Monday, December 2, 2013

Ha-Joon Chang in conversation with David Pilling

I count “Lunch with the FT” as amongst my favourite columns in the newspaper. Recently, FT columnist David Pilling interviewed and had lunch with Cambridge economist Ha-Joon Chang, author of 23 Things They Don’t Tell You About Capitalism and Bad Samaritans: The Guilty Secrets of Rich Nations and the Threat to Global Prosperity.
David Pilling
 
Ha-Joon Chang
You can read the full column here.

Some excerpts highlighting Ha-Joon Chang’s views below (bold emphasis added by me):

On the profession:
“The predominant view in the profession is that there’s one particular way of doing economics. It’s basically to set up some mathematical model, the more complicated the better,” he says, advocating instead what he calls a multidisciplinary approach. “In a biology department, you have people doing all sorts of different things. So some do DNA analysis, others do anatomy, some people go and sit with gorillas in the forests of Burundi, and others do experiments with rats. But they are called biologists because biologists recognise that living organisms are complex things and you cannot understand them only at one level. So why can’t economists become like that? Yes, you do need people crunching numbers, but you also need people going to factories and doing surveys, you need people watching political changes to see what’s going on.”

On Freakonomics:
Doesn’t the success of Freakonomics (2005), written by Steven Levitt and Stephen Dubner, disprove his notion that economics is closed to new approaches? “They don’t get huge brownie points for writing for the general public because a lot of economists have a very dim view of what the general public can understand,” he says. “But the Freakonomics guys are accepted as part of the mainstream because they have this very particular view of human behaviour, which is ‘rational choice’. That is: ‘We are all selfish, we basically do our best to promote our self-interest and that choice is made in a rational way.’ ”“I don’t take that view,” he says, cramming in a piece of lamb before he continues. “Rational thinking is an important aspect of human nature, but we have imagination, we have ambition, we have irrational fear, we are swayed by other people, we get indoctrinated and we get influenced by advertising,” he says. “Even if we are actually rational, leaving it to the market may produce collectively irrational outcomes. So when a bubble develops it is rational for individuals to keep inflating the bubble, thinking that they can pull out at the last minute and make a lot of money. But collectively speaking…” His hands create a bomb blast above the cutlets.
On economic development:
Park Chung-hee had recently seized power in a military coup. Korea established a steel industry, a seemingly eccentric choice for a country without iron ore (it had to import it from Australia and Canada) or coking coal. Yet steel became a foundation of Korea’s industrial success. Chang believes that Park, though a dictator, made some smart choices and that the only countries to have prospered are those that ignored the siren call of free markets and comparative advantage – the idea that you stick to growing bananas if you’re a tropical island – and planned their escape from poverty.
Chang took those ideas with him to Cambridge in 1986, where he studied first for a masters and then a PhD on industrial policy. His first impression was how quiet England was. “In those days, everything closed at five o’clock and nothing was open on Sunday. Coming from Asia, it was like walking into a ghost town.” But the UK also had its charms: “I used to joke that I came to England – not to the US where most Koreans go – because I like Arthur Conan Doyle and Agatha Christie.”His studies consolidated his thinking. Countries, he argued, needed to develop their capabilities, just as a child’s potential is stretched in school. In 1955, for example, when General Motors alone was producing 3.5m cars, Japan had 11 or 12 manufacturers collectively producing 70,000. “From the short-term point of view, it was madness for Japan to try to develop an auto industry,” he says. “Except that the Japanese realised, ‘We will get nowhere if we stick to what we are already good at, like silk.’”But can’t the protection of infant industries go terribly wrong? In countries such as Argentina and India, closed economies led to lazy monopolies selling shoddy goods in the name of self-sufficiency. Chang agrees. Only those states that forced their entrepreneurs to compete internationally succeeded, he says. “In Bad Samaritans, I have this chapter called ‘My Six-Year Old Son Should Get a Job’. I’m trying to explain that the reason I don’t send this little guy to the labour market is because I believe that it pays, in the long run, for him to have an education rather than shining shoes and selling chewing gum. Protection is given with a view to eventually pushing your companies into the world market in the same way that you send your kids to school but [you] don’t subsidise them until they’re 45.”
On the importance of moral philosophy:
Finally, I ask whether he thinks economics is a moral pursuit. Chang’s starting point seems to be that economic policies can make the world better. “Moral dilemmas are unavoidable,” he says as I signal for the bill. “Don’t forget that, at least in this country, economics used to be a branch of moral philosophy. Adam Smith, Karl Marx, Joseph Schumpeter – they’re not just writing about economics, but about politics and culture and society and morality.” He drains his cup. “How has this wonderful subject we call economics become so narrow-minded? I find that really sad.”
The last paragraphs is of particular importance in my opinion. There is an assertion that economics, as it is practiced in most quarters, is value free and scientific. Despite unconvincing opinion pieces by the likes of Raj Chetty, it clearly is not. There is a literature on the methodological foundations of the discipline and a need to incorporate critical realism. But as a counterpoint, there will be dogged insistence from the high priests (like Larry Summers) that they have the insight and the answers (e.g. the necessity of asset bubbles). As we march ahead towards a combination or stagnation and asset euphoria we should ask why the policy prescriptions advocated in the past are simply palliatives and not the promised panacea.  

References:
Piling, David. "Lunch with the FT: Ha-Joon Chang."Financial Times, FT.com edition, sec. ft.com/life & arts, November 29, 2013. http://www.ft.com/intl/cms/s/2/27a2027e-5698-11e3-8cca-00144feabdc0.html