Introduction to Fairness Analysis for Economists

1.    
Abstract

This paper provides a brief explanation about the nature and importance of fairness analysis to economic studies through a simple deconstruction of the meaning and role of fairness in our everyday economic life. It could serve as an introductory discussion to the cultural transition from empirical investigation to rational analyses for social studies including economic studies.

 

1.    １．   A brief background

Market economy is a game driven by interest based free wills. Like in any other games played by people across the world around history, fairness is not only admirable but also demanded by most players in the game. Even those who do not respect the fair rights of others would also demand not to be treated unfairly when they cannot control the game. Therefore, the fundamental spirit of the game of market economy is fairness. However, if we examine the meaning of fairness very carefully, we might find that ironically the meaning of fairness is far from clear to people around the world. Even though equipped with supercomputing power and advanced database technology, when people are attempting to simulate the fair competition in a market economy, it is not clear to the society as a whole what exactly the meaning of fairness is; when people are predicting the market demand based upon the consumption of existing inventory, it is not clear to economists what is the real driving force of the demand down to personal purchasing decisions besides historical knowledge and a faith in the marketing power;  while people are calculating the costs and profits of various products in the market, it is not only mathematically but even philosophically not clear what might be the long term consequence of a very profitable market economy upon the life of the society as a whole.

If we attempt to anatomy any social standard of fairness, we might find that people have been constructing their standard with many specific conditions only for a given subject. For example, a state-wise math test is assumed to be fair in the sense that no student would know the questions in advance and everyone is allowed the same length of time using similar tools to answer the questions during the test, plus the environment for all is roughly the same. Those are the conditions on which the fairness of the test is constructed. However, if we deconstruct the foundation of this fairness of test by looking outside the isolated testing area and examining the fairness in the real life open society, then we might find the test is not really fair as people might have imagined. First but not the last, no matter how carefully the questions are selected, it could not possibly cover all the teaching patterns in all the classes of the state, and thus some students might be more familiar with the subjects than others simply because their teachers gave them more exercises on the subjects by accident. There could be much more to consider that would make the test not fair as they are supposed to be. Would this type of unforeseeable unfairness matter to the students? Of course it would, in this way or that way. But since this kind of unfairness seems unavoidable, people would tend to attribute it to something called luck. However, not all the unlucky things are truly unavoidable. For example, if two test centers located in two different places, one is quiet but one is noisy, and one is with comfortable inner atmospheric condition but one is freezing during the winter, then even though people could still extend the meaning of luck to their locations, it might not be the kind of luck that people cannot change it.

Since the influencing factors involved in an open market system would be much more than in a single test event discussed above, the function of fairness would be much more dynamic and its impact upon whomever live and work in the economic system would be much stronger; yet the meaning of fairness for market economy is also not as clear as most people might have thought so far. Since fairness is not only the assumed precondition of a market economy but also the goal of any serious economic theory (at least in principle), the lack of understanding of fairness would no doubt be manifested in theoretical endeavor on economic issues. While scholars are struggling to promote more effective as well as fairer economic solutions, they might actually help to create polarized and thus ineffective market environment due to the lack of understanding of fairness as have happened many times during the history. Therefore, a better understanding of fairness is warranted in order for us to work for a fairer economic system. However, once we start to investigate the meaning of fairness more carefully we would soon realize that fairness is not just a simple social standard, but indeed a fundamental driving force behind all human social activities, including economic activities. To acquire a full appreciation of what fairness is would involve a dynamic analysis of the interaction of social elements (persons, organizations, and abstract cultures) in a way similar to what natural scientists have been doing for the past few centuries but (unfortunately) without the handiness of a formal mathematical framework.

2.    ２．   The role of fairness

As we just saw in that math test example, to have a better understanding of fairness might involve a deconstruction of specific conditions in question for researchers and then bring in a full scale social and cultural inquiry. On the other hand, however, judgment about fairness always starts from very specific issues which might have immediate consequences in real life, such as corporate promotion, social wealth distribution, job opportunity decision, etc. More importantly, human awareness of the fairness issues in various events of their life would create some urges for them to say something or to do something for the change of what they might considered as unfair; or even if they don’t feel the courage or don’t bother to take the trouble to meddle in the unfair business of others, they would still choose to do whatever considered to be fair to themselves when possible. From this we could see the duality of fairness: fairness as the result and fairness as the driving force. Because of this duality while fairness functions as a judge of the game of life it is also a player itself in the game. More precisely, fairness is not simply a concept of political or moral standard of a society but also a fundamental force of everyday life similar to the natural force Newton[1] studied three centuries ago.

When we drive a car running on a highway, no matter how expensive the car is and how powerful the engine is, as we know according to our modern scientific knowledge that, it is being pushed forward by the same friction force between the tire and the ground; besides, what is moving along is a colossal assembly of large quantity of tiny parts and each tiny part is being pushed (or dragged) forward by the total force from its neighboring parts or is undergoing chemical and electronic interactions. Similarly, even though there might be so called great social powers or very splendid moments in this world, if we keep deconstructing the factors that build the social powers or create the big moments, we might always reach the very same interactive forces between human beings, and those interactive forces are all regulated by the same principle of fairness behind just like the interaction between material parts are regulated by the same Newton’s laws at macroscopic scale.

Owing to the successful work of natural scientists for the past centuries, we could now appreciate the full scale dynamic complicacy of material objects and systems around us in natural world; and due to the solid theoretical foundation of natural science, today when we enjoy our convenience of industrial artifacts we could have high level confidence of the technology behind the production. However, on the contrary, we don’t have the same level of confidence in the data or the interpretation of data from economic studies. The main reason of this is indeed neither because people don’t take economy as serious as natural sciences nor because nowadays people don’t invest huge quantity of capital in potent electronic means to gather and process economic data.

We might certainly blame the open nature of any realistic economic system which lacks the controllability that natural scientists might enjoy in their labs. However, the material world those pioneer natural scientists were facing to about four centuries ago before Galileo (or Stevinus) legendarily dropped two metal balls down the Pisa Tower[2] was also very open and uncertain to them, but natural scientists have overcome the openness and uncertainty and constructed the scientific edifice since then. There are two important means that have helped them to achieve this: one is the experiment in controlled environment, another is the abstract analytical thinking based upon knowledge of interacting forces between material objects. The second one is even more important than the first one since without abstract analysis, there would not be much meaningful controlled experiment.

On the contrary, in the domain of social sciences including economics, so far through the history, the knowledge system has not been properly reflecting the interactions between the basic units of the system--- human beings. Rather, social theories including economic theories have been constructed on top of collective concepts like moral standards and legal rights/ penalties or inhuman numbers of market transaction data. For this reason people are fundamentally counting on common senses and traditional empirical knowledge to handle everyday social events without much abstract analysis about the nuances of human interacting dynamics even though this dynamics would indeed determine the development of the events. One typical consequence of this lack of dynamic insight of social mechanisms in economic studies is the obvious detachment of economic data from the cultural environment from which those data are produced. Even though not too many nowadays people would naively deny the influence of political cultural development of a society upon its economic well being, scholars are not able to relate them together in a sensitive way except for their personal judgment based on some eye catching big events or some histogram variation trend. Financial analysts forecast the possible rise and fall of market prices based on historical data and foreseeable big social or technological events without much knowledge about what kind of undergoing cultural movements are causing tomorrow’s rise and fall. It is assumed to be the responsibility of historians to dig out subtle cultural influence upon real life political and economic status afterword while nobody really knows or cares about whether or how historians would do the job correctly. Therefore, it is not hard to see the reason why supposed sophisticated economic theories developed by elite scholars in the field could lead to crises in the past.

Knowing the fact that the coarse-grained knowledge about underlining cultural forces is responsible for deficiency in economic theories would remind us that we are facing to a similar challenge as people in the age of Galileo were facing to for the study of nature: how to make a transition from empirical world into an analytic world. The answer should be to bring social sciences including economics down to the ground of interactive forces between basic social units---human beings. Only in that level we might conduct more sensitive bottom up investigations about human social system including economic system like natural scientist have been successfully doing towards the material world. In order to do so we need fairness analysis since fairness is the key to understand the apparently dazzling interpersonal forces. Even though we should not unrealistically expect that we might pull out a highly analytical system for social sciences as the one for natural sciences, we still could make changes, radical changes, in the study of social problems including economic problems with the help of fairness analysis.

3.     ３．  Fairness analysis and the challenges

Fairness analysis is a methodology or a philosophical way to examine human civilization based upon interactions between human beings with the help of abstraction of the force of fairness[3]. Because fairness analysis is aiming at general nature of low end interpersonal interactions, unlike any existing theories of social sciences, it thus does not depend upon traditional moral standards or political norms; rather it could be used to analyze or deconstruct existing cultural concepts and social structural norms such as freedom, leadership and so on across cultural and geopolitical boundaries. For example, it is a common assumption that free market economy is fair. Someone might deduce furthermore based upon that assumption that the bigger the market size is the fairer the market would be since the benefit of the mechanism of free competition could be fully exploited with a bigger market. With that kind of mindset people would feel very confused when they saw things like global financial crises happened during past decades when the market was tremendously enlarged. But with fairness analysis, we might look into the real market logic in more details by deconstructing the presumption of fairness in free market economy. Once we do so we would then realize that the fairness assumption that people made about the free market economy was not much more sophisticated than the assumption people would make in the math test example we discussed above. Through the fairness analysis we might even discover some root cause of the global financial crisis: while it would inevitably involve some unfair factors from the real life open world into the assumed fair market system and those unfair factors would inevitably cause real life economic crises[4]if they are not properly curbed, people just ignored the existence of these unfair factors since it had already been assumed that the market was fair because they were not aware of the importance of fairness analysis.

On the other hand, even though fairness analysis would help social scholars to acquire a dynamic insight of social systems such as economic systems, compared to natural sciences, there are still two fundamental difficulties people would not be able to get rid of.

The first difficulty is the lack of controlled experimental environment. This is not only due to the complexion caused by the openness of any social system, but also because of the uncertainty resulting from the responsive nature of any intelligent system. Responsiveness of a system means it would make a quick self-adjustment in response to ongoing events. For example, any published trick to teach people to buy good stocks at low prices would soon be invalidated by itself if it is truly a good trick. Besides, unlike natural scientists that are testing materials made of inanimate atoms or observing caged white mice in a lab, social scholars are studying ensembles that they themselves do fundamentally belong to. Ethics then should be one important restraint for anyone who attempt to make social experiments without sophisticated knowledge based planning.

The second difficulty is the lack of elegant mathematical framework. There are mainly two factors responsible for this problem:

1) the immeasurability of many abstractions involved in social activities. Unlike most abstractions used in natural sciences such as mass, temperature and speed which are measurable, many abstractions involved in social activities such as passion, love, greedy are not measurable or at least not easy to measure. This does not mean those abstractions do not make real senses. They do make real senses just like mass, temperature and speed in natural sciences since all people could not only clearly feel their own passion, love and greedy at different levels in different time periods in life but also could clearly perceive passion, love and greedy of different others at different time. But these abstractions are simply not measurable as mass, temperature and speed is. Nonetheless, we might still find ways to measure social economic activities with some abstraction that reflects the dynamics of human interactions, and one good example is currency and prices measured by units of currency. Since the dynamics of social activities are constructed on top of non-measurable human wills, the values of abstractions (e.g. currency) used to measure social activities would often demonstrate higher instability and lower predictability than physical objects. For example, the face value of a bill is much more volatile than the weight of the paper which is used to print that bill;

2) the nonlinear discrete divergent nature of any social system including an economic system. Even if we have abstractions (i.e. stock prices) to measure their values, it would be very hard for us to work out partial differential equations to precisely calculate their variations based upon all market data including sales and production as well as stock history. Or even if we could arrive some type of equations with a selected set of abstract values for a very specific subject the equations would most probably highly nonlinear and difficult to solve due to the nonlinear nature of economic activities.

The above mentioned two fundamental difficulties would pose great challenges for any effort to rationalize economic studies, but they are not sentences of capital punishment to our goal of transition from the empirical world into an analytic world for economic studies. They just inform us of the limits of this transition we might expect in the same way the thermodynamics laws informed natural scientists of the limits they should expect centuries ago. But we are still very far away from those limits so that there are still many for us to achieve before we need to worry much about the limits just like what natural scientists have achieved during the past few centuries without the need to worry about the limitation posed by thermodynamics. These challenges should only make us smarter like what physical laws have made natural scientists smarter, not restrain us from moving forward.

Being aware of the difficulties of having controlled experimental environment or elegant math systems, we should tune our mind toward more realistic and productive efforts when attempting to analyze social economic systems. Fairness analysis as a philosophical methodology is an ideal tool to examine social economic systems without the need to set up a closed controlled environment or a grand system of mathematical equations as you might find out in the references [3,4] listed in the footnote of this paper.

4.    ４．  Closing words

Since Adam Smith first published his The Wealth of Nations[5] more than two centuries ago fairness has always been the basic theme of economics. What differentiate classic economics, economic liberalism, Keynesian economics, socialism, or even communism are their different interpretations about what is fair and what is not. However, it might be a surprise to many that when supercomputing power is extensively applied to do complicated calculations or simulations in the economic field, the meaning of fairness is still far from clear to scholars around the world. This might raise a question concerning any effort of the computation: whether it is calculated to a fair market economy or calculated to an unfair future.

As a matter of fact, even with all the high-tech utilities employed in the economic field, human intelligence about economy could hardly deemed as rational due to its fundamentally empirical nature. The root cause for this backwardness is obviously not lack of data processing technology or lack of fund but is lack of abstraction means to analyze full scale social cultural system.

This paper provides an introduction to fairness analysis which would help us to revolutionize our social cultural system on this globe.  As it might be found from the references [3,4] listed that I have done some initiative work on fairness analysis in the past years. But much more needs to be done if we are aiming at a more rational social cultural system in the future.

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[1] The Mathematical Principles of Natural Philosophy, Isaac Newton, translated by Andrew Motte, published by Daniel Adee, 45 Liberty Street, NY. 1846

[2] Drake, Stillman (1978). Galileo At Work. Chicago: University of Chicago Press. 

[3] On Fairness Analysis, R. Dai, URL: http://fairlifebook.wordpress.com/

[4] Chaotic Order – The Economic Relativity, R. Dai, URL: http://fairnessofcapitalism.wordpress.com/2013/02/05/chaotic-order-the-economic-relativity/

[5] An Inquiry into the Nature and Causes of the Wealth of Nations, by Adam Smith, London: W. Strahan, 1776