Interview

Old economics, new stirrings

Print edition : March 06, 2015

Ha-Joon Chang. Photo: V. Sridhar

Central London, March 2009: A protest before a G20 meet on the global economic crisis. Photo: AKIRA SUEMORI/AP

Thomas Piketty, author of the bestseller "Capital in the Twenty-first Century". "The conclusions he seems to have drawn were well known to us for a long time, especially if you were a non-free market economist," says Chang. Photo: ERIC PIERMONT/AFP

Interview with the economist and author Ha-Joon Chang.

THE public has generally held professional economists in awe, believing that the technical intricacies of economics are beyond its comprehension. But the global economic crisis of 2008 changed all that. When most professional economists were taken by surprise at the speed and enormity of that crisis, the incredulous public saw this as a blow to their collective credibility. As an intellectual class, economic journalists met the same fate; there was widespread public revulsion that financial and economic journalism had let them down by playing along with the orgies of the financial oligarchs in the run-up to the collapse. Worse, because of its excessive reliance on the dominant current in economics, and by failing to hear the voices of dissent within professional economics, journalism had failed to spot the signs of the imminent collapse on a global scale.

However, long-time critics from within the ranks of professional economists blamed the overwhelming dominance of the mainstream in economics—otherwise labelled as the neoclassical brand of economics—for the collapse of the credibility. The neoclassical approach is based on the centrality of the market and of “rational expectations” of economic agents and a set of stringent assumptions and conditions that would be unavailable in the real world. This understanding is based on the premise that since the world works in very predictable ways and that since people act completely rationally and know what they ought to do, there is no justification for governments to meddle with the working of markets.

Right at the forefront of this battle within economics has been Ha-Joon Chang, who teaches at the Faculty of Economics at Cambridge, United Kingdom and the Development Studies programme at the university. He came to Cambridge as a doctoral student in 1986 from South Korea and retains his South Korean citizenship.

Dr Chang is the author of several popular books, among them Kicking Away the Ladder: Development Strategy in Historical Perspective (2002), Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism (2008), 23 Things They Don’t Tell You About Capitalism (2010) and Economics: The User’s Guide. He is a prolific writer in the popular media, in both English and Korean, a powerful voice against the orthodoxy in economics.

In this wide-ranging interview to Frontline in Bangalore on a recent visit to the country, Ha-Joon Chang explains why mainstream economic journalism has lost much of its credibility in the wake of the economic crisis, the reasons for the stranglehold of economic orthodoxy and the need for pluralism, and what is happening to the Indian economy under Prime Minister Narendra Modi. Excerpts:

There is growing disenchantment among economics students across the world about the nature/relevance of their curriculum, especially because of its inability to either help predict or explain the global economic crisis. In the U.K. (Manchester, for instance), as well as elsewhere, students have demanded a curriculum that is rooted in the real world. Why has the profession reached such a pass?

It is quite paradoxical because these very same (mainstream) economists who have been preaching consumer sovereignty and the need to meet market demand don’t want to apply this to their own profession. They face students who are demanding something different because in the job market employers are finding such students to be poorly trained. These teachers say, “No, we know what is good for you.” So, economics teachers are doing exactly the opposite of what they are teaching their students. In the real world of “free markets”, they are supposed to give the customer what he/she wants, but they do not do what they preach (laughs).

The dissent against this approach to economics has existed for a long time. In 2001, for instance, a group of doctoral students at Cambridge [U.K.], many of them doing mainstream economics, issued an open letter complaining that their curriculum was too narrowly focussed and unrelated to the real world. Around the same time, in France, there was a movement organised under the umbrella of the Post-Autistic Economics group. They argued that the economics profession had become autistic, unable to relate to the real world. Since then, the subject [economics] has become even more narrow-minded in many ways.

How do you say that?

In the sense that there now exists in the economics profession an implicit and perverse intellectual hierarchy which is premised on the understanding that the less of what you do is related to the real world, the cleverer you are. So, if you are really clever, you would do mathematical modelling of a kind that has nothing to do with the real world. You would do something on the Turing machine [a theoretical computing device] or on information cascade or some such thing. If you are a little less clever, you would do econometrics, and if you are not even that clever, you would work on monetary policy or development economics. And, if you are not even that good, you would do economic history. But if you are the worst, you would go around factories interviewing managers. So, the leadership of the profession is moving towards abstraction for the sake of abstraction.

This has resulted in the shutting down of courses such as the history of economics, history of economic thought, philosophy of economics and other such fields. Basically, teaching economics has become like one of the other trades, like becoming a plumber or a bricklayer, as if it is about providing students with a set of skills which they can apply. There is no encouragement of critical thinking or teaching of real-world issues.

Isn’t something strange going on? In the real world, a person trained as a doctor or a biotechnologist would step out into the real world and start doing what they have learnt, but economists do not seem to have to do this. But how does the system cope with this dysfunctional set of professionals?

Yes, these people do not have much training about the real world. They go to the workplace and learn about the real world in the way their employers demand. I have been talking to employers as part of my involvement in the economics reform movement. They say, “We hire them basically because they are otherwise clever. They could jump through all the hoops, which the typical economics undergraduate programme demands, so they must be clever. They are useless in terms of their understanding of the real world, but that we can teach them.” Another reason for the existence of this kind of teaching is to justify what is going on in the world today. The logic runs thus: It does not matter if you don’t know anything of the real world as long as you say things that people with power and money like.

And, they listen to you if you say free trade is the best way to go or if you say India should liberalise more and that global corporations ought to be made welcome here. If you say these kinds of things, they are not going to look too deeply into your research. I often liken the role of mainstream economists to the role played by the Catholic theology in medieval Europe. Mainstream economics today is an almost religious belief. Never mind if it works or not in the real world, as long as it works for the powerful, it is fine. This is the reason it has been possible to paper over the dysfunctional nature of the profession for so long. But now, students are revolting and demanding a different programme [curriculum].

Actually, this generation of students has been quite remarkable. Many of them have not been taught anything but narrowly defined neoclassical economics, unlike until the 1990s when many departments had at least two or three persons teaching something else. Although this has disappeared in the last 10-15 years, these students have figured out what is wrong with the teaching they are getting. They have also been very good at organising themselves. In the U.K., where the movement is the strongest, an alliance of student groups (called Rethinking Economics with chapters in more than 20 universities) is part of an international network of students called International Student Initiative for Pluralism in Economics. These students, savvy at using social media and other forms of communication, are able to stay in touch even if they are unable to ever meet each other physically.

Are you more hopeful of change?

The power of the academic establishment is very strong. It is usually the academic establishment that is the last to change. After all, their careers and identities are bound to the ideas they uphold. If you are a business manager, you can change your policy if you can argue that it would help your company make more money. But if you are an academic, you cannot say: “90 per cent of what I did in the last 25 years was completely useless, so I must change course.” There are some courageous economists who are saying that, but the response of most mainstream economists has been very guarded at best. They say they would like to teach students more about the real world—about economic history, about different schools of economic thought, etc.—but they are short of time. They say students have to be taught mathematical skills, econometrics, micro- and macroeconomics and ask: Where is the time to teach about what happens in the real world?

Maybe it is more difficult because this kind of academic plugs into, in a systemic sense, the kind of regime he/she is intended to serve. Maybe it is also more difficult to destabilise because of this….

Exactly. They are backed by the bigger power structures, which determine the scale of funding for universities. Obviously, the entrenched interests will take a lot of effort to dismantle. Yes, I am more hopeful, but that does not mean things are going to change radically very soon. But you have to fight these struggles one thing at a time. I am more hopeful now than I have ever been, mainly because of what the students are doing.

FAILINGS OF ECONOMIC JOURNALISM

While this may have been the fate of your profession, mine has not fared much better. The failure of mainstream journalism—all over the world—to not only spot the looming economic crisis but comprehend the enormity of its scope has severely dented its credibility. Have the failings of economic, financial and business journalism gone hand in hand with the failure of professional economists?

Yes, of course, these two are related. I do not want to paint all journalists with the same brush — there are many who are doing excellent work. But journalists tend to get their interpretation of the real world mostly from academia. So, if 97 per cent of economists say one thing, it is difficult for journalists to say something different. But it is also important to recognise that journalists are part of the same power structures that condition economists. The incorporation of the media into the power structure has also corrupted academia.

One of the striking aspects of the media coverage of the economic meltdown of 2008 was that it took a Matt Taibbi, writing in Rolling Stone, a mainly music-oriented magazine, to provide a detailed, blow-by-blow account of how the Lehman collapse happened in the U.S. Even if many readers were upset with Taibbi’s style of writing, it served as a reminder that mainstream economic journalism had seriously let its audience down.

Yeah. But there were others too. To be fair, some reasonable stuff has also appeared in publications such as Financial Times and some other publications. But most mainstream financial papers were hopeless in their coverage of the financial crisis. This is partly because they are players in the game of puffing up the markets and exaggerating the achievements of globalisation.

You are often labelled as an economist in the heterodox mould. How comfortable are you with this characterisation? What has it meant for you to swim against the tide in the world of economists? How have university departments (and their dons) reacted to the demand for greater plurality in the profession?

Well, heterodox is relative, isn’t it? The Pope is a heterodox if you are a Greek or a Russian (laughs). I don’t particularly like it but wouldn’t mind if people use it as an easy way of saying that I am not a neoclassical economist. But, as I have explained in my latest book ( Economics: The User’s Guide), I don’t entirely subscribe to one school or another. I have been influenced by many different schools. I believe—not only for political reasons but for intellectual reasons too—we need pluralism in economics. Different schools have different methodological approaches, have different interests (some more interested in production, while others are more interested in exchange, for instance) or make different political and ethical assumptions. We need all of them to understand fully the complexity of the world.

I have a problem with the term heterodox because it suggests that we reject the entirety of mainstream economics, which I do not do. The term heterodox can be a hindrance to a pluralistic approach. The Institutional School is probably the one that has influenced me the most. It is because I am interested in particular kinds of problems; but I wouldn’t insist that everyone use it to study every problem. Yes, it is a difficult life swimming against the tide. They [the establishment] don’t take you seriously; many will say you are not even an economist; they won’t promote you. I don’t know what to say, but even when my book sells 1.8 million copies they don’t take me seriously. But I have no complaints. I have come to the conclusion that the economics profession cannot be reformed from within. In the last 10 years, I have started to write a lot for newspapers, magazines and publish popular books, which, by the market’s yardstick, appear to have succeeded. In the English-speaking world, at least since the 1950s, the neoclassical school has been the dominant school. But it has never been as monolithic as it is today. Until the 1970s and 1980s, every respectable department had a couple of economic historians, maybe a couple of Marxists.

The fierce controversies in capital theory involving Robert Solow and Paul Samuelson on behalf of the neoclassicals and Joan Robinson and Piero Sraffa on the other side come to mind as examples of what students were exposed to until the 1980s.

Yes, the new generation of economists just ignored the debate and pretended it never happened. In fact, very few people even know that such a debate happened. Not now, but about 15 years ago I even came across students in American campuses who had never even heard of [John Maynard] Keynes! They didn’t even teach Keynes in order to criticise him! He was completely obliterated. Now, of course, everyone at least hears of Keynes, thanks to the financial crisis.

Those who are not taking the mainstream approach—barring a few special departments like the one at Leeds, SOAS (School of Oriental and African Studies) in the U.K. or at the University of Massachusetts at Amherst or the New School in New York—run the risk of not getting hired. Even if they do get hired, they are likely to be kicked out during the tenured tracking assessments. Such people may end up teaching in the small, liberal arts colleges or move to another department like a business school or a geography department, urban planning or development studies where they still need economists working on real problems. Actually, non-neoclassical economics has not disappeared; it has only disappeared in the economics departments. But outside economics departments, there is a real demand for economists. So you see Harvard Business School hiring economic historians, government schools hiring people with a background in institutional economics, and geography departments hiring economists to study industrial policy.

When I went to Cambridge in 1986, we still had the legacy of the Keynesian heyday. At that time, half the economics faculty were not [from] mainstream economics. Even into the initial four-five years of my teaching career, I was protected from the intellectual monocropping that is so characteristic of the economics profession today. Over time, non-mainstream economists either retired or dropped out because of not being treated fairly. Yes, it has been dispiriting.

THOMAS PIKETTY

What is your reading of Thomas Piketty’s sensational book Capital in the Twenty-first Century, which has been welcomed as a great effort at placing inequality at the very centre of economic analysis and policy?

I must admit I have not read Piketty, so I cannot comment on the book. But it does address an interesting social phenomenon. I gather that he has laboriously collated new data going far back into history. But the conclusions he seems to have drawn —from my superficial reading of the reviews of his book—were well known to us for a long time, especially if you were a non-free market economist. People have debated this for a long time. The underconsumption debate within the Marxist tradition and the work of early post-Keynesians like Josef Steindl belong to the long tradition of linking income inequality to capitalist dynamics.

There is deep unease today about inequality in the American middle class. I am told that people who otherwise would only read ebooks have preferred to carry a physical copy of Piketty’s book so that they are seen to be reading him.

Inequality is a major issue in the Western world. The benefits of whatever recovery there has been in the U.K. and the U.S. after the collapse of 2008 have largely gone to the rich, the top 0.1 per cent. But it is also important to recognise that much can be done even now.

For instance, the pre-tax share of the richest sections in the national income in countries such as Germany and Sweden is more lopsided than even in the U.S.; but taxation is able to reduce inequalities significantly in these countries.

There are others such as Yanis Varoufakis (the new Greek Finance Minister) who have challenged the methodological foundations of Piketty’s book, especially the conflation of capital with wealth.

I cannot comment because I have not read it.

India is now led by a right-wing government, led by a party that is not only right wing in its economic outlook but one that is explicitly committed to an ideology that is communal (against minorities, for example). In the name of “being decisive” and allowing greater play for “free” markets, the new government has pursued an aggressive policy of appeasement to industrial and financial capital—Indian and foreign—in the name of economic liberalisation (rapid privatisation and the handing over of resources such as land on very attractive terms are some of its key features). What parallels do you see to this in global terms?

I can only describe it [Modi’s ascent] as the result of the incompetence of the Congress party, especially its inability to manage the Indian economy and society better when it was in power. Yes, the rhetoric of the new government is aggressive, and it has done some things to back that up, but I am not so sure that this government can do as much as it claims it will do.

India is a very complex federation; it is not like South Korea in the 1960s under the dictator General Park Chung Hee. The constitutional limits in India and the federal structure could hinder a full-blown pro-corporate attempt here.

I have heard people here say that Modi uses a lot of rhetoric but is basically a pragmatist. I did not even realise, until you told me, that he had abolished the Planning Commission. In recent years, the Commission had been run by those with a free market outlook. But for the government to actually give up the attempt to coordinate the economic activity in different sectors and States has been a powerful symbolic move.

The biggest problem I see with this kind of vision is that it is not even pro-market, it is blatantly pro-corporate sector. Of course, we need markets; and we need corporations, which are the main actors behind the veil of the market since the market is only a metaphor. But the role of the government is to reconcile the demands of the corporations with those of the rest of society. Otherwise, why bother to have a government at all? We might as well outsource everything to corporations.

Basically, no country in the world has ever progressed through the pursuit of pure free market and free trade policies, which Modi claims as his ideals. People think Britain and the U.S. became hegemons because they pursued such policies, but these are countries that invented protectionism. In the 17th and 18th centuries, Britain used protectionism, subsidies and government-granted monopolies to promote its own industries. In the 19th century, the U.S., which was trying to catch up with Britain and the rest of Europe, was the most protectionist country in the world, and this lasted until the Second World War. So I laugh when I hear the British and the Americans preaching to the world about the virtues of free trade. These countries did free trade only when they held the upper hand and it was in their interests. This is the same story with almost all the rich countries of today. The Netherlands is probably the only country in the world, at least from the 19th century, to have practised free trade, although it too did rather different things before that. In the late 20th century, Japan, Taiwan, South Korea, China and even Singapore pursued policies that were certainly not free trade policies.

People often think Singapore is the textbook model of free trade and free market policies. Yes, it does have some elements of free trade policies, but we are never told that 90 per cent of the land in Singapore is owned by the government; 85 per cent of housing is provided by the state (and more than one-fifth of national output is produced by state-owned enterprises). Even when it courts foreign investment, it does not give huge tax concessions and so on, but provides customised infrastructure and manpower to suit the needs of the corporations. It is a much more forward-looking approach; it does not just open up the economy and say: “Please come and exploit us.”

Given this historical pattern of development across the world, I do not know how the Indian government believes being pro-corporate will lift India to a higher level. Of course, India being a relatively poor economy, these kind of policies can get some traction in the next 10 years. But after the advantages of cheap labour and resources are exhausted, what are you going to do? India does not even have resources like Chile. The best you can hope for is becoming something like Mexico, which is the slowest growing economy in Latin America in the last 15 years. I see India reaching this kind of a dead end because it is pursuing similar policies.

The other side of the pursuit of the aggressive wooing of capital is the heavy-handed clampdown on welfare schemes and subsidies such as those on food and the threat of abridgment of the scope of the rural employment guarantee scheme.

These kinds of policies are propelled by the myth that you need inequality in order to grow faster, even if the evidence is largely against such a belief. Look at the evidence: in-country inequalities across the world have increased significantly in the last 30 years, and most of them are growing much slower now. The high growth in India in the last decade, which has been accompanied by rising inequality, may be possible only at the beginning of an industrial take-off; but it cannot last for long. I am not saying that more equal societies necessarily grow faster, but there is no evidence to show that you necessarily need inequality to generate growth.

This era of globalisation is often portrayed as one that is characterised by the “withdrawal of the state”. However, this has been contradicted by “non-mainstream” economists as being precisely the opposite—an era in which states (of many hues) have, if anything, intervened aggressively on behalf of dominant social classes while shedding any pretension of being an impartial arbiter. How do you see this, and how does this compare to the experience of Korea of the 1950s and 1960s?

Look at the U.S., the supposed home of free enterprise. How can you justify the U.S. government’s subsidies running into hundreds of billions of dollars to save failing financial institutions if you believe that the state has really withdrawn? Many governments talk about the withdrawal of the state but still actively intervene in the economy. Americans will deny that the U.S has an industrial policy, but my view is that they have perhaps the most active industrial policy in the world. It is called the Federal Research and Development Funding programme. Almost all the industries in the U.S. that now enjoy a technological advantage over competitors from other countries were supported at least initially, and in many cases well into the development stage, by the state. Much of the development of computers and the Internet came from research organised by the Pentagon. Semiconductor development, in the initial stages, was completely financed by the U.S. Navy. The American aircraft industry would not be what it is today without research funding from the U.S. Air Force. Even in pharmaceuticals, 30 per cent of the research funding comes from the federal government.

In Germany, when you look at the federal level, it may appear that the state is not doing much. But when you see at the regional and local levels, there is a huge amount of intervention by the state. State-owned banks, industry associations and public and semi-public research institutions work together to help particular industries.

The truth is that all this is going on despite all the rhetoric of the free market. But developing countries do not have the intellectual confidence to see through this. Instead, they say: “Well, the Americans, the Germans and the Japanese do not use industrial policy, so let us abandon it.” This is like shooting themselves in the foot.

Of course, these countries are intervening significantly but aggressively in favour of corporate interests, which is nothing but subsidisation of corporate interests. And they have the cheek to blame the poor for being subsidised. The state has only withdrawn from some of the things it used to do, and now it gives even more money to corporations.

The Korean “miracle” was not the work of free markets. It was because of the strong intervention by the state, led by a brutal dictatorship. But you don’t need a dictatorship to have strong intervention. Between the 1950s and the 1980s, countries like Japan, France, Finland, Norway and Austria used heavy-handed state intervention.

Except perhaps in the case of Japan, this was done mainly through state-owned enterprises and tight control of the financial sector to ensure that lending is directed to productive enterprises. Many of these countries used heavy-handed industrial policies but they are democracies with impeccable credentials. The land reforms in Korea also played a vital role in the industrial take-off.

It is said that the Korean state’s heavy-handed intervention ensured “discipline” among capitalists there, unlike in India, where the capitalist class used protection in an undisciplined way….

Where does “discipline” come from? It could come from the threat of violence, as it did in South Korea and Taiwan. Or it could come from financial controls wielded by the state or from the enforcement of rules and regulations. It can also come from social pacts, as in the Scandinavian countries where the government mediates between employers and employees. Of course, imposing discipline is important but it does not have to come from the threat of a police state or of violence.

How do people in South Korea now look back to that period of your history, of a brutal dictatorship?

Well, that is interesting. Our own free market enthusiasts have exploited the association of industrial policy and government intervention with the dictatorship. They have used this to spread the notion that state intervention is bad. After the financial crisis of 1997, the country had to accept free market policies imposed by the International Monetary Fund. The economy has become much more market-driven. Unfortunately, the economy has not done very well. Between 1961 and 1997, the average annual per capita income in South Korea increased at the rate of 6.3 per cent; since then, incomes have grown at barely 3 per cent per annum. Inequalities have also increased.

I lived under the military dictatorship until I was 23. For the first 16 years of my life, I knew only one president. I wouldn’t recommend a dictatorship to anyone.

You seem to have a fan following in Korea...

I have incessantly engaged with the Korean public. I have been writing for some Korean newspapers since 1999. My books have sold well there. Yes, I have a following, but not big enough to change the government’s mind.

There are lots of others, all over the world. Even among the neoclassicals, Joseph Stiglitz is someone who I am close to. There are post-Keynesians at Leeds, at SOAS and many more across the world. Actually, I don’t feel lonely at all.

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