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

So, comparative in comparative advantage refers to comparison between the products that a country can potentially produce. The possibility that one country is more efficient than another in producing the same product is already reflected in the term advantage . For a more detailed exposition of the theory, see Chapter 3, ‘My Six Year Old Son Should Get a Job’, in my book Bad Samaritans .

The theory is named after Eli Heckscher and Bertil Ohlin, the two Swedish economists who developed the idea, and Paul Samuelson, the American economist (and the author of the most famous economics textbook in the twentieth century), who perfected it.

The elevation of the individual by the Neoclassical school goes beyond the labelling of economic actors as individuals, rather than classes. Most members of the school believe in methodological individualismas well – namely, the view that a scientific explanation of any collective entity, such as the economy, should be based on its decomposition to the smallest possible unit – that is, the individual.

Another way to put it is to say that a society is in a state of Pareto optimality if no one can be made better off without making someone worse off.

Despite the fact that it was going to hurt US workers in industries like automobile and textiles, many Neoclassical economists advocated the NAFTA, the free-trade agreement with Mexico and Canada, on the ground that the national gains from increased trade are more than enough to compensate those (and other) losers. Unfortunately, the losers have not been fully compensated, so the outcome could not be called a Pareto improvement.

In Akerlof’s classic example of ‘the market for lemons’, given the difficulty of ascertaining the quality of used cars before purchase, prospective buyers will not be willing to stump up good money even for what is a truly good second-hand car. Given this, owners of good used cars will shun the market, lowering the average quality of cars further, leading, in the extreme case, to the disappearance of the market itself. See G. Akerlof, ‘The market for “lemons”: quality uncertainty and the market mechanism’, Quarterly Journal of Economics , vol. 84, no. 4 (1970).

The remaining two volumes were edited by Engels and published after Marx’s death.

Before the Russian Revolution, the leading Marxist economists were Karl Kautsky (1854–1938), Rosa Luxemburg (1871–1919) and Rudolf Hilferding (1877–1941). The key Soviet Marxist theorists were Vladimir Lenin (1870–1924), Yevgeni Preobrazhensky (1886–1937) and Nikolai Bukharin (1888–1938).

In some formulations, communism is divided into two phases. The first phase is also called socialism and is run through central planning. The second, or ‘higher’, phase is called ‘pure communism’, in which the state will have withered away. In this book, I use the terms communism and socialism interchangeably.

A few, like Jean-Baptiste Colbert (Louis XIV ’s finance minister between 1665 and 1683), are still remembered for their policies. Most are forgotten altogether. Some, such as Henry VII and Robert Walpole, are still remembered but not for their economic policies.

For this history, see my books Kicking Away the Ladder (more academic and detailed) and Bad Samaritans (less detailed and more user-friendly).

Typically recommended were: promotion of new industries through tariffs, subsidies and preferential treatment in government procurement (that is, government buying things from the private sector); encouragement of domestic processing of raw materials through export taxes on raw materials or through a ban on their exports; discouragement of the imports of luxury goods through tariffs or prohibitions so that more resources can be channelled into investments; export promotion through marketing support and quality control; support for technological improvements through government-granted monopoly, patents and government-subsidized recruitment of skilled workers from economically more advanced countries; and, last but not least, public investment in infrastructure.

List started out as a free-trader, promoting the idea of a free-trade agreement between various German states, which was realized in 1834 as Zollverein (literally the customs union). However, during his political exile in the US during the 1820s, he came across Hamilton’s ideas, through the works of Daniel Raymond and Henry Carey, and came to accept that free trade may be good between countries at similar levels of development (e.g., the German states then) but not so between economically more advanced countries, such as Britain, and backward countries, such as Germany and the US then. It may be added that, like most Europeans at the time, List was a racist and explicitly argued that his theory applied only to ‘temperate’ countries.

The early leaders of the American Economic Association, John Bates Clark (1847–1938) and Richard Ely (1854–1943) studied under economists of the German Historical school, such as Wilhelm Roscher (1817–94) and Karl Knies (1821–98).

This contrasts with the predominantly (although not exclusively) one-way causality supposed by the Marxist school, from material production system – or the base – to institutions – or the superstructure.

Important names include, in alphabetical order, Alice Amsden, Martin Fransman, Jorge Katz, Sanjaya Lall and Larry Westphal.

On this debate, see D. Lavoie, Rivalry and Central Planning: The Socialist Calculation Debate Reconsidered (Cambridge: Cambridge University Press, 1985).

Herbert Simon, the founder of the Behaviouralist school, has pointed out that modern capitalism is better described as an ‘organization’ economy than as a market economy. These days, most economic actions happen within organizations – predominantly firms but also governments and other organizations – rather than through markets. See Chapter 5 for further discussion.

The idea that ‘permits to pollute’ can be bought and sold may still sound alien to many non-economists. But the market for these permits is already a thriving one, with an estimated value of trade in 2007 at $64 billion.

The prefix ‘neo’ is debatable. The differences between the two are much less than those between, for example, the Classical school and the Neoclassical school.

They are named, ‘Marx the Prophet’, ‘Marx the Economist’, ‘Marx the Sociologist’ and ‘Marx the Teacher’.

Leading members of the school, which is sometimes called evolutionary economics, are, in alphabetical order, Mario Cimoli, Giovanni Dosi, the late Christopher Freeman, Bengt-Åke Lundvall, Richard Nelson and Sidney Winter.

Over time – in his grandchildren’s generation, as Keynes put in a famous article titled ‘Economic Possibilities for Our Grandchildren’ (though he himself had no children) – living standards in countries like Britain will have risen sufficiently that not much new investment would be needed. At such a point, he envisaged, the focus of policy should be switched to reducing working hours and increasing consumption, mainly by redistributing income to poorer groups, which spend larger proportions of their incomes than the richer ones.