April 23, 2021
I’ve been reading Ha-Joon Chang’s Economics: The User’s Guide. I placed it on my desk a week ago; more as a decorative piece than as a book I should read. I remember dabbling in it when I first bought it, which must have been years ago. The book is from 2013.
Last weekend I suddenly felt the urge to pick it up. It’s good to refresh the memory every now and then; especially when it comes to topics that greatly affect our lives. And economics is about life, but also it isn’t.
In the book Chang deftly provides a good argument that while economicsts often try to explain life through economics, economics should really be (and stay) the study of the economy. Doing the first is defining your subject in terms of its theoretical approach, rather than its actual subject matter. Doing the latter is looking at the actual thing we’re supposed to study. It’s acknowledging that there are many ways to think about the economy.
After that primer, the book takes a dive into the history of economics. It’s an all too familiar tour of tragedy, malice and greed. From slavery, colonialism and imperialism to devastating policies of irresponsible experimentation and self-serving unbridled deregulation.
To paraphrase Chang’s comments about Reagan’s trickle-down policies for example: How does it makes sense that the richer should get richer for them to work harder, when the poor should get poorer for them to do the same thing.
Some of these policies which often find much of their basis in the Classical and Neoclassical schools of economics are downright malicious and cynical. Whether the founders of the underlying schools of thought would actually agree with those policies as implemented in real-life, is maybe not the most interesting question. It is however a problem when politicians and other powerful figures utilize these theories (often wrongly) to legitimize their agendas.
Is it really Neoclassical to be in favor of Britain’s Margaret Thatcher’s selling off all institutions to the private market in the 80s?
Because even though I personally always linked the Neoclassical school of economics with the free market, many of the school’s theorists, don’t necessarily propose a completely free market. Because yes, the basis of both the Classical and Neoclassical school may be that people are rational and act in their own interest, with a market that is self equilibrating, there are enough thinkers who have identified situations where the market does need an intervention.
In the 1920s Cambridge professor Arthur Pigou argued that there are occassions when market prices fail to reflect the true social costs and benefits. Chang gives the example of a polluting factory. In a free market a factory may do so freely, as air and water have no market prices, yet as a result of this over-production of pollution, the environment gets destroyed and society suffers.
This is what is called an externality. In this case it is up to the government to force this factory to pollute less through tax and regulation, because it has created a negative externality. The flipside is that the same company might be involved in research and development that could benefit society as a whole.
In that case it can be seen as a positive externality, which in turn the government might reward or promote through subsidies or investment.
So even within the Neoclassical school of economics the belief that markets should be completely free is not supported. In his book Chang does a great job of summarizing what the various economic schools actually value and how they came to their arguments.
But more than that, Chang stresses that there is more than the (Neo)classical. In fact, his main point is that we should look past just the few dominant schools of thought, and look at the vast array of economic theory that is out there to explain the economy. There is no single theory that is completely right, especially when the economy is so different across the globe and across time.
I’m looking forward to reading more of the book in the coming days. Economics used to be my favorite subject in high school, but over time it has somewhat moved to the very fringes of my life.
I must say, the European Super League antics of this week also provided an interesting financial and economical case. I can recommend reading this interview with Mark Blyth on Ryan O’Hanlon’s newsletter.