In the first part of an extensive interview, leading development economist Ha-Joon Chang discusses Marx, Keynes and the nature of economics as an academic discipline.
Ha-Joon Chang is a leading development economist and critic of neoliberalism. His 2002 book Kicking Away the Ladder showed that today’s rich countries became rich by following precisely the policies they now deny to developing countries – his follow-up Bad Samaritans prompted Financial Times chief economics commentator Martin Wolf to describe him, somewhat misleadingly, as "the world’s most effective critic of globalization". His most recent book, 23 Things They Don’t Tell You About Capitalism, takes aim at prevailing economic myths, among them the idea that ‘free markets’ exist and the equation, often made by the current British government, of "fairness" with "social mobility". Underlying the many essays that comprise the book is Chang’s insistence that economic decisions are political ones too, and should be discussed on those terms.
I met up with Prof. Chang in early December for a wide-ranging interview. In the first of two parts, below, Chang discusses Marx, Keynes and the methodological limitations of orthodox economics.
Let’s begin by looking at the nature of economics as an intellectual discipline. In a recent talk you argued that mainstream economics "starts by eliminating most of the important questions" and that "any competent economist can justify anything" because the answers flow from the assumptions. Are you critical of the basic methodology often employed by economists? How do you do it differently?
First, let me start by saying that I’m a methodological pluralist. I think all methodologies have their places. Mainstream economists use a particular methodology based on deductive reasoning – where you start from an apparently obvious general axiom and try to derive everything from there, and then you test that against the reality. That kind of methodology has its usefulness, but the first problem is that most of my colleagues think that it is the only ‘scientific’ methodology, which is plainly wrong. Secondly, never mind being ‘scientific’ or not, reality is complex enough that you can never understand it with just one type of methodology. If you go to, say, a biology department, you have people trying to understand complex organisms – life – through all kinds of methodologies. So some people sit in the jungle with the gorillas and watch them, some people do DNA analysis, some people do mathematical modelling of animal behaviour, some people do live experiments with animals... all kinds of things. But somehow in economics you are only supposed to use this deductive reasoning. So that’s my main problem, rather than the methodology itself. As long as you know what it is useful for, as long as you know its limitations, and so on, you can use any methodology.
So can you give a concrete example of a case where you think that that kind of deductive methodology has been misused?
Yes. A big problem is that mainstream economics today starts from assumptions about human motivation and rationality which are patently unrealistic. Basically, you reach the conclusion that markets are efficient and never fail and so on only because you are assuming that everyone is fully rational, all the time. Some economists who are critical of this have called it the assumption of ‘hyper-rationality’. So you assume that everyone knows everything, and obviously if everyone knows everything then you can run everything in a perfectly decentralised – i.e. market – way. You assume that everyone is only interested in promoting self-interest and therefore you reach the conclusion that if you give anyone any discretionary power, such as governmental power to regulate, then you open the door to abuse and therefore you come to the conclusion that government is bad. So the conclusions are built into the assumptions.
The trouble is that these assumptions, at a very general level, may be acceptable, but when you look at it more closely they are highly suspect. The standard response from mainstream economists is, ‘who cares whether the assumption is realistic? As long as it predicts the right outcome we don’t really care.’ The classic example they use is: when someone’s playing a game of pool, you know that this guy is not a trained physicist, but you can assume that he is and still predict his behaviour fairly accurately, because without knowing high-level physics people are still able to calculate likely ball trajectories, and so on, and therefore it doesn’t really matter if the assumption is wrong. But it does matter, because the predictive power of these unrealistic economic models has proven to be extremely weak – if we had such good models then why is the world in such a mess? There was an army of economists saying that everything is working fine and predicting that everything will be fine, and then we landed in this mess. So the predictive power of those models has proven extremely wanting.
But even if the models were reasonably good at predicting things, the assumptions still matter, because if we believe that everyone is entirely driven by self-interest, then we will design a certain kind of society that focuses on preventing people from cheating each other, ripping off the public space, and so on, whereas if we assume that humans have very complex motivations and that depending on how you frame things they can behave in very different ways then you will be much more careful and thoughtful in designing the incentive system. So these things do matter.
You asked ‘how do I do it?’ – well, I tend to use a lot of real-life cases to study economics. One of my methodological slogans is that ‘life is often stranger than fiction’. In that context my favourite example is Singapore, which is known only for its free-trade policy and welcoming attitude to foreign investors. We are rarely told that in Singapore the government owns all the land, 85% of housing is provided by a government-owned housing corporation and more than 20% of national output is produced by state-owned enterprises. When I give this example I tell my students, look, if someone tried to invent a well-working economy based on a particular economic theory – Marxist, neo-classical, Keynesian, whatever – no-one would have invented something like Singapore, because it combines these elements that we think are incompatible with each other. So by looking at real-life examples you get to think through a lot of things. Many people take it for granted that state ownership is incompatible with a market-based economy, but patently Singapore is flying in the face of that assumption. And then you get to think about the nature of ownership, and control, and whether the market necessarily requires private property, and all sorts of things. So I find those methodologies useful. Sometimes it’s a comparison between existing societies at this moment, sometimes it’s a historical comparison – it could be a comparison of the UK today with the UK in the 1930s, it could be a comparison of developing countries today with, say, the United States in the 19th century, etc. – so it can be done in many different ways, but my favourite methodology is to look at real cases, because they always beat the imaginations of theoreticians.
So that’s my favourite methodology. I’m not saying, however, that therefore everyone should go about it in the same way. As I said earlier, I’m very much in support of the idea that we need to study the economy, or society, or whatever we are studying, through many different lenses, and therefore while I advocate this kind of methodology I’m not saying that the other people shouldn’t use their favourite methodologies.
But, to return to the beginning of your question, it is definitely the case that in mainstream economics only the deductive methodology is considered legitimate and that creates a very strong bias towards free-market solutions. It’s not inevitable – there are people like Paul Krugman or Joe Stiglitz, who very much use this kind of methodology but try to build-in additional assumptions which prove that free markets do not always give the right solution. These people get that kind of conclusion because they essentially make sure that they get that kind of conclusion, by adding the right additional assumptions. But the default setting is free-market.
Those methodological assumptions – that people are ‘hyper-rational’, that they are almost pathologically ‘self-interested’, and so on – seem so obviously unreflective of the complexity of how people actually behave and think that I struggle to understand how they’ve been so influential, even dominant, for so long.
Yes, for non-economists it beggars belief how economists can work with those kinds of assumptions. There is a particularly interesting recent book called Free Market Madness, which was written by this medical doctor and behavioural scientist called Peter Ubel, which refutes, using a range of empirical evidence, the key assumptions in economics that we are totally rational and totally self-interested, and so on.
Unfortunately the conclusions that we derive from those assumptions tend to justify the status quo, and so people who benefit from the status quo, who by definition are likely to have more power and more prestige and more money, happen to like it, and therefore people who make that kind of argument get a huge amount of explicit and implicit support. In the very long-run arguments may be won or lost largely if not purely on the basis of their intellectual merit, but in the short-run, and in the medium term... I mean, just remember how long the Catholic Church has been around, despite being subject to various types of criticism for the last 2,000 years. Of course it has been much weakened, so I’m not saying that all the arguments that support the dominant groups will always continue to prosper, but there is a very explicit and implicit backing for these ideas. Especially in America, where you have all these think-tanks printing the most extreme kind of free market books and distributing them around. These people get much more column-inches in newspapers, they have a higher chance of getting research grants, they get all kinds of support. So it would be naïve to suggest that ideas in social sciences are simply won or lost on intellectual merits.
Richard Posner has observed that "[m]arket correctives work very slowly in dealing with academic markets... It takes a great deal to drive them [i.e. academics] out of their accustomed way of doing business".
Yes, you know it’s quite interesting because Posner is a very right-wing, libertarian American judge/legal scholar, and has been known as a very strong supporter of free-market economics, but at least he is an intellectually honest guy, so he would say something like this. A couple of years ago, right after the financial crisis, he wrote an article somewhere saying [a paraphrase], ‘look, I never read Keynes, I thought his arguments would be rubbish, but in light of this financial crisis I read him and... I actually think he’s right.’ Anyway, yes, Posner is talking about mechanisms like academic tenure, which basically installs a 30-year time-lag in intellectual adjustment within academia. I’m not arguing for the abolition of tenure, because we instituted this mechanism exactly in order to protect people from being politically kicked out of their job. I could have been kicked out without a tenure – there are all sorts of ways to rubbish your colleagues and kick them out. So I’m not saying that it doesn’t have any positive function – probably on the whole the positive function outweighs the negative. But having said that, it is true that, if a business manager doesn’t run his company well he could be kicked out within months if not weeks, governments can get voted out in a few years, but academics may not lose their job for the next three decades. So there is certainly that problem. Having said that, you should not see the academia as the engine of this problem – academia is basically a reflection of the society. So if society changes its mind, the academia will eventually change too.
Following on from that, do you think that mainstream economics has learned the correct lessons from the financial crash?
Some mainstream economists have, but most haven’t. One thing you have to realise is that a very large number of economists these days are not even interested in the real world. They do very abstract research – applied game theory, and that kind of stuff. Sure, if you ask them ‘do you support the free market?’, ‘do you support free trade?’, ‘do you think there should be a central bank?’, etc., they’ll give an answer, but that answer won’t necessarily be linked with their research, which is very far removed from that kind of question.
Now, among the ones who relate their research to the real world, some of them have learned their lessons – we just gave the example of Posner, who gave a refreshingly candid assessment of Keynes’s General Theory. And there are other people who have admitted that there are big problems with mainstream economics – one example is Prof. Willem Buiter at LSE, who used to be here in Cambridge, who is a very mainstream economist but has recently started rethinking a lot of things and rejecting a lot of standard claims, many of which he probably supported himself. So there are those people, but mainstream economists have largely failed to learn real lessons from the crash. When your whole identity as well as your career is built around an idea, it is very difficult to reject that.
A lot people are trying not to think about it, they are in denial. Some of the mainstream economists, in America especially, try to blame the financial crisis on this law that they have whereby financial institutions should set aside at least some of their mortgage lending for low-income groups. They started arguing that it’s because they were forced to lend to these high-risk black guys that we had this financial crisis. It was so absurd that this Chicago University professor who was on the Federal Reserve board came out saying, look, those laws account for only around 5% of mortgage loans and the default rate among that group is only slightly higher than other groups, so it’s nonsense. So there are people who will invent anything to defend their faith.
We’ve talked about how many of the assumptions underpinning orthodox economics are quite narrow, and fail to capture the complexities of human motivation and behaviour. Adam Smith famously criticised the disproportionate influence of merchant and manufacturing interests on state economic policy. My impression is that a lot of economic writing today fails to pay sufficient attention to the realities of power. Have you encountered something similar?
Oh, sure. Power is conspicuously missing in most economic analysis. Some mainstream economists do what they call ‘political economy’, which discusses how politics can influence economic decisions – so for example, looking at the behaviour of lobbying groups, the impact of monopoly on government policy, and so on, so there is some study of that. But what they fail to do is to look at structural power. There is a famous saying by the Brazilian bishop Dom Helder Camara, who was one of the leaders of left-wing Catholic liberation theology in Latin America in the 1960s and ‘70s: "when I give food to the poor they call me a saint. When I ask why the poor have no food, they call me a communist." It is in that spirit we have to understand the world.
Once you accept the given distribution of assets, income, political power, and so on, everything can be justified. Take child labour – these people want to employ cheaper labour, these children want to work, so what’s wrong with that? There’s a free exchange, no one put a gun against the heads of these children to work in hazardous carpet factories. The problem with mainstream economics and more broadly with liberal political thinking is that they take those structures as given. Yes, once you accept everything as given, then this is the best deal that you can get. So this guy volunteered to work in a dangerous mine, and he got killed, but why should the owner compensate his family when he volunteered knowing full well that this is a dangerous job? That’s one view. Another view that takes structural power more seriously would say that look, this guy had to walk into the job because given the education he had, given the other job opportunities available to him, this was probably his best option – even though it involved near-certain death. Such questions are not really asked in mainstream economics.
Earlier you put "scientific" in scare-quotes when talking about mainstream economics. To what extent can economics be viewed as an objective ‘science’? Because in terms of the social sciences, economics seems to have a privileged position – you have a Nobel Prize for Economics, whereas...
To begin with, let me point out that the Nobel Prize in Economics is not a real Nobel Prize. It is a prize set up by the Swedish Central Bank, so it’s not a Nobel Prize, it’s a ‘Swedish Central Bank Prize in Economic Sciences in Memory of Alfred Nobel’. A few years ago some of the main figures in the Nobel family raised objections to this bank consistently giving this prize to free-market economists of whom Alfred Nobel would not have approved. (While it hasn’t always been given to free-market people, the ratio between free-market economists and the rest is very imbalanced.) So let’s get that out of the way.
But yes, economists like to claim that we are scientists, unlike so-called ‘political scientists’ or ‘sociologists’, not to speak of ‘anthropologists’ and so on. It depends on what you mean by science. If ‘science’ simply means an organised way of inquiring about the real world then economics is a science, in that same way that political science, sociology, anthropology, etc. are also sciences. But if you mean by that something like the natural sciences, something with objective measurable categories, provable through experiment, and so on, then of course it’s not a science. The biggest problem for the social scientist is that the subjects of study, unlike in physics or chemistry, have minds of their own. So even when you say there is an objective structure that will have to make people behave in a certain kind of way, they stubbornly fail to do so. For example, there was for a while a small debate among very rational choice-minded sociologists and political scientists as to why there are revolutions. In rationalist terms there should never be revolutions because each individual has an incentive not to participate in it, because it is costly to them, whereas if there is a revolution because other people are stupid enough to do it, then you benefit from it.
The ‘free rider’ issue...
Exactly. So you never have an incentive to participate in a revolution, but there are revolutions. How do you explain that? That’s the kind of problem faced by so-called scientific approaches to the human societies. Now economists try to pretend that economics is a science unlike other disciplines studying human societies because it can quantify things and use mathematical theorems, and so on. But, let’s put it this way: these things look scientific only when you haven’t been taught in them. People like us, who have gone through the training, know that yes, it gives you a bit more precision in what you’re doing, but the extent of this is limited. You cannot really experiment with live people – although it is possible: Stalin did it, the IMF has done it many times in many countries, testing unproven policies to prove that such-and-such economic model works (not deliberately, but in effect). So there are all kinds of limitations and non-economists should not get scared just because economists can throw some equations and statistics at you – these are not scientific things in the same way that chemical formulae or physical equations are.
On a related note, do you think that the way economic issues are treated in popular media discourse is healthy?
I think it is not discussed enough to begin with – compared to documentaries about animals or history, how many have you seen on economics? It is considered a technical subject, a boring subject, in the same way that you would not make a documentary on the techniques of plumbing – it’s considered to be an arcane, technical subject that no-one would understand. I think this is quite wrong – there are all kinds of documentaries on the natural sciences, and they are in my view far more difficult than economics. So there is definitely a false aura that economics is a technical thing that normal people wouldn’t understand and shouldn’t try to mess around with.
Then you have, within that kind of general atmosphere, an additional bias in which the media talks mainly to bank economists, fund managers and, within academia, free-market economists, and as a result gives a very one-sided view of what’s going on. So there is a problem there. I’m not saying that these reporters do it deliberately, but the whole thing is set up in such a way that they find it a bit scary to go out of their way and seek out dissenting views. Some of that has been done since the 2008 financial crisis, so things might be changing slowly. Even judging from my own experience, I get more space in the media, more interview requests and so on than before, so there is certainly some change going on. But basically a lot of people take this view that economics is not a subject for ordinary people, and whenever you report it you tend to listen to some kind of authority rather than expressing your own view. People find it relatively easy to express strong opinions about religion, social services, defence policy, and so on, but when it comes to economics, they are scared of advancing their views.
Looking around the room, I can see quite a few leftist and socialist economics books on your shelves – David Harvey, Marx, and so on. How useful do you find economic analysis from that kind of perspective?
Well, that’s true, but on the other hand I also have books by Hayek and all these right-wing people. I read quite broadly because I don’t like getting tied down by one perspective, be it research methodology or political ideology. But yes, Marx was much better at understanding capitalism than many supposed ‘defenders’ of capitalism. Karl Marx, as I say in my book, was in favour of limited liability companies, which most free market economists actually objected to. Adam Smith famously said that the managers of limited liability companies, not being a full owner of that company, are essentially playing with other people’s money, and they are therefore bound to take excessive risk. And of course there is that aspect, but that cost is far outweighed, or at least in the beginning was outweighed, by the benefit of being able to mobilise large scale capital. So even before the London Stock Exchange became a major element in British capitalism, Marx said ‘this is the future of capitalism’. He really understood how capitalism works. I think he, unfortunately, didn’t really understand how socialism would work – not a big criticism, because when he was around there was no socialist society so how would he know how it would work. Although I’m not saying everything he said was correct, he had a lot of important insights and we have a lot to learn from that kind of perspective.
In the end I’m not a Marxist – I believe that capitalism is still the best economic system we have and I wouldn’t support a Marxist political agenda. But Marx had a lot of insight. I encourage my students to read Marx – obviously, unless they’re really into it, they’re not going to read all three volumes of Marx’s Capital, but depending on their interest there are some chapters that are highly recommended. For example, chapters 13, 14 and 15 of Capital Vol. 1 contain very, very advanced analysis of how the way production is organised in the capitalist system has evolved through different stages and how things like labour law were revised in step with the evolution. I still think that his analysis of the first 50-60 years of labour regulations in Britain remains one of the best analyses of the subject that we have, even 150 years after it was written. So there are some really powerful analyses there. Personally I’m not totally convinced by his whole vision, but the way he analysed things can be very instructive.
Yes, in the book you say explicitly that you’re taking aim at a "particular version" of capitalism, not capitalism as such. Should we infer from this that you are in favour of a return to Keynesianism of the kind dominant after WWII?
Well, I don’t know exactly what to call it, but I’m not saying exactly that we should go back to the ‘50s and ’60s. The world is different now – that was a time when a lot of people in the rich countries still worked in factories rather than shops and offices; when there was a strong labour movement in a lot of countries; when China wasn’t part of the world economy; when we didn’t know about the environmental limitations of our way of life; and so on. Of course you cannot go directly back to that. But yes, I would strongly argue that we need to rebalance our system in such a way that the government plays a greater and a more active role in the economy, because this belief that the market will take care of itself – or that even when regulations are necessary, self-regulation is more effective than government regulation – has been proven completely invalid through the financial crisis.
Having said that, let me emphasise that it wasn’t just the financial crisis: even before 2008 there were already clear problems. I and many other people have written about this – before the financial crisis in the US and the UK you had numerous financial crises throughout the ‘80s and ‘90s in developing countries; the world economy had slowed down despite the fact that China and India started growing very fast; income inequality increased in probably, depending on the estimate, between two-thirds and three-quarters of the countries in the world;... there were already lots of problems. But a lot of this was masked by the credit boom and asset bubble in the key economies, which also controlled the ideological machinery. So people kept reading in the Economist magazine, the Financial Times, the Wall Street Journal, and so on that the world is doing great, and so a lot of people believed in that. Now there is no basis to argue that this old belief still remains valid, although some people still cling to it, and I think that we clearly need to redraw the boundary between the market and the state. But of course you cannot go back and design, for example, the pension system the way you designed it in the ‘baby boom’ period, because now we know that there will be a lot fewer young workers who can support the older generations, so either people have to retire later, or young people have to pay more taxes, or we have to accept more immigrants, etc. Changed circumstances open up a whole new range of issues, so I’m not saying you can just go back to the good old 1950s and ‘60s, but yes, definitely if you give me a black and white choice between what went on in the 1990s and what went on in the 1960s, I would say we have to go back to the ‘60s.
So you’d reject the argument that those kind of policies "proved unsustainable in the end" [John Quiggin, Zombie Economics, p. 207]? Presumably it’s possible that the reasons why those policies in the end gave way to the kind of policies we saw in the ‘80s and ‘90s continue to exist, and so it might just happen all over again.
I mean, there is ‘unsustainability’ and there is ‘unsustainability’. Those policies became unsustainable because, basically, the capitalist class pulled out of the bargain. The classic example is the 1979 General Election in which the Tories attacked Labour for generating high unemployment. There was this famous fake dole queue used by Saatchi & Saatchi in the election campaign – I wasn’t here at the time, but it was quite famous even several years later when I arrived in this country. They had this long dole queue with the title ‘Labour isn’t working’ – it was a very clever piece of advertising. Later it turned out that the people in the dole queue were all hired by Saatchi & Saatchi –
So they were employed...
Exactly, yeah. And at the time, unemployment was around one million people. When Margaret Thatcher came along it became three million. So they won the election on the grounds that one million is too many, but once they were in they had enough political and monetary backing that they could get away with three million unemployed people (and of course changing the definition of ‘unemployment’ something like 17 times – I forget the exact number). So yes, it was not sustained because one party to the bargain – i.e. the capitalist class – pulled out of it, but it wasn’t unsustainable in the sense that, say, our current style of living is unsustainable (because it will lead to global warming and environmental collapse). It’s not unsustainable in that sense.
Originally published at New Left Project
Read the concluding part of this interview here.