Book Review: Ha-Joon Chang — Economics: The User’s Guide

Leiden, a.d. XVI Kal. Apr. MMDCCLXIX A.U.C.,

In ‘Economics: The User’s Guide’ Ha-Joon Chang shows his readers that there are more ways to look at economics than the neoclassical method, the right wing branch of which is usually referred to as ‘neoliberalism’. The first part of the book first shows what economics as a discipline has achieved in the past, then gives a short overview of modern economic history, and ends with and introduction of nine economic schools (behaviorist, institutional, Keynesian, classical, Marxist, neoclassical, Austrian, developmental tradition, and Schumpeterian) in a highly accessible way. Chang stresses the importance of broad understanding of economics by citizens, and tries to supply citizens with a book which can help them along the way. The chapter on the nine schools is probably the only decent chapter of the book, but it is written very accessibly and I think about as balanced as possible. For those without a background in economics, read this chapter, it really is about as good as it gets. The second part of the book tackles several economics issues of our time using other economic theories than neoclassical economics (although it remains rather unclear which ones exactly).

What I find surprising about the book is that at the one hand the book is presented as neutral, pretending to present all theories in an unbiased way, while on the other, it is actually very left wing. Chang clearly believes that governments are great, and markets are bad. For instance, in the chapter on the 2008 financial crisis and the subsequent European debt crises Chang only discusses the standard left wing argument how the crisis started (greedy bankers!) and how austerity is harming citizens. Meanwhile, Austrian economists and unbiased (that is, not working for or associated with a bank) neoclassical economists have plenty to say about the sources of 2008 financial crisis and the subsequent sovereign debt crises in Europe. The financial crisis and subsequent sovereign debt crisis are far more complicated then Chang is willing to admit, involving greedy bankers (exactly like neoclassical economics as a science seems to predict, even if ‘neoliberals’ as policy makers failed to anticipate this/were happily enjoying Wall Street jobs before or after their public careers), involving governments highly influenced by the banking sector to the degree that banks could safely bet on bail outs, creating massive moral hazard issues (when one person takes more risk, because someone else bears some or most of that risk), and involving governments actively creating bubbles by low interests and subsidies on housing ownership. So any explanation of the financial crisis would at least have to include the political story about why governments did what they did, and how that affected decisions individuals made. I agree with Chang that using several approaches is the only way to explain those things (I would think of rational choice institutionalism, Austrian economics and neoclassical economics)  but Chang himself does not actually do so.

Chang makes quite some unsubstantiated claims. For instance, he recognizes the fact that given his relentless attacks on markets and constant appraisal of governments he has to defend his arguments against critique of governmental interference in private deals. That is, he needs to argue that in the case of market failure, government failure will not make things worse, and that market failure is not often due to government interference. He does so by saying that the risk of predatory government is minimal and greatly exaggerated. I think that is an unsubstantiated claim, unsupported by human history. Predatory government is the rule, rather than the exception. Elsewhere, Chang manages to blame several sovereign debt crises on financial deregulation, which I think is misleading to those who want to use this book to better understand economics. Also, many crises that were caused by unsound monetary/exchange policy in combination with freedom of capital are all caused by financial deregulation in Chang’s view. For instance, a major cause of the economic crises in South-East Asia in the 1990’s was that governments pegged their currency to the Dollar, thus intervening in currency exchange markets. Indeed, those governments deregulated their financial markets at the same time, which made the pegging of the currencies very dangerous. Chang prefers to blame those crises simply on financial deregulation, completely ignoring how pegged currencies were a sine qua non for these crises. It is this constant biased view which makes Chang’s initial promising remarks ring very hollow.

Moreover, Chang does not provide theoretical underpinnings for integrating the economic schools. While he claims that he supports further integration between the different economic school, (using Mao Zedong’s proverb: ‘Let Thousand Flowers Flourish’, I do not know why he did not use ‘Arbeit Macht Frei‘ in the chapter on production, if quoting totalitarian lunatic mass murderers is OK. Apparently quoting Mao is considered normal in certain academic traditions?) he does not actually ever really do that. I do not think you can simply state that schools should be integrated, without going deeper into their assumptions, and explaining to what degree those assumptions are conflicting or not, and then arguing which hypotheses would follow from integrating certain schools. Then just do not mention it, and do not pretend you are doing this while praising governments to heaven and damning individuals to hell.

What I found disappointing as well, is that Chang goes as far as to argue against methodological individualism (the idea that all social phenomena are the result of individual decisions), because organizations exist, for instance: ‘Enterprises are the most important decision makers, not individuals’. This is a statement which is both empirically incorrect, enterprises are social constructs, which means they do not have the cognitive abilities to make decisions, but also making a straw man of what methodological individualism is. Of course individuals have to cooperate, and make decisions together, and methodological individualism has done more for our understanding of how individuals make decisions together than any other approach to social science has done so far (in my opinion). By arguing against it Chang actually takes a really clear position against several of the economics schools he purportedly finds important. There is no such thing as a new economic institutionalist, Austrian economist or neoclassical economist who is not a methodological individualist. Discarding methodological individualism the way Chang does is discarding all those schools because ‘organizations exist’.

Meanwhile, methodological individualism has presented us with plenty of reasons of why markets fail. Transaction costs, tragedy of the commons, moral hazard, prisoner’s dilemmas, adverse selection, information asymmetry, externalities and public goods are all good reasons to expect a company or an accountable government to do better than market exchange. These are all ideas based on methodological individualism, so I really do not understand why Chang makes a straw man of this approach and then tries to argue against it. Moreover, he argues that economics should be limited to the study of the topics that are traditionally typical economics topics. As someone who favours abolishing the artificial boundary between economics and political science, of course I cannot agree with him. Economists and economic research methods have made major advances in political science possible, and I think it makes sense to try to apply those methods developed in economics to other topics.

Moreover, I think a discussion on how rational individuals are, is extremely useful and relevant. What are the cognitive biases and limitations that individuals are subject to? How do cognitively biased and limited individuals interact? What can we learn from the way we use information and spread information by comparing real individuals to hypothetical individuals who are not cognitively limited and biased? How can we use increasingly advanced statistical, experimental and modeling methods to better understand how individuals think and interact? Chang does not go into this at all, merely saying that neoclassical economics should stop using ‘Olympic rationality,’ showing the usual ‘rational-choice-theory-fobia’, while actually using bounded rationality himself (maybe without realizing it). Of course Olympic rationality is empirically falsified, but by ignoring bounded rationality Chang does everyone a disservice.

All in all I did not enjoy this book. Yes, economic orthodoxy is a problem, and people should know more about economics. Many of Chang’s criticisms of neoclassical economics are useful, yet tarnish other approaches based on methodological individualism. I think Austrian and neoclassical economics and new institutional economics/rational choice institutionalism go a long way in explaining many of the social phenomena of interest, because all highlight different aspects and can be build around bounded rational individuals. Nevertheless, Chang does not once try to look at issues from such a perspective. He clearly has a left wing agenda, which is fine, but then do not pretend to be the ‘unbiased one’. This book is very biased. It misrepresents one of the major approaches to political economy, it does not explain what rationality is and how it can be interpreted differently and why that matters. It does not actually integrate different economic approaches, it rather gives a typical left wing rant against capitalism. I can think of plenty of reasons why capitalism can lead to disasters, but all of them are based on methodological individualism and on bounded rationality. Moreover, I do not see how Chang’s unbridled faith in governmental interference would present actual solutions. In short, I do not understand what the first part of the book, a call for integrating economic schools, has to do with the second part of the book, an unfounded call for big government based on unclear methodological underpinnings. So, if you want an excellent intro to economics, read the first chapter, but do not bother with the rest of the book.


Bottom Line: The book was very promising, but it actually just tries to defend a left wing agenda. I am perfectly fine with that, but then just be honest about it. Moreover, there are much smarter ways to be pro-government then Chang’s rather simplistic approach. Still, the first chapter is very good.

 

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