Book Summary: Economics: The User’s Guide by Ha-Joon Chang

I’m prefacing this summary of Economics: The User’s Guide with a disclaimer: There’s a lot that I haven’t summarised, because the book itself is a summary of the field of economics. Trying to condense something that has already been cut down to the bones would be like making a map as large as the country it tried to map!

I’ve previously explained that summaries are not substitutes for books, which applies with particular force here. In writing this summary, I’ve generally omitted or skimmed over parts of the book that I understood well and was already familiar with, focusing instead on the parts that I personally found interesting.

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Key Takeaways from Economics: The User’s Guide

• The economics education in a typical undergraduate course is incomplete:
  • There are many different economic schools, each presenting a different way of “doing economics”: classical, neoclassical, Marxist, developmentalist, Austrian, (Neo-)Schumpeterian, Keynesian, Institutionalist and Behaviouralist.
  • Each school has its own strengths and weaknesses. Different schools will be more or less relevant to different issues. Most undergraduates only learn the dominant neoclassical school.
  • Despite its importance, most undergraduate courses do not teach economic history.
• Economics is not the exclusive domain of professional economists. As a subject that deeply impacts all of our lives, everyone can benefit from better understanding economics. The topic is also much more accessible than you may think.
• There are no “objective” truths in economics:
  • Economists like to pretend their field is an objective science, and not get into messy political questions. But economics inevitably involves political and frequently moral judgments.
  • Even numbers, which appear objective, are based on a theory. What we decide to measure and how to do so hugely impacts economic policies. Although numbers are useful, don’t blindly accept them.
• Some of Chang’s personal views come through strongly:
  • Government intervention is necessary and desirable. Chang supports a mixed economy, combining positive features of both capitalism and socialism.
  • Free trade is overrated, and protectionism is underrated.
  • Production is generally underrated by Neoclassicals. They overlook the importance of the manufacturing sector and the role of work in people’s lives.
  • Balanced budgets are harmful — Chang supports Keynesian policies.
  • Inequality and poverty are bad, and can and should be reduced through state intervention.

Detailed Summary of Economics: A User’s Guide

As noted above, there’s a lot in the book I haven’t summarised. In particular, my summary omits or skims over:

• What is “economics”?
• Why economic development is important, even if you care about the environment.
• The financial system — banking, the Global Financial Crisis and other banking crises, regulation and derivatives.
• Inequality and poverty.
• Work and unemployment.
• State intervention — market failures (public goods, monopolies and externalities) and government failures.
• Balance of payments, trade surpluses and deficits.
• Immigration and remittances.

Economic history

Until the 1980s, economic history was a compulsory subject in most American universities’ graduate economics training. Now, many don’t even offer economic history at all.

Why understand history?

History is important because it affects people’s decisions today. Policy advisors frequently point to historical examples to support their recommendations. If those examples are wrong, their underlying recommendations hold less weight.

Moreover, history is full of radical policy experiments that have destroyed millions of people’s lives. To the extent we can learn from history, we may be able to avoid making the same mistakes.

Pre-1500 (pre-capitalism)

Between 1000 and 1500, Western Europe grew very slowly (around 0.12% per year). But this was still about 3 times faster than Asia and Eastern Europe.

1500 to 1820 (start of capitalism and colonialism)

Western Europe’s overall growth rate was around 0.14%, while Britain and the Netherlands had increased to about 0.28% per year.

Developments in sciences and maths led to new technologies and innovations, especially in textiles, steel-making and chemicals. Colonialism expanded rapidly, and colonies brought back new resources such precious metals, spices and slaves.

1820 to 1870 (Industrial Revolution)

Capitalism takes off, with Western Europe’s annual growth rates averaging 1%.

Initially, living standards for many declined. Artisans lost their jobs and were replaced by machines; people worked 70-80 hours per week; and working conditions were hazardous. Life expectancy fell by up to 30% in some areas. In the longer run, however, life expectancy increased from 36 years in 1800 to 41 years in 1860.

1870-1913 (high noon of capitalism)

Western Europe’s growth rates increased to 1.3%. Mass production systems grew and limited liability became widely available. Bankruptcy laws were liberalised, making it far less risky to start a business.

As workers pushed for labour law changes, wages went up and conditions improved. Many countries began to ban child labour.

The role of the state increased. Welfare reforms introduced things like health, accident and unemployment insurance as well as old age pensions. Governments also invested in public infrastructure (railways and canals) and education.

Contrary to popular belief, trade protectionism increased. Tariffs on agriculture and heavy and chemical industries in the Western European countries increased in the late 1800s. Latin American countries similarly introduced high tariffs. To the extent trade was liberalised, it largely occurred in weaker countries in Asia and Africa against their will (see below).

1914-1945 (World Wars and Great Depression)

Russian Revolution

Vladimir Lenin argued that capitalism would inevitably lead to imperialism, given its need for expansion. He spearheaded the Russian Revolution, which started in 1917. Eventually, the means of production in the Soviet Union (i.e. factories, farms, land, etc) became publicly owned. Markets were abolished and replaced by central planning.

Initially, these changes looked successful. Between 1928 and 1938, income per capita in the Soviet Union grew at around 5%. It later transpired that this impressive growth came at the cost of millions of deaths, including from famine.

The Great Depression

Around the same time, the Great Depression in 1929 shook many people’s faith in capitalism. US output fell by 30% while unemployment rose to 24%. The shock turned into the Great Depression as capitalist countries became wedded to the idea of a “balanced budget” and the Gold Standard. They refused to run a budget deficit to maintain the level of demand in the economy.

Following the Great Depression, there were efforts to reform capitalism. In the US, the First and Second New Deals established things like Social Security, new labour laws, and programs to build infrastructure and provide jobs.

1945-1973 (Golden Age of capitalism)

Western Europe grew at around 4% each year while the US grew at around 2.5%. There was virtually no unemployment in the advanced capitalist countries (Western Europe, the US and Japan) and inflation was relatively low.

Chang believes that this era prospered because it employed a “mixed economy” model, combining the best of both capitalism and socialism. Many governments strengthened financial regulations and promoted selected “strategic” industries through trade protection and subsidies. Both the welfare state and labour rights expanded, and taxes increased significantly to fund welfare measures.

Decolonisation also occurred, starting with Korea in 1945. After gaining independence, countries often pursued state-led industrial policies.

The post-WWII economic system established three key institutions:

• The International Monetary Fund (IMF) provides short-term funding to countries in a balance of payments crisis.
• The World Bank loans money to countries for large investment projects such as dams and other infrastructure. World Bank loans have longer maturities or lower rates than commercial loans, allowing countries to invest more aggressively and longer-term.
• The General Agreement on Trade and Tariffs (GATT) cut tariffs (mostly among rich countries), resulting in expanded markets and more competition.

Over in Europe, the European Economic Community (EEC) lowered barriers to trade between member countries. Many European countries set up State-Owned Enterprises (SOEs) to own key industries such as steel, railways, energy, and banking. Some SOEs contributed significantly to the high growth rates by investing in high-tech industries that the private sector considered too risky.

1973-1979 (oil shocks)

Free-market economists critical of the mixed-economy model tend to describe this period as an economic disaster. Chang, however, points out that although growth in the advanced capitalist countries slowed to around 2%, it was still higher than any period before WWII and the three decades following (1.8%).

The US dropped the Gold Standard, which prompted countries to adopt floating exchange rates. This created instability as currency speculation increased.

The First Oil Shock in 1973 led oil prices to quadruple overnight, and inflation surged. Stagflation followed — growth was largely stagnant as prices continued to increase. The Second Oil Shock in 1979 generated further inflation.

1980-today (neo-liberalism)

Globalisation and free trade

Further moves towards globalisation and free trade included:

• The European Economic Community developed into the European Union (EU) in 1993;
• North American Free Trade Agreement (NAFTA), signed in 1994; and
• GATT developed into the World Trade Organisation (WTO) in 1995.

Of course, technological advances in communications and transport also contributed to increased globalisation and trade.

Tax and welfare cuts

In the UK, Margaret Thatcher lowered higher-rate income taxes, reduced government spending and privatised many SOEs. In the US, Ronald Reagan similarly cut higher income tax rates aggressively. Their acts were spurred by the “trickle-down theory” that tax cuts meant the rich would invest more, creating more jobs and lifting incomes for all. At the same time, welfare was cut and the minimum wage was frozen.

Deregulation

Financial deregulation in the US facilitated hostile takeovers. To ward off such takeovers, firms had to deliver profits faster — the easiest way to do this was through downsizing.

Foreign debt crises

Interest rates in both the US and UK were increased to bring down inflation, and the increases led to the Third World Debt Crisis. Developing countries had to turn to the IMF and World Bank, which required them to make structural reforms such as cutting their budget, privatising SOEs, and reducing tariffs. Even when they made these reforms, most countries experienced sharp declines in economic growth.

Later, Mexico (1995) and Asia (1997) also ran into financial trouble and the IMF had to bail them out. Again, the IMF forced countries to implement policy changes that further liberalised their markets.

The GFC

In the early 2000s, things seemed to go well, especially in the US. Growth was robust and inflation remained low.

When the Global Financial Crisis (GFC) hit in 2007 and 2008, the major economies initially adopted Keynesian policies and let huge budget deficits grow (unlike during the Great Depression, when they cut government spending in line with falling tax revenues). Central banks brought interest rates down to historic lows and governments bailed out various large banks and firms.

By 2010, however, the idea of a “balanced budget” started to regain traction. Portugal, Ireland, Italy, Greece and Spain (the PIIGs) had to adopt austerity measures in exchange for bailouts. Even the US made large spending cuts in 2011.

Chang observes that financial reforms since the GFC have been relatively mild, though it was excessive liberalisation of financial markets that caused the GFC.

Nine different schools

There is more than one way to think about economics. Different schools focus on different aspects of the economy, and each school has its own pros and cons. Knowing a range of schools gives you a richer, more balanced understanding of the economy. For example, whether a monopoly counts as a “market failure” justifying state intervention differs under the Neoclassical school and the Schumpterian or Austrian schools.

Chang provides a handy “one-sentence summary” of each of the nine schools:

• Classical. The market keeps all producers alert through competition, so leave it alone.
• Neoclassical school. Individuals know what they are doing, so leave them alone — except when markets malfunction. [Note that Neoclassical is different from Neoliberal — an easy mistake to make.]
• Marxist. Capitalism is a powerful vehicle for economic progress, but it will collapse, as private property ownership becomes and obstacle to further progress.
• Developmentalist tradition. Backward economies can’t develop if they leave things entirely to the market.
• Austrian school. No one knows enough, so leave everyone alone.
• (Neo-)Schumpeterian school. Capitalism is a powerful vehicle of economic progress, but it will atrophy, as firms become larger and more bureaucratic.
• Keynesian. What is good for individuals may not be good for the whole economy.
• Institutionalist. Individuals are products of their society, even though they may change its rules.
• Behaviouralist. We are not smart enough, so we need to deliberately constrain our own freedom of choice through rules.

[The book goes into each of these schools in much more depth — although, given space constraints, they are necessarily still cursory overviews.]

The boundaries between the school can be blurry. Chang suggests thinking of certain groupings of the schools as ‘cocktails’, with flavours that may complement or contrast with each other. To understand when and why we need government intervention, look at NDK (Neoclassical, Developmentalist and Keynesian). If you want to focus on groups and classes, take CMKI (Classical, Marxist, Keynesian and Institutionalist). Chang gives other “cocktail recipes” like these.

Criticisms of mainstream economics

Chang spends much of the book explaining and critiquing mainstream economics. Given their dominance, most of his critiques are directed at the Neoclassical school, though sometimes he’ll simply ascribe a view to “many economists” or “most economists”.

Economic freedom does not equal political freedom

Neoclassicals draw a link between economic freedom to choose and broader political freedoms.

However, Chang points out that many dictatorships have had very free-market policies while many democracies, such as the Scandinavian countries, have low economic freedom due to high taxes and regulations. [This is debatable.]

Our world is organised in groups, rather than individuals

Neoclassicals focus too much on individuals and overlook the dynamics of decision-making in organisations (e.g. corporations, governments, trade unions and co-operatives).

However, the most important producers today are large corporations, very few of which are majority-owned by a single shareholder. And in practice, most corporations are run by managers, not the owners, which gives rise to a principal-agent problem. Chang also spends some time talking about worker-run companies and decision-making in governments. Even one-party states contain political factions, which makes decision-making much more complex than for individuals, and political decisions then have to be executed by the bureaucracy.

Rational self-interest and stable preference assumptions are untrue

The assumption that people are selfish is overly simplistic. Neoclassicals also take individual preferences as given and fail to examine where they come from. In reality, humans are complicated creatures with many different motivations. We can behave differently in different circumstances and are shaped by our societies. Our preferences can also be manipulated (e.g. by advertising, think tanks and political campaigns).

Not only does Neoclassical theory assume that people are rational, it assumes a kind of “Olympian” rationality that no one actually possesses. By assuming this unrealistic level of rationality, the Efficient Markets Hypothesis led policymakers to believe that financial markets didn’t need regulation, which was key cause of the 2008 global financial crisis. [There are multiple problems with what Chang says here. I think he’s attacking a straw-man.]

Neglects the role of work in people’s lives

Neoclassicals see work as a means to an end — to generate income to buy goods and services. Work is not valued in and of itself. Chang argues that this is flawed. For most people, work is much more than a means to earn income. Because we spend so much time in the workplace, our work greatly affects our well-being and even shapes our identities. As such, changes to labour standards can affect our welfare.

Chang recognises that most economists are opposed to such standards on the grounds people will take “bad” jobs only when they are more than compensated for the poor working conditions by their wages. While Chang accepts this argument is not “unreasonable”, he points out that workers only accept such jobs if the alternative is starvation. We should therefore consider whether the conditions that lead workers to accept such “bad” jobs can be changed.

Similarly, unemployment is bad not just because it means people don’t have an income. It also has high social costs — depression, humiliation and even suicide.

Free trade may not be the best form of trade, especially for developing countries

Chang explains the difference between absolute advantage and comparative advantage in trade.

He points out that two key assumptions behind the Heckscher-Ohlin-Samuelson (HOS) version of the theory of comparative advantage are unrealistic:

• All countries have equal productive capabilities. Under this assumption, there’s no reason a country would ever want to protect its infant industries. (The Ricardian version assumes different countries have different productive capabilities but also assumes these differences cannot be deliberately changed.)
• Perfect factor mobility. This assumption holds that all capital and labour are the same and can be readily redeployed in any activity. In reality, machines and workers’ capabilities are specialised — a steel worker who has lost their job cannot easily retrain to become an investment banker.

Economists acknowledge that perfect factor mobility is not realistic such that free trade produces “winners and losers”. However, most nevertheless support free trade on the grounds that the losers can be compensated for their losses by part of the winners’ gains, and everyone would still be better off. The problem is that, in practice, adequate compensation is rarely made, particularly in developing countries that do not have social safety nets.

Chang acknowledges that international trade does bring many other benefits, especially for small economies. By opening up a bigger market, it allows producers to take advantage of economies of scale. Increased competition also incentivises producers to become more efficient. Trade can also spur innovation by exposing producers to new ideas and technologies (which is particularly useful for developing countries). He just doesn’t think free trade is needed.

Some unorthodox views

In this section, I attempt to summarise some of Chang’s less orthodox views on economics.

Protectionism works

Chang argues that Britain and the US did not become economic superpowers due to free market and free trade policies. Contrary to popular belief, both the British and US governments played leading, interventionist roles along the way.

In Britain, the Tudors (beginning around the start of the 1500s) protected domestic woollen textile producers, a “hi-tech” industry at the time by imposing tariffs on superior imports. The government even helped poach skilled artisans from overseas to acquire their better technologies. By the 18th century, woollen textiles accounted for around half of Britain’s exports.

Then in 1721, Robert Walpole (Britain’s prime minister) launched a major development programme that imposed tariffs and granted subsidies to certain “strategic” industries. Chang argues this programme was partly why Britain forged ahead of other countries. When Britain finally switched to free trade in 1860, it already accounted for 20% of world manufacturing output and 46% of world trade in manufactured goods (while having only 2.5% of the world’s population).

The British deliberately suppressed the US’s manufacturing capabilities while it remained a colony. After the US gained independence in 1776, Alexander Hamilton and others argued for the use of tariffs to protect infant industries against foreign competition. From 1816, US trade policy became increasingly protectionist. It had the highest average industrial tariff in the world for around a century. Protectionism enabled the North to develop its manufacturing industry, which helped it win the Civil War.

Free trade did eventually spread, but not because other countries recognised how great it was and voluntarily adopted it. Rather, between 1810s and 1850s, many countries were forced to enter into unequal treaties that made them give up the right to set their own tariffs (e.g. the Nanking Treaty following the Opium War in China, the Latin American unequal treaties). Chang argues the inability to protect their own infant industries played a huge role in Asia and Latin America’s decline during this period, where they experienced negative per capita growth. [This seems like an oversimplification.]

Manufacturing is more important than most economists think

Most economists underrate the manufacturing sector because the Neoclassical school focuses on consumption. As the service sector and knowledge economy grew, many believed that manufacturing could simply shift to developing countries with cheaper labour.

However, Chang believes that manufacturing is important:

• In practice, manufacturing has been critical to achieving economic development in the vast majority of countries. While in theory it’s possible for a country to achieve economic development by raising productivity in any sector, Chang argues it’s much easier to do so in manufacturing than in other sectors such as agriculture and services. [However, his reasons are unpersuasive.]
• The manufacturing sector acts as a “learning centre” for the rest of the economy as organisational innovations in the manufacturing sector filter through to other sectors. For example, McDonald’s prepares food using an assembly-line and large retail chains use inventory management techniques developed in the manufacturing sector.
• Switzerland and Singapore are often held up as service-based success stories. However, according to UNIDO data, Switzerland had the highest per capita manufacturing value added (MVA) in the world in 2002 and Singapore topped that same list in 2010. [A lot of this is in high-tech manufacturing such as pharmaceuticals or biomedical sciences. I had assumed pharmaceuticals belonged in the service sector since most of the value comes from the R&D and intellectual property (IP) embedded in the drugs, but apparently not.]

Chang further points out that “deindustrialisation” is not as widespread as statistics commonly suggest:

• Much of the decline in the share of manufacturing output is because prices of manufactured goods have declined due to faster productivity growth. If you calculate the shares of different sectors in constant prices, the share of manufacturing has not fallen very much in most rich countries. For example, France’s share of manufacturing has fallen by 40% if measured in current prices but by less than 10% if measured in constant prices.
• Many services that manufacturing firms used to do in-house (e.g. catering, security) are now outsourced. This gives the illusion that the services sector has grown more than it actually has.

Foreign investment should be tightly regulated

Chang points out that foreign direct investment (FDI) by large, transnational corporations (TNCs) has both benefits and drawbacks.

The benefits, also known as “spill-overs”, include:

• Demonstration effects. Local producers can observe TNCs’ practices and learn from them.
• Supply chain influences. TNCs buying from local suppliers tend to demand higher product quality and delivery standards, which means local suppliers have to lift their game.
• Employee knowledge. After gaining skills and knowledge at the TNC, employees can leave to join other firms or start up their own.

On the other hand, drawbacks of FDI include:

• Tax minimisation. TNCs can often minimise their tax obligations through inflating costs in high-tax countries and realising most of their profits in low-tax countries or tax havens.
• Crowding out credit market. TNC subsidiaries may crowd out local firms in the credit market, as they may get easier access to credit, even when they are less efficient, because of the fact that they are TNC subsidiaries. [It strikes me as very unlikely a TNC would want its sub to borrow in a local market. Usually such groups centralise their “treasury” function so they can borrow at lower cost in international debt markets. And related-party loans are one of the main ways that TNCs are able to strip profits out of local subsidiaries, so why would they want to undermine that by borrowing locally? Chang’s idea seems entirely speculative to me and he does not provide any references to support it.]
• Monopolistic or oligopolistic power. TNCs will be big players in developing countries, so may be able to exploit their monopolistic or oligopolistic position in such countries.
• Political influence. Since TNCs have a lot of money and the political backing of their home countries, they can get the host country to change ways that benefit them rather than the host economy. One example is when the American United Fruit Company influenced the Colombian government into sending its army to crack down on striking workers in the 1928 Banana Massacre.
• Harder to develop local productive capabilities. Perhaps most importantly, FDI hinders a country’s ability to increase its own productive capabilities in the long run. Local firms will struggle to compete with TNCs. Chang argues that many of today’s rich countries, such as Japan, Korea, Taiwan and Finland, strictly restricted FDI until their companies acquired the ability to compete in the world market. Japan did not open up its automobile industry to FDI until their carmakers could compete with US and European firms.

Overall, Chang’s view seems to be that the drawbacks outweigh the benefits. He says the evidence on whether FDI benefits the recipient economy is “at best mixed” and that many of the cited benefits are merely theoretical. But countries can use regulations to maximise the benefits of FDI, such as by requiring TNCs enter a joint venture with a local partner, making them transfer technologies to that partner, train local workers, or demanding that subsidiaries buy a certain amount of inputs locally.

Common economic measures

There are many limitations with economic measures such as output, income and happiness, and it’s important to be aware of them.

Becoming somewhat familiar with common economic numbers also gives you a sense of what the economic world “looks like” and puts other numbers into perspective.

Output

Economists typically use Gross Domestic Product (GDP) to measure output. GDP is roughly the total monetary value of what has been produced within a country in a given period.

Alternative measures of output include:

• Net Domestic Product (NDP), which is GDP less depreciation in capital goods. While NDP provides a more accurate sense of what an economy has produced, GDP is more common because people disagree about how to measure the depreciation.
• Gross National Product (GNP). GNP focuses on what is produced by a country’s nationals (including companies), rather than what is produced domestically within its borders. In the US, GDP and GNP are nearly identical, but in some countries they can differ significantly. For example, in Canada, GDP could be more than 10% higher than GNP because many foreign firms operate in Canada but relatively few Canadian firms produce abroad.

Limitations

• These output measures value outputs at market prices and don’t account for economic activity taking place outside the market (e.g. imputed rent, housework or childcare). According to many estimates, housework accounts for around 30% of GDP.
• The drivers of GDP are relevant. For example, as of 2010, Equatorial Guinea was the richest country in Africa, and had been one of the fastest-growing economies in the world for the past few decades. Between 1995 and 2010, its per capita growth rate of 18.6% per year was more than double China’s. However, the reason for all this growth was that the country had found a very large oil reserve in 1996.
• When comparing growth numbers, make sure you distinguish between absolute growth and per capita growth. This may not matter over a short period where the country’s population is relatively stable, but over a longer period you should use per capita rates.

Real-life numbers

World GDP in 2010 was around $63.4 trillion. [In 2021, it was $96 trillion.]

• Just five countries (the US, China, Japan, Germany and France) accounted for over 50% of that output. [Still true although, according to latest figures, India is now the fifth largest economy, followed closely by the UK. France has dropped to 7th.]
• Low income countries had a GDP of $0.42 trillion combined, just 0.66% of the world economy. [This has increased to $0.56 trillion, although the relative share has actually dropped to 0.58%.]

Income

We usually measure income using Gross National Income (GNI) which is like GNP (in theory they should be equal). Many consider GNI to be the single best measure of a country’s living standard.

Limitations

• Income figures cannot fully represent living standards because we care about things that money can’t buy and we often buy things that don’t make us better off. However, higher incomes generally do result in higher living standards, especially in poorer countries where a higher income can be the difference between starving and eating.
• GNI per capita merely measures the average income, which can be a misleading indicator of standard for living when a country has high inequality.
• Goods and services cost different prices in different countries. Economists adjust for this using purchasing power parity (PPP), which measures the value of a currency based on how much a common set of good and services it can buy in different countries PPP adjustment is very sensitive to the methodology and data used. When the World Bank changed its PPP adjustments in 2007, it reduced China’s PPP income per capita by 44% and increased Singapore’s by 53%.

Real-life numbers

• In 2010, with PPP adjustments, Luxembourg was the richest country in the world with per capita income of $63,850. [The most recent World Bank data from 2021 shows Singapore as the richest country at $102,450. I’ve selected the “current international $” series so I’m not sure the figures are directly comparable to the ones Chang used.]
• The Democratic Republic of Congo was the poorest country in the world with per capita income of just $310. [Now Burundi at $780.]
• The (PPP-adjusted) per capita income of the richest country was therefore 206 times greater than the poorest country’s. [This ratio has dropped significantly to 131 times.]

Unemployment

The unemployment rate is the number of “unemployed” people as a percentage of the “economically active” population. The economically active population does not include those who are too young or old to work (the precise ages can vary across countries) and who are actively seeking work (as in, they applied for a job within the last four weeks).

Limitations

• A person counts as “working” if they’ve worked one hour in a week, which is a very low bar. People who are underemployed, in that they want to work more than they can, are not counted as unemployed.
• By only counting people who are actively looking for work, the definition excludes discouraged workers who have given up looking altogether.
• Many people in poor countries work jobs in the informal sector that are actually more like begging. They provide goods and services that people don’t actually want (e.g. washing windscreens at intersections, holding doors for people) in the hopes someone will toss them a few coins.

Real-life numbers

• During the Golden Age, unemployment rates in Japan and Western European countries were around 1-2%. Some countries were even lower. The US’s unemployment rate was relatively high, at 3-5%.
• Today, the unemployment rate in rich countries often ranges between 5-10%, though some countries (e.g. Japan, Switzerland, Netherlands and Norway) have managed to keep their rates lower at 2-4%.
• Since the 2008 GFC, unemployment rates have risen in rich countries.
  • In the US, UK and Sweden, rates rose from around 6% to around 10%. Five years later, they still remain at around 7-8%.
  • In Greece and Spain, rates rose from around 8% before the crisis to 26-28%. Youth unemployment was particularly high at over 55%.
• Unemployment rates in developing countries range from low to high:
  • Low unemployment (1-5%) countries include Bangladesh, Bolivia, Guatemala, Malaysia, Mexico and Thailand.
  • Medium-low unemployment (5-10%) countries include Brazil, Indonesia, Pakistan and Sri Lanka.
  • Medium-high unemployment (10-15%) countries include Colombia, Jamaica, Morocco and Venezuela.
  • High-unemployment (20 to over 30%) countries include South Africa, Botswana, and Namibia.

Other measures

Chang also discusses the following measures briefly:

• Happiness. Measuring happiness is hard. These days, happiness studies, such as the OECD’s Better Life Index, tend to combine subjective happiness measures with objective elements such as income level or life expectancy. But working out what weight to assign each element is tricky.
• Investment ratio (GFCF/GDP). Chang argues that the ratio of GFCF to GDP is a the single best indicator of a country’s development potential. GFCF is gross fixed capital formation, the amount of investment in fixed capital. The world investment ratio is around 20-22%, but for individual countries this ranges from as low as 2% (e.g. Central African Republic) up to 45% (e.g. China). Higher investment ratios are not necessarily better, since it’s sacrificing consumption today in the hope of achieving higher consumption in the future.
• R&D spending ratio (R&D/GDP). Another useful indicator of economic development, particularly for richer countries. Rich countries tend to have a much higher R&D spending ratio (around 2-3%), while developing countries do almost no R&D.

Other Interesting points

• Adam Smith argued that division of labour increases productivity in three ways:
  • Workers can practice their tasks and get better at them more quickly.
  • Reduced transition costs as workers don’t have to spend time moving (mentally and physically) between different tasks [i.e. less context switching!].
  • As each task gets simpler, it becomes easier to automate.
• In Smith’s time, most factories and farms were operated by individuals or small partnerships, and capitalists were usually personally involved in production. And there was no limited liability — Smith himself was opposed to the idea.
• The reason so many African borders are straight is because they were arbitrarily drawn up by colonialists. Natural borders are rarely straight as they tend to follow geographical features.
• Mondragon (in Spain) is the largest co-operative in the world. It famously has a wage rule in which the top management partner’s pay cannot exceed 9 times the lowest-paid partner.
• To work out how long it takes for an economy to double at a constant growth rate, divide 70 by the growth rate. For example, it’ll take around 12 years for an economy growing at 6% to double.
• Some countries refer to limited liability companies as “anonymous societies”, because they allow business owners to sell their shares to anonymous investors.
• The Ministry of Defence in most countries used to be called the Ministry of War.
  • In 18

My Thoughts

Economics: The User’s Guide is an ambitious book. Economics is a wide-ranging topic and Chang covers a lot of it. I felt the book was fairly accessible but I was not coming to the subject as an absolute beginner. Given how much Chang packs into the book, it may be overwhelming for someone with no background in economics.

I also worry that someone without any economics background may take Chang’s points at face value. Chang holds some strong positions that conflict with the mainstream economics view. While I appreciate an alternative viewpoint, I don’t think Chang always presents the issues fairly (see Criticisms of “Economics: The User’s Guide”). In my opinion, a book aimed at newbies that calls itself “The User’s Guide” should be held to a much higher standard of objectivity. Sadly, I think Chang failed to meet that standard.

That being said, I appreciated this book for several reasons:

• It was good hearing a contrary viewpoint. I’ve done a few undergraduate economics courses, and Chang was correct that the reality is often far more nuanced and messy than lecturers suggest. Of course, this depends on the lecturer, but what he wrote about the shortcomings of economics education rang true for me. The constraints of these courses inevitably pressure lecturers to oversimplify things.
• If nothing else, I am grateful to Chang for setting out a brief overview of 9 different schools — I found the book worth reading for this alone. In explaining the history of each school, Chang listed the key figures and their works, a useful jumping-off point for further reading.
• I agreed with Chang that it’s important to know some real-life numbers to get a sense of the “economic world” looks like. I found it interesting to play around with the World Bank data when checking for updated figures.

Overall, I’d recommend the book if you have some economics knowledge and want to consolidate and build on your existing knowledge. Just make sure to keep a sceptical mind and don’t accept unquestioningly everything that Chang says (I mean, that’s generally good advice for most books, but especially here). I’d hesitate to recommend it to anyone new to economics.

What do you think of my summary of Economics: The User’s Guide? Would you recommend this book to people new to economics? Share your thoughts in the comments below!

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If you enjoyed my summary of Economics: The User’s Guide, you may also like:

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