Ha-Joon Chang - Economics - The User's Guide

Given all this, economics seems to suffer from a serious case of megalomania – how can a subject that cannot even manage to explain its own area very well claim to explain (almost) everything?

Economics Is the Study of Rational Human Choice . . .

You may think I am being unfair. Aren’t all these books aimed at the mass market, where competition for readership is fierce, and therefore publishers and authors are tempted to hype things up? Surely, you would think, serious academic discourses would not make such a grand claim that the subject is about ‘everything’.

These titles are hyped up. But the point is that they are hyped up in a particular way. The hypes could have been something along the line of ‘how economics explains everything about the economy’, but they are instead along the lines of ‘how economics can explain not just the economy but everything else as well’.

The hypes are of this particular variety because of the way in which the currently dominant school of economics, that is, the so-called Neoclassical school, defines economics. The standard Neoclassical definition of economics, the variants of which are still used, is given in the 1932 book by Lionel Robbins, An Essay on the Nature and Significance of Economic Science . In the book, Robbins defined economics as ‘the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses’.

In this view, economics is defined by its theoretical approach, rather than its subject matter. Economics is a study of rational choice, that is, choice made on the basis of deliberate, systematic calculation of the maximum extent to which the ends can be met by using the inevitably scarce means. The subject matter of the calculation can be anything – marriage, having children, crime or drug addiction, as Gary Becker, the famous Chicago economist and the winner of 1992 Nobel Prize in Economics, has written about – and not just ‘economic’ issues, as non-economists would define them, such as jobs, money or international trade. When Becker titled his 1976 book The Economic Approach to Human Behaviour , he was really declaring without the hype that economics is about everything.

This trend of applying the so-called economic approach to everything, called by its critics ‘economics imperialism’, has reached its apex recently in books like Freakonomics . Little of Freakonomics is actually about economic issues as most people would define them. It talks about Japanese sumo wrestlers, American schoolteachers, Chicago drug gangs, participants in the TV quiz show The Weakest Link , real estate agents and the Ku Klux Klan.

Most people would think (and the authors also admit) that none of these people, except real estate agents and drug gangs, have anything to do with economics. But, from the point of view of most economists today, how Japanese sumo wrestlers collude to help each other out or how American schoolteachers fabricate their pupils’ marks to get better job assessments are as legitimate subjects of economics as whether Greece should stay in the Eurozone, how Samsung and Apple fight it out in the smartphone market or how we can reduce youth unemployment in Spain (which is over 55 per cent at the time of writing). To those economists, those ‘economic’ issues do not have privileged status in economics, they are just some of many things (oh, I forgot, some of everything) that economics can explain, because they define their subject in terms of its theoretical approach, rather than its subject matter.

. . . or Is It the Study of the Economy?

An obvious alternative definition of economics, which I have been implying, is that it is the study of the economy. But what is the economy?

The economy is about money – or is it?

The most intuitive answer to most readers may be that the economy is anything to do with money – not having it, earning it, spending it, running out of it, saving it, borrowing it and repaying it. This is not quite right, but it is a good starting point for thinking about the economy – and economics.

Now, when we talk of the economy being about money, we are not really talking about physical money. Physical money – be it a banknote, a gold coin or the huge, virtually immovable stones that were used as money in some Pacific islands – is only a symbol. Moneyis a symbol of what others in your society owe you, or your claim on particular amounts of the society’s resources. [10] This is brilliantly explained by Felix Martin in his book Money: The Unauthorised Biography (London: The Bodley Head, 2013).

How money and other financial claims – such as company shares, derivatives and many complex financial products, which I will explain in later chapters – are created, sold and bought is one huge area of economics, called financial economics. These days, given the dominance of the financial industry in many countries, a lot of people equate economics with financial economics, but it is actually only a small part of economics.

Your money – or the claims you have over resources – may be generated in a number of different ways. And a lot of economics is (or should be) about those.

The most common way to get money is to have a job

The most common way to get money – unless you have been born into it – is to have a job (including being your own boss) and earn money from it. So, a lot of economics is about jobs. We can reflect on jobs from different perspectives.

Jobs can be understood from the point of view of the individual worker. Whether you get a job and how much you are paid for it depends on the skills you have and how many demands there are for them. You may get very high wages because you have very rare skills, like Cristiano Ronaldo, the football player. You may lose your job (or become unemployed) because someone invents a machine that can do what you do 100 times faster – as happened to Mr Bucket, Charlie’s father, a toothpaste cap-screwer, in the 2005 movie version of Roald Dahl’s Charlie and the Chocolate Factory . *5Or you have to accept lower wages or worse working conditions because your company is losing money thanks to cheaper imports from, say, China. And so on. So, in order to understand jobs even at the individual level, we need to know about skills, technological innovation and international trade.

Wages and working conditions are also deeply affected by ‘political’ decisions to change the very scope and the characteristics of the labour market (I have put ‘political’ in quotation marks, as in the end the boundary between economics and politics is blurry, but that is a topic for later – see Chapter 11). The accession of the Eastern European countries to the European Union has had huge impacts on the wages and behaviours of Western European workers, by suddenly expanding the supply of workers in their labour markets. The restriction on child labour in the late nineteenth century and early twentieth centuries had the opposite effect of shrinking the boundary of the labour market – suddenly a large proportion of the potential employees were shut out of the labour market. Regulations on working hours, working conditions and minimum wages are examples of less dramatic ‘political’ decisions that affect our jobs.

There are also a lot of transfers of money going on in the economy

In addition to holding down a job, you can get money through transfers– that is, by simply being given it. This can be either in the form of cash or ‘in kind’, that is, direct provision of particular goods (e.g., food) or services (e.g., primary education). Whether in cash or in kind, these transfers can be made in a number of different ways.