Ha-Joon Chang: facts, even numbers, are in the end not objective

Chang EconomicsUsersGuideThis is the last in the recent series of excerpts taken from Ha-Joon Chang’s Economics: The User’s Guide. Chang is an economist at Cambridge University (his personal non-academic website can be found here) and specialises in development economics. He has also written a number of popular books, some of which aim to debunk many of the myths of mainstream economic discourse.

The User’s Guide is one such, aimed at the lay reader rather than academics, and engages in a pluralist introductory approach to economics. I have therefore chosen a number of quotes over the past few months which stood out for me and which I felt were worth sharing. Here is Chang on p.453-5:

“Johann Wolfgang von Goethe, the German writer (Faust) and scientist (Theory of Colours), once said that ‘everything factual is already a theory’. This is something to bear in mind when looking at economic ‘facts’.

Many would assume that numbers are straightforward and objective, but each of them is constructed on the basis of a theory. I might not go as far as Benjamin Disraeli, the former British Prime Minister, who quipped that ‘there are lies, damned lies, and statistics’, but numbers in economics are invariably the results of attempts to measure concepts whose definitions are often extremely contentious or at least debatable.

This is not just an academic quibble. The way we construct economic indicators has huge consequences for how we organize our economy, what kind of policies we implement and ultimately how we live our lives.

This applies to even the most basic figures that we take for granted, like GDP or the rate of unemployment. The exclusion of household work and unpaid care work from GDP has inevitably led to the undervaluation of those types of work. GDP’s inability to take into account positional goods has directed consumption in the wrong direction and made it an unreliable measure of living standards for rich countries, where those goods are more important. The standard definition of unemployment underestimates the true extent of it by excluding discouraged workers in the rich countries and the under-employed in the developing countries. Naturally, these types of joblessness have been rather neglected by policymakers.

All of this is not to say that numbers in economics are all useless or even necessarily misleading. We need numbers to be able to get the sense of the magnitude of our economic world and monitor how it changes; we just shouldn’t accept them unthinkingly.”

Ha-Joon Chang: why free trade may not be best

ha-joon-chang“When they hear someone criticizing free trade, free-trade economists tend to accuse the critic of being ‘anti-trade’. But criticizing free trade is not to oppose trade.

Apart from the benefits of specialization that the theory of comparative advantage extols, international trade can bring many benefits. By providing a bigger market, it allows producers to produce more cheaply, as producing a larger quantity usually lowers your costs (this is known as economies of scale). This aspect is especially important for smaller economies, as they will have to produce everything expensively, if they cannot trade and have a bigger market. By increasing competition, international trade can force producers to become more efficient – insofar as they are not developing country firms that would get wiped out by vastly superior foreign firms. It might also produce innovation by exposing producers to new ideas (eg., new technologies, new designs, new managerial practices).

International trade is particularly important for developing countries. In order to increase their productive capabilities and thus develop their economies, they need to acquire better technologies. They can in theory invent such technologies themselves, but how many new technologies can relatively backward economies really invent on their own?…For these countries, therefore, it would be madness not to take advantage of all those technologies out there that they can import, whether in the form of machines or technology licensing (buying up the permit to use someone else’s patented technology) or technical consultancy. But if a developing country wants to import technologies, it needs to export and earn ‘hard currencies’ (universally accepted currencies, such as the US dollar or the Euro), as no one will accept its money for payments. International trade is therefore essential for economic development.

The case for international trade is indisputable. However, this does not mean that free trade is the best form of trade, especially (but not exclusively) for developing countries. When they engage in free trade, developing countries have their chances of developing productive capabilities hampered…The argument that international trade is essential should never be conflated with the argument that free trade is the best way to trade internationally.”

Ha-Joon Chang (2014), Economics: The User’s Guide, Pelican Books, p.412-4.

The blurred boundaries between the market and politics

Chang EconomicsUsersGuideCambridge economist Ha-Joon Chang frequently makes the case for the priority which should be given to a pluralist social science of political economy rather than a ‘pure’ (neoclassical) economics and its pretensions to be more like a natural science.

Political economy, a branch of the study of man in society, an interdisciplinary social science, incorporating the economic, social, political, ethical and even philosophical, can often provide us with richer insights than are on offer from modern mainstream economics alone.

That is not to say that we should ignore the arguments of neoclassical thinking. Economics, the ‘science of rational choice’, as it is sometimes defined these days, does tell us that individuals respond to incentives: change the incentives and our behaviour may change. But it tends to neglect much that I have just mentioned in its quest to be scientific, and therefore somehow apolitical and asocial. It also tends to lack an awareness of its own methodology and how this has evolved in ways shaped by economic and social history.

Along this vein is another insightful quote from Chang’s Economics: The User’s Guide, (p. 393-6), which takes to task economics’ pretension to be apolitical: Continue reading

Lazy or overworked? The myths and realities of working hours and productivity

Myths abound when it comes to cultural stereotypes regarding working hours and productivity. But it is important to distinguish between the two. People can work all day long in a poor country with inadequate technology, infrastructure and institutions, and produce a fraction of the conventionally measured economic value of someone in a rich country in which these factors are much more advanced.

Yes, incentives for individuals to work are important, but without the right physical and social technologies, there are significant limits on how much can be produced. Parachute a rich entrepreneur from an advanced economy into a very poor one and, while she may have some good ideas about how to make a living, she will find it impossible to earn anything like as much as she does at home. Continue reading

The causes of poverty: individual or structural failure?

Chang EconomicsUsersGuide“Starting from the Disney animations that we watch as young children telling us that if we believe in ourselves, we can achieve anything, we are bombarded with the message that individuals, and they alone, are responsible for what they get in their lives. We are persuaded to accept what I call the L’Oréal principle – if some people are paid tens of millions of pounds per year, it must be because they are ‘worth it’. The implication is that, if people are poor, it must be because they are either not good enough or not trying hard enough.

Individuals are in the end responsible for what they make out of their lives. Even if they are from broadly the same backgrounds, different people end up in different positions because they have different talents in different things and make different levels and types of efforts. It will be silly to blame everything on the ‘environment’  or luck. Attempts to suppress the effects of individual talents and efforts too much, as in the former socialist countries, can create societies that are ostensibly equal but fundamentally unfair…There are, however, causes of poverty that are ‘structural’ in the sense that they are beyond the control of the individual concerned.

Inadequate childhood nutrition, lack of learning stimulus and sub-par schools (frequently found in poor neighbourhoods) restrict the development of poor children, diminishing their future prospects. Parents may have some control over how much nutrition and learning stimulus their children get – and some poor parents, to their credit, make great efforts and provide more of those things than do other parents in similar situations – but there is a limit to what they can do. They are by definition under great financial stress. Many of them are totally exhausted from juggling two or three insecure jobs. And most of them had a poor childhood and poor education themselves.

All of this means that poor children start the race of life already weighed down by sandbags on their legs. Unless there are social measures to at least partially compensate for these disadvantages (eg., income support for poor parents, subsidized childcare, greater investments in schools in poor areas), those children won’t be able to fully realize their innate potentials.

Even when they overcome childhood deprivation and aspire to climb the social ladder, people from poorer backgrounds are likely to meet more obstacles. Lack of personal connections and a cultural gap with the elite often mean that people from underprivileged backgrounds are unfairly discriminated against in hiring and in promotion. If those people also happen to have other ‘wrong’ characteristics – in terms of gender, race, caste, religion, sexual orientation and what not – they will have an even harder time to get a fair chance to demonstrate their abilities.”

Ha-Joon Chang (2014), Economics: The User’s Guide, Penguin books, p.336-8.

Too much finance – misallocation, corruption and ideology

800px-A1_Houston_Office_Oil_Traders_on_Monday“[T]he financial sector has become much more profitable than the non-financial sector, which has not always been the case. This has enabled it to offer salaries and bonuses that are much higher than those offered by other sectors, attracting the brightest people, regardless of the subjects they studied in universities. Unfortunately, this leads to a misallocation of talents, as people who would be a lot more productive in other professions – engineering, chemistry and what not – are busy trading derivatives or building mathematical models for their pricing. It also means that a lot of higher-educational spending has been wasted, as many people are not using the skills they were originally trained for.

The disproportionate amount of wealth concentrated in the financial sector also enables it to most effectively lobby against regulations, even when they are socially beneficial. The growing two-way flow of staff between the financial industry and the regulatory agencies means that lobbying is often not even necessary. A lot of regulators, who are former employees of the financial sector, are instinctively sympathetic to the industry that they are trying to regulate – this is known as the problem of the ‘revolving door’.

More problematically, the revolving door has also encouraged an insidious form of corruption. Regulators may bend the rules – sometimes to the breaking point – to help their potential future employers. Some top regulators are even cleverer. When they leave their jobs, they don’t bother to look for a new one. They just set up their own private equity funds or hedge funds, into which the beneficiaries of their past rule-bending will deposit money, even though the former regulators may have little experience in managing an investment fund.

Even more difficult to deal with is the dominance of pro-finance ideology, which results from the sector being so powerful and rewarding to people who work in – or for – it. It is not simply because of the sector’s lobbying power that most politicians and regulators have been reluctant to radically reform the financial regulatory system after the 2008 crisis, despite the incompetence, recklessness and cynicism in the industry which it has revealed. It is also because of their ideological conviction that maximum freedom for the financial industry is in the national interest.”

Ha-Joon Chang (2014), Economics: The User’s Guide, Penguin Books, p.306-7.

Ha-Joon Chang: why we need to pay more attention to production

Chang EconomicsUsersGuideMore from Ha-Joon Chang’s Economics: The User’s Guide, this time on production and its relative neglect by neoclassical economics. Despite the rise of the so-called knowledge economy, manufacturing and industry more generally remain vital to the development and evolution of our society, and a key driver of the economy.

Chang has written extensively on industrial policies, making the case for their role in promoting economic progress, both in the poorest and the richest countries. Here he is on p.273-275:

“Production has been seriously neglected in the mainstream of economics, which is dominated by the Neoclassical school. For most economists, economics ends at the factory gate (or increasingly the entrance of an office block), so to speak. The production process is treated as a predictable process, pre-determined by a ‘production function’, clearly specifying the amounts of capital and labour that need to be combined in order to produce a particular product.

Insofar as there is interest in production, it is at the most aggregate level – that of the growth of the size of the economy. The most famous refrain along this line, coming from the debate on US competitiveness in the 1980s, is that it does not matter whether a country produces potato chips or micro-chips. There is little recognition that different types of economic activity may bring different outcomes –  not just in terms of how much they produce but more importantly in how they effect the development of the country’s ability to produce, or productive capabilities. And in terms of the latter effect, the importance of the manufacturing sector cannot be over-emphasized, as it has been the main source of new technological and organizational capabilities over the last two centuries.

Unfortunately, with the rise of the discourse of post-industrial society in the realm of ideas and the increasing dominance of the financial sector in the real world, indifference to manufacturing has positively turned into contempt. Manufacturing, it is often argued, is, in the new ‘knowledge economy’, a low-grade activity that only low-wage developing countries do.

But factories are where the modern world has been made, so to speak, and will keep being remade. Moreover, even in our supposed post-industrial world, services, the supposed new economic engine, cannot thrive without a vibrant manufacturing sector. The fact that Switzerland and Singapore, which many people consider to be the ultimate examples of successful service-led prosperity, are actually two of the three most industrialized countries in the world (together with Japan) is a testimony to this.

Contrary to conventional wisdom, development of productive capabilities, especially in the manufacturing sector, is crucial if we are to deal with the greatest challenge of our time – climate change. In addition to changing their consumption patterns, the rich countries need to further develop their productive capabilities in the area of green technologies. Even just to cope with the adverse consequences of climate change, developing countries need to further develop technological and organizational capabilities, many of which can only be acquired through industrialization.”

The appeal of individualism in economics

Chang EconomicsUsersGuideHere is another extract from Ha-Joon Chang’s 2014 introduction Economics: The User’s Guide. I have posted a number of quotes from Chang’s popular books over the last few years. For me these works make accessible to a potentially wide audience important points about economics and political economy.

This one outlines what he sees as the “appeal of the individualist vision of the economy and its limits”. In particular, economic freedom may not always be aligned with political freedom, contrary to the claims of many free market economists.

Elsewhere Chang has argued that there is no such thing as a ‘free’ market anyway, as markets under capitalism are institutions structured and sustained by all sorts of rules, both formal and informal, whose emergence and management are frequently subject to political intervention and debate. Although this kind of argument starts becoming one of semantics, I find that it can be helpful to challenge conventional wisdom and elements of discourse and meaning which are widely influential. This reveals them as partially subjective as much as objective, and therefore able to be changed. Continue reading

Ha-Joon Chang on the different ways to ‘do’ economics

Chang EconomicsUsersGuideIt is important to recognize that there are distinctive ways of conceptualizing and explaining the economy, or ‘doing’ economics, if you like. And none of these schools can claim superiority over others and still less a monopoly over truth.

One reason is the nature of theory itself. All theories, including natural sciences like physics, necessarily involve abstraction and thus cannot capture every aspect of the complexity of the real world. This means that no theory is good at explaining everything. Each theory possesses particular strengths and weaknesses, depending on what it highlights and ignores, how it conceptualizes things and how it analyses relationships between them. There is no such thing as one theory that can explain everything better than others – or ‘the one ring to rule them all’, if you are a fan of The Lord of the Rings.

Added to this is the fact that, unlike things that are studied by natural scientists, human beings have their own free will and imagination. They do not simply respond to external conditions. They try – and often succeed – to change those very conditions by imagining a utopia, persuading others and organizing society differently; as Karl Marx once eloquently put it, ‘[m]en make their own history’. Any subject studying human beings, including economics, has to be humble about its predictive power.

Moreover, unlike the natural sciences, economics involves value judgments, even though many Neoclassical economists would tell you that what they do is value-free science…behind technical concepts and dry numbers lie all sorts of value judgments: what is the good life; how minority views should be treated; how social improvements should be defined; and what are the morally acceptable ways of achieving the ‘greater good’, however it is defined. Even if one theory is more ‘correct’ from some political or ethical points of view, it may not be so from another.

Ha-Joon Chang (2014), Economics: The User’s Guide, Penguin books, p.111-112.

Industrial policy and development – some neglected themes

Production_LineThere has been a resurgence of interest in the theory and practice of industrial policy in recent years. To many, the financial crisis of 2008 exposed a general failure of the ideology, if not the practice, of a minimal state. Although the interventions that resulted were necessarily imperfect, they reawakened among more mainstream economists and other social scientists ideas that had for some time been confined to the heterodox margins of academia, at least in economics.

Meanwhile, the experiences of economies in East Asia, such as Japan, South Korea, Taiwan and Singapore, which all experienced significant periods of rapid catch-up growth to advanced country status, revealed that, if one cared to look closely enough, industrial policy had never really gone away.

Moving to the present day, policy-makers all over the world have engaged in unprecedented intervention to try and protect parts of the economy during the Covid-19 pandemic and subsequent widespread lockdown. While these are more general than traditional industrial policies, those economists more sympathetic to state intervention are making the case that economies should learn some lessons from the current crisis, such as that there is very often a need for the state to work with the private sector to tackle public ‘missions’ at the national and international levels. Continue reading