21st Century Economics: A Conversation with Ha-Joon Chang

Editor-in-Chief Adam Strømme sits down with Ha-Joon Chang, a Prospect Magazine “Top 20 World Thinker”, multi-award winning author, and Reader in Political Economy at the University of Cambridge.

Adam Stromme: How did you first become interested in studying economics?

Ha-Joon Chang: One is a bit more general, and the other is a bit personal. On the general side, I grew up in South Korea at the height of the economic miracle, so it was hard to ignore how important economics was in your life. I mean, income was doubling every five, six, seven years. Places were physically transformed, with new buildings, roads, and bridges, beyond recognition even during my childhood.

At the same time, there was a dark side to the miracle. High degrees of exploitation, especially of young women, in factories. Riot police were often deployed against workers or residents of slums. With all of these things happening, good and bad, you just have to know what is going on behind the scenes.

On the personal side, my father worked in the Korean Ministry of Finance, and subsequently did a part time PhD in economics. So he was able to tell me what economics was – I grew up at a time when young people could almost be forgiven for not knowing that there is such a subject as economics. But above all else I have always been thankful to him emphasizing how limited economic models are, and to never see them as more than a guideline.

AS: Who were some of your earliest or most important influences in the field?

HJC: I went to University in the early 80s during the height of the military dictatorship, and while it began earlier, led by the infamous General Park during the 60’s, in the 80s it got even worse. During that time there was a lot of revolutionary movements, so Marxist literatures were quite popular even though possessing them was highly illegal.

In particular I recall something called Dependency Theory being very influential. Dependency Theory came out of Latin America, and it argued that unequal international economic relationships were the source of underdevelopment. Even though I didn’t completely embrace it, it did help emphasize that in order to understand economic phenomena you can’t take the given structure of the economy for granted.

By contrast, what was taught in the universities in the early ‘80s did not teach you to concern yourself with the justice of the economic system – unfortunately this is still the case. You were just to take it for granted.

Thinking like this reminds me of a quote I am fond of [attributed to Helder Camara, the Left-wing Brazilian bishop] which goes “When I give food to the poor, they call me a saint. When I ask why they those people do not have enough to eat, they call me a communist”. In that sense we all need to be a bit of a communist. We need to ask what the justice of the given distribution of money and power is. And if it isn’t just, we need to set ourselves the task of fixing it.

Although I never accepted their argument that socialism was the solution to current injustice – in particular, I hate the concept of proletarian dictatorship for example – I at least found it quite helpful. They were asking the right questions, and they encouraged you to challenge the status quo.

AS: Why should we all, from doctors and lawyers to steelworkers and farmers, learn a bit of economics?

HJC: To put it simply, because we are all material beings. We all rely on one another to get the things we need. Even to just survive you need an economy. We live and work with other people, so we need to understand how we live and work even with people we’ll never meet. We’re not spiritual beings!

AS: What kind of questions do you always keep in mind when considering the consequences of economic policymaking?

HJC: I would ask two things. The first is to ask “who benefits”? One interesting thing is when people are pushing for certain policies they often argue things like “Sign this free trade agreement, and Colombia will produce X many jobs”. Well, okay, but where are these jobs coming from? What happens to those that lose their jobs? Will they be able to get new, better jobs? In thinking in this narrow way, it’s kind of ironic, because people used to argue that a big problem of Communist economies was that they would be sacrificing individuals for common good, and yet capitalist economies do the exact same thing!

The second is “what is the short versus the long term cost benefit of this arrangement”? Is everyone really being made better off in the long run? Free trade policies, in most cases, are a better policy in the short run because you’re able to sell more of what you’re producing. But in the long run it could harm your economy unless you manage the consequences properly.

DR
CHANG’S
WORK:

AS: On your Cambridge faculty page, your research focus is listed as “[The] role of the State in economic change”. What is the role of the State in economic change and development?

HJC: If I could give you a short answer I wouldn’t find my job so interesting!

I would again, say two things. The first is the development of productive capabilities. The essence of economic development is for states to enhance the ability of their national economic actors to produce technologically advanced, high-value products. You can do this in any number of ways, from overt state action to subsidizing existing companies. For example, many people forget that Korea became the economic powerhouse it is because it acted against the advice of the World Bank in subsidizing its state-owned steel industry while working to make it competitive on the international marketplace.

Another dimension I emphasize is what I call “conflict management”. Economic development can be a very conflictual process. It involves huge structural changes. New industries are rising, while old industries are collapsing or being rendered redundant. These changes create conflicts between winners and losers.  Economists don’t talk about this much, but the managing of these apparently technical changes is a really an intensely political process. It can involve suppression of wages, of democratic forces, and other political and social processes as well.

A great example of this was the US civil war. The North and the South had radically different development models. The North was based around the protection of infant industries, the building of a manufacturing base, investment in infrastructure, and so on. The South, on the other hand, was heavily based on the export of primary commodities, like cotton and tobacco, and largely opposed to all this. Of course, the clash of these two visions ultimately came to a head with the election of Lincoln, who championed the cause of the North, and which ultimately prevailed because it was the more productive economic system.

Unless you manage these things, the entire process can go off the rails.

AS: In 2002 you wrote an enormously influential work called “Kicking away the Ladder: Development Strategy in Historical Perspective”. What inspired you to write this book, and what were some of your most important take aways from it?

HJC: I have studied economics mainly because I am interested in studying how the real world works. I don’t really care about proving any particular theory. Unfortunately, most academic economists have this kind of attitude. They get convinced that a particular theory, whether its Marxist, Neoclassical, Austrian or so on, and they just keep writing stuff to prove it’s correct.

I don’t like this approach at all. Economic theories are just tools for helping us understand the world. I’ve used everyone from Karl Marx on the Left to Friedrich Hayek on the Right. All I care about is how useful the tools are to me. And when you have this approach you become very interested in studying economic history.

And when I studied economic history I couldn’t ignore how bad many of the blanket assumptions of the major theories were about explaining economic growth. Free trade doesn’t necessarily produce growth. Major industrial countries rarely engaged in uncritical free trade. I kept getting small glimpses of what was really going on, and the world was so much more complicated than any of these theories can explain.

And once I got enough of this information I decided that I couldn’t bear it anymore! I just needed to write about all these different things down and put it all in one place. It took a lot of extra research, sure, but the broad outline was a long time coming.

History may not repeat itself, but it does rhyme!

AS: Who are the “Bad Samaritans,” and what makes them so?

HJC: The “Bad Samaritans” are to me all of these rich countries which say they are force developing countries adopt policies which they say will help those countries grow— free trade, privatization, and so on —but are actually harming their long term growth prospects. A lot of these policies, as I argue in Kicking Away the Ladder and Bad Samaritans, are nearly the exact opposite of what the currently developed countries did in order to get where they are!

But the most interesting question is “why are they doing this”? I think there are two answers. The first is just self-interest. It helps them to keep the relationship with developing countries beneficial to them. But the other is more interesting: it’s their ideological presupposition. These people really want these countries to use these policies to grow, and genuinely believe they are doing good when they force those policies on those countries, but the reality is just flatly different. You tend to see this in European Social Democrat-types in particular. They just can’t understand why people in developing countries don’t want these kinds of policies.

AS: A few years before the financial crisis, the New York Times columnist Daniel Altman penned a piece titled “Neoliberalism? It Doesn’t Exist”, stating “What seems to irk campaigners against globalization or a supposed neoliberalism is the idea that rich people are going to get richer at the expense of poor people. Yet this is not what free markets do.”  Is he right? What is neoliberalism?

HJC: Well I haven’t had the “pleasure” of reading his article, what he is saying is basically the kind of damaging orthodoxy I was mentioning earlier.

Whether or not neoliberalism exists depends on what you define the term as. But I am with those that understand it as a pretty strictly defined analytical category, and I would strongly disagree with those who say it doesn’t exist. In Latin America, for example, there are politicians that proudly say they are “neoliberal”.

For Americans these terms might be a bit confusing. But to simplify neoliberalism is quite similar to the American Libertarianism. Neoliberalism is kind of an updated version of the 19th century liberalism, only with a little bit more tolerance towards state involvement. But, that said, 19th century liberals were strongly opposed to state involvement in any form, to even basic things like patents, because they would amount to a state-imposed monopolies. They also rejected things we take for granted today like central banking. Neoliberals accept these things.

Americans tend to be a bit confused about this because “liberal” tends to mean centre-left to them, which is the opposite of what it means in Europe. But neoliberalism is a pretty consciously Libertarian ideology which has been the dominant approach to economic policymaking basically since the 80s, starting with figures like Reagan and Thatcher.

The underlying problem with neoliberalism in my opinion is that it fundamentally misunderstands wealth creation. They argue we can basically ignore a lot of the distributive consequences of a radically libertarian economic system. But they ignore how economies maintain their standard of living and grow. We are social beings, and live in a society where wealth is necessarily created collectively.

Inequality matters.

 THE WORLD TODAY:

AS: You are widely-known not only as a first-rank economist, but a campaigner for educational reform. When did you first get involved in movement for educational reform, and why?

HJC: I have always been concerned with the way the standard economics education has been going. Since the 80s its been getting narrower and narrower. A lot of top American universities used to require, require, that you take courses like “The History of Economic Thought” or “Economic History”. Some would even require you take a foreign language should you need to study works written in foreign languages.

Today, by contrast, economics is effectively serving as the modern equivalent of Catholic theology in Medieval Europe – an ideology that justifies the status quo. And economists, like the Catholic priesthood at the time, have an enormous amount of influence and power – in governments, business, and think-tanks. But ultimately, since their education has narrowed so much, these extremely important people are coming into their roles with an increasingly biased view of how the world works. Trying to promote reform in the economics education has therefore been a big goal for me. In Cambridge for example we have been able to introduce a course on the history and philosophy of economics that has been very highly rated. Unfortunately, we fighting against a huge interest group, so the changes are going to be slow.

AS: Your works, particularly some of your most popular works like “Economics: A User’s Guide”, and “23 Things they Don’t Tell you about Capitalism” are championed for both their readability as well as their incorporation of the weighty arguments of classical thinkers as far afield as Adam Smith, Alexander Hamilton, Joseph Schumpeter, F.A. Hayek, Friedrich List, and Karl Marx.In an era when so much of an undergraduate economics education is becoming standardized, why should we continue to read the classics of economics?

HJC: Well, one of my favorite quotes is from Isaac Newton is “If I can see further than others, it is because I stand on the shoulders of giants”. So this physicist, who you would think has everything figured out on his own, has quite succinctly argued why we need to learn about the great thinkers who have come before us. Economics has an enormously rich intellectual history. You’ve mentioned some of the first-rate thinkers, but there are so many more, like Albert Hirschman, Herbert Simon, Tom Schelling, and so on.

I don’t personally argue that students need to read the classics. Especially if you are talking about people like Adam Smith or [David] Ricardo, their English is quite difficult. But there are many good books which break it down in an accessible way which can introduce them to all of these wonderful ideas. In particular, requiring people to read something like Richard Heilbroner’s The Worldly Philosophers would do a lot of good.

What are these professors so afraid of? Why are they keeping these thinkers away from their students? This I think is a big problem. Economists have come to pretend they are scientists and argue that students don’t need to learn about ‘past’ economists, because anything that is worth knowing in what they said must have already been incorporated into the standard textbooks. But this a very philistine and narrow view.

AS: Your most recent initiative, “ecnmy”, is a wide-reaching initiative with great promise. How did the “ecnmy” project come to be, and what is its purpose?

HJC: This was actually an initiative of students who were involved in Rethinking Economics. I helped them a little bit. The idea behind it is you need to get ordinary people interested in economics.

Take the case of austerity. People have swallowed this idea because they just didn’t get to learn that you cannot treat the national economy like a household. Even at the family level, debt can be useful, if it is invested in education and health, but you can see why running debt for a household may be a problem. However, nations don’t work like households at all! Your spending is someone’s income, so it has a completely different dynamic at that level. So it’s very important to expose to these ideas, and I think that “ecnmy” is a useful initiative towards that end.

AS: Many prominent Left-wing economists, like Mark Blyth, Mark Weissman, Yanis Varoufakis and Joseph Stiglitz, have publicly spoken out against the policies of the Troika. What do you believe will be the future of the Eurozone?

HJC: Wow. That is a very tough question! In the end, the problem of the Eurozone is political. These kinds of problems that we are seeing today would not have happened if Germany had treated countries like Greece as they had the former provinces of East Germany. All of these problems happened because they had this monetary integration before they had a proper political union.

For example, in the United States, there are massive fiscal transfers through the political system. For example, if a given state in the United States loses $1 of income , it’ll tend to get around 50 cents back through fiscal transfers from the Federal government. In the Eurozone it is more like 5 cents.

While I’m not an expert, my personal guess is at one point they’ll have to make a two-tiered system. It would be politically embarrassing to abolish the euro, so they’ll have to find other ways to subsidize the weaker regions. The negative scenario is a continuity of the current policy, ultimately leading to its dissolution.

AS: What do you make of the rise of Right-wing populism in the West? Are the problems and anxieties powering it more a matter of economics or identity?

HJC: It’s a toxic mixture of both. A lot of people in the working classes in the west have been struggling through a lot, and this has certainly been the basis for a lot of these movements. But there is also a question of identity. A big mistake of European Social Democracy is that they assume issues of identity don’t exist. When people say “oh, we can’t talk about identity. Only neo-Nazis talk about identity” it tends to ignore a lot of very difficult questions.

Worse still, a lot of class identity that used to exist in Europe is gone. There is a lack of social identity. And into this vacuum has come a lot of these nasty and reactionary movements.

AS: What is your opinion on the outcome of the 2017 General Election?

HJC: It’s very interesting! What has happened is that a huge section of the British electorate has rejected this economic model of the last few decades. While many rightly say it was also about Brexit, I think it was a lot more than that. It’s a rejection of the nasty, petty politics of the last few decades. Theresa May has done a great thing for the world in calling this election. It has let a lot of dissatisfied people channel their anger in a more productive way. Its no longer just about immigrants, it’s about the welfare state, and about the minimum wage, and so much more. I hope it becomes the beginning of a long overdue change in British politics.

AS: What do you see as the biggest challenges facing the economies of the 21st century?

HJC: Climate change! I mean, can we afford to get that wrong? I’m not a techno-fantasy type, it’s going to take real work. But at the same time, I think a lot of environmentalists ignore the power of technology that is latent in our society, and a lot of what technology is already doing to help tackle that issue. It is already happening, so even if we prevent a disaster scenario, we still need to adapt to the changed world.

The solutions might differ, but the main challenge is pretty clear.

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