23 Things They Don’t Tell You About Capitalism

If you’re not happy with the way the U.S. economy is being run right now, you’ve been pretty much stuck talking to leftists to get any serious in-depth dissidence. With the exception of a few distinguished rightist critics like Paul Craig Roberts, a former Reagan appointee at the Treasury Department, most people who do hard-hitting across-the-board criticism of our present variety of capitalism are liberals and beyond. So if pink isn’t your political color, you’re pretty much stuck with narrow-bore criticism of the recent financial crisis—most of which comes down to “people were stupid and crooked.”

Thus it is with great pleasure that I review Ha-Joon Chang’s new book 23 Things They Don’t Tell You About Capitalism. (Full disclosure: I went to school with his brother.) This is one of the toughest assaults on what passes for capitalism in the U.S. these days to come out in decades—but it is not especially a liberal or leftist book, and thus supplies the profound need America has for economic criticism that is both radical and bipartisan.

There’s plenty here to offend both Republicans (Americans have no intrinsic right to be rich) and Democrats (immigration makes local workers poorer), but plenty to delight both, insofar as they are looking for real answers. This is a theoretically profound book, but emphatically not a book for theorists. It is thus a book for anyone who has grasped that America is being strangled by a set of myths about what capitalism is and how it works. Debunking these myths is thus job one.

Ha-Joon Chang is a South Korean economist currently teaching at Cambridge University in England. His academic specialty up to now has been protectionism and state industrial policy, i.e. two things that conventional economics says can’t work. But his own native land is visible proof that they can. And this is just his starting point for exposing the flaws in conventional economic wisdom.

Because Chang is so spot-on with most of what he has to say, I shall keep my commentary to a minimum and just reel off his insights in order. To wit:

Thing 1: There is no such thing as a free market. Pace the glorification of the free market in recent years, this is largely a mythical animal. This is not just because of government interference, it is often because the private sector doesn’t want to be free, regardless of what it says. Even when we could hypothetically free up markets, we frequently wouldn’t be better off it we did.

Thing 2: Companies should not be run in the interest of their owners. Not entirely, that is. Even the former king of “shareholder value” himself, ex-GE CEO Jack Welch, has recently conceded this. Long-term success requires taking seriously everyone who contributes to a business: not just equity investors but also employees, suppliers, customers, and plant communities.

Thing 3: Most people in rich countries are paid more than they should be. Neither you nor I did anything to deserve to be born in this country—or after the invention of antibiotics, for that matter. This doesn’t mean we should feel guilty; it does mean we should remember we succeed in large part because of what society we belong to, not just due to our own efforts.

Thing 4: The washing machine has changed the world more than the Internet. The washing machine and other labor-saving devices made feasible the radical change in women’s roles we know as feminism. Similarly, without the humble air conditioner, America would have no Sunbelt. Twitter doesn’t come close.

Thing 5: Assume the worst about people and you will get the worst. Yes, people’s behavior is maybe 70 percent self-interested. But the remaining 30 percent is a big chunk, and you can’t make sense of even a capitalist economy without taking it seriously. Companies (and countries!) that understand this do better than those that try to run on selfishness alone.

Thing 6: Greater macroeconomic stability has not made the world economy more stable. Brutal anti-inflationary policies can easily do more damage than the inflation they combat. Protecting the value of a nation’s money is less important that protecting its economy as a whole. We’ve had more financial crises the more obsessed with hard money we’ve become.

Thing 7: Free-market policies rarely make poor countries rich. As I discussed in Chapter Six of my own book, every developed nation from England down to the present day got that way through protectionism and state industrial policy, not pure free markets. Even the good ol’ USA played this game from Independence until after WWII.

Thing 8: Capital has a nationality. Capital mobility causes plenty of mischief in our overly globalized world, but it’s a myth that capital has been denationalized into free-floating ether. Money always belongs to somebody, and those somebodies have passports and home addresses. It matters who’s in charge, and the answer is never “nobody.”

Thing 9: We do not live in a post-industrial age. The myth that we do has just led to the neglect of U.S. manufacturing while Japan and Germany remain quite competitive in hard industries despite paying decent wages. You can’t download a ride to work or the supermarket.

Thing 10: The U.S. does not have the highest standard of living in the world. Much bad policy, both here and abroad, has been based on the idea that the American version of capitalism is observably superior. But our per-hour average income ranks about 8th in the world on a purchasing-power parity (read the book to find out what that is) basis.

Thing 11: Africa is not destined for underdevelopment. Africans aren’t poor because of any mysterious or immutable factors. In the 1960s and 1970s, they were making progress. They’re poor for the same reasons other nations were once poor—which means that their poverty can be fixed if the apply the same solutions other nations have.

Thing 12: Governments can pick winners. Not every time, and don’t get careless, but the free market isn’t always right, and the government isn’t always wrong. In the U.S., government was responsible for (in order) the Erie Canal, the Transcontinental Railroad, the Interstate Highway System, and the Internet. Not to mention the aircraft and semiconductor industries. In East Asia, governments did even more.

Thing 13: Making rich people richer doesn’t make the rest of us richer. Trickle down economics doesn’t work because wealth doesn’t trickle down. It trickles up, which is why the rich are the rich in the first place.

Thing 14: U.S. managers are overpriced. America has the highest-paid corporate managers in the world. We don’t have the best-performing industries. Are we getting our money’s worth? You do the math.

Thing 15: People in poor countries are more entrepreneurial than people in rich countries. Yup: they open up fruit stands at the drop of a hat. This doesn’t stop them from being poor, so stop telling them they need to be more “entrepreneurial.” Their problems lie elsewhere.

Thing 16: We are not smart enough to leave things to the market. In the real world, markets don’t take care of themselves. They need to be regulated. How much and in what way is legitimate party politics, but an unregulated economy is a dangerous fantasy.

Thing 17: More education in itself is not going to make a country richer. You need not just education, but industries for educated people to work in. And paper-pushing education isn’t necessarily the kind of education you need—something America forgets with its neglect of serious vocational training. Again, ask Germany and Japan.

Thing 18: What is good for General Motors is not necessarily good for the United States. There was (maybe) once a time when the interests of giant corporations were reasonably closely aligned with the interests of the national economies they reside in. That time is long gone. Multinationals will treat nations as hotels if we let them.

Thing 19: Despite the fall of communism, we are still living in planned economies. Capitalist planned economies, that is—only nobody calls it that when we get the results that happy suburban consumers like ourselves want. The very fact that people are whining to Washington to solve our economic problems reveals how important planning is in this country.

Thing 20: Equality of opportunity may be not be fair. A “get what you deserve” society sounds good, and in many ways it is, but there need to be some minimums for what even the losers get.

Thing 21: Big government makes people more open to change. Because it makes them more able to take risks. Some economies with big welfare states do very well, thank you. It all depends on what kind of big government you have. If big government is always a loser, why is America borrowing money from Sweden?

Thing 22: Financial markets need to become less, not more, efficient. Efficiency in financial markets isn’t the same thing as efficiency in other industries. It can easily just mean “efficiently sinking into debt.” Even we Americans understood this from about 1930 to 1980; time to relearn it.

Thing 23: Good economic policy does not require good economists. Most of the really important economic issues, the ones that decide whether nations sink or swim, are within the intellectual reach of intelligent non-economists. Technical Economics with a capital “E” has remarkably little to say about the things that really matter. Concerned citizens need to stop being intimidated by the experts here.

On this last score, reading Dr. Chang's book would be a good place to start. Ian Fletcher is the author of the new book Free Trade Doesn’t Work: What Should Replace It and Why (USBIC, $24.95) He is an Adjunct Fellow at the San Francisco office of the U.S. Business and Industry Council, a Washington think tank founded in 1933. He was previously an economist in private practice, mostly serving hedge funds and private equity firms.