Sunday, 22 April 2018

Book review: 23 things they don't tell you about capitalism

Right from the title of his book 23 things they don't tell you about capitalism, it's clear that Ha-Joon Chang is pitting himself against the establishment. In doing so, he lays the ground for both the book's significant insights and its serious flaws. Chang's arguments are divided into 23 chapters, covering a range of economic issues. Each chapter starts off with two headings: "What they tell you" and "What they don't tell you". "They" refers to neo-liberal economists peddling "the free-market ideology that has ruled the world since the 1980s". Chang is not shy in setting up in opposition: in the introduction, he claims that the result of this ideology has been "the polar opposite of what was promised". Instead, he wants to push everything leftwards - still capitalist, but under the supervision of a bigger and more active government which intervenes to promote some sectors and impede others.

Let's start with four of Chang's lines of argumentation which I found convincing. The first is that we shouldn't promote the idea of selfishness as an acceptable goal or even a moral good, as discussed in Thing 2 (Companies should not be run in the interest of their owners) and Thing 5 (Assume the worst about people and you get the worst). I think that examining the value of economic ideas in terms of their effects on cultural mindsets is underrated, and am glad that Chang and others are pushing back on this. The second is the argument that the neoliberal approach to international development has failed, discussed in Thing 7 (Free-market policies rarely make poor countries rich), Thing 11 (Africa is not destined for underdevelopment) and Thing 15 (People in poor countries are more entrepreneurial than people in rich countries). This is a much more complicated question than I'm able to properly evaluate, but as far as I can tell, these are sound and reasonable arguments which deserve serious consideration (and are elaborated upon further in his book Kicking Away the Ladder, where he argues that America and the UK became rich by using the very trade barriers they now rail against). Thirdly, he claims in Thing 22 (Financial markets need to become less, not more, efficient) that innovations in financial markets are, on the margin, doing more harm than good. I've seen this argument floated before, particularly with reference to high-frequency trading, and have yet to see a convincing rebuttal. Lastly, he offers a defense of job security and the welfare state, discussed in Thing 10 (The US does not have the highest living standard in the world), Thing 20 (Equality of opportunity may not be fair), and Thing 21 (Big government makes people more open to change). These lines of argument are fairly common, but worth reading another take on. In Thing 21, there's a nice analogy between welfare for employees and bankruptcy laws for employers: both are measures which encourage risk-taking by reducing the possible worst-case loss.

Yet that last chapter also showcases one of the book's main failings. Thing 21's title is about the benefits of big government, but its content is only about the welfare state. I'm happy to grant that social safety nets can be beneficial for job mobility, while still strongly believing that increased regulation and state-sector employment have the exact opposite effect. Perhaps Chang's conflation of big government with the former alone is an honest mistake, but if so it's one of several cases in the book where good arguments are used to imply bad conclusions. Phrasing his points as 23 challenges to conventional wisdom seems powerful, but disguises the fact that quite a few of them fail to support his overall anti-establishment, pro-government stance, and some actively undermine it.

A good example of this is Thing 3 (Most people in rich countries are paid more than they should be). According to Chang, the conventional wisdom is the following: "In a market economy, people are rewarded according to their productivity. Bleeding-heart liberals may find it difficult to accept that a Swede gets paid fifty times what an Indian gets paid for the same job, but that is a reflection of their relative productivities." However, he argues, it's largely artificial barriers to free movement which perpetuate income differences. This point is, in my mind, entirely correct: increasing international mobility is just about the best thing we could do to help those in poor countries. Yet I doubt you'd find any leading economist who'd deny that international borders are a huge contributor to international inequality. In fact, the Open Borders movement is driven disproportionately by the libertarian right, the strongest supporters of the free markets which Chang rails against elsewhere.

Similarly, Thing 17 (More education in itself is not going to make a country richer) is spot-on in its analysis - but Chang conveniently leaves out the fact that overeducation is perpetuated by massive government subsidies for universities. Meanwhile in Thing 18 (What is good for General Motors is not necessarily good for the US), he argues that regulation can be a force for good and claims that GM "should have been forced to invest in the technologies and machines needed to build better cars, instead of lobbying for protection". The missing link, of course, is the question of whether, even if good regulations are possible, they will ever be consistently implemented. What the example of GM actually suggests is that if regulation is on the cards, lobbyists will more likely than not manage to twist it into the harmful sort.

A second issue is the fallacy of grey: the idea that because there's no black and white answer to a question, we can't sensibly choose between the remaining options. This is particularly prevalent in Chang's discussion of Thing 1 (There is no such thing as a free market), where he argues that all markets have regulations - such as those against child labour, pollution, unapproved medicines, practicing medicine or law without a license, and the sale of votes, organs, or courtroom decisions - which are determined by culture and politics, and so the goal of reducing government interference is an illusory one. But firstly, the mere fact that these regulations exist doesn't make them a good idea: many libertarians would argue that occupational licensing and obligatory pharmaceutical testing, for example, should be repealed. Even apart from that, I think Chang's point is rather misguided: the real world is complicated, of course, but broadly freer markets can be well worth striving for even if there's no platonic ideal of a totally free market (are the benefits of freeing slaves illusory just because we can't define what "perfect individual freedom" means?). Thing 19 (Despite the fall of communism, we are still living in planned economies) falls prey to the same fallacy.

Other arguments that Chang makes, which I have fewer strong opinions about: that inflation isn't nearly as bad as it's made out to be; that where multinationals are based affects their behaviour significantly; that manufacturing is underrated and knowledge-based services like banking and consulting are overrated (although he skims over the most scalable ones, like software and entertainment); that governments have an important role in "picking winners" (historically true in research at least, unclear elsewhere); that trickle-down economics doesn't work (tying in to the much bigger debate about inequality overall); that CEOs are overpaid (probably true, but also probably of mainly symbolic importance); that labour-saving devices like the washing machine have changed the world more than the internet (plausible in general, but false when it comes to washing machines in particular, according to the author of 50 Inventions that Shaped the Modern Economy: apparently people haven't saved time overall, because they wash clothes way more frequently now); and that government regulation is good at restricting choices and thus reducing the complexity of businesses' problems (an interesting idea in theory, but in reality adding a morass of legislation probably makes the decision landscape even more complex).

The book ends on an ironic note with Thing 23 (Good economic policy does not require good economists). Chang points out that the miraculous growth of the Asian economies was led by engineers, lawyers, generals, and practically everyone except actual economists. That's a thought-provoking fact, but upon reflection I'm not sure this chapter would actually be controversial amongst economists. After all, almost all economists would agree that getting rid of crony capitalism and pork-barrel subsidies is good, increasing immigration is also good, taxing negative externalities like pollution is good, and increasing trade barriers is bad. The fact that these ideas aren't implemented is not due to lack of expertise, but rather to lack of political will. In other words, coming up with ideas which work is much easier than coming up with ideas which work within the constraints of the current political orthodoxy. Perhaps, in the short term, we need economists mainly for the latter; and in the long term, we need them to change the overall political orthodoxy in the right direction. (My essay on conflict theory vs mistake theory is also relevant here).

Overall, this book is a worthwhile read, and identifies a number of important and relevant ideas. I think it would have been better off without its ideological slant - perhaps as "23 things you didn't know about capitalism"? - and with acknowledgement that the left-right divide is a rather limited explanatory tool. At the same time, Chang's facts are interesting even when they are rhetorically misused; and my existing political views make me interpret his arguments more harshly than most would. I now know a few more things about capitalism - which is what he promised, after all.

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