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How to 'Use' Economics

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In my new book Economics: The User's Guide, I aim to show the reader how to think, not what to think, about the economy. There are a few important things to keep in mind when you are 'using' economics.

Cui bono?


Sometimes it is easy to see the political nature of an economic argument because it is based on questionable assumptions that blatantly favour certain groups. The trickle-down argument, for example, crucially depends on the assumption that, when given a bigger slice of national output, the rich will use it to increase investments - an assumption that has not been borne out by reality.

In other situations, an argument may favour certain people unintentionally. For example, the dominant Neoclassical school of economics uses the Pareto criterion to judge social improvement. It may seem not to favour anyone, as it says a change is a social improvement only when it makes some people better off without making anyone worse off and thus does not allow even a single person to be trampled on by the rest of society. Yet it implicitly favours those who benefit more from the status quo, as the criterion allows them to prevent any change to the status quo that hurts them.

Political and ethical judgments are present even in ostensibly value-free exercises, such as defining the boundaries of the market. Deciding what belongs in the domain of the market is an intensely political exercise. Once you can drag something (say, water) into the domain of the market, you can apply the 'one-dollar-one-vote' rule to decisions surrounding it, making it easier for the rich to influence the outcome.

Conversely, if you can take something (say, child labour) out of the domain of the market, it becomes impossible to influence its use with the power of money.

Saying that economics is a political argument does not mean that 'anything goes'. Some theories are better than others, depending on the situation at hand. But it does mean that you should never believe any economist who claims to offer 'scientific', value-free analysis.

Don't become a 'man with a hammer'

There isn't just one right way of 'doing' economics, despite what most economists tell you. Though the Neoclassical approach has been the dominant one in recent decades, there are at least nine different schools of economics, each with its strengths and weaknesses.

The economic reality is complex and cannot be fully analysed with just one theory. The various economic theories conceptualize basic economic units differently (e.g., individuals v. classes), focus on different things (e.g., macro-economy v. micro-economy), ask different questions (e.g., how to maximize the efficiency with which we use given resources v. how to increase our abilities to produce those resources in the long run) and try to answer them using different analytical tools (e.g., full rationality v. bounded rationality).

As the saying goes, 'he who has a hammer sees everything as a nail'. If you approach a problem from a particular theoretical point of view, you will end up asking only certain questions and answering them in particular ways. You might be lucky, and the problem you are facing might be a 'nail' for which your 'hammer' is the most appropriate tool. But, more often than not, you will need to have an array of tools available to you.

You are bound to have your favourite theory. There is nothing wrong with using one or two more than others - we all do. But please don't be a man (or a woman) with a hammer - still less someone unaware that there are other tools available. To extend the analogy, use a Swiss army knife instead, with different tools for different tasks.

The economy is much bigger than the market




The economy is much bigger than the market. We will not be able to build a good economy - nor a good society - unless we look at the vast expanse beyond the market.

This is an extract from Ha-Joon Chang's latest book, Economics: The User's Guide, which is available in stores now

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