How To Use Economics & Not Be Used By Economists (2/6)

Economist Ha-Joon Chang says there are political assumptions in any economic theory; what makes Neoclassical economics different is that its proponents will tell you that their analysis is objective, scientific analysis, and therefore you cannot question it.

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LYNN FRIES, PRODUCER, TRNN: Welcome to The Real News Network. I’m Lynn Fries, in Geneva.

This is Part 2 of a six-part series with economist Ha-Joon Chang. We’re looking into thoughts from his book Economics: The User’s Guide, where our guest explains there are at least nine different major schools of economics, each doing economics with their own emphasis and their own strengths and weakness, and no one of them explaining everything.

In this segment, we look into one approach: the Neoclassical approach. Our guest, Ha-Joon Chang, joins us from the UK where he teaches economics at the University of Cambridge. Economics: The User’s Guide is his latest book. Earlier books include Kicking Away the Ladder, and 23 Things They Don’t Tell You About Capitalism.

Welcome, Ha-Joon.

HA-JOON CHANG, ECONOMIST, UNIV. OF CAMBRIDGE: Hi.

FRIES: So of the nine major schools of economic thought that you go into in The User’s Guide, one of them, one approach, the Neoclassical approach, dominates economics today. You name it, our universities, the government, international institutions. So let’s talk about that approach. Tell us about the strengths and weaknesses in Neoclassical economics.

CHANG: Yea, the Neoclassical School has quite a lot of strengths. I think one of the strengths is the fact that it adopts what is known as methodological individualism. Now, this is the view that every social phenomenon has to be broken down to the individual level, and this has made Neoclassical economics very precise.

The second strength I would say is that it’s very versatile. You know, it starts with minimum assumptions about human nature and institutions and other things, so it can actually accommodate a lot of different political positions. So you know, while it’s very difficult to imagine a right-wing Marxist or left-wing Hayekian, there are a lot of political differences among Neoclassical economists. On the left of the political spectrum you have people like Joe Stiglitz and Paul Krugman. But Neoclassical economics also include a lot of right-wing people like Robert Lucas and Robert Barro. So that has given it a lot of kind of coverage.

However there are crucial weaknesses. You know, in trying to make it very logical and scientific, in their view, Neoclassical economists have adopted this very narrow view of individuals. And this narrow view is also very unrealistic because it is assumed that people are basically very rational and very self-seeking. Now, at one level, you know, people might say, oh, you can make some unrealistic assumptions and still derive meaningful results. But this is wrong, because when you have wrong assumptions about people, you might produce decent results in a very specific context in which you made that assumption. But as soon as you try to apply to elsewhere, the thing breaks down.

I mean, the great example is the recent global financial crisis. I mean, the whole regulatory relaxation was based on this view that people are rational. They are capable of taking care of themselves. And therefore we should just let them do whatever they want. And the result was a collective insanity that almost destroyed our economies. So I mean, this assumption of rational and self-seeking agents might look quite innocent, but it can actually have devastating consequences.

The other weakness of Neoclassical economics is that it’s too accepting of the status quo. Because Neoclassical economics, when it conducts its analysis, accepts the existing distribution of income, wealth, and power as given, and derive conclusions that are on that basis, which means that it has an inherent bias towards the status quo. So it limits the kind of policy options that we can adopt.

Well, lastly I would say that its neglect of production that I mentioned earlier is another weakness. Because you know, after all, production is the foundation of any economy. And when Neoclassical economics treats production in a very sketchy and schematic and rather uninformative way, we get to draw a lot of wrong conclusions from it. So you know, one example is almost total neglect of work in discussion of human welfare. Because it doesn’t really matter what happens in our workplaces. It is assumed that people are doing whatever work they are doing because they find their wages adequate compensation for the inconvenience that the work gives. There’s no discussion of the role of work as an integral part of human welfare, and our desire to create things and things like that.

So I mean, that also provides a very stunted view of what makes a good society. Because the underlying presumption is that people live just for consumption, and therefore all that matters is higher income and whether work is stressful, boring, or whatever, it doesn’t really matter, so that’s another crucial weakness.

FRIES: And what about finance? Is that a weak spot?

CHANG: Only Keynesian theory has a proper theory of finance. All other theories have rather weak theories of finance. But the Neoclassical School is especially weak in finance, because its core model is essentially that of a barter economy. And money appears only as an accounting unit, or at best a convenient medium of exchange. And there’s no real independent role of money in Neoclassical theory, which tends to make people kind of ignore how important proper regulation of the financial system is.

FRIES: So that gives us a picture of strengths and weaknesses of one approach. Much as we’d like to get into all nine, we’re going to move on to another important point, which is the challenge we all face when confronted with an economic argument. And for that you have two words: qui bono. So tell us about that.

CHANG: Yeah. Well, qui bono is what the Roman orator and politician Cicero said. Who benefits? I mean, when you are faced with economic analysis, that’s the question that you have to ask all the time.

Of course, Neoclassical economists will try to tell you that their analysis is objective, scientific analysis, and that therefore you cannot question it. But the point is that there are a lot of political assumptions in–well, any economic theory not just Neoclassical theory. The difference is that other schools like the Marxists or the Austrians and so on are quite open about their political assumptions, whereas Neoclassical economists in their desire to present what they do as a scientific endeavor are not willing to make these political assumptions very clear.

So–well, there are two types of political assumptions. One type is rather explicit, even though it is not meant to be a political assumption, according to Neoclassical economists. For example, take the case of the famous trickle-down economics. This is an idea that, when you take money from poorer people and give it to the rich people it sounds like a moral outrage but it actually is something that is good for the whole society. Because when you give more money to people at the top, these are the people who invest and create wealth. And therefore when you give more money to those people, in the beginning it might look like a bad thing. But subsequently you will see that these people will make extra investment and create more jobs and income, and everyone will be better off.

Now, this–logically this is another stupid argument, but the trouble is that empirically this has really not happened. You know, many countries have redistributed income upwardly in the last two, three decades, and the results have been falling investment and falling economic growth. So when there’s an explicit assumption about giving more money to rich people being a good thing, you have to ask whether this is actually true. I mean once you accept that assumption logically it’s fine. But you know, when you are confronted with that kind of analysis, you have to ask whether this particular assumption about the rich or top 1% or whatever we may call it is valid.

But more importantly, a lot of assumptions are hidden. I mean, this is a very important point because we don’t see those political assumptions in the actual analysis or, alternatively, that you might see it but it is presented as a kind of innocuous assumption.

FRIES: Let’s take up these hidden assumptions in the next segment. Please join us for Part 3 of our conversation with Ha-Joon Chang. Ha-Joon Chang, thank you.

CHANG: Thank you.

FRIES: And thank you for joining us on The Real News Network.

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