Let me start with a confession: I live in a capitalistic country. Let me add another confession: my believe in capitalism is sketchy at best.
O.k.; I did it, I came out as a doubter of capitalism.
But why am I doubting capitalism? To keep a long story short: the fundamental assumptions of contemporary “pure capitalism” are flawed (homo economics, knowledge symmetry …), and even state-controlled capitalism has its major problems (influence of policy making through economic processes, etc.). Further more, the scientific basis of capitalism, as it is taught at business schools today, is sketchy at best. Major criticism against the scientific basis of modern economics was, for instance, launched by Nicolas Taleb, who had come to the insight that the statistical models used in finance significantly and systematically underestimate the probability of big events (financial crisis in 2007/2008, dotcom stock-market crisis at the beginning of the millennium, …). This bias in the economic models actually amplified and even accelerated the impact of these crises. Other critics have undermined the rational-actor assumption in economics the way innovation affects companies and the market and ,and whether market processes even lead locally to efficiency. And the list goes on.
So, capitalism is not perfect, and the globally hummed mantra of neo-liberalism is based on core believes that do not square with reality. Since we all are inundated with neo-liberal ideas every day, it would of course be good to know all these shortcomings and pitfalls of free-market ideology by heart. However, if you do not want to study this topic one weighty book at a time, a cliff-note version of all the arguments against neo-liberalism is a real perk. That brings me to the title of this blog: The Cambridge economist Ha-Joon Chang wrote a book for “lazy readers” of economy. In his book (23 Things They Don’t Tell You About Capitalism), he engages 23 myths about capitalism in dense, informative, perspicuous, and often times even entertaining focus chapters. They span all the way from destroying foundational myths, like the existence of a free market, to more detailed criticism of free-market economics. An example for the latter is that a country does not need good economists to pursue good national economics.
Although I have, as became apparent in the first paragraph of this blog post, quite some background knowledge about the dysfunctional nature of neo-liberalism, even I was confronted with five myth busters in Chang’s book that I had not encountered before. So what are these five things that were new to me?
Thing 1: There is no such thing as a free market
When listening to the contemporary discourse about free markets, how important they are, how they work, what they “need”, and even when listening to criticism about free markets, one gains the impression that there actually is a commonly agreed upon definition of free markets. One even gets the impression that a universally valid definition of free markets exists, as is the case for energy, momentum, valence, phenotype, etc.
Turns out there is not. Not only is there no commonly agreed-upon definition, free market do not exist as a universal object at all. It is actually not hard to appreciate the vacuousness of the free-market concept. Just ask yourself how liberal a free market needs to be to be really free. The first items on the list are easy: no tariffs (check), no national regulations (check), no pesky trade unions (check), etc. While compiling this list though, one soon enters a grey area. What about environmental regulations? Well, yes, they probably have to go. But what about regulations that are almost universal, like the prohibition of child labour? Aren’t they infringing on how free a market is? After all, if I am a small-business owner, why not letting my children work for me? Doing that they learn all they need for life and they will also contribute to the net wealth of the family. And once I am at it, why not letting work some extra hours at the nearby factory? Let’s push the envelope even further: what about slavery? Shouldn’t companies be allowed to buy the human labour they need in bulk instead of being weighted down with the cost of negotiating contracts with each of their employees? And what about organ harvesting? Shouldn’t a truly free market permit the international trade of human organs? Buy your organs via eBay! By now you should have become quite uncomfortable with this line of reasoning. Clearly it has to stop somewhere, because selling organs and owning slaves is both highly unethical and illegal. So, there are limits to free markets.
Exactly! Free markets do not exist in the same way natural concepts (mass, gravity, mobility, …) do exist, rather the notion of a free market is a societal construct. We, as a society, agree upon where to draw the line (child labour, slavery …), and we do not infer the limits of the free market from empirical data, economic models, or mathematical proofs. These limits are external (ethics, culture, politics, …). Since society as a whole defines the limits of the free market, we can ask ourself, why, for instance environmental regulations and minimum wage cannot be combined with a free market? The answer is of course: it can, and it is up to us a society to find to define (free) markets that work best for us.
Thing 3: Most people in rich countries are paid more than they should be & Thing 10: The US does not have the highest living standard in the world
Have you ever asked yourself why wages are so unevenly distributed around the world, even for the same profession? Think, for instance, of a bus driver in a high-wage country like Sweden and a bus driver in a low-wage country like India. Their wage differs by orders of magnitude. If one applied naïve market thinking, this discrepancy could only be explained by market forces such as supply and demand. But surely, there is a high demand for bus drivers in urban centres like Calcutta, right? The difference can also not be explained by the drivers’ skill level. After all, driving in the chaotic streets of Calcutta is more stressful and requires better driving skills than driving a bus in orderly Sweden. But even if we focus on the western world, we see significant differences. Take, for instance, the US and Sweden. In one country salaries are more levelled (Sweden), while they vary a lot between occupations in the other (US). The explanation for the above discrepancies is twofold. Let us first focus on the discrepancy between countries. Why is it, that the wage of bus drivers in Sweden and India is so different, especially in a supposedly global economy? Regulation is of course one answer. If one country institutes a minimum wage it -at least on the paper- puts a lower limit on wages. However, Sweden does not have minimum wage, while India does. This explanation does thus not cut the mustard. So, why don’t we see a mass-migration of Indian bus drivers to Sweden? After all, wages and living standards are higher there, and, used to lower wages, the Indian bus drivers would be more than ready to compete with the Swedish bus drivers. Well, the answer is immigration: as long as a country limits immigration, it also, indirectly, hampers downward competition and bolsters thus the lower wages paid within the country. That is the zest behind Chang’s explanation in chapter 3 of his book.
Fair enough, but why is it that some services, like getting a hair cut or eating at a restaurant, are so much more expensive in, for instance, Switzerland than in the US? That takes us to the second aspect of the overall question of the “uneven” global wage distribution. The average wage in the US is high, but waiters, barbers, etc., earn much further below the average than what their Swiss colleagues do. But why? This aspect is, among others, answered in chapter 10 of Chang’s book. First, we have to answer the question: what defines the exchange rate of currencies? The answer is: the supply and demand for internationally traded goods and services available from the pertinent trade zone (US $ –> USA, Euro –> Euro zone, etc.). However, what you can buy with the currency within the country is defined by the prices of all goods and services, including those that are only offered locally (restaurant food, hair cuts, …). So, if a country has a strong manufacturing base and/or imports cheap goods, buying things is inexpensive, but if there is no strong competition in local services, what one can buy for each currency unit is less than the global average, and that is then also inversely true for the wages paid in the local service sector. So, although the explanation is a bit more involved then the first one, it again boils down to immigration rates. The more immigrants the more competition and the closer the cost of services is to the worldwide average. It is thus no wonder that eating out in countries with rather restricted immigration (Switzerland) is comparably more expensive than in high-immigration countries such as the US.
Thing 9: We do not live in a post-industrial age
One of the economic buzz concepts in the west is the post-industrial society. This buzz concept is often also expressed as the advent of the service economy. This concept implies that most of the national GDP is generated in the service sector. However, Chang thinks this concept falls short of what we really should mean by post-industrial society. In a truly post-industrial society also the GDP growth in the service has to be high. However, the service sector has generally a noticeably lower growth rate than the production sector. There are at least two reasons for this. First, it is harder to export services than goods (cultural and organisational differences …). Second, services do not offer the same principle of scale as production does. Thanks to mechanisation and continuous technological progress, producing 100 000 instead of 1000 cars is actually not 100 times more costly. However, since services still strongly rely on human labour, which is not really subject to principles of scale, services do not offer the some growth margins. So, even in perceived “service countries” such as Switzerland, the production sector is still the major growth engine and calling such countries post-industrial is actually quite misleading.
Thing 19: More school education in itself is not going to make a country richer
When I first saw the title of Chapter 19 my immediate reaction was: “????!!!!” This chapter does not square at all with common knowledge. What Chang wants to convey in this chapter is that while school education is important for a society (democratic discourse, thriving cultural life …), it is only very weakly connected to the country’s GDP growth. This is not what is conveyed in the press, by politicians, and most economists. However, Chang’s argument is quite compelling: each profession has a very particular skill and knowledge set, and it is impossible to teach these skill and knowledge sets for all professions to every pupil. Rather, this kind of learning is usually delayed to when pupils enter the job market and when they have committed to one occupation. What Chang eludes to are on-the-job training, corporate training, vocational schools, etc. Also, skilled workers can be recruited from abroad. This is, for instance, rather the rule than the exception in the US academic system. Mind well, that Chang is not against more (school) education (and neither am I), but he thinks we should not use the pervasively used economic-growth argument for justifying more education.
Other things I -sort of- already knew
Besides the above, novel insights, Chang also elaborates many topics and explanations I already had been familiar with, but I have to admit that he explains them in a very retaining and economical way (pun intended).
Thing 4: The washing machine has changed the world more than the Internet has
Arguably the Internet has profoundly changed the world we live in (remember, you are reading an Internet blog :)), but modern household appliances have caused larger societal change by far. After all, freeing women from laborious chores in the household made it possible for them to enter the work force. Once in the work force, the advent of organised child care and women’s suffrage were not far off. Just think of what literary doubling the work force does to a society and you get the picture. So yes, the Internet has changed society and the way we are working, but in terms of economic wealth created, it still has some catching-up to do before it can compete with the washing machine, the coffee maker, and all its electrical relatives.
Thing 16: We are not smart enough to leave things to the market
It is often argued that big data, the Internet of Things, and similar technologies will provide us with more and higher-qualitative input about the world around us, which inadvertently will lead to a better understanding of, for instance, market dynamics. Thanks to this knowledge we will be able to run a market economy with even less safeguards and regulations. Not so, says Chang. What we do not need is more data about markets, production, etc., rather we need to understand each of them better. The totality of our economic activity represents a non-linear system on a truly epic scale. Not only that, but many of the important mechanisms are mediated through our rather less than rational psychology, and the limits of the models we use for forecasting market dynamics are still quite primitive. So, if we really want to leave things to market forces, we really need to understand the market, and until that happens, smart regulation instead of deregulation is the way to go.
Thing 22: Financial markets need to become less, not more, efficient
Chapter 22 ties neatly into Chapter 16. Computerisation of commerce has made trading quite effortless and it has also made the construction of new financial tools (such as derivatives) very easy. Higher efficacy (computer-based trading) and increased exploitation of assets (derivatives) certainly make markets more efficient, but since we do not understand how these advances impact the market, we have sown more havoc than we initially realised. Again: until we understand markets (munch) better, less efficient trading (slower, simpler) is the way to go.
I enjoyed Chang’s book quite a lot, and due to its clear structure and partition into 23 short chapters it is also valuable as a reference. I have to admit that while I found some of explanations a bit too simplistic, I still found the overarching observations he relays quite enlightening (see above). After all, pointing out that the emperor wears no clothes often actually is enough to get us thinking even if the explanation for why the emperor wears no cloths might be somewhat off.
If this blog post perked your interest, but you are not ready yet to invest your time in a 200+ pages book, have a look at Chang’s public talk at the RSA before you make up your mind.