LYNN FRIES: Welcome to The Real News Network. I'm Lynn Fries, in Geneva.
This is Part 5 of a six-part series with economist Ha-Joon Chang. We're exploring thoughts from
his book Economics: The User's Guide, where he critiques the narrow focus of today's economics
profession that recognizes one approach, the Neoclassical approach, as the right way of
doing economics. In this segment, we're continuing our look into respective strengths of many
other, different approaches. 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: Hi.
FRIES: We're going to pick up where we left off in Part 4, where you talked about the
Marxist, the Developmentalist, the Austrian, and the Institutionalist Schools. So now give
us an example of a contribution from the Keynesian School. .
CHANG: The Keynesian School has two key differences from the Neoclassical School. The first difference
is that the Keynesian School starts from the assumption that what is good for individuals
is not necessarily good for the entire economy. The best example is that of, say, government
deficits. You know, in the U.S., UK, in many European countries after the 2008 financial
crisis, government deficits mushroomed because that economic collapse, and tax revenue wasn't
coming in, while the government had certain spending commitments.
Now, in order to solve this problem a lot of Neoclassical economists said we just have
to cut spending, because government debt is a bad thing. Now, you can debate whether government
debt is a bad thing or a good thing, but even assuming that it's a bad thing, a Keynesian
would say, well, even so you cannot cut government spending in the way that Neoclassical economists
want it to be cut, because my spending is your income. If the government begins to cut
its spending, someone else is losing income, and therefore that person also has to cut
spending, and it gets into a downward spiral.
So what may be prudent for individuals, i.e. your income falls and therefore you need to
reduce your spending, may not be actually a wise idea for the entire economy. Because
if everyone, including the government, begins to cut spending the economy will get into
a downward spiral. So that idea that what is rational for individuals may not be rational
for the entire economy, that is one crucial difference between Neoclassical economics
and the Keynesian School.
Another difference is that in Keynesian theory, money is at the center of the economic theory,
whereas in Neoclassical economics it's kind of a, an add-on. I mean, Neoclassical economic
theory doesn't need money to work, whereas in Keynesian theory, money and credit and
debt--I mean, these are central to economic dynamics.
FRIES: The Schumpeterian School?
CHANG: Schumpeter's theory of economics was very, very different from the Neoclassical
theory. Now, in Neoclassical theory the ideal state of the economy is known as the state
of perfect competition. This is referring to a market in which only very small producers
exist and they fiercely compete with each other, but individually they are incapable
of affecting the market outcome. So in that theoretical scheme, monopoly is actually a
big enemy. I mean, many Neoclassical economists will call monopoly a market failure, and the
government is justified to regulate prices or the rate of profit in monopolistic industries.
However, Schumpeter has a totally different view. He sees monopoly as an inevitable or
even necessary feature of capitalism, in the good sense. Because in Schumpeter's view,
capitalism develops because people innovate. They come up with new technologies, new forms
of organization, they open new markets. But when they innovate then they become monopolies.
When you invent something that no one can imitate, at least in the short run, you can
basically charge whatever you want for people who want to buy your product.
Of course, this doesn't last forever. I mean, competitors come up, they undermine you, or
completely new technologies that get invented, and they make you irrelevant. Just think about
the way in which IBM and Kodak have become, well, basically specialized consulting companies.
I mean, these companies whose names were at one point synonymous with computers and cameras,
respectively, have now basically disappeared. So in Schumpeter's view, that's what makes
capitalism dynamic, and therefore that monopoly is the natural phenomenon of a dynamic economy.
Only that no monopoly lasts forever.
So in Schumpeterian view, this state of fierce (called perfect) competition, which the Neoclassical
economists take as an ideal, is actually a state of stagnation rather than a good thing.
So it?s a very different view of capitalism.
FRIES: The Behavioralist School?
CHANG: Now, the Behavioralist School starts from the observation that the human beings
assumed in Neoclassical economics is really so totally unrealistic, it is--that assumption
is really useless in helping us understand the world. I mean, the view of the Behavioralist
School is that we actually need to understand the underlying cognitive processes of human
beings. Understand how they think, how rational or irrational they can be, how emotional they
can be, and how that affects what people do.
They argue basically that human beings are very complex and flawed, you know, we have
multiple motivations, we have limited rationalities. And they built a whole theory about human
behavior and organization and institutions eventually based on this assumption, which
is totally different from the Neoclassical one, and it actually is much better at allowing
us to understand, allowing us to understand how the real world works.
I mean, to go back to the example of the recent financial crisis, you know, if you really
studied the Behavioralist approach carefully, you could have actually prevented a lot these
problems in the financial sector. Unfortunately, policymakers are mainly informed by Neoclassical
economics, and believe that these bankers really know how to take care of themselves,
they are rational, they have their own self-interest and they wouldn't deliberately do things that
destroy themselves.
Unfortunately, these bankers like all other human beings are very complex and flawed characters,
and they ended up making a lot of decisions which not only destroyed themselves but also
destroyed the rest of the economy. So actually the insights from the behavioralist school
are very important in helping us understand the world in a more realistic way.
FRIES: And there's an emphasis in this approach that the market only accounts for a small
part of the economy?
CHANG: Yes. Herbert Simon once made this observation that something like 80% of economic activities
in the United States are actually not organized through the market. They are mainly organized
through the internal directives of companies and sometimes by government directives, and
only about 20% of economic activities are organized through the market. So he said,
actually, that we keep talking about the market economy but it might be more accurate to call
it the organization economy.
Now, this is a very important point, the fact that the market accounts for only about 20%
of economic activities doesn't mean that its importance is only 20%. Because you know,
this is where different economic forces meet and compromises are worked out and competition
is set afloat and so on. But the fact that we are ignoring the remaining 80%, especially
what goes on inside a company, it means that we are actually trying to understand the whole
economy by looking at only one part of the process.
So it's like the parable of the blind men feeling an elephant, you know. I mean, you're
only touching the leg and you think an elephant is like a pillar. So in that sense it appears
just looking at the market exchange process, you lose sight of many important aspects of
our economic activities, of production, how people work in the production process, how
internal hierarchy of companies are organized. So you need to get insights from the Behavioralist
School, Institutionalist School, and even Marxist School who will tell you that inside
companies in greater depth.
So I mean, this is one example of why actually you need the different schools to fully understand
the economy.
FRIES: Let?s talk about that in the next segment and how to make economics better serve democracy.
Please join us for Part 6, the concluding segment, 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.