Economics – The User’s Guide

Economics - The User's Guide

Economics – The User’s Guide by Ha-Joon Chang

 

I first stumbled upon this book when I was looking around for a book that explains the different schools of economic thought. I’ve always been frustrated by how the history of economics is essentially not taught at all in college. And I still can’t keep my Keynes and Friedman and Austrian straight. Unfortunately, I couldn’t really find ANY book devoted to this purpose. I’d like to believe that, as a consultant, my Googling skills are at least competent. So I’m tempted to think that almost no one has really written a go-to piece for this. In retrospect, it’s not that surprising. Anyone who has the pedigree to write about all these schools would have to be very well versed in economics and established in the profession. And you probably can’t go far in academia unless you’re a strong proponent of one school (better to have both supporters and haters than neither). This is likely a case of hindsight bias, but the point is, I had a very hard time finding any resources until I read about Chang’s book here.

Chang claims that his book challenges people not to get trapped by what’s taught in college or reported in the media. I think he does a very good job of stepping back and looking at a very wide range of topics in economics and different ways of looking at each of those topics. He also makes a huge point that the mainstream theories now mostly belong to one school – Neoclassical – that has dominated for the past few decades. Ultimately, he says that economics is not a science and there’s no right answer. I agree.

1) Isaac Newton was the highest officer at the Royal Mint. By setting a mint ratio between gold and silver, he effectively put Britain on a gold standard in 1717.

Add to the list of Newton’s laws.

2) It’s estimated that 30-50% of international trade in manufactured goods is actually infra-firm trade.

This is one example of how large corporations, much more so than individuals (rational or not), drive the economy.

3) Household work is not included in GDP.

Not a surprising fact, but not something that I’ve thought about. Household work is estimated to make up 30% of GDP (not sure how great this estimate is, or how to measure this at all). But it does mean that work by women are underrepresented in the most prominent number in economics.

4) Different schools of thought vary in how they view the basic unit of the economy, how rational individuals are, how certain the world is, the relative importance of exchange/consumption/production, and policy recommendations.

The Neoclassical school – the current mainstream economic thought – is based on an economy made of selfish, rational individuals living in a certain world with calculated risk. Exchange and consumption are emphasized, and the school allows both free market and interventionism policies. This indeed sounds very much like all the economics classes I’ve taken. Take the utility function. Maximize based on consumption. Etc.

Contrast this with Keynesian, which emphasizes the class and the importance of fiscal policy. Or the Schumpeterian school, which focuses on production and technological innovation.

5) The ratio of financial assets to GDP in the US went from 400-500% in the 1950s-1970s to over 900% by the early 2000s.

It’s really tough to wrap your head around how large finance is. And this gives a point of reference. It’s really big. Doesn’t anything over 100% mean it’s technically created out of thin air? I’d need to verify that, but that’s a scary thought.

6) Between 2001-2010, the largest US companies distributed 94% of their profits.

Yet another number that I had no idea about before. I know companies paid out dividends, but 94% is huge. I’m guessing that this has come down as companies have trended towards hoarding cash lately.

7) The Kuznets curve says that inequality rises then falls through economic development.

This book probably doesn’t do the theory justice, but this sounds like a totally made up theory and is a perfect example of how certain theories come about as things happen. These theories explain the recent past extremely well. Then some shock happens and the world functions completely different and the theory is totally useless.

8) 1 in 5 people today live on under $1.25 a day. 

Every problem I have is a first world problem. And also true of everyone I know.

9) The call for depoliticization of the economy in a democracy results in an anti-democratic effort that gives more power to the people with money.

Yes. I don’t know how people keep saying you should take politics out of the economy. That doesn’t make any sense. That’s like saying take the beef out of steak. Chang makes two very great points on this topic. One – Economics used to be called political economy (which is what I studied in Oxford). Two – Democracy is one-person-one-vote. Free market is one-dollar-one-vote. As a follow up, democracy and free market don’t come hand in hand. Just because that seems to be true in the U.S. does not mean that’s how it works.

10) The term “banana republic” originated from countries that were poor dictatorships that got taken advantage of by large corporations like the United Fruit Company. An example is Honduras.

This makes me a little uneasy about wearing BR stuff. Knowing this now, why did the founders name their clothing store Banana Republic? A quick Google search suggests it has do with its safari-themed beginnings. Ok.

 

An expert is someone who doesn’t want to learn anything. Instead of listening to experts asserting their own beliefs about a topic that has no definitive answers, go out and find the answer for yourself.

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