It is an honour
for any author to have a book translated into another language. I am especially
pleased to have Debunking Economics translated into Chinese by my good friend Professor Yanli Huo and his colleagues,
and published by the China Economic Publishing House at this
important time in
You may wonder why a book entitled
“Debunking Economics” would be thought worthy of translation into Chinese. I
can give no better reason than a comparison of the economic performance of
What caused this dramatic difference
between
The difference did arise because
one country “followed the advice of experts” while the other did not. But
ironically, the country that followed the advice of experts was
In a nutshell, the dominant Western theory
of how a market economy functions is unsound. Since the theory itself is
unsound, any advice based upon it is likely to be misleading—as is clearly the
case with the advice given to
As you will find from reading this book,
the flaws in economic theory are many and varied. If there is one common theme,
it is that the theory ignores the issue of time. Nowhere was this more apparent
than in enthusiasm that Western economists had for
The outstanding difference between the
transitions in
It might be thought that, since speed was such a key aspect of his recommendations, Sachs and economists like him must have modeled the impact of slow versus fast transitions and shown that the latter were, in model terms at least, clearly superior. But in fact the models from which economists took their guidance effectively ignored time. Rather than considering the time path that an economy might follow as the result of a policy change, these models presumed that the economy would move very rapidly from one equilibrium to another, and the time path of this change could be ignored.
This assumption of instantaneous change has
been a key weakness of the dominant school of thought
in Western economics since its inception in the 1870s. However,
“Rational expectations” argues that consumers and producers in a market economy form their expectations in a rational manner—a statement that in itself seems innocuous. Of course there must be some people in an economic system who are irrational, but it would be foolish to assign much importance to their behavior when building a model of the economy.
However, what economists like Sachs meant by the phrase “rational expectations” was the ability to accurately predict the future of the economy. John Muth, who first developed the “rational expectations hypothesis”, assumed that, apart from some random error, people's predictions of the future were accurate. When this assumption was fed into standard economic models, it meant that the model was always in equilibrium (or displaced only slightly from it by the impact of random and unanticipated shocks). Processes that even neoclassical economics once had to accept took time—such as the movement from one price to another in a market when conditions of supply changed—became instantaneous under the assumption of “rational expectations”.
In the early 1970s, three younger economists Thomas Sargent, Neil Wallace and Robert Lucas promoted Muth's hypothesis, and by the mid-1980s it dominated Western economic theory. This belief that the world is populated by people who can predict the future lay behind the haste neoclassical economists recommended for the transition from a planned to a market economy. If people are omniscient, then why waste their time with a drawn-out transition from one social system to another? Simply change overnight and people will instantly choose the appropriate settings for the new system.
Even though rational
expectations has since fallen from favour in
the West, I expect those who once believed in it would protest that their views
were more subtle than my summary implies. I beg to differ. Though they
occasionally expressed some concerns, in general neoclassical economists
advised that “economic agents” could rapidly adapt to any change that was
thrown at them, and that the faster change was implemented, the better.
Consider, for example, the discussion of how fast
Central planners seemingly should at once resign their posts and close their offices. Their departure simply would signal the market to move immediately to equilibrium. (Wolfson 1992: 37; emphasis added)
Implicit in this statement was the
proposition that all
The belief that market processes occur instantaneously is obvious in the statement that the end of central planning would “signal the market to move immediately to equilibrium”. Less obvious is the obsession with “equilibrium” itself. As I argue later in this book, the obsession is a large part of the reason why neoclassical economics provides such a poor model of a market system.
Wolfson's discussion of a gradual approach to the transition in this paper showed how much economists relied upon the “rational expectations” belief that people are omniscient(and how little a role time plays little in the thought patterns of neoclassical economists). His argument that a gradual program would fail relied heavily on the surmised actions of “rational and reasonably knowledgeable economic agents”. As I point out, by “rational” he meant what ordinary language describes as “prophetic”: how could people acquire so profound a knowledge of a system they have not yet lived in that they could predict its behavior (and prices in it) before it existed?
Wolfson's policy prescriptions were as didactic and extreme as his actual analysis was simplistic. He advised that:
A rational expectations conclusion is that quitting communism Cold Turkey is the only way to get from A to B. In practice, governments must make the national currency convertible and allow it to float on legal as well as black markets, abolish the system of subsidies and direct plans and quotas, close plants that cannot compete, come quickly to a privatization of industry even if some inequities result, strictly control the money supply, and allow goods and services to find their own price on national and international markets. (Wolfson 1992: 39)
Wolfson did qualify his arguments with some concessions to reality, but in the end his recommendations were all for speed on the basis of a belief in the self-adjusting properties of the market economy populated not by people, but by gods.
Wolfson is far from a leading light of neoclassical economics, but his
views were typical of those who recommended upon and helped implement the
actual transition, as George Stiglitz makes clear in
his book Globalization and its Discontents. The actual process of
transition was also more subtle than the simplistic propositions put by Wolfson, with some attempt to stage the introduction of
change. But in general,
A time-based analysis would instead have supported a gradual transition, if only to give Russian factories time to introduce modern production technology, products and process control methods. Time would also have been set aside for the development of the framework for distribution and exchange of goods in a market system: systems of wholesale and retail distribution, respect for written contracts, systems for consumer protection, laws of exchange, lines of credit, bankruptcy laws.
Unfortunately for Russia, given the haste
with which the actual transition was implemented, the only market systems that
could rapidly develop were those that were already in place in the preceding
socialist system—the black market that had always been there to lubricate the
wheels of the shortage-afflicted Soviet system, just as market intrusions once
permeated the feudal systems out of which capitalism itself evolved in Europe.
That gave the upper hand to criminal elements in the development of
entrepreneurial activity in
There was, of course, much more to the
story of
In contrast,
The Chinese experience demonstrates that shock therapy is not the only way to proceed. To the shock therapists who warn that step-by-step, gradual economic reform is like crossing an abyss in two leaps, the Chinese gradualists respond that economic reform should be like crossing a river by feeling for one rock at a time. (Goldman 1996: 210)
The gradual approach taken by
Steve
Keen
February，2005