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Book Review: Ha-Joon Chang, Economics, the User’s Guide (New York: Bloomsbury Press, 2014.
Raymond Richman, 6/9/2015

The author, Ha-Joon Chang, Reader in the Political Economy of Development, Faculty of Economics, University of Cambridge, states in the Prologue that this is a book without the economic jargon that makes economics appear to be more difficult than it needs to be. Economics, he writes, cannot be a science like physics or chemistry. In this regard, he fails to distinguish between economic theory and economic policy. Determining economic policies is not a science. But in theorizing about economics, economics uses scientific methodology just as the physical sciences do. The prologue is a bad beginning.  So is the first chapter which is entirely devoted to defining economics. Prof. Paul Samuelson in his introductory textbook, Economics, which was the leading bestseller in the world for many decades takes half a page and his definition, five lines, includes the essentials of all textbook definitions, economics is the study of the conditions for an efficient allocation of the world’s scarce resources among alternative uses. To Chang, economics is the study of “money, work, technology, international trade, taxes, and other things that have to do with the ways in which we produce goods and services, distribute the incomes generated in the process and consume the things thus produced --  rather “than ‘Life, the Universe, and Everything’ or ‘almost everything’, as many economists think.” Try urging people to “economize” using Chang’s definition. No wonder he thinks economics is not a science?

He defines capitalism, as Karl Marx did, as an “economy in which production is organized in pursuit of profit.” Most individuals spend yeas and substantial money to educate themselves in pursuit of a higher income. They make an investment in themselves. Producing products that people want requires an investment by an entrepreneur, who provides the capital, thereby a capitalist. The economy should be called the investment economy or, as I prefer, a competitive market economy in which anyone can compete to distinguish it from socialism which is a closed market economy, permitting no competition. Nowhere does Chang refer to monopolistic competition or to Prof. Chamberlin who described our economy as a monopolistic competitive economy. Instead he devotes less than a page to what Prof. Ursula Hicks called icksHicks “imperfect competition” but he seems unaware that there is nothing imperfect about a monopoly and few, if any, firms that are perfectly competitive. Every firm has some monopoly power ranging from nearly perfect monopoly in cases of patents and copyrights to illusory product differentiation achieved as a result of advertising to hardly any monopoly power, individual farmers.

He writes that capitalists, workers, markets, money and economic theories have changed since Adam Smith’s day. What hasn’t?

In Ch. 3, he asks, “What Use is History?”  He answers, some knowledge of economic history “is vital to fully understanding contemporary economic phenomena.” So what history does he believe is vital? You should know about the slow growth of western Europe before capitalism, the  emergence of new sciences, technologies and institutions, colonialism left big scars including slavery, the industrial revolution, the rise of anti-capitalist movements especially Marxism, the rise of protectionism, protectionism, free trade spread “mostly among unfree nations”, the rise of mass production, the rise of new economic institutions (mentioning Marx again!), increased globalization, the growth of Liberalism, the turmoil 1914-45, the Golden Age of capitalism post-war to about 2000, the collapse of communism,  the Asian financial crisis, the dot.com revolution, the 2008 financial crisis, etc. Needless to say, in a survey of history, brevity is not the soul of wit!

In Ch. 4, he asserts “Contrary to what most economists would have you believe there isn’t just one kind of economics – Neoclassical economics. In this chapter I introduce nine different kinds, or schools, as they are often known.” This accords with his assertion that economics is not a science. He identifies the other schools as the Austrian, Behaviouralist, Classical, Developmentalist, Institutionalist, Keynesian, Marxist, and Schumpeterian. This really is an extension of Chapter 3, a history of economic thought representing theories held by economists at one time or another and believed to be true by some economists even today. The chapter gives the reader an inkling of views held by economists over time much of which economists as scientists have to overcome. Much of it is ideology, not science at all.  What economics there is in this book is largely in this chapter of 41 pages and one or two other chapters. By contrast, Samuelson’s economics, 10^th ed., is 900+ pages. There is very little economics in this book.

A quote appearing at the beginning of Ch. 4 recites, apparently with the author’s approbation, “The corporations don’t have to lobby the government any more. They are the government.” If you believe this, this book is for you. The chapter is about who makes important economic decisions. Corporations, especially their dominant owners, government, labor unions international agencies, individuals. The latter, according to the author, are highly imperfectly conditioned. “Only Imperfect Individuals Can Make Real Choices.” No economics here.

Part 2 deals with “Output, Income and Happiness.” In Ch. 6, he defines national economic accounts and their limitations and how little the developing economies produce. He describes how badly income is distributed. Among the topics, why we cannot totally rely on people’s judgments on their own happiness. Marx knows better; he calls ii “false consciousness”. Another, Why Numbers in Economics Can Never Be Objective.

In Ch. 7, he asserts that “an economy with low productive capabilities cannot even be sure of the value of what it produces”, that “changes in technologies are at the root of development”, how scientific management is anti-worker, why a 6 percent growth rate is a miracle, the power of compound interest, “unlike economic growth, economic development cannot be measured by a single indicator”,  the importance of investment  to growth, de-industrialisation and the rise of the post-industrial society but manufacturing still matters (!), and environmental limits to growth. Poor countries need to grow faster because of global warming. Again, is this economics?

Ch. 8 is a discussion of banking. Some of the topics and observations:  1)                                   “Banking is a confidence trick ..but..socially useful  (if managed well)”, 2) the importance of the central bank, and 3) the growth of investment banks and mutual funds, collateral debt obligations, derivatives. Increased complexity has made the financial system more inefficient and unstable. In no way is banking a confidence trick. Only a propagandist would call it that. Depositors, including owners of checking accounts, receive services including interest. Banks then re-lend those deposits. In what way is that a confidence trick?

 Ch. 9 deals with inequality. “Too much inequality is bad.” By definition, “too much” is bad. So how much is too much? He has no answer. He wastes time denying Prof. Kuznets’ hypothesis that inequality decreases with growth, on the Gini coefficient which measures inequality. To what purpose? Simply to upset the reader that income is so unequal. Income is unequal in the U.S. but the American standard of living is one of the highest in the world for the vast majority of Americans. How have they been hurt by inequality? He writes that “Poverty has been the dominant human condition for most of history.” How about right now? It is no longer the dominant human condition in the West and much of Asia. He wastes considerable time talking about almost irrelevant economic problems. They are politically important topics for those who oppose free markets. What characterized the poor nations, the absence of competitive markets, i.e., capitalism. What causes inequality?  The high rewards granted Inventors of popular products, innovators, successful managers, and risk-takers. His concluding remarks to the chaptere con state that “Poverty and Inequality Are Not Beyond Human Control.” His way of achieving their elimination is to redistribute income, economically develop poor nations, equal childhood opportunities. So who will perform the role of entrepreneurs, inventors, innovators, and managers? Silence!

Ch. 10. Work and Unemployment. Workers human rights are violated, he says. Workers in poor countries work longer hours and earn less. We have become used to high unemployment. He lists causes of unemployment: frictional, technological, political, cyclical, capitalism needs what Marx called a reserve army of unemployed to maintain discipline. He decries “neo-classical economics” focus on consumerism. The following gives you some idea of the author’s views: “Especially in the rich countries, such consumerist mentality has led to waste, shopping addiction and unsustainable household debts, while making it more difficult to reduce carbon emission and fight climate change.” How would reduced economic activity that accompanies cutting carbon emissions help workers? He is a modern Don Quixote, tilting at windmills.

Ch. 11.The Role of the State. Economics, he writes, should be called by its old name, political economy. The push and pull of politics is not science. Economics may suggest policies, but making policy is politics. Government policies are necessary to deal with the failings of economic policy, market failures, the production of public goods like money, defense, roads, courts, and abuse of economic power by monopolistic practices, and externalities, mentioning social costs but not social benefits of private enterprises. There are many government failures but, on the whole he believes we exaggerate them.

Ch. 12. The International Dimension. The spends some time criticizing the theory of comparative advantage, which since Adam Smith has called for eliminating barriers to trade among nations – free trade. Some people get hurt by trade liberalization but more gain than lose. “International trade is particularly important for developing countries” but free trade may hamper their productive capabilities by making them dependent on advanced countries. The evidence that Foreign Direct Investments are highly beneficial to developing countries is “rather weak”. They may become monopolies in the host country. They need to be regulated. Most FDI is between advanced economies. The movement of people to advanced countries has resulted in a brain drain as unskilled immigrants are not wanted. “The world has become globalized in the way it has in the last three decades only because the powerful governments and business elite in the rich world decided they wanted it that way.” Is this economics?

Ch. 13. How Can We Use Economics to Make Our Economy Better? “Economics is a political argument. It is not – and can never be a science; there are no objective truths in economics that can be established independently of political, and frequently moral, judgements.” While this is true about economic policy, economics as a science can tell you what the likely effects will be of economic policies

There is nothing in this book that shows what constitutes economics as a science, using scientific methods to verify the causes and effects of economic variables. Economic policies can be analyzed to show what the likely effects will be of economic policies. This is not a book on Economics. It is a political tract that provides some description of a number of area of interest to economists and the facts as the author sees them and the opinions he expresses are often, indeed usually, at variance with views of well-educated professional economists. It would appear that to be a Reader in the Political Economy of Development at Cambridge University one does not need to be educated in the Science of Economics.