Thursday, 30 March 2017

Ha Joon Chang: Clueless and Important

One of the projects I had imagined for this year was titled "23 ways Ha Joon Chang is wrong about Capitalism". Monday's talk at Edinburgh University greatly reminded me of the reasons behind this project: Ha Joon Chang has gained rockstar status among many of my heterodox friends by making incoherent and unsubstantiated arguments that suit their political convictions, with nothing more than mistaken cherry-picked data behind them. In Monday's talk he spoke for almost two hours, making some very strange arguments leading up to how production needs to be at the center of developmental economics. Let me discuss some of the most eye-wateringly silly stuff.

In a way Chang reminds me of Paul Krugman: they both hold cult status in a certain niche of pop econ and they both use the same dirty tricks to get their points across. They talk, people listen, and logical consistency, scientific rigour or common sense all disappear out the window. I guess the difference is that Krugman has a well-read New York Times column and a Nobel Prize

Let me start with my go-to critique of various heterodox economists these days: the misuse of 'neoclassical' economics. The most ardent critic of some aspects of economics loves bundling his opponents into some shady-sounding term with awful connotations, completely clueless to its actual meanings. The ironic part is of course that heterodox economists tend to be slightly better than your average economist at understanding the history and development of economic thinking, although only very selectively. The historian of economic thought, David Colander, formally declared the death of 'Neoclassical' economics quite a while back, but like certain other confused ideas predominantly used to oppose some unclear description of what the critic currently wants to attack, it has thus persisted:
We all, me included, fall into the habit of calling modern economics neoclassical when we want to contrast modern mainstream economics with heterodox economics. When we like the alternative, the neoclassical term is often used as a slur, with our readers or listeners knowing what we mean. Of course, historians of thought are far better at avoiding this “slur” use than are others. The worst use, and the place one hears the term neoclassical most often, is in the discussions by lay people who object to some portion of modern economic thought. To them bad economics and neoclassical economics are synonymous terms.
 Most economists understand that
Economists today are not neoclassical according to any reasonable definition of the term. They are far more eclectic, and concerned with different issues than were the economists of the early 1900s, whom the term was originally designed to describe. If we don’t like modern economics, we should say so. but we should not take the easy road, implicitly condemning modern economics by the terminology we choose. (Colander 2000, 'The Death of Neoclassical Economics', p. 130)
Unsurprisingly, Chang decided to double down on this mistake. Not only did he intricately brand mainstream economics 'neoclassical', he also explicitly drew a link between that and another meaningless term commonly used to attack ideas one disapprove of: 'Neoliberal'. Armed not only with an incorrectly used term, but also a meaningless empty box of ideas, what could possible go wrong? Chang merged them together, and tried to describe the neoliberal dominance of development economics. Read that again. The last outpost of central planning within economic thinking is under "neoliberal dominance" and was aided to this position by neoclassical economics? No, no and no, professor. There are so many mistakes here that I could fill several books trying to refute them; the two terms are at least 50 years apart; the dominant economic thinking of the 1970s hardly brought neoliberal ideas (whatever they mean) to power, but political strategy did, sometimes taking selected economic ideas along for a ride; neoliberal ideas are not governing the development world. 

Let's do some more substantive criticism. Chang began his talk by trying to proxy "entrepreneurship" by the percentage of people who are self-employed. This, he argued, was conclusive evidence that our preconceptions about developing economies as lazy, unproductive and lacking in entrepreneurship is wrong. He conveniently ignored the fact that those statistics for developing countries are likely to be 1) residuals, 2) reflection of their poverty in the first place; not every curve is a straight line, and the fact that Benin and Bangladesh have self employment stats of 89% and 75% respectivelly, while Norway and France have high single-digit numbers is precisely the problem at hand: not enough capital and not enough scale  not a revelation of a long-lost entrepreneurial spirit. 

So he tried another route. Look at all these examples of innovative behaviour around the world: car pooling in Indonesia to get around the 3-people-per-car restriction in certain lanes of the crowded highways; the South Korean professional queue-waiters when travel to U.S. was still restricted; the South African car watcher, "protecting" the car from damage. These desperate people "have to invent non-jobs to make ends meet", indicating much entrepreneurship. Insofar that those examples of human ingenuity are true or representative, they also argue against Chang's main proposals in the area of development policies; notice how all of them are artificial regulations applied to the economy by governments? Moreover, after the lecture he argued for a complete ban of "complex financial products", with no consideration of the same ingenuity just presented  or indeed the general outcome of innovating around regulations. 

Let's move on to the standard post-keynesian position these days: re-industrialisation. Chang praised manufacturing production at least partly for its ability to rapidly expand productivity. That's a whole different section of critique, but let's pretend for now that it is sound. So he gave us a bunch of explanations and cherry-picked examples where services only got marginally more productive over time. Moreover, the few high-productivity services around allegedly need a strong manufacturing base, since they mainly sell to those sectors (and "cannot prosper without them"). An example close to Chang was a Cambridge-based manufacturing firm outsourcing to East Asia. There are at least two reasons for why this makes no sense even pretending that most of what he says is true; first, what difference does it make if all services remain in Britain and all manufacturing is abroad? Secondly, when he answers "but productivity growth!", that would presumably help those countries to catch-up with the West  ie, the ultimate wet dream of a development economist. Again, where's the problem?

Oh, and my favorite part. Building on his work in Kicking Away The Ladder he argues that the Western world only got rich by state interventions, export subsidies and protectionism, but in their hypocricy now try to impose free-market policies on poor countries that only benefit the West. Apart from seeing the world through Trump's glasses, he showed examples of companies and industrial policies around the world that at first seemed strange or unnatural before they finally turned out to be competitive, decades later. Governments shouldn't "pick winners", he argued, but "create them." Again, a million potential routes of criticism here: free-market policies don't only benefit the West; Governments have terrible track records at picking pretty much anything, let alone create entire sectors; but the most interesting dissonance: Chang accepts that the Ricardian theory of comparative advantage is sound, but only in the short run. In the long run, he argues, "anyone can produce anything": 
  1. Demonstrably not the case since resource allocation, social and economic institutions and everything else that differ across the globe makes that impossible, 
  2. the long run consists of a bunch of short runs, meaning that favouring some arbitrary sector today (departing from comparative advantage) imposes costs today of which we may only reap benefits way into the future (he gave us Nokia as an example whose cell-phone division didn't make a profit for 17 years)
  3. That cost-now-chance-of-benefits-later makes us all worse off up until that point. The extent to which entire nations want to impoverish themselves to maybe, possibly become successful in some far-off unknowable future is hardly ever a task for governments, under any ideological framework. 
Finally, some of the nonsensical stuff coming out of Chang:
  • The pound depreciated during the pre-GFC era by some 30%, but there was no boost to manufacturing sector, so our models must be wrong. I'm sure they're wrong, but since the pound hardly moved in the decade leading up to 2007, this is probably another of Changs many empirical and theoretical mistakes. 
  • Walt Rostow was a right-wing pundit, Paul Krugman and Joseph Stiglitz neoclassical economists. 
  • Human capital doesn't matter, only productive institutions and division of labour. 
  • Productivity increases don't happen at the individual level, but only inside firms. 
  • The World Bank's index on "Ease of Doing Business" is nonsense, and anyway only measures "secondary things". 
  • We need more humanist and non-material development (freedom, solidarity, equality, climate change), conveniently forgetting the earlier part of his talk where manufacturing and production was all that matters.
Over and over, he says dubious things and try to prove some nonsensical point with cherry-picked data, or else changing the metrics halfway through. The resemblance to Krugman is of course stunning. But not everything is bad (although his depiction of Austrian Economics was horrendous...): his emphasis of pluralism in economic thinking deserves some praise; he at least nominally embraces comparative advantage which, in a Trump world, is increasingly important; engaging with different ideas and providing other perspectives is very important for any intellectual discipline. Not to mention the many students his works, probably single-handedly, have drawn into the sphere of economics. For this, I thank him. 

In summary, I'm no longer surprised nobody takes Ha Joon Chang seriously even in development economics. Calling this corner of economics where central planning still hold sway a place of neoliberal dominance is absurd on so many levels. Mis-labelling a large chunk of economists shouldn't be too big of a deal, but when Paul Krugman and Joseph Stiglitz and Walt Rostow are all thrown together as "right-wing neoclassicals" the conversation has turned quite absurd. Chang really needs to shape up his game. And I'm looking forward to refute his work more thoroughly once he does. 

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