As a European who during the last few years has been compelled to hear bad news about the economy of my continent, I wanted to know more about capitalism in order to understand what’s going on. And what’s going wrong.
I never believed the myths neoliberal economists have been telling us for decades now. One thing is the theory, and another thing is the reality. My generation has witnessed the failure of the promise that neoliberals made in the 1980s and 1990s. When Margaret Thatcher and Ronald Reagan turned neoliberal thinking into a mainstream ideology that has been dominating the West for decades, they told us that their economic policy would create more wealth by fostering entrepreneurial spirit. They told us that free market and free trade were the only way to more prosperity, and that government interference, bureaucracy, and ‘leftism’ were the shackles from which we had to free ourselves.
But what has been the result of forty years of neoliberalism? The first test was the integration of the former Soviet block into the capitalist world. This test showed the flaws of neoliberal thinking. Eastern Europe (including East Germany) experienced rising unemployment and the collapse of its industrial sector. Whole societies were shaken by the shock therapy that did not deliver the impressive results that were expected. When neoliberal policies failed the test, their advocates came up with an excuse that we have heard over and over again whenever such policies were unsuccessful: it’s not neoliberalism that is wrong; it’s governments that are too corrupt and inefficient. This excuse has helped shake off all responsibilities from the proponents of neoclassical methods. The fact that many corrupt and inefficient governments that did not adopt neoliberal formulae (like China or S. Korea) succeeded in creating growth and employment, and that the same neoliberals who advocate free market and free trade are very well aware of the “rising China”, is simply not discussed.
Forty years of neoliberalism have brought about a widening wealth gap, social insecurity, unemployment, financial speculation, inbalances in international trade, stagnating or falling wages, and deindustrialisation in some parts of the first world. And I always wondered: why does it have to be like that? Why are we told that we live in the best of all possible worlds when we clearly see that this isn’t the case?
Is it really true that our standard of living is too high and we have to put up with a more modest (austere) existence – i.e., more work and less consumption? Is it true that the rich who have been getting richer year by year are benefiting the majority of us? Is it true that the banking sector has done great things for the economy and all the bonuses and hyperbolic earnings of bankers are justified?
I wanted to find answers to these questions. I therefore had to buy this book. And when I read it, I was not disappointed.
Ha-Joon Chang (Korean: 장하준, Hanja: 張夏准, born in 1963), is a so-called “heterodox” economist. What does that mean? Well, I guess it means he doesn’t belong to those economists who propagate free-market economics. Calling Mr Chang “heterodox” is in itself a clear proof of the predominance of the neoliberal narrative in today’s economic discourse.
Mr Chang’s origin might partly explain why he rejects neoliberal ideology. He comes from a country (South Korea) where state intervention actually has played a major role in its astounding economic success. The same is true for East Asia as a whole. Something free market advocates might find puzzling. I think of what Milton Friedman once said: Japan is successful despite having state intervention. The word “despite” is used to turn a simple fact – that Japan’s protectionist economic policy with heavy state regulation made it the 3rd richest country in the world – into a bizarre exception that cannot be rationally explained.
In 23 Things They Don’t Tell You about Capitalism the Korean Cambridge professor analyzes 23 myths that economists have been propagating for decades, deeply influencing the thinking of both us citizens and our politicians. Free marketeers argue that the government should stay away from business. The state should be minimalist. It ought to guarantee the rule of law and other basic functions, but it should not interfere in the economic activity of the citizens. Whenever governments attempt to influence the economy – so do free marketeers say – the results have been disastrous. Therefore we should let the market regulate itself.
It sounds great, doesn’t it? We are told that if we all pursue our own interests all of us will in the end benefit from each other’s selfishness. We need no control. We can be as greedy as we want, and in doing so we keep our economies going. So long as we have individual freedom, we will live in a prosperous, free world. Wonderful. But is it really true?
Mr Chang argues that part of the assumption that the market is a fundamental element of the economy is true and that the market shouldn’t be replaced by Communist-style planned economy, where the market is suffocated by state regulation. Mr Chang is not an anti-capitalist. “Being critical of free-market ideology,” he says, “is not the same as being against capitalism.” In his book, the Korean economist explores some of the commonplaces mainstream economics have created.
In the first chapter, for instance, Mr Chang explains that “[t]here is no such thing as a free market”. We think that the market is free because we accept rules and regulations as though they were ‘natural’. But they aren’t. Think of child labour. If markets were really free, then child labour should be allowed and subjected to the “rules of the market”. Of course, it isn’t. Our states prohibit child labour because we consider it immoral, even though there might be some capitalists out there eager to exploit any underpaid work force in order to maximise gains. When in 1819 the British Parliament discussed an act aimed at regulating child labour (the Cotton Factory Regulation Act), opponents “saw it as undermining the sanctity of freedom of contract and thus destroying the very foundation of the free market.” Nowadays, no one would dare suggest that “labour ought to be free”. We regulate labour because we think it’s a moral duty of the society to protect our children from exploitation and give them a better future. Interestingly enough, through the regulation of child labour and the subsequent introduction of compulsory education, the well-being of society was better served – completely against the short-term interests of the industrial magnates.
Or think about copyright and patent laws. If the market works perfectly without state intervention, then why do we need such regulations? Well, it’s obvious. The state must guarantee by legislation that it’s worth investing time and money in new ideas. If there were no copyright and patent laws – which have to be enacted and enforced by the state – there would be less investments.
In Chapter number 7, Mr Chang refutes one of the core myths of free-market economics: it is not solely the free-market that has made today’s rich countries rich. Virtually all of today’s richest countries had at some stage of their history a protectionist economic policy. For example, it isn’t true that the United States of America became the greatest industrialised nation in the world through free market and free trade. In fact, trade tariffs in the USA averaged 20% and were often as high as 40-50 % for much of its history until after WWII. One of the strongest promoters of protectionism was lawyer and first United States Secretary of Treasury Alexander Hamilton, who in his Report on the Subject of Manufactures argued that “industries in their infancy” had to be protected and supported by the government before they could afford competition from the outside. For one century and a half the country did not depart from this approach.
After the rise of the first industrial powerhouse – now deindustrialized England – in almost all other countries industrialization was favoured in one way or the other by the state: Germany had high tariffs to protect its market from the flood of English products. Japan, China, South Korea and almost all Asian countries achieved their “economic miracle” through protectionism and state intervention.
In Chapter 18, Mr Chang shows us that the highest degree of freedom for private companies might be detrimental for the interests of society and the overall economy. The reason is that a company might pursue short-term gains and neglect the long-term well-being not only of the company, but also of the whole country. General Motors (GM) is a good example of this.
After WWII it was the biggest company of the USA and the biggest car manufacturer in the world. When the United States opened up to foreign imports, GM was unable to match competition from Japan, Germany, South Korea and other countries. GM did not invest in making better cars consumers wanted to buy. Instead, it shifted its business model to finance. In 2004, 80% of GM’s revenues came not from car manufacturing, but from its financial branch, General Motors Acceptance Corporation (GMAC). In 2009, GM went bankrupt and had to be rescued by tax-payers’ money. It was easier for GM’s shareholders and managers to earn loads of money through finance, thus sacrificing jobs and the industrial infrastructure of the US, instead of investing in better cars. And that’s because the American government didn’t set limits to what GM could or could not do in the interest of the nation and the workers.
Chang Ha-Joon’s book gives a thought-provoking insight in the history of capitalism and the misconceptions that surround the alleged superiority of the neo-liberal model of free market economics. Mr Chang proves that the market is not a self-regulating entity in which we should trust blindly. The interaction between market and other forces such as the state is way more complex than free-marketeers have long argued. A deep understanding of this interaction is a key to develop better, more efficient economic policies.