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This lovely book is called Economics: The User's Guide is a wonderful, accessible economics book that's perfect for anyone interested in learning more about the subject.
As it's such a popular book, you'll find the content is really easy to understand. I just want to say that easy doesn't mean shallow. I can assure you that this book is by no means a low-end version of an ordinary economics textbook. This book is different. It takes us beyond the theoretical framework of ordinary textbooks and introduces us to what economics really is and how we can use it as a tool in a whole new way. I feel like the true Buddha speaks common sense, at least after reading this book!
Right at the start of the book, Ha-Joon Chang makes a really funny comment about economics: 'Is economics difficult?' The great news is that 95% of economics is actually common sense! It's no surprise that economics can seem difficult. After all, economists often use fancy mathematical formulas and technical terms that can seem intimidating to us ordinary folks. In recent decades, economists have really tried their best to convince everyone that economics is a "hard science", just like physics and chemistry. They say that there is only one right answer under given conditions. And since economists have already given the only correct answer, the general public doesn't need to worry about things like money, trade, taxation and employment. After all, we don't understand them anyway!
But Ha-Joon Chang has a different take on this. He wrote this book to help bust a few myths about economics. One of the big ones is that it can ever be a "hard science" like physics or chemistry. This is because the physical particles in nature don't have free will, but people do! So, there can be no single correct answer to questions about people. Secondly, I'd like to say that economics is really quite straightforward and we can all understand it with a little common sense. What's most important is that when it comes to things like the economy, which affects us all, it's not fair to leave it all up to economists. Ha-Joon Chang kindly invites every responsible citizen to learn a little economics. After all, that's the meaning of the book's title, "Economics for Everyone."
I just wanted to mention that even though this is an introductory economics book, even people like me who have studied economics for many years will also gain a great deal from reading it! I'd love to share with you the three aspects of this book that have inspired me the most. So, what exactly does economics study? Secondly, it would be really helpful to understand why it's so important to grasp the different schools of economic thought. And finally, why is economics not "value neutral"?
Part 1
Let's dive right in and look at the first question together: So, what exactly does economics study? You might be thinking, "That's not a difficult question." Just like physics studies matter and law studies law, economics studies the economy. Oh, but it's not that simple, my friend!
Let's take a look at the most popular economics bestseller in recent years, 'Devilish Economics'. The author of this book, Steven Levitt, is a real economist through and through. He graduated from Harvard and MIT at a young age and went on to become an economics professor at the University of Chicago. However, Levitt said that he was not interested in traditional economic issues such as the stock and property markets, savings and investment, inflation and unemployment, exchange rates and trade, etc. Indeed, if we open the book "Devil Economics", we will find that it discusses a bunch of strange issues, such as fraud, abortion, drug trafficking, the Ku Klux Klan, terrorists, etc. It's a bit surprising, isn't it, that it doesn't discuss serious economic issues? I'm sure you're wondering why the title is called "Devil Economics".
You might say it's a bestseller, a gimmick created by the publisher to make money, and that it doesn't need to be taken seriously. But it really isn't! Many mainstream economists agree with Levitt's view that economics is not a discipline that studies the economy. To be more precise, they believe that economics is not a discipline that studies a particular subject. Rather, it's a set of theoretical methods that people can use to study any subject they're interested in! As the subtitle of "Devil Economics" says, "Explore the hidden side of everything."
This fascinating new way of understanding economics first started to emerge in academia as early as the 1970s. At that time, Gary Becker, a representative of the Chicago School and a Nobel Prize winner in economics, published an academic work called "An Economic Analysis of Human Behaviour". The book says something really interesting: "The economic method is a method that can be used to understand all human behaviour." In other words, economics can be used to make decisions about all aspects of our lives, from what job to take, whether to start a business, who to marry, whether to have a second child, to what to order for lunch every day. Becker even came up with a kind of magical formula to help people decide when it's time to get married and when it's time to get divorced.
It's so interesting to see how economic research has grown and changed over time. It's now exploring so many different areas of our lives, from relationships to everyday choices. Some people have even playfully called this phenomenon "economic imperialism"!
I bet you're curious about what theoretical methods economics uses that are so amazing that they can explain and understand everything. Guess what? It's just two words! The word is "scarcity". Economists say that economics is all about scarcity. Economists like to say that "there is no such thing as a free lunch", which I think we can all agree is a pretty fair point! Just a heads-up, this doesn't mean you have to pay for a meal at a restaurant and that you should never eat without paying. So, it basically means that if we think about how limited our resources are, then when we do anything, we have to give something up. The things we give up are what economists call "opportunity costs". Economics is all about helping us make the best choices between different opportunities. If we think of human life as a series of choices, then economics can explain pretty much everything!
So, I'd love to know, is this understanding of economics correct? Zhang Xiazhu has a different take on it. He playfully uses Charlie Munger's famous quote to poke a little fun at his fellow economists: "If you hold a hammer, everything looks like a nail." Zhang believes that economics can't possibly use a set of theoretical tools to explain all the problems in the world. It's not the job of economists to save the world or to study the small things people do every day. It's to help us understand the big economic issues. It's a shame that economists are so busy meddling in other people's business that they end up not even taking care of their own backyard.
Economists have been shown up on some of the most important economic issues, such as the financial crisis, and it's been a bit of a learning curve for them. The wonderful Lucas, who won the Nobel Prize in Economics, once said in 2003 that "the core problem of preventing depression has been solved." Sadly, this meant that just a few years later, the 2007 financial crisis occurred. In November 2008, when things were at their worst, the Queen paid a visit to the London School of Economics and Political Science. The Queen looked around at all the economists and asked them a question with a little bit of puzzlement in her voice. How on earth did none of you see this crisis coming?
The Queen's question left the economists present feeling a little flustered. It's said that the Royal Society of the United Kingdom held a lovely roundtable meeting with a group of top economists to discuss how to respond to the Queen. Six months later, they finally wrote a lovely letter to Her Majesty the Queen to explain the matter. The gist was that they had only looked at the risk of individual financial products and hadn't considered the overall systemic risk. The letter also included this lovely little sentence: "We all share the blame for not predicting the timing, magnitude and severity of this crisis. It was a collective failure of many intelligent people."
Zhang Xiazhu thinks the main issue is that most mainstream economists don't have the right tools to help them. As we chatted about earlier, economics is the study of scarcity. But here's an interesting fact: that's only the claim of one school of thought in economics. It's the neoclassical school! It's true that from the 1960s to now, the neoclassical school has been the mainstream school of economics, or what we call "orthodox economics." The textbooks on Western economics that you'll find in most universities today mainly use the theories of the neoclassical school. I just wanted to let you know that there are actually lots of other theoretical tools in economics besides the neoclassical school.
In this book, the wonderful Zhang Xiazhen introduces us to nine major schools of economics. Each one has its own research focus and blind spots, strengths and weaknesses. When we're facing an economic problem, it can be really helpful to try to analyse it from the perspective of different schools of thought to find the best explanation. It's not a good idea to stick to one method and imagine that it can solve all problems. Zhang Xiazhen truly believes that this is the best way to study economics.
Part 2
Now, let's have a look at these different schools of thought together. We'll see what they have in common, what makes them different, and what fresh perspectives they can offer us when it comes to thinking about economic issues.
Of course, there's the neoclassical school, and there's also the "old" classical school! Let me tell you about some of the greats of the classical school! There's Adam Smith, David Ricardo, Thomas Robert Malthus, and David Ricardo. Adam Smith thought that economics was all about understanding the nature and causes of national wealth. He believed that production was the heart of the entire economic activity. In his wonderful book, The Wealth of Nations, Adam Smith took a close look at how a small pin factory could increase its productivity from 20 pins per person per day to a whopping 4,800 pins per person per day by simply dividing up the work.
However, Ricardo, who was born half a century after Adam Smith, had a different take on things. Ricardo thought that the heart of economic research wasn't so much production as distribution. He was really interested in how national income was shared out between the three main groups of people in society: landlords, capitalists and workers. He also wanted to know how distribution could help everyone in society to live better lives. Ricardo also came up with the labour theory of value, which says that the value of a product is based on how much time and effort went into making it.
About half a century after Ricardo passed away, two new schools of thought emerged to carry on his legacy. The first was the neoclassical school, and the second was the Marxist school. I bet you're surprised! It might seem a bit surprising, but these two schools of economics actually have the same origin and emerged at the same time, even though they seem to advocate completely different ideas! They each took a little bit of the classical school's theory with them.
As we chatted about earlier, the classical school was all about production and distribution. They thought that economies weren't made up of individuals, but of classes. They also came up with the theory of labour value. The Marxist school was happy to take all three points on board and make them part of its own thinking. I'd even go as far as to say that the Marxist school is more faithful to the tenets of the classical school than the neoclassical school! Building on the classical school, the Marxist school also suggested that economics is the study of the laws of motion of capitalism.
I just wanted to check in and ask: what exactly is a "capitalist economy"? We all know what the term means, but we might not fully understand what it actually is. Simply put, a capitalist economy is one where production is geared towards making a profit, rather than for personal consumption or to fulfil a social obligation. The lovely folks over at the Marxist school think that the capitalist economy will eventually come to an end because of the inherent flaws of private property rights.
Later on, the Marxist school also had an important successor: the Schumpeter school. Schumpeter's wonderful book, Capitalism, Socialism and Democracy, is all about Marx in the first four chapters. Some scholars have even joked that Schumpeter simply replaced the adjective with Marx! Schumpeter, like Marx, believed that technological development is the driving force of capitalism. Schumpeter had a really interesting idea. He thought that entrepreneurs could get a temporary monopoly through innovation and enjoy excess profits, which would drive economic development. And, like Marx, Schumpeter thought that capitalism would eventually come to an end. This is because, as companies get bigger and bigger, the innovative entrepreneurs who drive capitalism will make way for bureaucratic professional managers. This will make capitalism lose its vitality.
Let's now take a peek at the other heir of the classical school: the neoclassical school. The neoclassical school is proud to call itself a direct disciple of the classical school. It has inherited two important concepts from the classical school, namely the "invisible hand" and the theory of market equilibrium. If we all follow the "invisible hand" and work towards our own personal interests, we can all help to make society a better place for everyone! What's more, over time, the market can always find its own balance without any help from the government.
This is why most neoclassical economists are all for laissez-faire economic policies and think that a smaller government is the way to go. And there's another school that's even more radical than the neoclassical school when it comes to laissez-faire and small government. That school is the Austrian school, and it's represented by the famous Hayek. It's also worth mentioning that, even though these two schools of thought have the same academic proposition, their reasoning is actually completely opposite! The neoclassical school believes that everyone is perfectly capable of making the best choice for them, so there's no need for intervention. However, the Austrian school has a different take. They believe that human rationality is unreliable and that no one has sufficient rationality to know what the optimal choice is. This is why they think there should be no intervention in the economy.
And there's another fascinating school of thought that's emerged in recent years: behavioural economics. This school has shown us through lots of experiments that the Austrian school's view of human rationality is right on the money. It's clear that our cognitive system has some pretty obvious flaws, and it's often impossible to determine what the optimal choice is. However, the policy recommendations given by the behavioural economics school are completely opposite to those of the Austrian school. This is because, while people may not be perfect, it is all the more important for the government to use various explicit and implicit methods to support and guide people in making the best choices for themselves. This is the "nudge" policy, which is all about helping people make better choices by exploiting the flaws in our decision-making systems in a clever way. It's a concept that's been championed by behavioural economists like Richard Thaler.
It's really quite fascinating how the neoclassical school and the Austrian school have such opposing views on human rationality, yet their policy recommendations are surprisingly similar. While the Austrian school and behavioural economics agree on human rationality, their policy recommendations are completely different. Isn't that just so interesting? It's so interesting to look closely at these different schools of thought!
Take the neoclassical school, for instance. It's inherited two important concepts from the classical school: the 'invisible hand' and the theory of market equilibrium. But many people haven't noticed that the neoclassical school differs from the classical school in several important ways.
The classical school believes that society is made up of different groups, such as landlords, capitalists, and workers. They believe that these groups have both economic and moral attributes. The neoclassical school, on the other hand, believes that there are no classes, that society is made up of individual atoms, and that there is no morality. Everyone is perfectly rational and perfectly selfish, like robots constantly calculating how to maximise their personal gain. This is a pretty big change to the fundamental assumptions of the classical school about society.
Secondly, the classical school has a very interesting theory about the value of labour. They believe that the value of a commodity is determined by the amount of labour time invested in it. The neoclassical school, on the other hand, believes that the value of a commodity is primarily determined by how useful it is to the consumer. Consumer utility is all about how happy a consumer is when they use a product. It's a personal feeling about the product and how it makes them feel.
The third thing to know is that the classical school thinks economics should focus on production and distribution. The neoclassical school, though, has a different take. The neoclassical school is pretty relaxed about how products are produced. They believe that as long as the factors of production, such as capital and labour, are put together, all kinds of goods and services will be automatically generated. The middle part of the production process is a bit like a "black box" to economists. They don't need to know what's going on inside, and that's okay! It's probably best to leave things like the organisational structure of the factory, management mechanisms, technology research and development, and system improvements to the experts in those fields. Similarly, the neoclassical school doesn't concern itself with how products are distributed. Whether the distribution is reasonable or not is neither here nor there. Instead, it sees the distribution of wealth and power as something that just is, and doesn't question it.
So, you might be wondering, what does the neoclassical school care about? They're really interested in the field of exchange and consumption. The neoclassical school sees the entire economic system as a network of exchange, where individuals act independently, rationally and selfishly, and trade freely to maximise their personal interests. It's pretty clear that the neoclassical school has a much narrower view of economics than the classical school. But here's the thing: in modern society, this idea of the economic system just isn't right.
Herbert Simon, a wonderful man who won the Nobel Prize in Economics, once thought that only 20% of domestic economic activity in the United States is organised by the "invisible hand", that is, the market mechanism. The other 80% of economic activity is carried out within enterprises and governments by the "visible hand", that is, management methods such as planning, organising, coordinating, and controlling.
In today's world, the most influential players in the economic landscape are businesses, not individuals. It's pretty amazing to think that 10% of the world's total output is produced by the 200 largest enterprises! And in international trade in manufactured goods, intra-group trade by multinational companies accounts for 30% to 50%. Let me give you an example. Toyota's engine factory in Thailand sells its products to Toyota's assembly plant in Pakistan. Even though this is also trade, the price isn't set by market forces. Instead, it's decided by direct orders from Toyota HQ.
The new institutional school, represented by Ronald Coase, has a really interesting take on large enterprises. They believe that the essence of these big businesses is actually the internalisation of a large number of market transactions. This replaces the "invisible hand" of the market with the "visible hand" of management. This makes transactions much cheaper and improves how resources are allocated. However, the process of making management decisions by an enterprise involves a complex game between various stakeholders, such as shareholders, managers, and trade unions. This is completely different from a decision-making process based on the simple maximisation of personal interests.
So, it's not really accurate to think of the whole economic system as one big market where lots of people are buying and selling goods. In his Nobel Prize acceptance speech in 1991, Coase playfully dismissed neoclassical theory, suggesting it's better suited to analysing "lonely individuals trading walnuts for strawberries at the edge of the forest."
In today's world, if the most important economic decision-makers are businesses, then the most important economic participants are governments, without a doubt. In many countries, the government is the biggest employer, with 15% to 25% of the population working for it. And it's worth noting that there are many more civil servants in developed countries than in developing countries. The United States has a small government among developed countries, but it also has more than 20 million civil servants, which is a lot of people! In fact, they account for 6% of the total population of the United States. China is a different story. It has 7 million civil servants and more than 30 million people in the establishment, which together amounts to about 40 million. That's only 3% of China's total population! It's pretty amazing to think that in most countries, the government is not only the largest employer, but also the largest spender! On average, government spending in developed countries accounts for 45% of GDP, which is quite a lot!
Given the government's crucial role in economic activity, it's no surprise that three major schools of economic thought – the Keynesian school, the institutional school and the developmentalist tradition – all place a lot of emphasis on the government's role. Let's break it down into simple terms. The Keynesian school is all about using macroeconomic tools like fiscal and monetary policies to regulate the economy. The institutional school, on the other hand, is more about adjusting economic structures through things like financial regulatory systems, social security systems, and public management systems. The New Deal of Roosevelt in the 1930s in the United States is often thought of as a Keynesian policy, but it was actually mainly promoted by members of the institutional school.
The developmentalist tradition is all about how countries that are still developing can catch up with those that are already there. It's a fascinating area of study! And it's clear that the government has a big role to play. The wonderful world of development economics has its roots in the ideas of early mercantilism, infant industry protectionism and more! I'm delighted to introduce you to Chang Xiazhun, a truly esteemed scholar in the field of development economics.
Let's quickly go over the main schools of economics mentioned earlier: the classical school, the neoclassical school, the Marxist school, the developmentalist tradition, the Austrian school, the Schumpeter school, the Keynesian school, the behavioural school, the institutional school, and the new institutional school. It's so great to realise that when we're thinking about economic issues, we don't just have the hammer of neoclassical theory in our hands. We have a whole toolbox of tools that can help us understand and solve economic problems from different perspectives!
Part 3
You might be wondering: why does economics have so many schools of thought, and why do they argue with each other? It's pretty amazing when two economists win the Nobel Prize in Economics at the same time, but their views can be so different! Guess what! In 2013, two American economists, Eugene Fama and Robert Shiller, both won the Nobel Prize. Eugene Fama came up with a brilliant financial theory called the "efficient market hypothesis", while the behavioural finance school, led by the wonderful Robert Shiller, offered a different perspective on the same topic. It's so rare that we see this kind of situation in the field of natural sciences.
I heard a lovely story once about Winston Churchill. Someone once advised him: "It's probably best not to ask an economist for advice, because they all have different opinions." And especially not Keynes, because he has three different opinions on everything!
I've often wondered why economics can seem so 'schizophrenic'. This brings us to another really interesting insight from Zhang Xazhun's book. It's all about why different economic theories don't always see eye to eye. It's down to the different ethical and political values that are behind them. In the days of the classical school, economics was originally called "political economy." This means that economics includes value judgments and political claims. The scholars of the classical school didn't see themselves as "economists," let alone "scientists." They saw themselves as social philosophers first and foremost. Later on, the neoclassical school changed the name from "political economy" to "economics." This was done to make their analysis seem like a "pure science," which didn't involve moral or value judgments.
I'd love to know your thoughts on this! It's a common belief that economics can be "value neutral," but I think we can all agree that's not quite right. Sometimes, it's not just about economic theory. It's also about politics. Take the Keynesian school versus the Austrian school, for instance. That's a great example of a political debate about how much power the government should have. Sometimes, the political intent of economic claims is more subtle and requires a bit of thought to understand.
The lovely folks over at the neoclassical school have a pretty cool theory called the "Pareto criterion". It basically says that when some people get a better deal, it's a win for everyone! I believe that we can all agree that social improvement is not something that can be achieved at the expense of another person's interests. It doesn't matter how many people benefit, as long as one person is negatively affected, it's not social improvement. It's easy to see how the "Pareto criterion" might seem like it's protecting our interests, but it's actually defending vested interests. It's just not possible to make real reforms without affecting the interests of interest groups. After all, that's what reforms are all about! If we stick to the Pareto criterion, it means that the whole of society will just end up maintaining the status quo. Zhang Xiazhu has a great suggestion for us all: when we hear an economic proposition, let's be sure to ask ourselves, "Who will benefit?"
Sometimes, even statistics that seem totally objective and neutral can actually imply certain value judgments and political intentions. This is because numbers are based on theories, which can sometimes be a bit tricky! It's so interesting how numbers can tell us so much about complex real-life situations! But it's also important to remember that what a number emphasises and what it ignores depends on the theory behind it. GDP is a great example. It seems like a completely objective and neutral economic statistic, but it was actually born tied to politics. It was the hero behind the US winning World War II and the Cold War – what a legacy! If you're interested, you can listen to my interpretation of another book, What the Heck is GDP? Anyway, it's always a good idea to remember that statistics in economics are never equal to objective facts. It's always best to think things through before accepting them.
And that's a wrap! We've covered a lot in this book, so let's take a quick recap.
Zhang Xiazhu thinks that mainstream economists claim they can use the same set of economic theories to explain all the world's problems, which is a bit of a tall order! I think the best way to approach economics is to go back to basics and look at the real world. By using the different theories from different schools, we can understand the world better and solve problems in a more holistic way. I think we can all agree that economics is never going to be a "pure science" or "value neutral." It's so interesting to see how different schools of economics have different value orientations and political propositions behind them!
Zhang Xiazhu also said that, at the end of the day, economics is really a political debate. It's about how interests are distributed and who benefits and who loses. It's so important that we don't leave economics to others to think about. It doesn't matter if you're not an economist! Even if you've only dipped your toes into some of the big ideas, you can still make smart choices about the economy. Just understand the political and moral assumptions behind the theories, and you'll be ready to go! I'd really love it if you could find the original book and read it. I think you'll find it really helpful! It's available as an e-book, and I believe you will definitely benefit from it.
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