Becoming Economic Citizens     (Part 2)

Ha-Joon Chang is a leading development economist and critic of neoliberalism. His 2002 book Kicking Away the Ladder showed that today’s rich countries became rich by following precisely the policies they now deny to developing countries – his follow-up Bad Samaritans prompted Financial Times chief economics commentator Martin Wolf to describe him, somewhat misleadingly, as “the world’s most effective critic of globalization”. His most recent book, 23 Things They Don’t Tell You About Capitalism, takes aim at prevailing economic myths, among them the idea that ‘free markets’ exist and the equation, often made by the current British government, of “fairness” with “social mobility”. Underlying the many essays that comprise the book is Chang’s insistence that economic decisions are political ones too, and should be discussed on those terms.

I met up with Prof. Chang last week for a wide-ranging interview. The first part of the interview can be read here. In the second part, below, Chang talks about the government’s ‘austerity’ measures, the limitations of meritocratic ‘fairness’, and how people can become active economic citizens.

Turning to more recent political and economic events, you have been very critical of the British government’s austerity measures, accusing politicians of using the “deficit hoax” to “roll back the welfare state”. They would presumably respond, at any rate in their more candid moments, that even though the cuts will harm people in the short term, 1) they’re necessary to restore ‘stability’ and ‘confidence’ to the economy by cutting the deficit, and 2) in the long-term everyone will benefit from measures to improve competitiveness and the direction of resources to where they will be most productive. Where does this argument go wrong?

On the first point, this belief that the bond market actually wants these massive cuts is simply wrong. Actually, when countries like Spain and Ireland announced these massive budget cuts, their bond rating got downgraded, because the bond rating agencies know that if you cut your deficit too quickly, your economy is going to go down. So it’s not clear that that the government’s ‘austerity’ policies are actually what the bond market wants. There are conflicting signals, of course – some people say yes, you have to do that – but there are enough signals showing that even people in the bond market know that an excessively rapid spending cuts can be harmful for the economy. So have they really engaged with these people to figure out exactly what they think? I don’t think so.

Secondly, even if you agree that budget deficits have to be cut, these people are proposing to cut it by calendar dates, which doesn’t make any economic sense. If you want to cut it in a way that makes economic sense you have to come up with some economically meaningful trigger indicators – so you will say, ‘when growth accelerates by this much, we will cut the budget by this much’, ‘if inflation goes above this we probably need to accelerate the cuts because that’s probably a sign that we have released excess liquidity’, and so on. Which economic theory says that the budget deficit should be eliminated in four years? It doesn’t make any sense.

And on top of that, these people are trying to sneak in welfare state reform on the coat-tail of spending cuts. If they are genuinely committed to the welfare state they should say something like, ‘we have to cut spending by this much to get rid of the deficit, so we will temporarily cut child benefit, university subsidies, or whatever, but we will restore it when the economic condition improves’. Instead they are cutting entitlements, they are restructuring the welfare state. These two things shouldn’t be mixed. I don’t believe so, but there might be a case for massive restructuring of the welfare state but even if there was a need for massive restructuring, you have to properly debate it. You cannot just tag it on to short-term cyclical management. So the whole thing is basically a) economically illiterate, and b) based on false arguments. The bond market wants us to cut? No, actually, the bond market doesn’t want you to cut in that kind of massive way, as seen in the experience of countries like Spain and Ireland. And if you want to reform the welfare state, reform it properly, with a proper debate; don’t tag it on to this short-term deficit management issue.

And the second argument?

That argument might make some sense if you are in a full employment situation. I don’t believe so, but one could argue that public spending has necessarily lower productivity than private spending, so if you are in a full employment situation one more pound of public spending means one less pound of private spending, and if you happen to believe that that £1 will bring about less return than the other £1, then yes, you can make that kind of argument. But now it’s a situation where, basically, we are suffering from deficient private sector demand. In order to be talking about ‘crowding out’ the place first has to be crowded! Right now we’re talking about a room that is half-empty. And because you are letting three more people in the half-empty room, you are saying that this will push out some people who are already in the room? No. So this is starting with a false diagnosis of the situation.

Secondly, even if the diagnosis were true, there is lots of debate over whether, say, public spending and private spending may be complimentary. So if you cut public spending in certain areas like infrastructure or research & development, it might actually adversely affect private sector productivity, even when the equivalent amount of spending is made by the private sector, because they go to the wrong activities. Moreover it is debateable whether public spending necessarily has lower productivity than private sector spending of equivalent amount. I’m not saying that it necessarily does have higher or equivalent return, but it’s an empirical question.

Recently Cambridge students occupied the university’s administrative headquarters for nine days. Are you sympathetic in general to the student protests against the government’s proposed reforms to higher and further education?

Yes. I don’t want to go into one direction too much – I’m not of the view that university education has to be entirely paid for by the general public. There are arguments for it and against it. But once again, what I really cannot take is that this is once again a classic example of making long-term permanent cuts on the excuse that you have to deal with a temporary short-fall in your budget. It doesn’t make sense. You could even say that, ‘given our growth projections the university budget has to be cut by x% in the next three years but when the economy recovers we will restore it’, but that’s not what they’re not doing. Secondly, even if you think that people who go to university should bear the bulk of the financial burden because they are going to get the higher earnings in the future and so on, even if you think that, the reforms have to be made with a proper debate. You can’t just set up one commission, they make a recommendation and then you just legislate it. That way of doing business is completely wrong. Thirdly, we should debate whether, even if it is right to raise tuition fee levels, it’s right to raise it by three times in one go. And we should think about the balance between richer and poorer universities, and so on. There are all sorts of details that need to be worked out. You cannot ram this kind of radical change down the country’s throat without proper discussion.

It seems to me that the Browne Review was based, in general, on the idea that introducing markets or quasi-markets to public services will inevitably drive down costs, improve quality and expand consumer choice – i.e. the argument used to support privatisation more generally. Does the history of privatisation so far support these claims?

Look at the state of railways in this country – I rest my case. Privatisation has a very mixed record, to say the least. For certain things, privatisation is usually a bad idea. For other things, it might be a good idea, in general. But for things like railways or energy or education, it tends to be more bad than good. Once again, to make a definitive judgement you actually have to look at particular cases, because each country has a different education system, they have different ownership structures, different institutions, different funding methods, different status attached to university graduates – for example, as I say in the book, Switzerland has managed to maintain one of the highest standards of living in the world without sending very many people to universities. Their university enrolment ratio has historically been less than half the OECD average. So to make a definitive judgement you really need to look at these details. But as a general thing, you don’t have to do a thought experiment. If you go to some Latin American countries – Argentina, Chile, etc. – they have recently allowed lots of private universities to spring up, and basically, many of them are just money-making institutions not interested in education itself. Some, very well-endowed ones may attract the best students and therefore achieve the best outcomes, but most of them just become a factory for degrees. So again, I’m not saying that universities necessarily should be run in the way they are currently run in this country, but if you want to change the university system in that kind of a serious way – I mean, I can’t say I’ve actually read the Browne Review itself, I’ve only read newspaper reports about it, but I don’t think they’ve really thought through these things. What is the function of education in the society? What is the function of higher education in society? What does it mean actually to teach people? I mean, for example, it’s very easy to raise university ‘productivity’ if you just triple the class sizes. But is that the kind of teaching we want?

The government talks a lot about ‘fairness’, by which it generally means meritocratic ‘equality of opportunity’. In your book you take issue with this argument – can you briefly explain your objection?

Let’s start with a relatively extreme example. Introducing free primary school education in very poor countries doesn’t ensure that the kids are going to have the same opportunities, because a lot of kids in very poor countries do not eat enough. When you haven’t had your breakfast, when you only have one or, if you’re lucky, two meals a day, then in the classroom you’re going to think about food all the time, and you won’t be able to concentrate on your studies. Maybe your brain development has already been stunted because you didn’t eat enough when you were very young. So in that kind of situation saying that, ‘ah, this kid only got 55% in Maths and this other one got 95%, and so the latter should go to a better school’ is a fundamentally misleading thing to say, because probably this kid with the 95% mark had enough nutrition, a private tutor and very insistent parents who had time to intervene in their child’s education, whereas the other kid didn’t eat enough and had parents who were so tired after 10-11 hours of hard physical labour that they couldn’t care less about their children’s homework. You cannot call that ‘equal’ competition. That would be like saying that ‘no-one had a head-start and so we have to accept the result of this race’ without mentioning the fact that one of the losing kids had only one leg and some others had sandbags on their legs.

So in order to ensure equality of opportunity, we need to ensure equality of outcome – in this case parental incomes – to some extent. I’m not in favour of absolute equalisation as you saw in Maoist China or today’s North Korea. That has huge negative impacts – if people put in extra effort to educate their children, if kids, despite all the adverse circumstances, work harder, they should be rewarded. So you cannot say that we’ll make everyone absolutely equal, unless you are willing to go to the brave new world of Aldous Huxley where every kid is a clone of every other kid, and everyone is raised by the same people in the same government-owned nursery. I mean, even individual families will have differences and you shouldn’t try to abolish that. So I’m not in favour of absolute equality in outcome, but you have to have some minimum conditions that are equalised if kids are going to compete. At least in poor countries you should give kids free school meals – yes, it’s only one meal a day, but at least that will help them a bit. On top of that you have to equalise parental income a bit by instituting minimum income programs and so on. Otherwise you don’t really have genuinely fair competition.

In the book you talk about ‘active economic citizenship’. What do you mean by this, and how should people go about attaining it?

I often joke that the most difficult job in the world is being an active citizen in a democratic society. In our daily work we have to worry about only one thing – you are either a plumber, or a chartered surveyor, or a chemist, etc. But if you are a citizen you have to have a view on everything: nuclear submarines, our relationship with Afghanistan, tuition fees, the alleged pension crisis, and so on. So a lot of people just think ‘bye-bye, I can’t be bothered to worry about all those things’. However, without the general public putting pressure on our political leaders they’ll never do things that benefit the general public. OK, they’ll do some things – I’m being too strong – because they need to get re-elected – but they’ll just do the minimum. So citizens should put pressure on their politicians. The way that some of the Liberal Democrat MPs have been coming out against the fee increase under enormous pressure from students in certain areas who voted them in is a great example of how pressure from citizens is important.

In order to become an active economic citizen you have to know something about the economy. As we discussed earlier, most people think economics is too difficult, too technical or too boring, but you have to know some things to have a view. My point in the book is that economics is actually a lot easier than you might think – 95% of economics is commonsense deliberately made complicated, and even the remaining 5% you can explain its basic logic, if not all the technical details, in plain language. So people have to learn about economics. They don’t need to learn a huge amount – you don’t need a degree in epidemiology to know that there should be hygiene standards in restaurants and food factories – but you have to know some basic facts. You have to know, for example, how the income of the top 1% in countries like Britain and the United States has increased so much compared to the other groups in the past 20-30 years; how despite apparently conquering the world has become more unstable because we are now experiencing more frequent and more violent financial crises; and so on. If you know some basic principles and basic facts you can actually make some quite robust judgements on a lot of things.

You don’t have to know all the ins and outs of derivative trading to demand that there should be tougher regulations on these derivative financial instruments; you just need to grasp the basic point that as a financial instrument becomes further and further away from the real, underlying economic activities, it is going to become more and more difficult to judge its quality, which means that it is going to become more and more likely to cause bubbles and crashes. These are very commonsensical things. To elaborate on that example: in the old days, when someone borrowed money from a bank, the bank owned at least part of that person’s house. End of story: if that guy is not paying back very well, the bank knows there is a problem and they sort it out – sometimes they repossess, but they know what is going on. Now these mortgage loans have been lumped into these instruments, they have been leveraged and derived, and now, basically, you’ve got a financial instrument which is made up of thousands of different mortgages, god knows where from, and there is no way anyone can monitor them properly. So when you have products like that, there is clearly a greater chance of something going wrong. So we can, without necessarily knowing how these instruments are made, what kind of instruments exist, and what mathematical formulae are used in order to build them, still demand that the further and further away you move from the underlying, real activity – like someone having a job and using the expected income from that job to buy a house – the stronger the regulation required.

Finally, and on that note, could you recommend three contemporary economic writers – your good self excluded – to our readers?

It depends on what kind of things you’re interested in. Geoffrey Hodgson, who used to teach here [in Cambridge] and then went to the University of Hertfordshire as a research professor, is a tremendous, non-mainstream guy in terms of theoretical economics. Ben Fine, who used to be a famous Marxist economist, today does a lot of great theoretical work, not necessarily using a Marxist framework although he still does that, and also writes a lot of empirical stuff on industrial development in South Africa and things like that. In terms of issues surrounding the financial crisis, Joe Stiglitz, Paul Krugman and Martin Wolf are all very insightful.

About this article

Published on 15 December, 2010
By Ha-Joon Chang, Jamie Stern-Weiner