economics as a science is quite "humble" or even "modest." To be more precise, if someone truly understands economics, they would be humble, knowing that economics can explain and address only a limited range of problems.
First, how an individual makes choices and decisions is something only they can do—even the most insightful economist cannot make decisions for others. This is because the fundamental concepts upon which economic analysis relies—"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 tastes in food and clothing to ethical morals and ideologies. Moreover, each person faces specific conditions—abilities, interests, family backgrounds, social relationships, and expectations about future changes in their own and societal environments—that are all different.
Therefore, even if an economist knows 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 individual is trying to maximize. Economists can 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 firms)! Economists do not even have the right to judge the correctness of others' decisions, because you simply do not know what preference system they are based on!
This "individual specificity of preferences" leads to significant limitations in economics in terms of 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 reforms, and the pursuit of equality, within the context of "economic imperialism." However, since the "goods or bads" involved in these behaviors cannot be priced (the transaction costs of pricing are too high), our quantitative analysis must stop here. Due to the individuality of preferences and the incomparability of utility between people, we can only propose 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 decision-making 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 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 merely 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 special 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 assign economics a greater mission, including changing people's moral values within its scope. If so, that would no longer be "economic imperialism" but rather "economic piracy," because it would be seizing something that does not belong to you.
Someone once asked me, "In a market economy, due to 'repeated games,' people who lack integrity will eventually face punishment. If people realize this, they will be more trustworthy, so in a market economy, people's credit ethics 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 ethics but because they realize that dishonesty in a market economy is ultimately "unprofitable" (they will be punished). In other words, it is still based on "calculation" that leads to behavioral changes, not because they have "become better" and thus changed their behavior. Making people "better" is a very meaningful thing, something each of us should strive for as individuals, 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 also has a limited role in public policy issues. 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, each person's effort to maximize their own interests must take into account the behavior of everyone else as a constraint (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 advantage, others and other interest groups will "resist," 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. It has an unavoidable nature. However, given any society at any point in time, its ideology (which is an "exogenous" constraint condition for economics), if the wealthy group completely ignores the consequences of widening social wealth gaps leading to increasingly tense social relations and refuses to carry out necessary or reasonable income redistribution and assistance to the disadvantaged (what is necessary or reasonable? This is also a question that 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 also "unprofitable" for the wealthy. While the wealthy may pay slightly more in taxes for social welfare, within a certain range, it may be "profitable" for them in the long run (please note that here, economics relies not on the "goodwill" of the wealthy but on their "calculations." Those who hope for the wealthy to "have a change of heart" should consider what they can do if people's consciences never change!).
Here, the "policy recommendations" that economics provides to society are not to "divide and conquer" but to tell everyone that extreme income inequality is not beneficial to anyone. However, overly radical public policies and social security systems, like those in developed countries, that aim to establish social welfare systems too early are also not beneficial to everyone. We should avoid extremes and pursue a certain "sustainable equilibrium." But if economics is asked to do more, its limitations become evident. Due to the fundamental concepts it relies on, such as "utility" and "preferences," which are all "individualistic," economics finds it difficult 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. We call such a state "Pareto optimality." Clearly, this state, which is often mistakenly used by some as a "best state," is actually just a statement that "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, but according to the "Pareto standard" of economics, as long as one person—the monopolist themselves—is slightly worse off, economics cannot "justify" 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 that we can equate and 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 the antitrust process is "sufficiently compensated" by the monopolist (as recognized by the monopolist, not by economists) can economics "recognize" that an improvement has been achieved. The improvements that economics can argue for are only Pareto improvements.
Therefore, what is called Pareto optimality is merely what economics can confirm as "unreachable optimality," and Pareto improvement is merely the only improvement that economics can confirm. Both indicate that as a science, economics has no 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, 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 why there is so much debate with no absolute truth or authority (first because economics cannot provide such truth or authority).
Precisely for this reason, economics has taken the path of political economy in the context of public goods, analyzing the mechanism of political allocation of public goods, 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, etc. 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 firm must be made by the individuals involved, while public decisions are made through a social process, involving many people (including politicians) and the research results 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 (such as 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, resulting in a smaller 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 still more scientific and has stronger explanatory power and a broader scope of explainable issues due to its methodological characteristics. In other words, it is even more "imperialistic."