In 2008 Queen Elizabeth visited the London School of Economics. After a presentation on the financial crisis she asked, “Why did no one see it coming?” Good question. A meteorologist who missed a one-in-a-hundred-years blizzard or a category five hurricane will be looking for a new job. Why shouldn’t economists be treated the same way?
Cambridge economics professor Ha-Joon Chang believes a lot of conventional wisdom in his field is widely off the mark. His recent book, 23 Things They Don’t Tell You About Capitalism, is an excellent primer for the average reader. According to Chang, a bit of common sense, a familiarity with history and a desire to prosper are often a better guide to economic development than the ruminations of economists – of either the Keynesian or the free trade variety.
Chang is on solid ground pointing out in Thing #7 that “Free-market policies rarely make poor countries rich.” Indeed, the world’s wealthier nations didn’t achieve success by sticking to free-market dogma. England, France, Germany, Japan and South Korea used a combination of protectionism, subsidies and even state-controlled industries in the early stages of development.
Even the American founding fathers set up a “protection racket”. The first US Treasury Secretary, Alexander Hamilton, introduced a brilliant plan, the “American System,” which used high tariffs to protect infant industries. He promoted a national bank and key infrastructure projects to spur economic development. The 1825 Erie Canal opened up commerce to the American Midwest. Later on the transcontinental railroad sponsored by President Abraham Lincoln did much the same.
Chang also skewers conventional wisdom in Thing # 9 – “We Do not Live in a Post-Industrial Age.” The laissez-faire approach, widely adopted over the last three decades, can actually have destructive effects. The UK and the US adopted policies which led them to a services and banking-based economy. But to the layman, it is only common sense that a nation which shuts down most of its key industries and manufacturing will get lower wages, more poverty and massive trade deficits. Germany, South Korea and China protected their industries and have emerged in much better condition.
Chang has more surprising and contrarian arguments than Ripley’s Believe it or Not. Thing # 11 is especially significant: “Africa is not destined for underdevelopment”. The dismal lack of economic development in the sub-Saharan region is not inevitable, no matter what Western elites say. “Structural conditions seem to act as impediments to development in Africa, only because its countries do not yet have the necessary technologies, institutions and organizations skills,” to overcome them, writes Chang. “The fact that most of today’s rich countries themselves used to suffer (and still suffer to an extent) from these conditions” provides an indirect proof for his more hopeful assessment.
Africa’s poorer countries were developing slowly during the 1960s and 70s and were poised to accelerate the pace of growth. But suddenly everything changed. Asian economies like South Korea, Japan and Taiwan embarked on a path of phenomenal growth which dramatically increased their living standards and life expectancy while most African countries remained trapped in poverty. Africa’s output actually contracted for 20 years. “The real cause of African stagnation in the last three decades is free-market policies that the continent has been compelled to implement,” insists Dr. Chang. He blames the Structural Adjustment Program, a set of laissez-faire austerity policies mandated by the International Monetary Fund, a body controlled by the richer Western nations.
We find out in Thing # 4 that, “The washing machine has changed the world more than the Internet.” Labor-saving machines, most of which were introduced early in the last century, made a much bigger difference in ordinary people’s lives than iPads and email. The washing machine, vacuum cleaner, internal plumbing, gas stove, and central heating drastically reduced the hours that the average family (ie, women) had to devote to such chores. “The proportion of married women of prime working age (35-44) years who work outside the home” has risen from single digits to nearly 80 percent. This transformed the traditional structure of the family. Women gained more control over their lives and their options increased dramatically. Feminism began with the refrigerator.
Among the interesting insights in Things # 12, 16 and 19 is Chang’s insistence that “despite the fall of Communism we are still living in planned economies.” But this is not a menace. In all modern capitalist countries, planning is flourishing and is here to stay. However it is not the top-down management of the USSR. Capitalist economies use “indicative planning”, with “carrots and sticks” to achieve economic goals in the national interest. The Asian miracle economies, Japan, Korea and Taiwan, employed this technique to great advantage. France, Germany and the Scandinavian countries used either an explicit industrial policy or indicative planning throughout after WW II. Ironically, according to Chang, “the share of government funding in total R&D in the supposedly free-market US is among the world’s highest. From 1950-80, the US government provided between “47 percent and 65 percent” of total yearly R&D. Indeed in most areas where the US has a technological advantage, the industries have benefited from state assistance.
Chang urges caution before we embark on measures which would severely curtail or do away with the social safety net – something market fundamentalists on both sides of the Atlantic are promoting. Nations could be gambling away their future.
It is no exaggeration to suggest that had the safety net or welfare state not been in place, the social fabric could have disintegrated rapidly. Many millions of people would have faced total financial ruin, homelessness and even starvation during the present economic meltdown. Unemployment compensation, job retraining assistance and health insurance can give people a second (or third) chance to succeed. Social spending helps to keep families from falling into destitution and allows people to take the chance of making a career change.
23 Things is not another blinkered anti-business book. Chang regards the market as extremely effective and efficient method for coordinating complex economic activities. He adds, “The profit motive is still the most powerful and effective fuel to power our economy and we should exploit it to the full.”
Nonetheless he bluntly declared that “by glorifying the pursuit of material self-interest by individuals and corporations, we have created a world where material enrichment absolves individuals and corporations of other responsibilities to society.” We must recognize that each nation’s path to economic independence and prosperity is due to dozens of factors and is linked closely to its unique history and culture. The growing apprehension about the justice and fairness of world economic policies is, on balance, a sensible and healthy development.
David J. Peterson is an author and a high school teacher with a degree in economics. He lives in Chicago.