“History affects the present – not simply because it is what came before the present but also because it (or, rather, what people think they know about it) informs people’s decisions. A lot of policy recommendations are backed up by historical examples because nothing is as effective as spectacular real-life cases – successful or otherwise – in persuading people. For example, those who promote free trade always point out that Britain and then the US became the world’s economic superpowers through free trade. If they realized that their version of history is incorrect, they might not have such conviction in their policy recommendations. They would also find it harder to persuade others.
History also forces us to question some assumptions that are taken for granted. Once you know that lots of things that cannot be bought and sold today – human beings (slaves), child labour, government offices – used to be perfectly marketable, you will stop thinking that the boundary of the ‘free market’ is drawn by some timeless law of science and begin to see that it can be redrawn. When you learn that the advanced capitalist economies grew the fastest in history between the 1950s and the 1970s when there were a lot of regulations and high taxes, you will immediately become sceptical of the view that promoting growth requires cuts in taxes and red tape.
History is useful in highlighting the limits of economic theory. Life is often stranger than fiction, and history provides many successful economic experiences (at all levels – nations, companies, individuals) that cannot be tidily explained by any single economic theory. For example, if you only read things like The Economist or the Wall Street Journal, you would only hear about Singapore’s free trade policy and its welcoming attitudes towards foreign investment. This may make you conclude that Singapore’s economic success proves that free trade and the free market are the best for economic development – until you also learn that almost all the land in Singapore is owned by the government, 85 per cent of housing is supplied by the government-owned housing agency (the Housing Development Board) and 22 per cent of national output is produced by state-owned enterprises (the international average is about 10 per cent). There is no single type of economic theory – Neoclassical, Marxist, Keynesian, you name it – that can explain the success of this combination of free market and socialism. Examples like this should make you both more sceptical about the power of economic theory and more cautious in drawing policy conclusions from it.
Last but not least, we need to look at history because we have the moral duty to avoid ‘live experiments’ with people as much as possible. From the central planning in the former socialist bloc (and their ‘Big Bang’ transition back to capitalism), through to the disasters of ‘austerity’ policies in most European countries following the Great Depression, down to the failures of ‘trickle-down economics’ in the US and the UK during the 1980s and 1990s, history is littered with radical policy experiments that have destroyed the lives of millions, or even tens of millions, of people. Studying history won’t allow us to completely avoid mistakes in the present, but we should do our best to extract lessons from history before we formulate a policy that will affect lives.”
Ha-Joon Chang (2014), Economics: The User’s Guide, Penguin books, p.48-50.