The Huffington Post recently published an excerpt of Cambridge University economist Ha-Joon Chang’s book Economics: The User’s Guide. It has then caused a little bit of a stir, mainly through progressive followers eagerly regurgitating some of Chang’s not-so-well-founded one-liners (this article, by almost ridiculously ignorant Tyler Darden, is a good example). But these regurgitations aside, it is interesting to look at the excerpt of Chang’s book and what it tells us about Chang and his view of economics. (I will not, out of respect for Chang, assume that the excerpt was chosen because it was one of the better parts of the book, though this may be an intuitive assumption.)

Chang is a development economist, which may not mean anything to those who are not well versed in economic lingo and the academic study of economics. This particular field is one of the very few where central planning is hailed as not only possible – but preferable to market. Development economists overall look at how underdeveloped or developing nations can or should bring about economic growth, but they are as much proponents of schemes to raise health, education levels, and other “welfare” measures as they are in markets and economic growth. Perhaps for this reason, development economists commonly are very strongly pro-government (since government is the ultimate central planner and therefore, according to this logic, the most powerful actor, it can bring about great good – if only good people with access to the “right” information and tools run the government).

It may be wise, therefore, to assume that Chang’s point of departure may be neither sound nor the common one among economists. The eager willingness of certain bloggers and writers to reuse Chang’s words may indicate this, though it is hardly conclusive evidence.

Nevertheless, with this caveat in mind, let’s look at what Chang says in this excerpt. As it is but an excerpt, let us assume that he has in other parts of the book substantiated some of the assertions made in the text published by the Huffington Post.

He starts by saying that “[t]here are a few important things to keep in mind when you are ‘using’ economics.” Of course. He then produces a rather outrageous assertion, one which Austrians would probably find more troublesome than neoclassical economists:

Economics is a political argument. It is not – and can never be – a science; there are no objective truths in economics that can be established independently of political, and frequently moral, judgments.

There is obviously no argument here and nothing to back up the statement. It is just a dismissal of the dismal science – by one of its supposed representatives. Strange, indeed, but not as strange as an outrageous assertion followed by “Therefore,” and a conclusion. Why anyone would take the following conclusion seriously based on only this assertion is something it is possible (but unlikely) that the Huffington Post editors have considered. We cannot here speculate on what the answer to such a question would be; there is simply no basis from which to engage in such speculation.

Let us instead move on to Chang’s arguments. He notes:

the dominant Neoclassical school of economics uses the Pareto criterion to judge social improvement. It may seem not to favour anyone, as it says a change is a social improvement only when it makes some people better off without making anyone worse off and thus does not allow even a single person to be trampled on by the rest of society. Yet it implicitly favours those who benefit more from the status quo, as the criterion allows them to prevent any change to the status quo that hurts them.

At first glance, this may seem like a worthy criticism – look, economics is supposed to be value-free, but not even its supposed value-free methods are value-free. But it really just amounts to a dishonest application without much relevance even to neoclassical economists. As readers of this blog know all too well, neoclassical economists tend to use “models” based on rather absurd and highly simplified assumptions such as “perfect information.” Well, they also commonly assume “perfect competition,” but Chang somehow misses this point. Instead, he assumes that the use of the Pareto criterion in abstract models under such assumptions is applied directly and thoughtlessly on empirical analyses.

Granted, if we take the Pareto criterion without thinking about it and apply it on an empirical situation akin to the ones we find in the developing world, then it appears rather outrageous. There’s nothing “natural” or equal or just with the starting point, which means the Pareto criterion only cements this situation – where radical change may be more just. In this sense, one can only agree with Chang. Except, of course, for the fact that economists don’t use the Pareto criterion inductively; they use it deductively, which in fact means that it is a criterion only from a starting point that is accepted as “untainted” by politics, privilege, etc.

So Chang takes a concept from one type of model and applies it in a completely different context – and then concludes that economics is biased. I’m afraid the only thing that is biased here is Chang’s dishonest attempt to smear economics.

He continues to do this in other statements. For example:

Political and ethical judgments are present even in ostensibly value-free exercises, such as defining the boundaries of the market. Deciding what belongs in the domain of the market is an intensely political exercise. Once you can drag something (say, water) into the domain of the market, you can apply the ‘one-dollar-one-vote’ rule to decisions surrounding it, making it easier for the rich to influence the outcome.

I’m not sure where he gets the idea that “one-dollar-one-vote” is an economic concept, except from a possible (over)simplified illustration used to instruct freshmen that economics is not undemocratic. But again the problem is that Chang takes (a caricature of) an economic model and applies it in a situation with characteristics that are very different from the assumptions in the model. In fact, the “one-dollar-one-vote” metaphor is only applicable to the free market model because government regulation and intervention introduce imperfections and privileges that undermines the market logic.

Introducing government into an economic model always introduces comparative misallocations of resources, which is in fact an important aspect of economic analysis from prior to Adam Smith. As very clearly expressed by Mises, the economist works with “imaginary constructions” of situations to which different changes can be introduced so that the implications thereof can be traced, analyzed, and understood. This is how we’ve done economics since the discipline’s inception. Yet it is somehow unknown to Chang, who seems to focus only on the inductive empirics of the developing world.

The fact that it is “easier” for “the rich” to “influence the outcome” if one has introduced government force into a model of economic market forces is not due to the market forces – it is due to introducing government force. This is very easy to see, but only if one structures the problem correctly. Chang instead, almost to the point that it seems intentional, structures the problem in a way that contradicts the usefulness of the model as well as its assumptions – and then draws far-reaching conclusions based on another set of facts.

He also states:

The market is only one of many different ways of organising the economy – indeed, it accounts for only a small part of the modern economy. Many economic activities are organised through internal directives within firms, while the government has influences – and even commands – over large sections of the economy. Governments – and increasingly international economic organisations like the WTO – also draw the boundaries of markets while setting rules of conduct in them. Herbert Simon, the founder of the Behaviouralist school, once estimated that only about 20% of economic activities in the US are organised through the market.

This statement should ring a lot of bells for Austrians, who are well aware of the socialist calculation debate between, primarily, Ludwig von Mises and FA Hayek, on one side, and market socialists such as Oskar Lange and Abba Lerner, on the other. There are certainly “different ways of organizing the economy,” with the only caveat being that the economy ceases to exist if it is not organized through market exchange.

We cannot speak of an economy under central planning (the obvious alternative to decentralized markets), since an economy deals with the problem of allocating scarce resources toward satisfying insatiable human wants and a central power is fundamentally unable to use the former toward the latter. There is no information available for the central planner, as Hayek noted, and therefore resource allocation becomes essentially blind. But as there is also no market for the means of production, there can be no economic calculation, as Mises showed, and therefore a central planner – even with information about consumer wants expressed through prices – is unable to allocate, develop, and maintain proper productive resources.

These are very real problems that have no solution in theory and are even more difficult to solve empirically. To talk of a society adopting central planning as an “economy” is a strange use of words, since this “economy” is but the limited time span during which all productive efforts come to a halt and society is torn apart as the living standards of everyone are pushed back to those of the Stone Age.

One should perhaps not blame Chang for being ignorant of this, since economists in general seem to be. In fact, it can persuasively be argued that mathematical neoclassical economics has its roots in the socialist argument from the great debate on calculation (this is a big reason for its failings, but that’s a topic for future posts).

Interestingly, Chang attempts to portray himself as open-minded and not tied to any dogma or theoretical perspective. This is a strange statement, since a theoretical perspective simply means a (hopefully coherent) way of seeing the world. Chang obviously doesn’t mean he doesn’t see the world one way or the other, and his arguments indeed support this conclusion. It is a bit comical that Chang notes how someone who “has a hammer” (I think he means, someone who has only a hammer) “sees everything as a nail.”

What he means to say is that “economics” is a hammer (despite some quarter-millennium theory development, with perspectives ranging at least from Marx to Mises), and therefore one should use other tools as well. That’s fine, and perhaps even a valid point in some situations – especially when analyzing issues that do not have an economic dimension. But Chang certainly does not come across as anything but one of the very most dogmatic skeptics of economics in this excerpt. He has already made the dismissal of economics, even if it is mostly a caricature, front and center of his approach. Is that “open-minded”? And as I’ve shown above, Chang doesn’t even understand how to use those economic tools he so eagerly dismisses.