1838. Economics: The User's Guide

By Lynn Fries, therealnews.com, May 10, 2015 

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

Unless we want our societies to be run by a body of self-elected experts, we all need to learn economics. So says Economics: The User's Guide, by economist Ha-Joon Chang. In a series of interviews with Ha-Joon Chang, we look into this. In this opening segment, we get some history on how we got here. Neoclassical economics is key to the story.

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: What we call economics used to be called political economy. So let's start there, with the story behind changing the name of the discipline. Tell us about that.

CHANG: Yes. In the beginning, economics was called political economy. Adam Smith, David Ricardo, these people never wrote any, anything on economics. They all wrote on political economy.

In the late 19th century, early 20th century the then-rising school of economics, Neoclassical economics, which is today's dominant school of economics, decided that they want to become scientists. You know, in modern world the title of science has a great aura, because after all, that progress in scientific knowledge is what has built the modern world. So if you can call yourself scientist, you immediately get much greater credibility. And, I mean, that, this is what the Neoclassical economists have aimed to achieve since the late 19th century.

And the most important thing they did at the beginning to achieve this goal was to rename the subject. So it wasn't political economy anymore, because when you say politics, you're already implying that people may disagree, you know. But if you're a, a scientist, you cannot have that kind of disagreement. So it was really important to get rid of that word politics from the name of the subject so that they can now claim that this is free of ethical judgments, this is free of political disagreement, and therefore there is a science like physics or chemistry.

FRIES: The Neoclassical school claims to be the intellectual heir of the Classical school. So first tell us what central ideas of the Classical school remain key to the Neoclassical, and then what's new? In other words, the Neo in Neo-classical.

CHANG: Yes. Classical economists actually thought about the economy in quite different ways from what you see in Neoclassical economics. But Neoclassical economics is still an heir of classical economics in the sense that it is--and I'll explain this in a minute--it is trying to make the same propositions in different ways.

So the two central propositions of Classical economics that have been adopted and advanced by the Neoclassical school is that first of all, market competition keeps producers efficient. So you have to become efficient, otherwise you'll be wiped out by market competition. That's the first idea. And the other one is that you have a self-equilibrating quality of the market. So market can be just left alone. There might be some disturbances that through, I don't know, war, or bad weather. Bad harvest, or things like that. But the market will always find equilibrium.

So when you have that view you could say that leaving things to the market will make sure that everyone remains efficient, and that--this is what the Classical economists believe. Now, Neoclassical economists are saying the same thing, but actually in quite different ways. And there are quite a lot of differences between the two approaches. But I would say that the two most important are the following.

First of all, unlike Neoclassical economics, Classical economics is a class-based theory. Of course in Classical economics there are individuals at the rhetorical level, but the core of their theory is all about class struggle, if you like. So in Classical economics there are capitalists, there are workers, and there are landlords. And most of their theory is about how the division of income between these three groups affect the way that an economy makes investment, generates economic growth, and manages itself.

Now, Neoclassical economics deny that. They even deny that class is an analytically meaningful category. And they construct the theory on the basis of individuals. So individuals are all different. I mean it's not, you know, unlike in Classical economics, in which position they are in in the economy, it doesn't really affect the way they behave. Whereas in Classical economics, it is assumed that the capitalists are behaving in particular ways, workers behave in particular ways. Landlords are behaving in particular ways. So the Neoclassicals have turned the theory into an individualistic theory, whereas Classical economics is a class-based theory.

Although the important difference is that the Neoclassical economists basically conceptualize the economy as a series of market exchange, whereas Classical economists put a lot more emphasis on the production. Of course, there was some market competition. But Adam Smith, for example, in the very first chapter of his famous book The Wealth of Nations wrote about a factory, not a market. I mean, he wrote about this famous example of pin factory, and he was discussing how can twelve people working together to produce a pin can increase productivity by hundreds of times, even thousands of times. And he started that, the whole discussion from there trying to explain how these changes in the domain of production have created a new type of society and how you need a different way of looking at things, that which he proposed the name of political economy.

Neoclassical economists do not really pay attention to production. I mean, you could--to exaggerate a little bit, you could even say that Neoclassical economics ends when people go to work. It doesn't really have a lot to say about what happens within the factories, within the shops, within offices. Most of it is about what happens after people leave work, bring salaries and wages from their work, go and buy the things, and then consume them. So in that way, the focus of economics was shifted from production to exchange and consumption.

And it does that two important ways. The theory might produce similar conclusions, but became something that is very different from Classical economic theory. And in that sense that we call it Neoclassical theory. Actually, some of the aspects that the Neoclassical economists have abandoned, the class-based approach to economics and the emphasis on production, they actually have been kept by the Marxist work. As you can say, is the half-brother of the Neoclassical school.

FRIES: Let's go deeper into all this in the next segment. Please join us for Part 2 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.

Ha-Joon Chang, a Korean native, has taught at the Faculty of Economics, University of Cambridge, since 1990. He has worked as a consultant for numerous international organizations, including various UN agencies, the World Bank, and the Asian Development Bank. A best selling author, his latest book is Economics: the User's Guide. He has published 11 other books, including Kicking Away the Ladder, winner of the 2003 Myrdal Prize. In 2005, Ha-Joon Chang was awarded the 2005 Leontief Prize for Advancing the Frontiers of Economic Thought.