Monday, June 4, 2012

Review: Twenty-Three Things They Don't Tell You About Capitalism, by Ha-Joon Chang

New York: Bloomsbury Press, 2010, pp. 286.

Ha-Joon Chang's book Twenty-Three Things They Don't Tell You About Capitalism is a critical analysis of the "free market" (aka, "neoliberal") version of capitalism prevalent for over three decades now, organized around a point-by-point debunking of twenty-three claims of orthodox economic thought.

This school of thought holds that human beings as rational and self-interested actors which most successfully maximize their individual (and by extension, their collective) benefit when the "invisible hand" of the market is given the greatest freedom to allocate resources. Government interventions in this process are held to be injurious because its decisions are necessarily of poorer quality than those of private actors for a number of reasons, including its having priorities besides maximizing the economic gain of its constituents (such as holding on to political power), and the inadequacy of its information (a government bureaucrat presumably knowing a particular situation less well than the businessman actually in the middle of it). Government intervention specifically for egalitarian, redistributive purposes, is harmful in its diminution of the incentive of all actors to create wealth (the rich who will hesitate to invest when they will lose some of their income gains to higher taxes, the poor who will forgo work when they can coast on welfare), while a government's "picking winners and losers" by favoring one enterprise or sector over another (like promoting manufacturing over services, or trying to restrain finance to protect the "real" economy), for the aforementioned reasons, means sub-optimal decisions damaging to economic efficiency. Accordingly, what government should do is get out of the way as much as possible.

By contrast, Chang holds that human rationality is "bounded," limited by such things as the available time, and the limits of human intellectual powers (so that the rationale that a private actor's access to greater information than public policymakers leads to their making the better decisions is doubtful), while human motivations are complex, including not just a selfish pursuit of material gain, but positive traits like self-respect or duty as well (without which, he argues, deceit and mistrust would be so overwhelming as to bring the market to a halt). Moreover, in contrast with the easy confidence that what leads to the maximum benefit of individuals leads to the maximum benefit of society as a whole, there are clashes between the individual and collective interest, evident in such issues as the externalities produced by economic activity (like pollution), while the pursuit of short-term gains may mean losing out on other greater but longer-term gains (as seen in the tendency toward short-termism which has so characterized corporate decision-making in recent decades). The result is that there are many ways in which markets fail, so that not only is there a role for government to play in economic life far beyond the libertarian minimum of protecting property and enforcing contracts – and government's active and competent performance of that role crucial to the development, and continued health, of national economies.

Moving past theory, Chang demonstrates that the economic success stories of modern history occurred in precisely those places where economic life did not adhere by the orthodoxy. Those countries which are wealthy generally became that because their governments intervened in their economies in ways like cultivating infant industries – crucial because wealth in the modern world is a function of successful industrialization, an outcome not usually produced by private capital and initiative alone. Britain in the eighteenth century, the United States and Germany in the nineteenth, Japan and South Korea in the twentieth, and China today, all reflect this pattern.1 Moreover, none of these governments ever stopped directing their national economic life, given such realities as national R & D budgets, government control of essential infrastructure and services of various kinds (utilities, the postal service), and immigration policies (a "protectionist" measure directed at the inflow of labor rather than the goods it produces). Additionally, the meritocracy demanded by the imperative of market efficiency requires enough "equalization of outcome" among parents to insure that their children get a fair chance, while social safety nets encourage risk-taking, providing a justification for the welfare state so loathed by the political right. (Indeed, Chang regards the welfare state as the working-class's equivalent of bankruptcy laws for businessmen.)

Equally, the shift to neoliberal policy by the 1980s has been strongly correlated with a sharp drop in the rate of economic growth around the world (something I have repeatedly noted in my own researches). Most pointed is their failure to produce growth in those regions where the reforms have been most aggressive (Latin America and sub-Saharan Africa), which cannot be complacently attributed to problems of geography or culture, as orthodox thinkers would have it. The relationship between development and the received circumstances of geography and culture is in Chang's view actually the opposite of what the orthodoxy posits: development is not a byproduct of favorable circumstances, but rather overcomes unfavorable circumstances like harsh climate or ethnic fragmentation as it proceeds (a pattern seen from Scandinavia to Singapore). The tendency to blame culture can be especially deceptive as the residents of poor countries are, if anything, more entrepreneurial than their rich-country counterparts, as they must be because of the terms of life in the informal economy in which so many of them survive (while the well-paid citizens of wealthy countries are beneficiaries less of their own entrepreneurial talent than the strong institutions their countries developed, and the technological know-how those institutions absorbed, over long periods of time).2

In visiting our most recent troubles Chang does not let orthodox economists off the hook as "innocent technicians who did a decent job within the narrow confines of their expertise until they were collectively wrong-footed by a once-in-a-century disaster that no one could have predicted" (247). Rather he holds that they played a key role in creating the disaster with their simplistic and ideologically-driven prescriptions – which ignored the vast, long-standing and still-growing body of theory and history which made their intellectual errors, and the risks of the course they cheered on, all too clear. He is also quite clear that, despite the hype, recent changes in technology and political economy – the information technology revolution, and the presumed footlooseness of international capital (both overrated in his view) – have not invalidated those earlier lessons.

Those well-acquainted with the subject of economics will appreciate that all of this has been said before, many times, not just by other thinkers from Adam Smith to James Crotty, but by Chang himself, in books like his recent Bad Samaritans.3 Rather than the presentation of original theses, this book's virtue is its accurately and clearly representing ideas gathered from all across the field's vast literature, organized into a coherent critique which is made accessible to the general reader in a series of succinct chapters (each about ten pages long, free of unnecessary jargon and the equations which have left proponents of orthodoxy "blind with science") that make the relevant points and amply support them with germane, concrete examples. In the handy concluding chapter he draws together the many threads of his argument, and outlines an alternative basis for economic policy.

That is not to say that Chang's book is perfect. I found his treatment of inflation and related aspects of monetary policy unpersuasive. Far from tight money having prevailed in recent decades, the loose money policies of Alan Greenspan and Ben Bernanke have played a major role in creating the bubbles so damaging to the American and world economies in recent years (as Matt Taibbi demonstrates in Griftopia). Chang's discussion of financial crisis would also have benefited from some deepening, as he merely references the crucial work of John Maynard Keynes, Charles Kindleberger and Hyman Minsky in passing, rather than using them to present a picture of how speculative bubbles happen, and send economies running off their rails (a twenty-fourth thing he might have told the reader about capitalism). I might also add that Chang does not address the politics of how neoliberalism came to prevail, or how it has remained so dominant after not just decades of nearly complete failure characterized by economic stagnation and recurrent financial crisis, but the disaster of 2008 in which it all came to a head, through which we are still living – but that is a whole story in itself, which can plausibly be regarded as outside this book's purview.

1. Indeed, no country much larger than a Monaco or a Luxembourg can found its prosperity on international finance, with Switzerland and Singapore – ordinarily thought of as models for this approach – actually among the world's most heavily industrialized.
2. For an interesting journalistic account of the informal economy, see Robert Neuwirth's recent Stealth of Nations: The Global Rise of the Informal Economy.
3. Perhaps the most iconoclastic point Chang made is his argument that there has been an overemphasis on higher education as a path to national economic advancement. (As he notes, not only is the correlation weak, but much of what is taught in school is of little use in most lines of work, and much of the knowledge needed for work is acquired on the job - while a rush to increase the numbers of graduates can simply mean the fostering of credentialing crises.)

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