(dramatic music) - Economics cannot be
free from value judgment, especially political value judgements. There are at least five
reasons why this is the case. Well, the first reason is that economics is, in large part, about government economic policy. It may be positive about it. It may be negative about it. There's, even within
your classical economics, there's the market failure approach which says real-world markets often fail to produce the result expected in economic theory of public competition because of monopolies, because of externalities,
because of public goods, and there are good reasons to intervene, for the government to bring individual cost-benefit structure in line with social
cost-benefit structure. Within the neoclassical school, there's also the government
failure approach, corruption, inefficiency, bureaucracy, so, I mean, you may be
positive or negative about the government intervention, but the point is that a lot of economics is actually about government policy. Even the idea of laissez-faire,
that is a policy. Doing nothing doesn't actually mean literally not doing anything. It supports a particular
type of government policy. The analysis of government policy within neoclassical economics
has developed much further. Because in the beginning they said we are renaming the subject to get rid of politics, but then, barely one generation after, along came Arthur Pigou, then professor of University of Cambridge, with this idea of externality, and from there developed
a whole range of analysis called the market failure approach. Frankly, if you apply this approach to its logical limit, there'll be very few areas where you cannot have
government intervention because markets fail all the time, and then, despite this pretension that we are getting out of politics, the subject actually has
developed far more tools to analyze policies and politics. Politics can influence the
way economic research is done, so whereas in the old
days, under socialism, the government basically banned research on bourgeois neoclassical economics unless it is done to criticize it, but it's not just the socialists. Many right-wing dictatorship used to ban the study
of Marxist economics. I grew up under a military
dictatorship in South Korea in the 1970s and '80s, and it was illegal to be
in possession of books by, for example, Karl Marx. You could go to prison for that. It could be a bit more subtle that that. I mean, the 1950s and '60s under McCarthyism in the United States, you had systematic persecution of Marxist economists in universities. Secondly, economically
powerful people can and have influenced economic
research through funding. There are many pro-free-market think tanks like Institute of Economic
Affairs in this country, or the Heritage Foundation
and Cato Institute in America, that have been funded by the rich people to generate research that justify free-market approach. Even when there's no direct pressure on the economics profession to study particular types of economics, what is the main topic of research is very heavily influenced
by the politics of the day, so right after the Second World War full employment was on
the top of research agenda for most economists because that's when the
society was reformed after the Great Depression
and the Second World War, and the working-class power rose with increasing unionization, coming to power of
social democratic parties in many countries. Yeah, so full employment, which was the concern for the workers, was at the top of research agenda. Since the 1980s, with the rise
of so-called neoliberalism, - [Announcer] A double act
that, for better or worse, changed the world. - realignment of politics
in many countries, full employment has basically
more or less disappeared from the research agenda of economists. Inequality, which was
supposed to be a non-issue until, say, 2005, '06, '07, is suddenly coming back as a popular item in research agenda for economists because now there's a growing concern that the gap between the
super-rich and the rest is widening, and this increasing gap is even negatively influencing
things like democracy, and civic rights, and so on, so there's now much greater
concern about inequality, so we've already seen three ways in which politics can influence economics, but there's also causality
in the other direction because economic theory actually affects the way the government, not just the economy, is organized, so in the socialist countries in the past you had this Marxist theory that says the best way
to organize the economy is to plan it centrally. Now, in order to do that, you basically have to create
a huge government apparatus. You cannot just have one kind
of central planning bureau kind of issuing projections and estimates. No, you need ministry of textile, ministry of light consumer goods. You need a ministry of coal. In the capitalist countries
in the last few decades, especially in the U.S., UK, Australia, and New Zealand, influenced by the
government failure approach, many countries have
reorganized their government because the government failure approach recommends that you should shrink the size of the state to the minimum, but also introduce a lot
of market principles, so these countries have privatized their
state-owned enterprises. You know, the UK used to have one of the biggest
state-owned enterprise sector in the world. Not anymore, and all of the government
activities have been outsourced, so in this country we have a lot of
apparently public agencies which basically provide public services by contracting these out
to private providers. These are not government services in the traditional sense anymore. You can see how powerful the influence of economic theories can be on the organization of the government, as well as the economy. The third reason why economics is intertwined with politics is that all economic theories contain political value judgments. Many of the differences between
different economic schools are due to their different views on economic things like
how technologies evolve, how market competition works. They all have different theories, but there are many differences that fundamentally come from differences in political value judgments. Now, sometimes there's
political differences embodied in what look like
a technical difference. The best example is the Pareto criterion that is a central principle within neoclassical economics. Now, what is Pareto criterion? Pareto criterion says that you cannot call a social
change an improvement if it makes even a
single person worse off. Now, in the beginning, when
the neoclassical economics emerged out of classical economics
in the late 19th century, neoclassical economics also subscribed to this
idea of utilitarianism. You have heard of this. Jeremy Bentham. The greatest happiness
of the greatest majority. In the early 20th
century, Vilfredo Pareto, this half-Italian half-French economist who taught in Switzerland, some of this followers came up and said, "No, actually that is not acceptable." If you run the society
in that kind of way, it means that you can demand sacrifice by a minority for the greater good. Let me give you a more
intuitive explanation with what I call the one-finger story. Tomorrow morning someone
knocks at my door. (dramatic music) - Good morning. - "Oh, Dr. Chang, we found
this marvelous technology "that will solve the climate
change problem overnight," and I say, "Oh, great, what is it?" "Well, never mind the details, "but we came to you to ask for help." "Well, I'm only an economist. "I don't know anything about science." "No, no, you can help." "What is it?" "Oh, this machine's already been built. "It's all primed up, ready to go, "but we need one little input, "which we want you to have
the honor of providing." So I say, "What is it?" "Well, we need one live human
finger to start this machine." Yeah, well even before
they finish the sentence I run into my kitchen,
cut my little finger off, and give it to them. Well, what is one finger
compared to the whole world? Well, what if it's one arm? You know, of course I'll do it. What if it's my life? Maybe. What if it's the life of my family? What if it's the life of
50 million South Koreans or 70 million North and South Koreans? This is the problem with
this utilitarian thinking because yeah, you can always say, "Well, you can make a little concession," and then where do you stop? Where do you draw the line? Before you know it you're in the same bed
with Stalin and Hitler. The greater good, so Pareto was making a very
powerful ethical point. You just cannot sacrifice individuals for the greater good. What it is saying is also that you cannot
touch the status quo. You might have a very unequal country, and someone might propose, "Oh yeah, if we raise taxes
for the rich by this much "and redistribute it to the poorest people "we can reduce poverty by this much, "we can reduce inequality by this much," but if the people who are
going to be taxed say no, you cannot do it if you
believed in Pareto principle. Yeah, so one person can
veto the whole thing. Now, I'm not saying that
there's an easy answer to this. In between absolute
defense of the status quo and this tyranny of the majority, but what I can with certainty tell you is that Pareto criterion is
a very political position. In this context, my favorite quote comes
from this Brazilian bishop called Dom Helder Camara,
who was one of the leaders of the so-called liberation theology, which was this radical Catholic theology that was popular in Latin America in the 1950s, '60s, and '70s. I mean, some of the more extreme members actually advocated even armed struggle, and he once famously said, "When I give food to poor
people, they call me a saint. "When I ask why they
have not enough to eat, "they call me a communist." No, I think as a trained social scientist we should all become a bit of a communist. No, you should always question
the underlying social order that is creating these problems. The limitations of the Pareto criterion is that it doesn't ask that question. It accepts the existing
distribution of income and power, and then say, "Well, what if we do this? "Is anyone get "is anyone going to get hurt?" So when you have things like
that sitting in the very middle of neoclassical economic theory, how can you say that it is a apolitical scientific understanding of the world? Power is something that is very
under-studied in economics. Even political scientists whose central interest is power don't seem to be able to
agree on a single definition. Within the dominant economic approach, that is the neoclassical school, there's only one kind of power, which is called market power. This is when someone has a monopoly, or a few firms have oligopoly, or someone has monopsony, which is the dominant position as a buyer, so there is that power, market power within
neoclassical economics, but other than that, power is not there, but even when there's no market power, there are at least three
other forms of power that matter in our
understanding of the economy. While many neoclassical economists see the competitive market as a place devoid of power relationships because market exchanges are voluntary, so under feudalism in Europe, the lord of the manor would
demand that their serfs work, say, three out of five days in their field rather than the serfs' own fields. Under the central planning system, the central planning
authority would decide, "Well, next year we are going
to produce only black shoes, "no patterned shoes," so they have to buy them, but within free market there's no such authority, so people make these voluntary exchanges, and the thinking is, well, if
it is not to their benefit, no one will go into these contracts, so for example, if there's a poor person in India, say, signing up to work in this factory that involves toxic chemicals which he knows is likely to make him sick in the next few years, and probably going to kill him in the next 10, 15 years, if he signs up to this job knowing this, neoclassical economists say, "No problem." You know, the guy has made a calculation, but this interpretation
ignores the fact that people with little independent
means of income and wealth voluntarily do unpleasant
things, dangerous things, things that are even sure
to kill them in due course because they have no alternative. Karl Marx made a sort of career out of emphasizing this point, but even Adam Smith, I mean, in his book,
"The Wealth of Nations," there's this passage where
he explicitly says that, well, basically workers have to accept whatever wages that are offered
to them by the capitalists because they are not going to last even a week without working. In contrast, most capitalists
can live very happily without employing any
worker for couple of years because they have money. I mean, of course they
want to make more money, so that's why they are running factories where, if the worse comes to worst, okay, forget about employing people. At least in the rich capitalist countries, this imbalance compared to the days of
Adam Smith or Karl Marx has shrunk quite a lot because the workers
have the welfare state. There are trade unions that provide some, say,
means of subsistence if they go on a strike and so on, but the imbalance is still there, and it might be actually increasing because of the increasing
income inequality, the shrinkage in the
welfare state in many, although not all advanced
capitalist economies, the weakening of trade unions, and the rise of the so-called gig economy, in which workers are bogusly classified as independent suppliers, and deprived of the workers' rights that are constituted in the laws. The second type of power is what I call the power to dictate things within organizations. What do I mean by that? You know, Herbert Simon, the father of the behavioralist school whom, in one of my earlier books I called the last Renaissance man because he was originally
trained as a political scientist, but then became one of
the founding fathers of artificial intelligence, and also studied psychology,
management, and economics. In that article, he observed that, well, if you invited a Martian or some alien being to come and watch the Earth economy, how would it describe the Earth economy? Would he call it a market economy? Never, because in his reckoning something like 80% of economic decisions are made within organizations like companies, governments, corporative. He was pointing to our neglect of this vast area of the economy, which does not work according
to market principle, so within these organizations, basically there's a hierarchical
power-based relationship. If you are a guy lower down
the hierarchical chain, basically you will do what
your superior tells you. There's no bargaining. Given that this kind of relationship covers basically 80% of the economy, or at least the vast majority, not understanding this power relationship means that we are understanding only a small part of the economy. The third, the power to make people think what
you want them to think. At the deepest level, this
is the most important power. If you can do that, you don't need police. You don't need army. You don't need prison. People will do what you want. The most obvious example is advertising. Yeah, advertising provides
you with certain information and influences your choice
given your preferences, but it often goes deeper. It actually changes your preferences. This is why advertisers
love to use celebrities and sports stars because some people then get
to associate this product with a high life, high achievement. People with money have, and still do, influence other people so that they acquire worldviews that are fundamentally
against their own interests, but are good for defending the status quo. Karl Marx used to call
this false consciousness, so given your objective
interests as a, I don't know, a struggling blue-collar worker in Midwest in the United States, why would you vote for
someone like Donald Trump? So people said that these
people have false consciousness. It's kind of the false idea. Well, these days we call this the Matrix, and there are numerous examples of false consciousness in history, so many slaves in the U.S., in Brazil, in the old days, they helped their masters
to oppress other slaves because they believed that this
was the right social order, and how dare this young guy that tried to break out of this order ordained by God? The scenes that we have seen after the introduction of the so-called Obamacare, the health care reform that Barack Obama was trying to introduce into the United States, these old people saying keep government out of my Medicare. Hello, Medicare is a government program, but these people have been so brainwashed by the American health insurance industry that government health
care programs never work, they couldn't imagine that
this nice little program that is helping them in old age to cope with disease and other problems, called Medicare, is a government program, so understanding this issue of false consciousness or the Matrix is crucial in understanding economics. Most economists believe that politics is an irrational force that interferes with the
rational workings of the market. We've seen this in this country in the run-up to the
so-called Brexit referendum. Economists were coming
out in great forces, arguing that this is going
to destroy the economy. I mean, I'm not disputing
whether they were right or wrong, and then, when people didn't vote the way they thought that they should, they started complaining, "Ah, this is why democracy's
bad for economic management." People don't understand these things. When people say things
like this, you know, that politics is an irrational force impinging on the rationality
of the market, and so on, what they're implicitly assuming is that there's a clearly
scientifically definable boundary of the market into which political forces
should not be allowed, so a lot of countries have done things to make that possible in the last few decades. A lot of countries have given political
independence to the central bank because that argument was if you let politicians dictate how monetary policy can be run, these irrational political considerations will come into the management of monetary policy. The problem with this argument is that actually there's
no such objective boundary around the market that you can draw. My view is that the freedom of the market is in the eyes of the beholder. There's no scientific way to say up to this should be left
to the logic of the market, and beyond that you can have
government intervention. Let me give you an example: child labor. You know, in 1819 a bunch of reformist MPs
in the British Parliament tabled this motion that was
supposed to introduce this law to regulate child labor, and by today's standard this was a joke. First of all, it was supposed to apply
only to cotton textile. There were millions of
children working in coal mines, and working as chimney sweep,
and other types of factories, but it was supposed to be
only for the cotton factory because this was considered particularly dangerous for children. At the time, the technology
of producing cotton textile produced a lot of dust, and this dust would settle
in the workers' lungs and cause disease, and a lot of children died in
the cotton textile factories, so they said, "Okay,
this is the worst case, "so we are going to regulate that," and then they said, "Of course now, "we cannot ban all child labor, "so we are going to regulate it," so they said very young
children shouldn't work, under the age of nine. Between nine and 16 they could
work, but only reduced hours. How many? 12. This is a time when other workers were
working 15, 16 hours a day, so 12 hours was considered light, but even then, a lot of
people were up in arms. Parliamentarians, economists, factory owners, and the strongest argument was this regulation fundamentally goes against the foundation of the free-market economy, namely the freedom of contract. These children want to work,
actually they need to work. These people want to employ them. What is your problem, huh? Well, fast forward two centuries. Today, no politician, no economist, at least in the rich countries, say we need to bring back child labor in order to truly make
our labor market free. In many developing countries, where unfortunately there is still widespread child labor, in many developing countries, 40 to 50% of population is children because they had recently
very fast population growth. It's the biggest possible
regulation that you can think of. You are basically potentially pushing half the labor force out of the labor market. No one sees it that way these days because we have accepted
this different value, so that's why I said that, like beauty, freedom of the market is in
the eyes of the beholder, and 1% could say, "Wow,
that's a free market." Another might say, "Well,
what are you talking about? "This is the most highly
regulated market I've ever seen." You know, George W. Bush, in his typical idiot-savant way, put this point across beautifully. When he was announcing the $700 billion bailout package for American banks following
the 2008 financial crisis, he argued that what he was doing was the continuation of the American system of free enterprise, which rests on the conviction
that the federal government should intervene only when necessary, but who decides when it is necessary? What economic theory do you use? So in this vein, I would argue that
defining the free market is, at the deepest level,
a pointless exercise because there's no such
thing as a free market. All markets are
constrained by institutions that determine who can
participate, what can be exchanged, what are the rights and obligations of people who are involved in the process, how to run the exchange
process, and so on, and all of these have underlying political and even ethical assumptions. Now, if you ask a free-market economist, "Do you really think
there are, in reality, "these textbook-style free
markets in existence?" they'll probably say, "Well,
I mean, that's an ideal, "but there's one market that
comes pretty close to it, "which is the stock market." You know, instantaneous price adjustment, the very rapid spread of information, but does this mean that I can turn up at the doorstep of London
Stock Exchange tomorrow morning with a bag full of the shares
of my company and sell them? No. Why? Because I have to get listed. Okay, having been told that
I have to list my company, I come back home and I call
the London Stock Exchange, and ask someone to list my company. Can I do it? No, because you need the vetting process. Depending on the country,
depending on the exchange, you might have to produce
huge amount of documentation, at least about the last
three to five years of your activities, and they'll check whether
you're worthy of listing. Okay, so I go through this process, and then does it mean that I can then go to
London Stock Exchange and sell my shares? No, because you have to be
a licensed broker and trader to do that. I cannot sell those shares myself. You know, right after the eruption of the 2008 financial crisis, many countries shut
down their stock market. It was known as holidays,
basically to calm the nerves. They shut down these markets, so even in the stock market
there are so many regulations telling you what you can
do, what you cannot do, who can do it, who cannot do it, and when it comes to other markets there are even more restrictions because this is one of the freest markets, so in many countries you are not allowed to
trade in addictive drugs, or human organs, or human beings, but when you think about it, why not? I'm told that in Iran that you
can sell your kidney legally. Until the 1960s and '70s, in most countries you could patent a drug invented by someone else as far as you make it
through a different process, so traditionally, in chemical
and pharmaceutical industries, there were these two notions of patents. One is product patent, so invention of a chemical substance that can act on certain diseases, and the process patent: having identified the
chemical, how you make it, and most countries actually
gave only process patent because the reasoning was that, "Well, we cannot give you product patent "because this chemical has
always existed in nature," which is why countries like
India, Brazil, and Thailand could produce these copy drugs with impunity because as well as you make it through a different chemical process, you could do it. How you deal with fraud, how
you deal with bankruptcy, if some company that has been
supplying you goes bankrupt, how do you get compensation? There is a huge range of issue
that need legal regulation, and all of these regulations are based on some notions of justice, some notions of what is someone's right and someone's obligation, and basically, the conclusion is that we think a market is free only because we so totally accept the underlying political and even ethical assumptions that create this body of regulations that define that market, that we stop seeing them. There are these people,
some libertarian economists, who make a case for slavery. We all own ourselves, and if
it's a voluntary agreement that you sell yourself
as a slave to someone, that's okay. Yeah, I mean, is there any economic reason why that shouldn't be the case? Well, of course that most
people find this idea absurd because they implicitly understand that people will give up their freedom and sell themselves as a slave only when they have no other alternative, so basically, what I'm trying to say is that market itself is
a political construct. It is based on a host of regulations that embody political and
sometimes even ethical values, and for that reason, it is an illusion to think that economies
can be politics-free because the ultimate economic category for people who believe that, i.e. the market, is actually politically constructed. You know, economics is
a wonderful subject. Pretending that it's the
science of everything, that you can explain everything from income inequality to climate change to Japanese sumo wrestlers
and Chicago drug dealers, that's when you have a problem.
