A recent reply from Steven N.S. Cheung about Policy Recommendations

“Policy recommendations should be absolutely objective on the part of analyzing causual relationships among changes in constraints and consequences, but for this important part economists are seldom objective.  I have always been totally objective on this.  As to the desirability of the consequences, it is of course subjective.  Totally objective in analyzing causual relationships is one reason why I have been routinely accurate in my predictions of policy implications.”

Steven N.S. Cheung

Pricing by Proxy

A good is a bundle of attributes. For instance, an apple can be desired for its freshness, taste, or its color. Before we can price a product, we need to measure those valuable attributes. And measurement is costly. Therefore, we price those valuable attributes indirectly by say measuring the weight of an apple instead of the three valuable attributes mentioned above. Another example is labor. We value the output of labor, and sometimes we can price it directly using schemes such as piece rate. Sometimes we don’t as it may be too expensive to do so. So we try to find a proxy and use it as a guide in pricing. Time is one such proxy as we don’t value the time devoted by a worker in a particular job per se, but the output he makes.

In the first volume of “Economic Explanation”, Professor Cheung has some discussion on this issue. There is also a bit of discussion in his “Contractual Nature of the Firm” which is now reprinted in his collected works. Some other good reference sources include Yoram Barzel‘s (Professor’s former colleague at UW) “Economic Analysis of Property Rights” (2nd edition Cambridge 1997) and Yoram’s 1982 piece entitled “Measurement Costs and Organization of Markets” in Journal of Law and Economics.

For a discussion of Professor Cheung and Barzel’s place in the development of new institutional economics, there is a paper called “Yoram Barzel and the New Institutional Economics” downloadable via SSRN. The author, Dean Lueck (a student of Barzel’s), examines professor Barzel’s thoughts through the history of economics lense, a paper worth pondering.

独裁、民主、市场——给阿康与何洋上一课 (2005.06.09) – Angela’s Comment

Me and my fellow study group members of the Monetary Policy class wrote our term paper on the monetary policies of China and India.  In trying to find out why India was experiencing high rate of inflation while its counterpart in East Asia – China was (then) doing reasonably well, we compared and contrasted the two countries’ economic conditions, demographic trends, political climates, social structure…etc. 

After close examination, it occurred to us that the Chinese central bankers’ jobs were a lot easier than that of their Indian comrades.  Well, there was the “Impossible Trinity” problem.  But we couldn’t ignore the comment the Chief of the Indian central bank made when asked why they were – allow me to paraphrase – doing a shitty job curbing inflation: “What we have here is a democratic society.  Unlike China, we have to meet more demands”.  Translate: we need to please more than one boss.  That made us thinking. 

I agree with Prof. Cheung: if the government could do a better job than any other private entity in the market, the government should absolutely go for it.  This doesn’t sound very libertarian, I know.  But Wallace made a sound point: the government can be like a firm as well, provided that the constitution is well-established so that the government does not have absolute monopoly power in the market.  Absolute power corrupts absolutely, we all agree on that.  But if that power can be checked and balanced, why not let government join the party?  Competition is a beautiful thing.                   

Some Important Ideas of Professor Cheung In My Humble Opinion

Off the top of my head, I have two:

 1) Pricing by proxy;

2) Any existence of rent-dissipation has to be a constrianed minimum.

Other contenders folks?

Top Ten List – Kempton

Just or fun, I looked at nine of Steven Cheung’s earlier books and picked my “top ten” favourite articles. I wonder if my fellow free lunchers would like to join me and share their favourites?

1. 卖桔者言
2. 私产可养鱼千里
3. 灯塔的故事 & 高斯的灯塔
4. 思考的方法（上）, （中）, （下）
5. 没有兄弟姊妹的社会
6. 给女儿上的一课——也是女儿给我上的一课
7. 赵紫阳与佛利民的对话 & 假若赵紫阳是个独裁者
8. 艾智仁 & 赫舒拉发 & 我所知道的高斯 & 老师普纳
9. 最佳、最劣、最受欢迎的教授
10. 初遇佛利民 & 再遇佛利民 & 佛利民与二十世纪

P.S. OK, I’ve cheated by grouping a few links into one pick. And some of those picks are actually multi-parts articles up to 7 parts like the Coase one. (smile)

独裁、民主、市场——给阿康与何洋上一课 （2005.06.09）- Wallace’s Comment-2

It is getting very interesting now. Let me clarify my position.

When the United States was formed in 1776, the founding fathers were thinking about a society with restricted government and political leaders being elected by the people (despite that universal suffrage still did not exist). They were experimenting a model that was unprecedented, and they realized that majority rules could be dangerous. That was probably why a constitution was written to define the role of the government, the power of leaders as well as human and property rights.

The formation and enforcement of the constitution (the rule of law) is, in my opinion, even more important to guarantee individuals’ freedom and rights. I am surprised that the discussion did not put much emphasis on this. Please also notice that the US constitution being approved in 1787 did not involve every individual and was not the outcome of suffrage.

If we have a constitution that restricted the power of the government, the way to select a leader becomes secondary. I am not against universal suffrage, but am skeptical if this model works for an economy that is at the developing stage. I agree with Steven Cheung. Looking at facts, rather than being idealistic, the development of Singapore, South Korea, Taiwan and even Hong Kong after WWII was not driven by a democratic system. Another classic example is definitely China. On the other hand, the development of Malaysia, Philippines, India and many South American countries (except for Chile, which was ruled by a dictator named Pinochet) have been very disappointing, given the governments are elected by their people. Two major reasons for their failures, which are related to each other: 1) poorly written/enforced constitution (fails to protect property rights); 2) the rent seeking initiated by special interest groups. James Buchanan’s public choice theory allows us to understand more about the rent seeking issue.

In regards of benevolent dictator, I do not believe in that. I would argue that rulers, whether they are elected or not, want to maximize their returns (a typical economic perspective), and the whole idea is to design a system so that the prosperity of the country can be beneficial to rulers. In a firm, that is rather straightforward for executives get bonus when profit is made. It would be interesting if we may design something along this line: do not forget that a government can be perceived as a firm.

I know that I may not sound politically correct, but isn’t it more important to be correct?

独裁、民主、市场——给阿康与何洋上一课 （2005.06.09）- Kempton’s Comment-2

Hi Aries,

Love your use of “expected damage” in your analysis.

Here are some observations and a thought experiment and I hope you won’t be bored by it.

Some observations:

1) The transfer of power in a dictatorship can be “messy”
2) It will take some luck for a good dictator to transfer power to another good dictator.
3) A bad dictator can transfer power to his/her offspring or sibling (e.g. North Korea, Cuba) or simply be overthrown by another bad dictator
4) we may get lucky and have a few good dictators but once we get one bad dictator, the risk is that we will stuck with quite a few bad dictators in a row because of #3.
(note: I am sure there are some fancy stats/probability expression/formula that can be used to say what I said in so many words. (smile))

A thought experiment

Taking your transaction cost ranking as a given for a moment,

Good dictator (GD) < Good elected leader (GEL) < Bad elected leader (BEL) < Bad dictator (BD)

and combined with the idea of “expected damage” and the observation of good dictator can turn into one after another bad dictators (for a long time)

For me, a revised transaction cost after taking consideration of “expected damage” (over time) and the chance of Good Dictators turn bad and stay bad (over time),

E (GEL) <= E (BEL) < E (GD) < E (BD)

note: I assumed there is no cross-over between democracy and dictatorship. (which sometimes happen unfortunately)

P.S. Hmmm, I don’t know if the above makes any sense at all. Love to see my fellow lunchers’ comments.

独裁、民主、市场——给阿康与何洋上一课 （2005.06.09）- Aries’ Comment

Democracy does not guarantee efficient government, it is correct. However, dictatorship does not guarantee efficient government either. Dictatorship can make decision in a much shorter time than democracy, but it is only the input side of efficient. To determine efficiency, I believe we need to consider effectiveness and quality as well.

Of course, dictatorship can make wrong decision and democracy can make wrong decision. I am not sure whether Prof. Cheung is going to receive money from his bet. Even I presume the probability for dictator to make wrong decisions is lower, it does not mean dictatorship is better in this sense. We need to think about the severity of those wrong decisions. For this, I bet democracy is more able to reverse wrong decisions and control their damage. In short, the expected damage of wrong decisions under dictatorship may (not must) still be greater even its probability to make wrong decisions is lower.

For me, transaction cost for different types of government is ranked as:

Good dictator<Good elected leader<Bad elected leader<Bad dictator

Democracy, therefore, will never achieve lowest transaction cost but have a lower uncertainty. Again, expected transaction cost for democracy may still be lower. I personally believe that democracy is adopted to limit uncertainty rather than achieve highest possible efficiency.

你可以学经济吗？（2008.03.04) – Angela’s Comment

A soldier who does not want to be a General is not a good soldier, so the old saying goes.  But this is as objective as one stating her favorite color.  What if this person gets a hell of kick from just being a soldier? 

What if an Economics student doesn’t really care that much about becoming a master of this subject?  I am not accusing Prof. Cheung of being elitist, but he sure made Economics sounded like rocket science.  No, not just rocket science, more of fine art – you either have “it” or don’t.  Don’t get me wrong, I am not denying the eminent existence of “talent”.  Otherwise, how could you explain Mozart?  But I do believe talent plays a less part in Economics studies than it does in art.   

Among the many things I learnt from my sociology professors, one is that as much as a sociologist wants to be objective, she would inevitably fail.  And this is not necessarily a bad thing.  What it takes to excel in anything, among hard work, little bit of talent and maybe a tiny bit of luck, is passion.  Nash didn’t develop Game Theory because he was objective and unbiased.  He did it because that’s all he could think about.

Believing in something firmly is not bad at all in academic world, if I may say so.  Unless of course, one becomes intellectual fundamentalist.  In Chinese history, there was a time when numerous thoughts developed and flourished side by side.  That was the great era of “百家争鸣“.  That was an era when our ancestors learnt an awful lot about the physical and cosmic reality.  So what if one economist praises the appreciation of RMB and doesn’t bother to state its negative effects on migrate workers?  Another economist can list out all the harms it would impose on migrate workers without having to mention its positive effects.  As long as both pieces of information get out there, people, especially the policy makers can be the judge.  

So as a student of both Economics and Sociology, I don’t think Economics is any more “mysterious” than Sociology or Political Science for that matter.  As for the last two criteria, namely “the right logic” and “being observant”, tell me a social science that does not require them.      

   

独裁、民主、市场——给阿康与何洋上一课 （2005.06.09）- Kempton’s Comment

It has been a while since I read Steven Cheung’s “独裁、民主、市场——给阿康与何洋上一课 Dictatorship, Democracy and Market“ and Wallace’s comments gave me a good excuse to re-read the article. I will comment on the original article first and then address Wallace’s comments.

“独裁当然可以错，可以大错特错。但问题应该不是独裁可不可以错，而是错的机会会比民主投票高吗？从判断错误的概率看，像赌马那样下注，以较少错为赢，我的钱会押在独裁那一边。“

Philosophically, the above analysis relies on having a benevolent dictator, unfortunately, I have my share of doubts of seeing dictator staying benevolent. Worst, once the current benevolent dictator passed on, will I be lucky enough that the next dictator is also a real nice guy or gal?

Another question is should we view the end result as the only goal ignoring how we achieve it? In a democracy, the people have the rights to get their voices heard. And if the government messed up, the voters can always fire the government and elect someone else. Sometimes, economic efficiency or low transaction costs should not be the only considerations. It is not an easy question and very subjective, but what system of government makes people “happier”?

Note that sometimes there are democratically elected leaders/deciders that acted as if they can operate above the law. In those case, some may argue that they are de facto dictator.

“市场不能办到的，政府要考虑干不干，甚至考虑大干特干。“

I would love to get my fellow lunchers’ help to shed some light on the above quote and may be provide a few clear examples to illustrate.

Points of discussion with Wallace

One problem is that a dictatorial government has little incentive to turn itself to a democracy with universal suffrage. Worst, I will bet a quarter that we won’t find too many dictators willing to accept a fully independent judiciary that is capable of saying “no” to the dictator. What is the fun of being a dictator when someone can say no to you? (smile) And I am willing to bet again that its constitution is more of a decorative piece of paper with beautifully crafted words than a functioning and effective check and balance tool to protect the people.

Mikhail Gorbachev, the last President of Soviet Union, is one man that I respect greatly. It is not an easy thing to do to give up power. Other dictator in the world has managed to see its whole population on the blink of starvation for years without feeling the urge to give up his power, love of good food, and western movies.