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The lunatics are in control
on 14 July 2014
For me it was the crash of ’86. For others it will be the Great Recession. Whenever economic calamity strikes we reach for a textbook to gain an understanding of what just happened, why, and what can be done about it. Three decades down from the awakening of my own curiosity I find there are more questions than answers, and they’re multiplying all the time. One of the virtues of Ha-Joon Chang’s introduction to Economics is that, unlike many of the books and courses I’ve devoured over the years, it makes clear that there is no silver bullet. Some of the people claiming to have the answers are as clueless as the rest of us, and that applies in spades for the uncritical cheerleaders of the neo-liberal consensus who laid the foundations for the current debacle, a process some have traced to 1979 and the election of Thatcher and, in short order, the 1980 election of Reagan.
In fact, one of Chang’s bugbears is the laughable concept of the “trickle-down” effect, made “popular” in the Reagan era, where we put even more money in the hands of the rich in the vain hope that they’ll invest it in something that will eventually provide the rest of us with a job and prosperity. Ha! How’s that one working out for ya? Well, looks like most of the people with the money are still investing in the kinds of complex derivatives that got us here in the first place, not in the capital equipment and R&D that would actually be useful.
Much of the content of the book deals with fairly basic economic concepts, clearly positioning it as a primer, but for those wishing to know more the Further Reading sections at the end of each chapter are excellent, referencing some of the books I had in mind when reading. Throughout the text new concepts are printed in bold so they’re easy to find if that’s what you need to do. Chang’s aim is, as I interpret it, to democratise economics, and in that he succeeds reasonably well, arming non-economists with sufficient insight to build an informed opinion and begin to challenge the views of the professionals.
One of the more useful things for me was the chapter explaining the different schools of economics, and who fits into which. One of my surprises in this was his placing of Paul Krugman in the neoclassical school, when I expected to find him in the Keynesian. However, Chang makes a good point about the essential conservatism of some of Krugman’s thinking, especially when it comes to his views of low-wage factory jobs in the developing world.
I do however feel he emphasises the wrong aspect of Schumpeterian thought, the atrophy of capitalism, and doesn’t make enough of the concept of “creative destruction” (it’s not even in the index). But at least it’s in the text, which is more than can be said for inflation, NAIRU and the Philips Curve, a shame given his treatment of unemployment, the other side of these concepts, is so good. He also misses some very straightforward opportunities to introduce the ideas of agency theory, moral hazard and adverse selection (though he does manage principal-agent problem), and the paradox of thrift. Perhaps he was trying to avoid overloading with jargon, and it’s partly true that economists (and other specialists, for that matter) use jargon to obscure rather than clarify, but it’s at least equally true that the use of specialist language can both shorten a conversation and give it focus.
Chang’s use of language is generally straightforward, with clear explanations of the ideas with which he deals. Sometimes he makes reference to popular culture in order to make his point, and this works better in some cases, as in the reference to Gordon Gekko in Wall Street, than others, as when he tells us not only that the Hoover Dam appears in a Superman movie but also that the movie stars Christopher Reeve. And much as I like the idea of an explanation of positional goods channelled through Sheldon Cooper of The Big Bang Theory, it becomes overlong when accompanied by a psych evaluation of the character and a rundown of the programme’s dramatis personae. At times like this, attempts to brighten up your subject look too much like an uncle dance in an Ibiza nightclub.
Having said all which, he’s right an awful lot more than he’s wrong. Overreliance on a single set of theories and models renders you blinkered; adopting a pluralist approach may not guarantee a correct analysis but may at least make it less wrong. Recent economic thought has concentrated too much on the market at the expense of non-market aspects of the world. Some things – free trade, comparative advantage, foreign direct investment – look great on paper and in static models, but the moment they are injected with a whiff of reality their elegant simplicity looks like starry eyed, rose-tinted idealism or, worse, cynically disingenuous. Apparently “scientific” measures such as the Gini coefficient and GDP, without proper understanding of their underlying strengths and weaknesses, are limited in their ability to tell us anything useful (although maybe it’s a case of their being the worst measures available except for all the others?). And, ultimately, that economics is political, driven by the personal agendas of economists themselves and the people and institutions that finance their work.
So back to the beginning. Will it help with an understanding of what went wrong in 2008?
Chang very carefully explains what the different types of banks do and are allowed to do. How some of them thought it would be a good idea to take a chance loaning people with poor credit ratings and little or no income enough money to buy themselves a house and bundle up the resultant debts into securities and sell these to other institutions to diversify the risk. How this was supposed to diversify away systemic risk, based on the assessment of some very clever mathematical modelling. And how the securities were ultimately so complicated that the associated contracts ran to hundreds of pages that virtually nobody had the time to read. Admittedly what he doesn’t tell us is what Nate Silver and Felix Martin, amongst others, have told us about the models’ being based on a limited dataset derived mostly from years when economies were booming, but by now most of us have got the idea that the problem was that the lunatics had taken control of the asylum. Read it and weep.