Economics: the User’s Guide
Pelican, 528pp, £7.99
How to Speak Money
Faber & Faber, 304pp, £17.99
In 2008, while the Queen was at the LSE being schooled on the troubling situation that turned into a credit crisis, she asked the assembled professoriate: “Why did nobody notice it?” A number of reputable economists felt the need to send her a letter apologising for their lapse and stating that the reason was a “failure of collective imagination”. But although it was the first case to involve such a specific rebuke from the lady with her face on the money, it was far from the first instance of failed imagination – or collective misprognostication – involving the economics profession.
Repeated evaluations of the accuracy of economic forecasts hint at predictive powers reminiscent of the wrong day’s horoscope. And when it comes to growth strategies, any economist worth a PhD should be able to present competing theories supporting the advantages of openness or protection, the centrality of education and health, the prime role for investment in factories or infrastructure, and the overwhelming importance of civil rights or property rights. One might be left wondering: does economics have any real-world utility at all?
Given this, Economics: the User’s Guide, by the Cambridge University economist Ha-Joon Chang, and How to Speak Money, by the journalist and author John Lanchester, should provide some comfort to the lowly researcher hunched over his laptop, analysing the latest data from the Office for National Statistics. For all that they poke a stick at mainstream thinking in the subject, at least the authors prove that it matters.
Both books are based on the premise that if the general public knew more about finance and economics things might be better. Chang says there is no one right answer in economics, and so “we cannot leave it to experts alone”. For Lanchester, with most of us ignorant, “the money people didn’t have to explain what they were up to” before the Great Recession. He learned “to speak money” and he wants us to learn, too.
The authors take different approaches. Much of Lanchester’s book is taken up with an entertaining (if not fully reliable) dictionary of terms. I spent a happy and thought-provoking few hours reading the entries. But I am not sure, if you took the book as your teaching aid to the 2008 financial crisis, that you would learn all you needed to know. There isn’t an entry on, say, credit default swaps, though they played a central part in the 2008 drama. The “hot waitress index” (the theory that you find many more attractive women working as waitresses in a recession, because the jobs they do when the economy is good, such as fashion and luxury retail, get scarce) has a longer entry than the one on derivatives and is, as Lanchester suggests, “fanciful” at best.
The 12 chapters of Ha-Joon Chang’s book cover topics ranging from income, happiness and finance to inequality and international development. He writes with enough depth to provide insights for experts and enough breadth to reach the further shores of the discipline for the interested layman. Chang convincingly demonstrates that there are no certain laws of behaviour and that individuals (let alone societies) are too complex to be explained by simple models. He highlights the example of Singapore, one of east Asia’s most miraculous success stories, which has policies that frequently place it at the top of the “economic freedom” indices compiled by right-wing think tanks. At the same time, as Chang points out, 85 per cent of housing in Singapore is supplied by the government, which also owns a swath of big businesses that account for more than a fifth of the country’s GDP. Or look at China: it is a melange of Wild West capitalism and state control beyond the fevered imagining of even the most postmodern of economic theorists.
But despite that, and though economists disagree about a lot of things, a lot of economists also do agree about some things. And this very agreement indicates that their hubris and blind spots might matter less than Lanchester and Chang seem to think. The Chicago Booth survey of US economic experts finds that more than four out of five think that increased budget spending in 2008 helped reduce unemployment over the next two years, but only 5 per cent were convinced that the costs of the US stimulus programme outweighed its benefits. Only 5 per cent think having trillion-dollar banks is definitely good for the US. Not a single economist out of those surveyed said he or she disagreed with the idea that “freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment”. Almost nine out of ten think that more skilled immigration would be good for the economy and fewer than one in ten think that more unskilled immigration would definitely be bad.
Better regulating banks that are deemed too big to fail, and going for stimulus when the economy craters (because we didn’t regulate the banks properly), are ideas that most economists actively support – but, before the 2008 financial crisis, their opinions didn’t seem to matter very much. The immensely powerful lobbying efforts of the financial services industry stymied such responses. We created corporations that can be sued by minority shareholders if they do not focus on maximising shareholder value: a case of too much regulation. When we give those corporations the right to spend on political campaigns we should not be surprised if they lobby for a singular focus on (short-term) shareholder value rather than longer-term sustainable growth.
If economists had such great power over the world, wouldn’t the World Trade Organisation be a little less moribund, and the transatlantic and trans-Pacific trade deals a little less of a land-grab by people trying to preserve their intellectual monopolies? Chang notes that “there are very few free-market economists who advocate free immigration in the way they advocate free trade”. That is all too true, yet opening the world’s borders to unencumbered movement of people could more than double global GDP, compared to a gain of a few percentage points from removing the remaining barriers to trade. However, economists know that their power to influence the debate is minimal, and so they keep quiet.
Or take the neoliberal policies of the Washington consensus, pushed by the World Bank and the International Monetary Fund. The American economist William Easterly reviewed the evidence on the impact of loans from the Washington-based institutions that were meant to help balance budgets, introduce open exchange rates and support privatisation and competition. He found that while some macroeconomic policies led to marginal improvements, overall they appeared to have had almost no impact – positive, or negative.
It may be that we want economists – with their consensus desire to spend our way out of recession, reduce monopolies, rein in the banks and open our borders not just to goods but to people – to have more influence over politics. If such books as these two spark a greater interest in economics, as they should, I hope that will be one result.
Charles Kenny is a senior fellow at the Centre for Global Development and the author of “The Upside of Down: Why the Rise of the Rest Is Great for the West” (Basic Books, £17.99)