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

There are transfers made by ‘people you know’. Examples include parental support for children, people taking care of elderly family members, gifts from local community members, say, for your daughter’s wedding.

Then there is charitable giving, that is, transfer voluntarily made to strangers. People – sometimes individually sometimes collectively (e.g., through corporations or voluntary associations) – give to charities that help others.

In terms of its quantity, charitable giving is overshadowed in many multiples by transfers made through governments, which tax some people to subsidize others. So a lot of economics is naturally about these things – or the areas of economics known as public economics.

Even in very poor countries, there are some government schemes to give cash or goods in kind (e.g., free grains) to those who are in the worst positions (e.g., the aged, the disabled, the starving). But the richer societies, especially those in Europe, have transfer schemes that are much more comprehensive in scope and generous in amounts. This is known as the welfare stateand is based on progressive taxation(those who earn more paying proportionally larger shares of their incomes in taxes) and universal benefits(where everyone, not just the poorest or the disabled, is entitled to a minimum income and to basic services, such as health care and education).

Resources earned or transferred get consumed in goods or services

Once you gain access to resources, whether through jobs or transfers, you consume them. As physical beings, we need to consume some minimum amount of food, clothes, energy, housing, and other goodsto fulfil our basic needs. And then we consume other goods for ‘higher’ mental wants – books, musical instruments, exercise equipment, TV, computers and so on. We also buy and consume services– a bus ride, a haircut, a dinner at a restaurant or even a holiday abroad. [11] Many of these services also involve consumption of material things as well – for example, the food in a restaurant – but we are also purchasing the cooking and the serving services.

So a lot of economics is devoted to the study of consumption– how people allocate money between different types of goods and services, how they make choices between competing varieties of the same product, how they are manipulated and/or informed by advertisements, how companies spend money to build their ‘brand images’ and so on.

Ultimately goods and services have to be produced

In order to be consumed, these goods and services have to be produced in the first place – goods in farms and factories and services in offices and shops. This is the realm of production– an area of economics that has been rather neglected since the Neoclassical school, which puts emphasis on exchange and consumption, became dominant in the 1960s.

In standard economics textbooks, production appears as a ‘black box’, in which somehow quantities of labour(work by humans) and capital(machines and tools) are combined to produce the goods and services. There is little recognition that production is a lot more than combining some abstract quanta called labour and capital and involves getting many ‘nitty-gritty’ things right. And these are things that most readers may not normally have associated with economics, despite their crucial importance for the economy: how the factory is physically organized, how to control the workers or deal with trade unions, how to systematically improve the technologies used through research.

Most economists are very happy to leave the study of these things to ‘other people’ – engineers and business managers. But, when you think about it, production is the ultimate foundation of any economy. Indeed, the changes in the sphere of production usually have been the most powerful sources of social change. Our modern world has been made by the series of changes in technologies and institutions relating to the sphere of production that have been made since the Industrial Revolution. The economics profession, and the rest of us whose views of the economy are informed by it, need to pay far more attention to production than currently.

My belief is that economics should be defined not in terms of its methodology, or theoretical approach, but in terms of its subject matter, as is the case with all other disciplines. The subject matter of economics should be the economy – which involves money, work, technology, international trade, taxes and other things that have to do with the ways in which we produce goods and services, distribute the incomes generated in the process and consume the things thus produced – rather than ‘Life, the Universe and Everything’ (or ‘almost everything’), as many economists think.

Defining economics in this way makes this book unlike most other economics books in one fundamental way.

As they define economics in terms of its methodology, most economics books assume that there is only one right way of ‘doing economics’ – that is, the Neoclassical approach. The worst examples won’t even tell you that there are other schools of economics than the Neoclassical one.

By defining economics in terms of the subject matter, this book highlights the fact that there are many different ways of doing economics, each with its emphases, blind spots, strengths and weaknesses. After all, what we want from economics is the best possible explanation of various economic phenomena rather than a constant ‘proof’ that a particular economic theory can explain not just the economy but everything.

R. BACKHOUSE

The Puzzle of Modern Economics: Science or Ideology? (Cambridge: Cambridge University Press, 2012).

B. FINE AND D. MILONAKIS

From Economics Imperialism to Freakonomics: The Shifting Boundaries between Economics and the Other Social Sciences (London: Routledge, 2009).

What is the first ever thing written about in economics? Gold? Land? Banking? Or international trade?

The answer is the pin.

Not the one that you use for your credit cards. But that little metal thing that most of you do not use – that is, unless you have long hair and like to keep it tidy or make your own clothes.

The making of the pin is the subject of the very first chapter of what is commonly (albeit mistakenly) [12] Before Smith, there were other economists, like the economic thinkers of Renaissance Italy, the Physiocrats of France, and the ‘mercantilists’, some of whom I discuss in Chapter 4. considered to be the first economics book, namely, An Inquiry into the Nature and Causes of the Wealth of Nations , by Adam Smith (1723–90).

Smith starts his book by arguing that the ultimate source of increase in wealth lies in the increase in productivity through greater division of labour, which refers to the division of production processes into smaller, specialized parts. He argued that this increases productivity in three ways. First, by repeating the same one or two tasks, workers become good at what they do more quickly (‘practice makes perfect’). Second, by specializing, workers do not have to spend time moving – physically and mentally – between different tasks (reduction in ‘transition costs’). Last, but not least, a finer breakdown of the process makes each step easier to be automated and thus be performed at superhuman speed (mechanization).