"Kicking Away the Ladder: How the Economic and Intellectual Histories of Capitalism Have Been Re-Written to Justify Neo-Liberal Capitalism"

January 9, 2011 7:13 PM

"Contrary to the conventional wisdom, the historical fact is that the rich countries did not develop on the basis of the policies and the institutions that they now recommend ..."

Ha-Joon Chang is a Cambidge-educated "heterodox" economist with interesting things to say about what works for developing (and developed) countries. Among his ideological predecessors he claims the little-known, yet highly-influential, Friedrich List and America's very own Alexander Hamilton, whose infant industry argument underpins much of his work on economic development.

posted by edguardo (77 comments total)

Well, of course not. We got rich on slavery and genocide and the general pillaging of a few continents. But that was before we realized it was, um, bad. And wrong. Really really wrong. So don't do it. Even though, you know, it worked out pretty well for us. But seriously no, you can't do that.
posted by Kadin2048 at 7:20 PM on January 9, 2011 [45 favorites]

what Kadin2048 said. Economic historians are all very aware of this, but no one listens to us. (Are you reading this, Planet Money people? I love your explanations of the financial sector, but your history of economic development is often wrong).
posted by jb at 7:22 PM on January 9, 2011 [4 favorites]

"He who controls the present, controls the past. He who controls the past, controls the future."
posted by Pope Guilty at 7:25 PM on January 9, 2011 [2 favorites]

Oh, and I should mention: the name of the hosting site is Francophone in origin. It is not meant to be derogatory, and I believe they've changed it in the meantime to the "real world economics review".
posted by edguardo at 7:28 PM on January 9, 2011

I would vote for some strong protectionist policies against our own corporations.

It would work like this: If you are an American concern that makes products offshore that you then sell in the American market - you will pay an import tariff and a punitive tax.

We won't tell you you can't do it - that would be un-American and anti-free-market. But we can make you think twice of the value of keeping things in-house.
posted by Benny Andajetz at 7:30 PM on January 9, 2011 [11 favorites]

I suppose it depends on what's now being recommended, but it's not a new observation that some "success stories" involved a great deal of government intervention and protectionism to build industry and infrastructure, which doesn't really jell with the Washington Consensus. But I should probably RTFA, sorry
posted by Hoopo at 7:30 PM on January 9, 2011

We got rich on slavery and genocide and the general pillaging of a few continents. But that was before we realized it was, um, bad. And wrong

Just to clarify, Chang is writing about the tendency for developed countries to recommend economic liberalization to developing countries despite not using that approach when at a similar level of development. It is not necessarily the attempt to diminish or ignore the crimes of the past. For Chang it's a failure to understand economic history, not an attempt to gloss over slavery.
posted by Adam_S at 7:30 PM on January 9, 2011 [13 favorites]

Actually one place the US did allow the sort of development Prof. Chang espouses was S. Korea, precisely because there was a political benefit to it.

(my only problem with this post is that the same logic is also applied to by opponents to global warming agreements)
posted by JPD at 7:33 PM on January 9, 2011

Also heterodox economist? why does the left like to marginalize itself.
posted by JPD at 7:37 PM on January 9, 2011

Criticising the British preaching of free trade to his country, Ulysses Grant, the Civil War hero and the US President between 1868-1876, retorted that “within 200 years, when America has gotten out of protection all that it can offer, it too will adopt free trade”.

I'm having a hard time coming up with a source for that quote before 1967. This guy too.
posted by bobo123 at 7:41 PM on January 9, 2011 [3 favorites]

Also heterodox economist? why does the left like to marginalize itself.

Heterodox economic schools of thought are not exclusively leftist.
posted by jedicus at 7:43 PM on January 9, 2011

Heterodox economic schools of thought are not exclusively leftist.

true, true, but when you see guys like Krugman, Stiglitz, and this guy - all of whom are from the left, and do things that were the very definition of orthodoxy 5-10 years ago - start to refer to themselves as heterodox then there is a bad trend a foot.
posted by JPD at 7:47 PM on January 9, 2011 [1 favorite]

Incomplete FPP!
The guy has just put out a great new book, 23 Things They Don't Tell You About Capitalism.

This follows on from Bad Samaritans; The Myth of Free Trade and the Secret History of Capitalism a couple years back, and the earlier Kicking Away the Ladder from 2002, of which the FPP link is just an extremely brief summary.

Basically all of these books should be absolutely required reading for anybody interested in the history of development or how real economies work (which by definition excludes 99% of academic economists).
posted by moorooka at 7:52 PM on January 9, 2011 [28 favorites]

Almost all of today’s rich countries used tariff protection and subsidies to develop their industries. Interestingly, Britain and the USA, the two countries that are supposed to have reached the summit of the world economy through their free-market, free-trade policy, are actually the ones that had most aggressively used protection and subsidies.

When I was doing research on the Philippine-American War, I noticed that it was filled with a very special brand of nationalist racism. One quote that really stuck out: Senator Allen of Nebraska did not want any Americans "in deadly competition with those who life on a bowl of rice and a rat a day." (Benevolent Assimilation, p 15)

The conservative racists who were against imperialism for pretty immoral reasons did understand that competing directly with poorer nations would lower the American standard of living, and it's amazing how neither party has kept this basic premise in their platform. The corporate desire for the wholesale destruction of governing bodies has usurped even the basic desire to help your fellow citizen maintain their lifestyle. Even on the side of people who believe in a minimum wage that is a joke.

Hell, one of the reasons we left the British Empire is because of the tariffs they instituted to protect English industry was damaging to industry in the colonies. Which brings us to Chomsky about 17 years ago:

One consequence of the globalization of the economy is the rise of new governing institutions to serve the interests of private transnational economic power. Another is the spread of the Third World social model, with islands of enormous privilege in a sea of misery and despair. A walk through any American city gives human form to the statistics on quality of life, distribution of wealth, poverty and employment, and other elements of the "Paradox of `92." Increasingly, production can be shifted to high-repression, low-wage areas and directed to privileged sectors in the global economy. Large parts of the population thus become superfluous for production and perhaps even as a market, unlike the days when Henry Ford realized that he could not sell cars unless his workers were paid enough to buy cars themselves.

So, here we are. The corporate body has been released of all chains, and is gobbling up government after government now that we have destroyed all restrictions of capital movement. It's causing mass hysteria in America, because all labor movements have been squarely crushed since the 80s, and though we're all working twice as much for less pay and practically zero benefits, the wealthy have seen enormous prosperity for the last thirty years.

The only way out of this hole is the same way we dug out of WWII: super high taxes for the wealthy funneled into government directed retooling of our infrastructure and massive investment in our manufacturing sector with tariffs to protect us from being undercut by slave labor that doesn't have to worry about dumping lead into drinking wells. Sadly, this would cut the rosy quarterly profit reports. Quarterly reports jealously protected by every American corporation, even the ones that give us our news.

The American worker simply isn't worth the drop in market cap.

And by the time it's too late... well, it will be too late. We'll be on the end of a very short leash held by multi-national corporations in tyranny-friendly Southeast Asia.
posted by notion at 7:57 PM on January 9, 2011 [56 favorites]

The only way out of this hole is the same way we dug out of WWII:

And, indeed, we have the perfect target in changing our world to a low carbon one. Sadly, the corporations agitating for this change are more than offset by the ones agitating against.
posted by smoke at 8:08 PM on January 9, 2011

Also heterodox economist? why does the left like to marginalize itself.

When orthodox economics is nothing but a mish-mash of fantasies and lies, anything that references reality in any significant way cannot fall under its banner.
posted by Pope Guilty at 8:11 PM on January 9, 2011 [7 favorites]

Yay Ha-Joon. He was my graduate advisor. Years later, we don't keep in touch as well as I like but I think the world of him. I've got lots of stories, but have one that I always like to share. At some point as a student, I had invited him to some discussion at my place. A number of students were there and it was potluck-y and lord if I remember what the occasion was or why I was hosting. Anyway, Ha-Joon came and brought a bottle of Korean Raspberry wine. Ardent supporter of infant-industry protection that he is, Ha-Joon loved the idea. While South Korea lacked the history of wine making that the rest of the world possessed and while it lacked great wine producing soil, it was not deterred. Instead, backed by strong industrial policy and protective tariffs, entrepreneurs were developing technology to reliably ferment wine to create a product that would one day compete on the world market.

Ha-Joon was thrilled with his country of origin's foresight but honestly the wine was undrinkable. I've since believed that one core tenant of a heterodox economy is regifting.
posted by allen.spaulding at 8:13 PM on January 9, 2011 [23 favorites]

ok, I'll bite. What the *hell* is "Post-Autistic Economics"?
posted by rebent at 9:04 PM on January 9, 2011

post-autistic economics is economic theory based not on an interior mental model, but on observation of the real world. For micro-economics, that means observing the behavior of people and tapping into psychology research (behavioural economics); for macro-economics, that often means historical research, because development is slow and you need to look to changes 100, 200, even 500 or 700 years in the past, to understand something like "how did England translation from being a majority agricultural economy in c1500 to a majority manufacturing economy in c1800"? or "what correlation does Market integration have with economic growth in development"?
posted by jb at 9:33 PM on January 9, 2011 [6 favorites]

Yay for protectionism and down with the IPO!
posted by Virtblue at 9:34 PM on January 9, 2011

@notion while I agree with most of what you're saying, "we'll be on the end of a very short leash held by multi-national corporations in tyranny-friendly Southeast Asia" is patently false. Southeast Asia is mostly democratic today (Philippines, Indonesia, Cambodia, Thailand, Bangladesh, India, Sri Lanka) with a handful or autocracies (Laos, China, Vietnam) and only one genuine tyranny I can think of: Burma/Myanmar.

As someone who's lived (taught, studied ,and researched) in this part of the world for awhile I'd ask you to check some of your assumptions about Asian "slave" labor. My experience shifts my views towards Kristof's "Where Sweatshops are a Dream" column from a few years back. What really did it for me was teaching a Globalization and Development course at a college in Shenzhen. Outside the window of my classroom mingong migrant workers were busily disassembling a mountain with bulldozers and dynamite (that shook our campus once or twice a day) to build a high tech industrial/research park. They lived about 40 to a room and likely worked 12 hour days seven days a week. Most were making south of $200 a month.

To my students, many of whom had migrated from the countryside with their parents (or at least knew well where their parents came from), there was nothing exploitative about the situation. It was an opportunity for the mingong. They understood what's difficult for Westerners to comprehend: people working in exploitive work situations are leaving something worse. However bad it looks they can (usually) pack up and go home. But they don't. There is always a choice (though I think negative vs positive conceptions of liberty need to be a bigger part of the debate). My students internalized human supply and demand in China to better understand their own prospects in the job market once they graduated. "China has too many people" is something you'll hear quite often. The Chinese I know take what they can from the market conditions (Reform and Opening) they're thankful for and don't leave much room for moralizing or wishing for a return to the Iron Rice Bowl. My own political and ethical leanings are troubled by this internalization/moralizing of market fundamentals - but I do my best not to impose my own values, which calling them "slaves" and expecting widespread social upheaval does.

If it bothers you, try to purchase from bigger companies like Wal-Mart that are ahead of the curve on Corporate Social Responsibility in Asia. Despite widespread misconceptions otherwise, Wal-Mart is doing all it can to demand their suppliers conform to existing environmental and labor laws (which are stronger than you'd imagine but often ignored) plus their own set of sustainability guidelines. One of my good friends is in the business of teaching suppliers how to conform and thus compete better for Wal-Mart bids.
posted by trinarian at 9:36 PM on January 9, 2011 [8 favorites]

point being (as the link says): the rich world today did not get rich due to free trade, and historians know this because they study history. And when economists study history, they notice it too.

that's not to say that free trade isn't the best thing for rich counties NOW (the few that actually practice it -- not that I can think of any). But is it the best thing for poorer countries?
posted by jb at 9:37 PM on January 9, 2011 [2 favorites]

Actually one place the US did allow the sort of development Prof. Chang espouses was S. Korea, precisely because there was a political benefit to it.

Japan is another good example. Remember all the whining about how Japan was "protectionist" whereas Japanese companies could sell products in the US? Well, of course they were -- but that was a deliberate and long-term plan by the U.S. to turn Japan into a "beacon of capitalism" in Asia.
posted by delmoi at 10:27 PM on January 9, 2011

They understood what's difficult for Westerners to comprehend: people working in exploitive work situations are leaving something worse.

It is utterly patronizing to assume that people who think labor rights should be part of international trade agreements are unaware that the people work in sweatshops for lack of other options.
posted by moorooka at 10:28 PM on January 9, 2011 [5 favorites]

It was an opportunity for the mingong. They understood what's difficult for Westerners to comprehend: people working in exploitive work situations are leaving something worse.
This is a wee bit blithe. Of course it's an opportunity in the sense that people are escaping the unemployment and underemployment of the rural hinterland, but the moment there's possibilities for even just getting by available at home, far fewer chose to be hyper-exploited if they can avoid it. You'll see from that link that labour shortages have been ongoing since 2003 (and after the abolition of agricultural taxes in 2006 the push factors in outmigration lessened that little bit further). The penny dropped some time ago that working away isn't all it cracked up to be, though of course that's a sweeping generalisation and there's still plenty of young folk with itchy feet in some backwater or other.
The other side of the coin is the increasing militancy among those who are working in the new industrial centres, such as last summer's strike wave in the auto industry. The new generation aren't just grateful for any job anymore.
posted by Abiezer at 10:40 PM on January 9, 2011 [7 favorites]

China's recent trillion dollar economic stimulus, which was largely directed on improving previously neglected infrastructure in the countryside, has also led to a major reverse migration in the past couple of years as living-wage-paying jobs become available in these areas for the first time, driving up labor costs in the cities.
posted by moorooka at 10:49 PM on January 9, 2011

I hate to Godwin this thread, but I sure hope a country doesn't have to repeat Germany's experience in order to reach its present economic status.
posted by effugas at 12:07 AM on January 10, 2011

We got rich on slavery and genocide and the general pillaging of a few continents. But that was before we realized it was, um, bad.

We also got rich by burning lots of foul shit and dumping even fouler shit into our waterways and generally not giving a crap about the consequences for the past couple of hundred years. But you third-world'ers aren't allowed to do that because climate change and pollution and stuff.
posted by Civil_Disobedient at 12:38 AM on January 10, 2011 [1 favorite]

CD: No, they're not allowed to do that because It's not going to be the industrial north that suffers starvation and death on a massive, almost unprecedented scale if the rivers fed by the Tibetan snow pack fail. It's unfair, and we should kick in and be the first to cut, but the grim meat-hook analysis is pretty simple, if they follow our path to industrialization, there's a very good chance that it means famine that makes the holomodor, or the potato famine, or the great leap forward, or the assorted famines under the British East India Company and the Raj look like a missed lunch.
posted by Grimgrin at 1:13 AM on January 10, 2011 [3 favorites]

people working in exploitive work situations are leaving something worse

But it doesn't make it just. Slaves in America having it better than slaves elsewhere doesn't justify slavery. The argument is that corporations simply offer them the choice to work in a factory, in addition to their only other choice to work back on the farm. But why is wealth distributed such that those are the only two options available?

I do my best not to impose my own values

To me that illustrates the moral nihilism inherent in "respect for difference".
posted by AlsoMike at 1:17 AM on January 10, 2011 [3 favorites]

"Contrary to the conventional wisdom, the historical fact is that the rich countries did not develop on the basis of the policies and the institutions that they now recommend ..."

-- well, no, of course not. The policies and institutions are the result of hundreds of years of trial and error. Pointing out the errors does not diminish the effectiveness of what was learned ... and countries would be wise to learn from history, like improvements to banking regulation made as result of the great depression. Some countries forget, the United States "forgot" good banking principles and ended up in a financial crises that was largely avoided by countries that didn't. The policies and Institutions promoted by the developed world are good ... we just all need to follow them, including the US.
posted by cjared at 1:59 AM on January 10, 2011 [2 favorites]

The fact that businesses captured government policy machines and advocated self-serving protectionism in developing economies and then when they were larger started advocating free trade (sort of) is no argument against the basic economic argument for free trade. Instead it demonstrates the power of mercantilism - of business capture of government - that was one of Adam Smith's primary concerns. In order to demonstrate the argument, one would need a counterfactual history that showed that protectionism was actually more beneficial than free trade would have been.

It is a triumph of the business-political corporatist ideology in the market for ideas that so many people seem to think that protectionist industrial policies that suit oligarchic elites across the developing world so well is a leftwing policy. (See e.g. Simon Johnson's excellent article on how this works)
posted by Philosopher's Beard at 3:21 AM on January 10, 2011

P.S.

Also heterodox economist? why does the left like to marginalize itself.

I have a post on this: Why is Heterodox Economics a Joke? which seemed relevant to that stream of the discussion.
posted by Philosopher's Beard at 3:24 AM on January 10, 2011

philosopher's beard: so Adam Smith did the economic and living standards research to support his position? Or did he rather base his ideas on a mental model of how economies work, filled with implicit assumptions?

We don't have a counter-factual, but we do have factuals: the west did not practice free trade during the period of rapid growth (end 18th to early 20th century). Countries whose economies have grown strongly recently (India, China) have not practiced free trade.

Are there any countries which have practiced free trade - and particular the policies currently advocated by the IMF - and which have seen strong economic development? (not being snarky - actually curious).
posted by jb at 3:33 AM on January 10, 2011

In order to demonstrate the argument, one would need a counterfactual history that showed that protectionism was actually more beneficial than free trade would have been.

Protectionism was quite clearly more beneficial to South Korea's economic development than free-marketism. It would be nigh on impossible to raise any country out of being a primary resource extraction satellite for more developed nations without protectionism. Then again, keeping the less-developed economies that way seems to be the goal of the free-marketeers.
posted by Bodd at 3:36 AM on January 10, 2011

> you third-world'ers aren't allowed to do that because climate change and pollution and stuff

Two wrongs don't make a right.
posted by Bangaioh at 3:59 AM on January 10, 2011

jb The point is not that mercantilism doesn't work at all, but that economies could grow even faster with more extensive free trade policies. Chang's own piece mentions the successful Dutch economy. Also many segments of the British and US economies were open, particularly for agriculture, and one can compare their relative efficiency with those of the protected sectors (a task for real economic historians somewhat beyond me, I admit. But also beyond Chang). But what is clear is that many-to-most infant industries fail, and fail at substantial cost to governments and consumers - think Concord or Saudi Arabian wheat - so pointing to a few successes as Ha-Joon Change does is hardly sufficient.

I should say that I am a great fan of Chang's broader work exactly because he challenges entrenched conventions in economics. (For example his excellent paper Hamlet Without the Prince of Denmark: how development has disappeared from today's 'development' discourse (also available in more informal verbal from the LSE public lecture series.) In particular the point that all economics is in fact political economy - that you can't get the political out of the economy however many general equilibrium models you try - is well taken. But in the spirit of Chang's own unconventionality I wanted to challenge the apparent orthodoxy here that politics is necessarily the ordinary people's saviour from cold ruthless economic theorems: politics can also be the saviour of cold ruthless business interests.
posted by Philosopher's Beard at 4:27 AM on January 10, 2011

@moorooka there's a very, very wide gulf between incorporating labor rights into trade agreements and calling all manufacturing work in Asia "slave labor"
posted by trinarian at 4:28 AM on January 10, 2011

@AlsoMike comparing slave labor to manufacturing jobs outside the US and Europe should be some offshoot of Godwin's Law. It doesn't compare. Slaves, by definition, have neither negative nor positive liberty. Chinese factory workers, like the American working class, have a great deal of negative liberty (the right to choose, lack of artificial barriers for mobility) but are increasingly marginalized positive liberty (not just the right to access, the ability to make use of it).

If you read what I said, you'd see I'm likewise troubled by the internalizing of market fundamentals. I'd like to see a more progressive population demanding more social justice but it ain't happening - and it's not because of CCP suppression, it's really just not there. I even played a translated version of The Story of Stuff to rouse my students a little. Except for the environmental aspects, nada. Zero resonance.

I think Chinese are like American voters. They're aspirational. Even though market forces are supressing their own wages they want low-wages around them to create cheap homes, products, food and infrastructure - even if they can't afford a home or a car. Were they ever to own a factory they don't want to pay more than their competitors are paying nor would they see it as a moral high point to do so. Perhaps they see that if they're not playing the same cutthroat bidding games and paying similar wages to workers their factory would just go under.

--> "To me that illustrates the moral nihilism inherent in 'respect for difference'"

I don't think the morality is much different than America's. Almost every American would agree with the statement that a KFC employee should make less than an Ivy League educated mid-level manager. Most Americans, like Chinese, want a good education to accrue the social capital necessary for class reproduction and mobility. Most Americans have no problem with KFC management skimming profits off an excess (exploited? slave?) unskilled labor market. Unless you're fully invested in Marxism I assume probably agree. Except for a difference in absolute dollars paid to labor in very different economies (I assume the profit margins are roughly similar as manufacturing is notoriously competitive and the margins slim once an industry has matured), what's different?

My point of departure is that I feel I have more of a right to moralize about my home country than about a foreign country, especially if my views diverge from those most involved in the issue at hand. What Chinese workers want (so far as my limited eyes can see) isn't a revolution but steadily growing wages that surpass inflation, professional development, workplace safety, upward mobility, time off, etc... and they're slowly getting it. I fully support them in that cause and quiet my own desires for them to mount national strikes and burn BMWs until they collectively get that and a lot more. It's not my place.

I think it's also worth considering that almost universally foreign manufacturers in China are a LOT better than their local counterparts. They get far, far fewer labor or environmental complaints than mainland, Hong Kong, and Taiwanese bosses get.
posted by trinarian at 5:12 AM on January 10, 2011 [1 favorite]

Britain did not have free trade in agriculture until agriculture had ceased to be the focus of the economy, that is, in the middle of the 19th century. this is after some 200 years of accelerating economic growth under a protectionist regime, as the country transitioned from being majority agriculture to manufacturing and services (in terms of employment, at least).

As to whether free trade does result in faster growth for developing economies, I am still waiting for any evidence to support this. It seems to have benefits for developed and more powerful economies, but has not brought the promised benefits to developing countries. The countries which have grown most rapidly have been China and India, both of which have engaged with international trade but in a very controlled manner. they have not been mercantilist, but they have also not been free traders.

Arguing that Britain, for example, would have grown more rapidly between c1550 and c1850 with free trade policy is itself arguing a counter-factual. As noted above, Tudor policy used protectionism to try to develop England into an exporter of finished, rather than raw goods.

As for the Dutch Republic, I need to read more Dutch economy history. But I know that in one industry they were far from free traders, because they had subsidies: Dutch sewing pins undercut English in terms of price in the late 16th century because they were made by workhouse labour supported by the state. (Pissed off English policy makers no end).

I am not arguing that free trade will not lead to more rapid growth for developed economies trading with other countries of similar wealth per capita. But I think what we need to question is whether the effect of free trade is the same for economies at different stages of development and particularly whether free trade has the same benefits when the trade is between very unequal partners (in terms of wealth, influence and expertise).
posted by jb at 5:23 AM on January 10, 2011 [1 favorite]

If I'm remembering my trade classes from a decade +, isn't the argument that import substitution + export driven economy only works as long as big countries choose not to enact their own trade barriers? So it ends up being the best stable trade off is no barriers for either side? So the case that needs to be made to the west is that "give up a little something now, and once these guys are caught up they'll remove the protection, and you'll have a much wealthier population to sell things to"

Korea and Japan (and SEA) were allowed to pursue the policies they pursued because the US had an interest in seeing those economies grow as rapidly as possible, so the didn't react to their protectionism as they would in the case of a country where it wasn't as self-interested. Not to mention that in both those cases the US provided massive amounts of financing at negative real-rates, in Korea's case up until the mid 80's.
posted by JPD at 5:33 AM on January 10, 2011

I think what we need to question is whether the effect of free trade is the same for economies at different stages of development and particularly whether free trade has the same benefits when the trade is between very unequal partners (in terms of wealth, influence and expertise).

JB You hit the point exactly. That is the great founding question of development economics: do we need different economic theories for countries at different stages of development? The question of how the surplus produced by mutually beneficial trade is divided fairly between the parties is the great ethical question of globalisation.

But still, the direct relevance of the history of the original developing economies of Northern Europe and America is unclear. Since in their time the world was different - there were no developed countries to trade with.

Britain did not have free trade in agriculture until agriculture had ceased to be the focus of the economy, that is, in the middle of the 19th century.

My point about how protectionism is always called for and enacted in the interests of powerful politically connected vested interests stands. Ricardo and other economists had been arguing for decades against the corn laws that kept food prices high for ordinary people and transferred excess profits to wealthy landowners. It was only when the landowners' political influence waned as the industrial revolution displaced them that free trade policies in agriculture could be adopted.
posted by Philosopher's Beard at 5:39 AM on January 10, 2011

It all comes down to how surpluses from trade get divided up has a lot to do with how much you'd be giving up if you stopped trade.

In short: typical ec 101 has two countries that can, say, produce 200 of sheep or wine, respectively, if they specialize, or something like 100 of one and 30 of the other if they instead attempt self-reliance. The conclusion you are supposed to draw is that, in that case, if both specialize there's 200 of each good to go around, whereas in the self-reliant scenario there's only 130 of each good to go around; ergo, specialize-and-trade yields objectively better outcomes.

The next level up, however, is to ask: how will those 200 of each good be distributed? Can we say anything about this based upon what we know right now?

The answer is: "sort-of". If, say, country A can produce 100 sheep and 30 wine on its own, it isn't going to turn around and accept an arrangement that left it with 90 sheep and 20 wine after trade; the reason it wouldn't accept that trade arrangement is that that arrangement is strictly inferior to the arrangement it could obtain by being self reliant. The same holds for the other country, and thus the "self-reliant" production capabilities serve as *bounds* upon the set of acceptable trade outcomes: each country wants as much as it can get out of the arrangement, but neither country will accept an arrangement that leaves it worse-off than it'd be if it just did everything itself.

So in the simplified wine-and-sheep example, in the long run it may be a wise investment for country A to invest in its production capability in the good that it's not really competitive at, because doing so tightens the bounds upon the outcomes from trade in a way that works in A's favor. EG: if country A is now s.t. it can produce 100 sheep and 50 wine, it's now going to be able to negotiate an arrangement that leaves it with at least 100 sheep and 50 wine, whereas previously it would only be possible to guarantee an arrangement that left it with at least 100 sheep and 30 wine.

In the real world there are many subtleties not captured in this ec-101, sheep-and-wine parable, but it illustrates the basic points: it's economically advantageous to specialize in what you're good at and trade for the rest, but you will improve your ability to capture more of the trade surplus often hinges upon your productive capabilities in fields that are *not* the source of your comparative advantage.
posted by hoople at 6:06 AM on January 10, 2011

Sorry, hoople, that's not how the law of comparative advantage works. Your argument depends on contradicting your premises since you have simply transformed the original country's production possibility frontier by fiat when that being fixed is the whole point. You have waved a wand and made Country A richer. But this leaves us no closer to determining the fair or actual exchange rate when A and B specialise and trade.

The exact exchange rate is set outside Ricardo's framework and has more to do with the dynamics of actual markets and the resources of different parties, for example their breakdown positions if price negotiations fail (e.g. poor country producing a common commodity like coffee, bad, rich country producing a unique good like sophisticated machine tools for factories, like Germany, good.)
posted by Philosopher's Beard at 6:26 AM on January 10, 2011 [1 favorite]

One should also include the other major reasons the U.S. became successful.

#1. An open immigration policy that led to waves of influx of immigration. The immigrants provided a cheap work force for the industries and many, desiring better things for their children, the children became the innovators for the economy. Open to immigration we also imported the best from the world. One example, the film industry boomed with refugees from war-stricken Europe (Fritz Lang, Alfred Hitchcock, many others). Another example, science (Einstein, Tesla).

#2. Geography, part one. We are in a mostly temperate climate with huge amounts of fertile farmland allowing expansion of our agricutural economy back when agriculture was the most important sector.

#3. Geography, part two. We are separated by two oceans from most of the world preventing ready invasions and the decimation of the economy. The oceans were (and are) the primary route of cheap exchange of commerce (shipping). Countries that are bordered by oceans generally do better.

#4. Geology. We had huge amounts of the most important industrial fuels when they were needed - coal and oil.
posted by dances_with_sneetches at 6:28 AM on January 10, 2011 [1 favorite]

"Contrary to the conventional wisdom, the historical fact is that the rich countries did not develop on the basis of the policies and the institutions that they now recommend ..."

Bullshit. Thats like saying that all those people in exercise videos didn't get that way because of the exercises and paraphernalia they are demonstrating. Come on now.
posted by hal_c_on at 6:29 AM on January 10, 2011 [2 favorites]

I'm sorry, is there still someone who thinks neo-liberal economics (as recommended to other countries) is designed to help them succeed? I thought it was pretty clear those policies were designed to loot what was lootable and create a small elite class that was beholden to the US for their status.
posted by Legomancer at 6:49 AM on January 10, 2011 [1 favorite]

Huh? I always thought the conventional wisdon was this allegedly "contrarian" position.

The real picture is slightly more complicated, but generally most people who have studied history have long acknowledged these facts.

Its funny, but the internet is making things suddenly obvious to people who didn't give a shit before and they are shocked, shocked I tell you.
posted by Ironmouth at 7:09 AM on January 10, 2011 [1 favorite]

Neoliberal economics is a political ideology. It stands in relation to the academic discipline of economics as Stalinism stands in relation to Marx.
posted by Philosopher's Beard at 7:20 AM on January 10, 2011

Ha-Joon Chang in a wide-ranging conversation discusses students, strikes, economic ideologies, what to do with finance, with power, nations, global governance and legitimacy as a public good.

For a New World, New Economics [1,2]

Why capital controls are not all bad [1,2]

Lazy Japanese and Thieving Germans - "What's missing is a recognition of how mysterious the secret of economic growth remains, despite all the energy that economists have poured into solving it." [1,2]
posted by kliuless at 7:49 AM on January 10, 2011 [2 favorites]

"Contrary to the conventional wisdom, the historical fact is that the rich countries did not develop on the basis of the policies and the institutions that they now recommend ..."

Bullshit. Thats like saying that all those people in exercise videos didn't get that way because of the exercises and paraphernalia they are demonstrating. Come on now.

No, it's like someone eating a bucket of ice cream saying it made them skinny, when it was actually all the exercise they did for the past ten years. The phenomenal periods of economic growth experienced in the US and Britain occurred when they had enormously protectionist policies for their own industries.

The US and Britain want to destroy protectionism in smaller countries because when a guy with a million dollars strikes a deal with a guy who has ten, you can imagine who often walks away with more advantages.
posted by notion at 8:56 AM on January 10, 2011 [1 favorite]

Philosopher's Beard: yes + no. Take Ricardo's model (since it's a widely familiar starting point). It assumes fixed production frontiers and, implicitly, a single round of trade (implicitly b/c without changing production frontiers, or changing stocks of wealth, etc., there's nothing within the model that would change the outcome between rounds, so a single round suffices to characterize the model).

As you point out the model is sufficient to show it is more efficient to specialize in one's area of comparative advantage and then trade, producing the famous trade surplus. As you also point out the model is insufficient to determine the allocation of the trade surplus, and requires factors external to the model. All we know is that the "solo" production possibilities of each nation serve as bounds upon the range of outcomes: if nation A offers nation B an arrangement for which nation B could do better on its own than nation B will go off and do it on its own, and vice-versa, so at least we have that (very weak) constraint upon the set of possible trade distributions.

What happens as we progressively make the elementary and famous example from Ricardo more in line with the real world? Let's find out.

- first, let's have trade take place over multiple rounds; we are interested in trade dynamics over time

- to make things interesting we need something to change between rounds, or else there's nothing gained from multiple rounds

- let's assume (implicitly in my previous comment) that there's some third resource (let's call it "investment capital"), which each nation can invest in-between rounds to push out their production frontier (in either or both of the goods). You can keep this simple by making this resource endowed by some exogenous mechanism, say a fixed budget per turn, or a fixed multiplier of the size of the basket of goods received through trade.

...how far does that take us? Not far enough, yet, to say anything interesting, but we have a new question to ask: is it better to invest in improving the your productive capability in what you are already specialized in, or is it better to invest in improving your productive capability in what you are weaker in?

One further assumption we can add is that there is declining marginal productivity of investment capital when invested into a particular productive activity: that is, the cost to push your production of wine from 100 to 101 is higher than the cost to push your production of wine from 30 to 31.

At this point we have enough to get where I started: within this expanded model you can set it in a way such that the most efficient use of your investment capital will be to invest in improving your productive capabilities in your weaker areas, b/c doing so tightens the bounds of possible trade outcomes in your favor (and does so for less investment than would be the case if you invested in your area of comparative advantage, because further improvements in your area of comparative advantage are more expensive vis-a-vis further improvements in your weak area.

How useful a model this is is debatable, but if you flesh it out and toy with it for awhile you'll find it lines up nicely with the empirically-observeable outcomes: the great bulk of nations that've made the leap to "developed" have done so by investing in areas in which they were comparatively weak (eg: Asian automakers in the past half-century), with the "investment" being carried out by a mixture of national industrial policy and old-fashioned protectionism. In many cases they've invested in those areas to the point of being more competitive than their original competitors (eg: US automakers), but at the time they started down that road they were most assuredly not doubling-down on their comparative advantage.

If that were a poor strategy it seems as though it'd be possible to point at some nation that developed more quickly and more thoroughly by using some other, better strategy, but there aren't any great examples to point at; to the extent there are such examples, they tend to be city-states engaging in tax and regulatory arbitrage (Hong Kong, Singapore, etc.).
posted by hoople at 9:22 AM on January 10, 2011 [4 favorites]

I thought it was pretty clear those policies were designed to loot what was lootable and create a small elite class that was beholden to the US for their status.

This is why neoliberalism is sometimes referred to as "neo-colonialism".
posted by Pope Guilty at 9:24 AM on January 10, 2011 [1 favorite]

PB -- when the 19th century guys were writing, corn laws were all about protected landed interests. But earlier in the 16th and 17th centuries, they have been about protecting the food supply at a time when spiking food prices and famine were serious concerns (both moral and political - high food prices might lead to civic unrest). By the time they were repealed, the majority of the country were against them, but they had once been all about food security.

India really could have used some Corn Laws in the late 19th century, when the famine-ravaged Punjab continued to export wheat to Europe, because the Europeans could afford to pay more for the wheat than local (and starving) consumers.
posted by jb at 9:37 AM on January 10, 2011

I'm forgetting who but I've seen a similar toy model cooked up that may illustrate the point better (and in a different light, too). It again assumes multiple rounds, that production possibilities bound the set of possible trade outcomes, and that production possibilities change between rounds.

In that model we have 4 products, let's call them wool and looms, and flour and mills (or similar). Key concept is that for each consumable resource R_i (wool, flour) you have a corresponding capital resource C_i (looms, mills), and your productive capability wrt resource R_i is a function of your stock of resource C_i (that is to say: having more looms or more mills means you can produce more wool or more flour, etc.).

In a model like that you need to introduce the capital good trade dynamics separately but it should be easy to see that it would be possible for one nation to close the gap with the other and over time command a larger share of the trade surplus (compared to its share in earlier rounds); import substitution policies are largely aimed at encouraging the real-world analog of that process.
posted by hoople at 9:44 AM on January 10, 2011

Actually, you could say that the current European Common Agricultural Policy are 20th century Corn Laws. The CAP was created after WW2 in direct response to food shortages during the war, and because most policy makers at the time believed that food prices would go up in response to increased demand. CAP was all about artificially supporting European production of food as a protection against food price increases, and also guarenteeing a price which non-agricultural workers could afford. The policy makers didn't predict that the Green Revolution would vastly increase the supply of food in the world, leading to a (relative) decline in food prices -- so what was meant to originally be a food price control to support production and protect consumers is now an articial food price inflation leading to over production of specific commodities.
posted by jb at 9:44 AM on January 10, 2011

hoople: I agree that Ricardo's little theorem (though an important and unusually counter-intuitive theoretical economics result) is quite limited in the real world and a bit dated. For example, it assumes that capital doesn't cross borders but goods do. Krugman's Nobel Prize in New Trade Theory was for explaining something that wasn't supposed to happen according to classical theory - Sweden making Volvos and importing Fiats - because of the significance of increasing returns to specialisation.

Nevertheless, sticking to Ricardo, doesn't the comparative advantage theorem say that one should specialise in the good for which your relative opportunity cost is lower? And doesn't that contradict your key assumption that the marginal productivity of that same good is lower?
posted by Philosopher's Beard at 9:49 AM on January 10, 2011

PB: starting from "sticking to Ricardo": I think you may be conflating "productivity (when producing the good)" with "productivity (of investment capital sunk into building out further productive capacity for that good)".

Otherwise, I don't see the contradiction you're trying to point out: the goal is to walk away from each trade round with the basket of goods you value the most. You'll always produce the goods you're specialized at producing. Between rounds the most productive use of your investment capital may be to invest it in expanding your productive capability in your weak areas, so as to tighten the bounds on the acceptable outcomes.

EG: for sake of argument assume you value wine + sheep equally, so the value of a basket is a straight sum of the goods in the basket. Assume further you always reject any proposed trade that leaves you worse off than what you're capable of doing on your own. Assume, finally, declining marginal productivity of investment capital: if, when you specialize, you can currently produce 200 sheep or 20 wine, then it'll cost less to push the wine to 21 then to push the sheep to 201.

We can even plot this: put sheep on one axis and wine on the other. We want a basket that's as far up and to the right as possible. Our productive capacity determines the minimum possible baskets we'd have to accept: we could, for example, produce (200, 0) on our own, or (190,1), etc., and thus we wouldn't accept (199,0) or (189,1) and so on (b/c we could do better on our own). If we plot all the points on that line we carve out a triangle of trade outcomes that're down-and-to-the-left -- meaning arrangements we wouldn't want, b/c we want up and to the right.

We can even quantify this excluded region: with 200 and 20 as our possibilities the area of that triangle is 200 * 20 * .5 = 2000.

So, how should we spend our investment capital? Do we push 200 to 201, or do we push 20 to 21?

If we push 200 to 201 -- invest in our strong suit -- the area under the triangle is now 201 * 20 * .5 = 2010.

If we push 20 to 21 -- invest in our weak suit -- the area under the triangle is now 200 * 21 * .5 = 2100.

This is the sense in which it can be more productive to invest in your weak suit: you would still continue to produce the good you specialized in to go and trade, but -- at least measured in terms of "what is the range of offers for which I know I can do better?" -- your investment dollars are better spent improving your weak hand than doubling-down on your strong hand.

At this point, the caveats: this result does assumes declining marginal productivity of investment into a particular productive capability. In some fields the opposite holds -- increasing returns on scale -- and so it would be foolish to extrapolate too much from this model.

It also assumes that measuring the relative desirability of a particular production capability -- in terms of the negotiating position it gives you -- is well-approximated by the area of the set of baskets-of-goods for which you know you can do better.

This is a reasonable tack to take when we don't have any more precise system for determining how the goods will get traded within a round, but if you start adding further assumptions to the model they may bring other bounds or dynamics into play that invalidate this measurement. And, at the end of the day, it's only a toy model, not a good model. The real world is complicated.
posted by hoople at 10:46 AM on January 10, 2011

Assume, finally, declining marginal productivity of investment capital: if, when you specialize, you can currently produce 200 sheep or 20 wine, then it'll cost less to push the wine to 21 then to push the sheep to 201.

You cannot assume this surely? A productivity increase would come from investment in mechanization/new technology. The difference in added return between wool and wine in your example is in reality dependent on the varying possibility for productivity gain via those means, the things that historically have driven gains. Whether wine or wool is the better investment depends on more factors than the trade possibilities, such as geographic factors and infrastructure.
The original model simply assumes these things are fixed. You introduced the time factor so I think it is fair to show how that completely destroys the new models applicability to demonstrating much of anything.
posted by Catfry at 12:38 PM on January 10, 2011 [1 favorite]

It would work like this: If you are an American concern that makes products offshore that you then sell in the American market - you will pay an import tariff and a punitive tax.

I'm trying to imagine living in a world without offshore production in the third world, that was sold to me by local companies (usually under their own brand). If all my possessions that were not at least ten years old or made in the first world suddenly disappeared and were replaced with their cash value at time of purchase, I'd be left with a teddy bear, a dish washer, one bicycle that was bought directly from a Chinese company, five shirts, a pair of winter boots, two bras and a handful of underpants. I'm pretty sure the only things left in my pantry would be flour, milk, eggs and bread, and a bag of potatoes. I'd have a small stack of books and some art supplies and pens that were made in Japan or Germany.

My ownership of furniture, dishes, pots and pans, paper and the laptop I do most of my mefi-ing, as well as my books, bedding and modest wardrobe of clothing depend heavily on being subsidized by this sort of trade. Realistically when you're selling that sort of lifestyle choice, exploitation meets a serious drop in standard of living. Walmart might be hell on small, local businesses, but the price point is really good for poor people.

And I only get to keep my teddy bear because she's older than I am. She was bought from Toys'R'Us.
posted by Phalene at 1:07 PM on January 10, 2011

Chang's claim that Unfortunately, this fact is little known these days because the “official historians” of capitalism have been very successful in re-writing its history would be more compelling if he'd identified the official historians of capitalism and shown some examples of them re-writing history. And when Chang writes it is important to note that the American Civil War was fought on the issue of tariff as much as, if not more, on the issue of slavery, I'd like to see some evidence to support the history he's writing.

I don't know enough about many of the issues that Chang discusses to decide whether he's correct, but in a piece that has as a central premise the notion that folks haven't been sufficiently skeptical about economic history, it's reads like it's written for an audience that exhibits no skepticism whatsoever.
posted by layceepee at 1:21 PM on January 10, 2011 [2 favorites]

Catfry: I don't understand your objection.

"A productivity increase would come from investment in mechanization/new technology."

Yes, of course. Suppose we measure productivity in terms of something like marginal-cost-per-unit-produced, eg $/unit. Suppose we pick some product -- call it P -- and say that for you, right now, it costs you $D/unit with your current technology and mechanized production. Suppose further you can reduce that to $.9D/unit by investing $I into better technology.

What would you want to assume it would cost to reduce that further, from $.9D/unit to $.8D/unit? More than $I? Less than $I? The same as $I? What about when you take it from $.8D/unit to $.7D/unit?

Your answers there determine whether or not you find the assumption objectionable.
posted by hoople at 1:50 PM on January 10, 2011

We got rich on slavery and genocide and the general pillaging of a few continents. But that was before we realized it was, um, bad.

So I take it your point is that we should allow, even encourage the same in third world countries? That developing economies have a right to slavery and genocide?


We also got rich by burning lots of foul shit and dumping even fouler shit into our waterways and generally not giving a crap about the consequences for the past couple of hundred years. But you third-world'ers aren't allowed to do that because climate change and pollution and stuff.

And your point I take it is that third-world economies should be exempt from any sort of pollution or environmental knowledge, no matter what the consequences down the road are?

What humanitarians we have here.


@notion while I agree with most of what you're saying, "we'll be on the end of a very short leash held by multi-national corporations in tyranny-friendly Southeast Asia" is patently false.

Well you see, that's part of the nativist rhetoric. The idea that internet pundits have is that as soon as the fiendishly clever Asians conquer us economically, they will throw off the veil of modernity, and suddenly it will be the Mandate of Heaven and foot binding all over again. And no evidence to the contrary will dissuade them. A hundred years ago it was "Yellow Peril", and today it's equally anonymous "corporate masters".

The lack of any connection of their xenophobic worldview with actual economics or politics is regrettable, but well, at least we've managed to get them to stop using the term "orientals". That's progress I suppose.
posted by happyroach at 1:58 PM on January 10, 2011 [3 favorites]

@moorooka there's a very, very wide gulf between incorporating labor rights into trade agreements and calling all manufacturing work in Asia "slave labor"

The article by Kristof (rehashing a very old, stock-standard pro-corporate argument) that you linked to was specifically directed at the Obama administration for wanting to incorporate labor rights into free trade agreements. That's why I mentioned it.

To describe sweatshop labor as "slave labor" does not mean that the person making the comparison believes that the sweatshop laborers are owned as property. However the term wage slavery to describe this type of life has existed since the industrial revolution.

And the people who use this term are well aware of the fact that such laborers do these jobs 'voluntarily' in the sense that they have no better options. Your comment seemed to be based on the fact that you and Kristof regard this as a novel bit of information that we were unaware of. The lack of alternatives for is the whole point of wage slavery.

As an aside, it's unsurprising that your urban bourgeois Chinese students aren't keen to spend their time in a hopeless agitation for the rights of the mingong (which would waste their precious time at best and land them in jail at worst) when they're busy enough engaged in the Darwinian struggle to find a job that might one day allow them to afford a post-housing boom apartment in a major city. There is a sense in which the urban Chinese regard the mingong as being another species. There are thousands of large and small protests that take place every year in China, but students and the relatively well-off Chinese people who foreigners tend to mingle with aren't generally part of them.

This could easily change if China's miraculous economic expansion comes to a halt, and the party is aware of this.
posted by moorooka at 2:02 PM on January 10, 2011 [1 favorite]

Philosopher's Beard, I read your post on why heterodox economics is a joke.

Let's just say that you are defining the many competent economists, such as Ha Joon Chang here, who take issue with the neoclassical mainstream as being in the same basket as a handful of fruit-loops.

You suggest that rather than complaining these people should just have their work compete in the market place of ideas. The problem, and the reason that they complain, is that the top economic journals do not consider any work that is more than a minor variant of what they already published. There is no market place of ideas. Looking at macro, if your work is not on rational-expectations based dynamic stochastic optimization, it is not admitted into the market place at all.

It is simply false to suggest that the economists who are building alternatives to this are doing so because they lack the mental equipment to learn the mathematical techniques used by the mainstream. In many cases they are very adept technically and are looking to build rigorous alternatives because they recognize that mainstream methods have little to do with how an actual economy actually behaves. The alternatives that they are developing are every bit as "technical" (example, example), and the fact that they dont get more airtime has more to do with the fact that the focus of economics education is so narrow that most orthodox economists' toolsets are too limited to evaluate anything different than what they already know. It is a reinforcing cycle; the time necessary to explore alternatives is time spent on something that will not get you anywhere in a university career, hence alternatives are not explored.

The ultimate result is that the economics departments of most universities are populated by people who are good at the theory of mathematical optimization, but don't know or care anything about economic history or the history of economics, and don't regard the workings of a real economy as relevant to what they do.

If you want to find people who do know how a real economy works, don't go to a university economist, go to an investment banker.
posted by moorooka at 2:23 PM on January 10, 2011 [3 favorites]

Hoople I completely accept the economic concept of declining marginal return on investment.

Suppose we measure productivity in terms of something like marginal-cost-per-unit-produced, eg $/unit. Suppose we pick some product -- call it P -- and say that for you, right now, it costs you $D/unit with your current technology and mechanized production. Suppose further you can reduce that to $.9D/unit by investing $I into better technology.

What would you want to assume it would cost to reduce that further, from $.9D/unit to $.8D/unit? More than $I? Less than $I? The same as $I? What about when you take it from $.8D/unit to $.7D/unit?

Your answers there determine whether or not you find the assumption objectionable.

I guess the simplest reply would be that the two different products wool and wine might have different ratios of $D for every $I.

I'm sorry my head is tired and I'm not sure this has much to do with my original objection or that I have understood your comments right. I might come back to you after some sleep.
posted by Catfry at 2:30 PM on January 10, 2011

If you want to find people who do know how a real economy works, don't go to a university economist, go to an investment banker.


thanks, needed that laugh. I'm guess you don't know many investment bankers.

moorooka - your point wrt to heterodox economics is entirely fair, however I don't think it applies to Chang (CV) look at the journals he's been published in, look at the academic departments he's been appointed to. This guy is not operating out on the fringes.
posted by JPD at 2:31 PM on January 10, 2011

Catfry: I think I see your objection now, and you're right that assuming declining marginal productivity of investment itself would be, for example, enough to know whether the marginal cost of going to 201 sheep per round was more or less than the marginal cost of going to the 21st bottle of wine; that's being inexcusable sloppy. In practice assuming the cost of additional productivity in each good is essentially the same isn't too unreasonable: the reason country A got good at making X is b/c it already bought all the "cheap" production capability available to it. To take it in full generality you'd need to throw in that marginal the cost of increased production capacity in good G not only increases, but increases without bound. Once you have that you can show that even if G is what they're specialized in they will reach a point where it's more sensible to invest in the capability of producing some other good. If you doubt the reasonableness of the marginal cost of additional production capability increasing without bound ponder the fact that so far as we know the universe has only a finite amount of matter.

JPD: Chang's almost the exception that proves the rule, though. Most everyone else has to cross over from statistical physics or something like that -- and call themselves an econophysicist, or say they investigate complex systems, or networks, or some such -- or resign themselves to living on the periphery of field.

It's mostly self-selection, from what I've seen: most people who have heterodox leanings go into other fields after awhile. This leaves the people still in the field feeling open-minded -- they, themselves, never had to close ranks against the heterodox, and they don't know anyone who did, either, ergo complaints about the close-mindedness of the profession are ungrounded (and perhaps motivated by animosity towards the conclusions the field has drawn).

It only gets ugly b/c economics influences policy decisions, and it's hard to have a sustained impact on economic policy without the aura of legitimacy that comes with being a real "economist".
posted by hoople at 2:54 PM on January 10, 2011

thanks, needed that laugh. I'm guess you don't know many investment bankers.

My point is that investment bankers spend their time analyzing (and manipulating) actually existing companies, markets, currencies and policies.

In the lead up to the recent crisis, while the people at Goldman Sachs were busy placing bets against the same sub-prime mortgages that they were selling to their customers, most academic economists didn't even know what a sub-prime mortgage was - that type of thing just wasn't relevant to their work.

If you're an investment banker, you have to understand the economy in order to loot it successfully. Most critically you need to understand its political aspect - an aspect that you simply cannot raise in an economics department without being told "the political science department is in the other building". Try finding a big-name economist at a top American university that will supervise a dissertation on the influence of finance-sector lobbyists on the writing of banking regulations. They will say that this isn't "economics".

Unlike an investment banker, an academic economist can pretty much rise to the rank of professor by, for instance, mastering stochastic optimal control theory, without ever needing to make reference to the actual real world economy, or having anything but the most rudimentary understanding or curiosity of how it operates.

An "autistic" focus on one very narrow branch of mathematical theory and an absence of interest in the actual economy and its history is considered a virtue. In fact when an academic economist drops the esoteric abstractions and starts to spend time talking about actually existing companies and markets their work gets dismissed as mere "economic journalism".

A few weeks ago I was talking to an ex-Professor of engineering who had moved to a top position at Merryl Lynch. He was describing how the major investment banks have computational power that far exceeds what is available to university economics departments, and that they develop economic models (obviously top-secret proprietary software) far more detailed than the type of thing that would be considered in an economic department. Being free of the need to conform to the type of orthodoxy approved by top journal editorial boards allows them to construct models that are informed by the actual material details of the real economy's production and transportation systems.

On to the meaning of 'heterodoxy', whether or not Chang can be considered as 'heterodox' depends on how broadly you define the term. These days even people like Krugman and Stiglitz can be considered somewhat heterodox. However it's worth pointing out that Cambridge University has long been a center of the type of 'postkeynesian' thought that has been long ago stamped out in all the major American universities. People publishing the type of arguments that Chang publishes would have little chance of getting appointed in America.
posted by moorooka at 3:53 PM on January 10, 2011

Bullshit. Thats like saying that all those people in exercise videos didn't get that way because of the exercises and paraphernalia they are demonstrating. Come on now.

Well exactly. Those people you see in the exercise videos, they've always been skinny.
posted by robertc at 4:17 PM on January 10, 2011

moorooka: you might find you enjoy this book; it has its biases and limits, and is at an introductory level, but gives a flavor for the mindset you would want to bring to performing large-scale, highly-granular economic modeling, as well as some related prior work: http://www.cs.cornell.edu/home/kleinber/networks-book/ .

Modeling large economies requires a lot of computer power but getting a feel for the material won't.
posted by hoople at 4:24 PM on January 10, 2011

It only gets ugly b/c economics influences policy decisions, and it's hard to have a sustained impact on economic policy without the aura of legitimacy that comes with being a real "economist".

No no that's precisely my point WRT to calling mainstream left-leaning economists like Chang "Heterodox" - it permits the right to marginalize them.

Moorooka - suffice to say I know a lot about what the investment banks do. You are massively overstating their competence and their understanding of how macroeconomics and the markets intercept. Indeed you must see your argument is logically flawed at face value given the events of the last 4 years. I would hypothesize that a large pool of investment bankers would be no better (Actually probably worse) at forecasting than a group of similarly educated widget makers.

And there are many many people who have risen to great wealth in the finance world on the back of being good at doing one very esoteric thing.
posted by JPD at 4:30 PM on January 10, 2011 [1 favorite]

fair point JPD.

I don't mean to overstate the competence of investment bankers, just to point out that the workings of the really existing economy is relevant to their jobs, whereas for academic economists, it largely isn't.

And while causing a massive economic meltdown may seem like incompetence, it takes quite a level of competence to manage to get away with it, having the government covering your losses so that you can go on, business as usual, making just as much money as before.
posted by moorooka at 5:16 PM on January 10, 2011 [1 favorite]

funny I think his article today is exactly on point

http://www.guardian.co.uk/commentisfree/2011/jan/10/banking-bonuses-britain-curbing

That's true about bankers vs economists - but you said:

If you want to find people who do know how a real economy works, don't go to a university economist, go to an investment banker.


BTW - I do think many finance people get how microeconomics impact investment decisions, but very very few of them are capable of sucessfully integrating macro factors. I'd trust them to tell me where the price of x is going if I told them what demand for it was going to be. I wouldn't trust them to forecast demand.
posted by JPD at 5:24 PM on January 10, 2011

here's a relevant discussion, an anecdote from the recent American Economic Association meeting in denver
posted by moorooka at 6:22 PM on January 10, 2011

Moorooka

Thanks for responding to my blog post on heterodox economics, but I must disagree with just about all your remarks.

Development Economics as a discipline was somewhat shielded against the neo-classical take over of most other parts of the economics department, exactly because developing economies seem so fundamentally different. That is to say, in development economics, positions like Chang's are quite within the bounds of mainstream respectability even though neoclassicals would be dismissive. Dani Rodrik for example has many similar positions as Chang on the importance of industrial policy and is an extremely respected and well published mainstream development economist. Clearly when heterodox economists stay within the mainstream they can make valuable contributions. My point in my blogpost was that when they are outside the mainstream many get a bit squirrelly.

There is a thriving market for ideas in contemporary economics, even if it isn't an ideal one. If you look at current issues of prestigious journals you will see real world topics and new schools of thinking well-represented in a way that wasn't the case 10 or 15 years ago. Just not all schools of thinking. You seem to expect that a free market for ideas requires the American Economic Review to publish Marxist polemics, but to the editors that seems the equivalent of requiring Nature to publish articles on 'Intelligent Design'. I think the burden of proof is on the outsider.

You mentioned that mathematical economics orthodoxy excludes thinking about the real world, its history and the history of economic thinking. But from your remarks about investment bankers it seems that your real concern is with academia's theoretical orientation, not mathematical analysis per se (what else do investment bankers use?). It seems obvious to me that however constrained and distorted the academic market for ideas may be, the market for ideas for investment bankers has been clearly far more distorted by their peculiar incentives, which as Keynes noted so famously, are not to judge fundamental value and long term consequences (the real world), but to outwit other investment bankers long enough to collect their bonus.
posted by Philosopher's Beard at 8:22 AM on January 12, 2011

In a peer-reviewed journal in a field proporting to be describing and modelling reality, the burden of proof ought to be on all would-be contributors, regardless of their theoretical model.
posted by jb at 10:23 AM on January 12, 2011