Category Archives: Ha-Joon Chang

In (further) defence of the Austrians

ludwig-von-mises

The original freakonomist

Steve Horwitz and B.K. Marcus have written a pretty decent rebuttal of a notably poor article by Janek Wasserman about the Austrian school of economics in its modern day incarnation. But I think there’s something more to be said in the Austrian’s defence.

When you study economics what is it that you’re studying? As Israel Kirzner explained,

(L.M.) Fraser has classified definitions of economics into Type A definitions and Type B definitions. Type A definitions consider economics as investigating a particular department of affairs, while Type B definitions see it as concerned with a particular aspect of affairs in general. The specific department singled out by Type A definitions has usually been wealth or material welfare. The aspect referred to in Type B definitions is the constraint that social phenomena uniformly reveal in the necessity to reconcile numerous conflicting ends under the shadow of an inescapable scarcity of means”

The argument as to which Type is appropriate is far from settled. Ha-Joon Chang in his recent book makes a pretty unequivocal case for a Type A definition of the scope of economics. To him, ‘economics’ is something you step into when you leave your house for work in the morning, and something you step out of when you get home, hug your partner, and feed the cat the in the evening.

But, as Kirzner notes, “During the twentieth century…a transition from Type A to Type B definitions has been vigorously carried forward”. Mostly thanks to the late Gary Becker, economic notions of choice and incentives were applied to an increasing array of hitherto non-economic phenomena. Becker applied economics to families and criminals and, while some may have griped about the ‘imperialism in the social sciences‘, bestselling books now argue that economics explains everything from what makes a perfect parent and why milk cartons and soft drinks cans are the shapes they are, to how racial segregation in housing can arise.

The Austrians were at these new frontiers in economics before most. One of the Austrian school’s great works is Ludwig von Mises’ Human Action. It was a vast treatise at a time when such had been denounced by Keynes. Compared to previous works, with names like The Principles of Political Economy and Taxation (Ricardo), Principles of Political Economy (Mill), The Theory of Political Economy (Jevons) or, again, Principles of Economics (Marshall), Mises deliberately took as his field of study Human Action in its entirety. “Until the late nineteenth century political economy remained a science of the “economic” aspects of human action, a theory of wealth and selfishness” Mises wrote in 1949

“It dealt with human action only to the extent that it is actuated by what was very unsatisfactorily described as the profit motive, and it asserted that there is in addition other human action whose treatment is the task of other disciplines. The transformation of thought which the classical economists had initiated was brought to its consummation only by modern subjectivist economics, which converted the theory of market prices into a general theory of human choice.

…The general theory of choice and preference goes far beyond the horizon which encompassed the scope of economic problems as circumscribed by the economists from Cantillon, Hume, and Adam Smith down to John Stuart Mill*. It is much more than merely a theory of the “economic side” of human endeavors and of man’s striving for commodities and an improvement in his material well-being. It is the science of every kind of human action. Choosing determines all human decisions.”

Modern day armchair economists, undercover economists, economic naturalists, freakonomists and their Type B students would agree.  As Horwitz and Marcus point out, Austrian economics was not ‘made in America’, but a substantial part of the most cutting edge modern economics was made in Austria.

* You might add Chang to this list

EDIT – This post was picked up by the people at the Foundation of Economic Education

Economics – orthodox and heterodox

Any old iron

In 2008 as The Great Moderation came to an end, Queen Elizabeth II asked Mervyn King “Why did no-one see this coming?” Her Majesty had clearly not read either Irrational Exuberance by recent Nobel laureate Robert Shiller, or Crash Proof by Peter Schiff (probably not a Nobel candidate). If she had she would have realised that, in fact, at least two economists, albeit with very different approaches, did see this coming. There were warnings, but many chose to ignore them. But Her Majesty was on to something, the belief that the crash had caught economists napping became quite widespread.

This dissatisfaction with the orthodox macroeconomics practiced by policymakers and taught in universities on both sides of the Atlantic has sparked an increased interest in heterodox economics, such as inspired Manchester University’s Post-Crash Economics Society which declares “The world has changed, the syllabus hasn’t”. There is much to commend this trend – much orthodox macroeconomics is mathematically overelaborate bunk. But what exactly is the orthodox we should be shunning and the heterodox we should be embracing?

According to the Guardian, one of the economists backing the efforts of students like those in Manchester is Cambridge University’s Ha-Joon Chang who says “Students are not even prepared for the commercial world. Few [students] know what is going on in China and how it influences the global economic situation. Even worse, I’ve met American students who have never heard of Keynes.”

Really? I did my economics degree at Birkbeck College between 2007-2011. One of my modules was Macroeconomic Theory and Policy and the course text was 2007’s Macroeconomics by N. Gregory Mankiw and Mark P. Taylor. It contains eleven index entries under ‘Keynes, John Maynard’  (‘consumption function’, ‘economic theory’, ‘gold standard’, ‘inflation’, ‘inflation as taxation’, ‘interest rate determination’, ‘investments’, ‘IS curve’, ‘IS-LM model’, ‘real wages, cyclical behaviour of’, and ‘stock market speculation’) and a further nine under ‘Keynesian Cross’ (‘adjustments’, ‘decrease in taxes’, ‘dwindling in popularity of’, ‘economy in equilibrium’, ‘government purchases’, ‘planned expenditure’, ‘policy shifts and’, and ‘taxes’). In another module, Intermediate Macroeconomics, the course text was 2007’s Macroeconomics by Stephen Williamson. Solidly in the Real Business Cycle tradition even this book contains index references to ‘Keynesian business cycle theory’ (‘labor market in a sticky wage model’), eleven references under ‘Keynesian coordination failure model’,  and one each for ‘Keynesian transmission mechanism for monetary policy’, and ‘Keynesian unemployment’.

Besides, the point of university is that you do much of the study off your own bat. At the end of my first year I had got so fed up reading textbooks telling you what was in The General Theory that I went and read it myself. Quite honestly, it is difficult to believe that Chang actually has met “American students who have never heard of Keynes” and if he did they would seem to be uninquisitive, unrepresentative idiots who a change of syllabus is unlikely to help.

In another Guardian article Mahim Husnain and Rikin Parekh of the Manchester society write that “in the education we receive as economics students, there is little stress on how a market could fail”. If this is true then the curriculum at Manchester University is very different to mine. In a module on Intermediate Microeconomics  one of the textbooks we used was 2003’s Microeconomics by Robert S. Pindyck and Daniel L. Rubinfeld, the fourth and final part of which was called ‘Information, Market Failure, and the role of the Government’. We also used Hal R. Varian’s 2006 text Intermediate Microeconomics which included entire chapters on supposed sources of market failure such as ‘Monopoly’ and ‘Oligopoly’, ‘Public Goods’, ‘Externalities’, and ‘Asymmetric Information’.

Much of the microeconomics taught at universities is, in fact, based on notions of market failure and what the government can apparently do to remedy them, so much so in fact, that Joseph Stiglitz, George Akerlof, and Michael Spence won the Nobel prize in 2001 for their work on the subject. If you haven’t come across it either your university is letting you down or you’re not paying attention in class.

Michael Joffe, professor of economics at Imperial College, London, says “many reformers (have) called for economics courses to embrace the teachings of Marx and Keynes”. But heterodox economics should not simply mean any old rubbish. Some of it, like Marx with the ludicrous Labour Theory of Value as the keystone of his system, is heterodox for a very good reason.  And the idea that Keynes is or was particularly neglected and that universities are teaching that markets can never fail is simply untrue; he is an integral part of the orthodox mainstream.

Economists should always be testing their theories against new ideas and to that extent the recent interest in different approaches is to be welcomed. But we should be wary of people trying to pass off the useless (Marx) or the thoroughly familiar (Keynes) as something fresh and challenging.

This article originally appeared at The Cobden Centre