Introduction

Ha-Joon Chang’s latest book, Economics: The User’s Guide [1], is true to its title. It starts from the premise that most people have two mistaken views about economics. The first, which is also believed by the majority of economists, is that it is a science like physics or chemistry and that consequently there is only one correct answer to any question and we can rely on the professionals to find it. The second is that the subject is far too difficult for any ordinary person to grasp; we just have to accept the experts’ word for how things are.

Chang points out that what is widely accepted as the theory of economics, the so-called neo-classical school, is actually only one of many different kinds of economic theory. He describes nine of them in terms that you can follow and with enough background and detail to give you a reasonable grasp of the differences among them and an understanding of why he believes that the current dominance of neo-classical economics is harmful. By the time you have finished the book, you will probably agree with him. Or if you do not, at least you will have a better understanding of what you do believe.

The dominance of free market economics

For a long time now, the idea of the free market has dominated politics and commerce in most of the world. The market, we are told, is better than any other conceivable mechanism for delivering the right goods and services to the right people at the right costs [2], and this must make it the best basis for understanding and managing an economy.

As long as we resist the temptation to interfere, the market will achieve the best possible outcome. Above all, we must not complain if a small number of people are doing far better out of this than we are; that is part and parcel of the deal. If we try to share the cake more fairly, we will inevitably reduce the amount to be shared and we will all end up with less.

This is the dogma that led to the big bang of the 1980s, the 1999 repeal of the Glass-Steagall Act, which was passed in the middle of the last major depression and separated main street banks from investment banks in the US; the Commodity Futures Modernization Act of 2000, which stopped the US government from regulating derivatives; and the policy of “light touch” regulation in the UK.

There was also widespread privatisation, justified by the claim that anything – utilities such as energy and water, railways, schools, whatever – is bound to be more efficient and more effective if it is governed by a market. If there isn’t a natural market, then we must create an artificial one, with hospitals competing for patients and primary schools competing for pupils. (Ironically, privatised companies like railways and energy now negotiate targets and prices with the government, which is disturbingly similar to the system that was used in the Soviet Union until its economy collapsed.)

Clearly this has worked well for the better off. They gain the most from lower income and capital gains taxes and a relaxed attitude towards tax avoidance. (The one tax that UK governments have felt able to increase is VAT, which hits the poor more than the rich because they spend a larger proportion of their income on goods that are subject to it.) If the market turns out in the end not to be the best way of running schools and hospitals, that doesn’t matter to the rich because they don’t use the state system.

When industries and utilities are privatised, the prices are deliberately set low to make sure that the shares are sold, but it is only people with money to spare who can take advantage of this. Soft touch regulation allowed people in the City and on Wall Street to make eye-watering amounts of money through activities that contributed nothing to the country and left massive bills for everyone else to pick up when the bubble burst.

Less clear is what all this was doing for those not so well off, which is most of us. Inequality, which had fallen in developed countries from about 1910, began to rise again in the 1980s and the gap between rich and poor continues to widen [3], [4] (Capitalism and the Inexorable Rise of Inequality, SiS 63).  But as long as things appeared to be going well, the majority of economists and politicians did not consider this a matter for concern. The tide was rising; sooner or later all the boats would be lifted.