Recent years have seen the emergence of a particular class of “popular economics” book which emphasises that the economic principle of people acting in their own rational self-interest explains all sorts of phenomena outside the usual perceived boundaries of economics. Others emphasise how the forces of supply and demand shape every aspect of the world around us.While these books have their merits, they don’t do the economics profession much justice. They propagate a myth that economics departments focus on churning out unthinking graduates trained to parrot “supply and demand” in response to every question. In reality, very little of the undergraduate economics syllabus focuses on perfectly functioning markets generating optimal outcomes.
In fact, after introducing the model of perfectly functioning competitive markets, most textbook microeconomics focuses on the various reasons this model fails, including externalities (such as pollution), imperfect competition (large firms able to manipulate the market), strategic interactions (co-operation failures) and the need for public goods. Textbook Keynesian macroeconomics also tends to focus on reasons why the free market can generate inefficient booms and slumps and requires government intervention to produce better outcomes. In many ways, textbook economics provides the justification for the type of “mixed economy” we see throughout the developed world: even in countries seen as having exceptionally free markets, such as the United States, there are a myriad of different government interventions.
Given this reality, Ha-Joon Chang's Economics: The User's Guide has much to recommend it. Chang recommends defining economics as the study of what happens in the economy, arguing this is complicated enough without economists also attempting to conquer other areas of social science. He also emphasises that people are not the hyper-rational calculating machines of economic theory and that ultimately these theories need to be assessed against the evidence of how real markets work. From this perspective, Chang's stated goal is to help people to understand how to use economics and to warn against the pitfalls of placing too much weight on one particular viewpoint. He wishes to "show the reader how to think, not what to think".
The book starts with a short introduction to economic history (which I suspect non-economists will find useful) as well as a guide to “schools of thought” (which I suspect non-economists will find tedious). It then moves on to a rapid-fire tour of different aspects of the economy.
If the target readership of the book is people with very little knowledge of economics, then there is plenty of factual material here for them to learn. If however, as I suspect, the likely purchasers are those who already know most of the basic facts about the economy (ie who don’t need to be told what a corporation is or what gross domestic product measures) then they will have to wade through a lot of plain vanilla factoids to get at the book’s real insights. In this sense, the book has a “one damned thing after another” feel about it.
When it comes to Chang’s insights about how to use economics, I think he fails to live up to his promise to tell people “how to think” but not “what to think”. After introducing each topic, rather than providing a range of possible viewpoints, Chang comes down hard on the side of an interventionist left-wing approach. In each case, the book emphasises the textbook market failures noted above but then tends to underemphasise the practical difficulties associated with government interventions to fix these failures. In reality, economists only learn how to make markets and government interventions work by trial and error, and by research that carefully analyses outcomes.
For example, knowing that a market is imperfectly competitive and could produce better outcomes with some government regulation is one thing; figuring out exactly how much regulation to apply without producing even worse outcomes is another.
Understanding that the free market generates socially inefficient recessions is one thing; designing a well-functioning set of fiscal and monetary policies to deal with these is another. All of this is hard work and sometimes when economists think they have figured out the right approach, the world changes and what used to work well doesn’t anymore.
Chang’s book also provides the reader with a fairly skewed view of mainstream thought among economists. He asserts that neo-liberalism, which advocates minimal state involvement in the economy, has been “the dominant economic view since the 1980s” and neo-liberals pop up as bogeymen throughout the book. However, his chapter on the different schools of thought in economics doesn’t list modern neo-liberalism.
In truth, it appears that very few professional economists define themselves as neo-liberal, and surveys of academic economist viewpoints have repeatedly shown most of them supporting a wide range of standard government interventions in the economy. As a term to describe the mainstream viewpoint within the economics profession, it is plainly inaccurate. In this sense, Chang’s book disappointingly adds to rather than counteracts the public’s perception of the economics profession as one dominated by unthinking supply-and-demand parrots.
Karl Whelan is professor of economics at University College Dublin