23 Things they don't tell you about Capitalism

Ha-Joon Chang addresses his text to those who are familiar with, and perhaps favorably disposed to, a particular economic philosophy known alternately as free-market capitalism or liberalism. Modern economists who subscribe to these ideals are sometimes described as neoliberals. As this term suggests, many of the ideas favored by these economists stem from the earlier, classical economics period in which most economists were pragmatically liberal.

Historians typically identify classical economics with a school of thought that approximately coincided with the Industrial Revolution (roughly 1760-1840). Economists like Adam Smith, Jean-Baptiste Say, and John Stuart Mill offered influential commentary on changing economic conditions. Smith is remembered particularly for his reference to an “invisible hand” guiding participants in a free market, in which goods and services are bought and sold with minimal regulation. According to Smith, though those who participate in the market do so out of self-interest, their actions are mutually beneficial to others in the marketplace.

These and other arguments by Smith’s peers proved persuasive, and over time, prior systems of feudalism and mercantilism, which involved significant government ownership and control, ceded to capitalism. Under this system, capital, or the materials used to create goods for sale, is privately owned, allowing for the formation of businesses. A key aspect of capitalism is competition between businesses: Each firm tries to offer the highest quality goods at the lowest prices.

According to liberal economists, the market is most efficient when left to its own devices. They reason that the supply, or the amount of goods produced, and the demand for the good by consumers will balance naturally. If a good is in high demand, the seller can raise the price until the number of willing buyers is equal to the supply. Meanwhile, if a good is unpopular, suppliers must lower their prices until it sells. Because they make less money from doing so, fewer suppliers will continue to produce that good. Instead, they will seek to produce more profitable goods. Through the simple mechanism of price, buyers and sellers can coordinate their preferences without even realizing it.

Early free-market capitalism had critics, among whom Karl Marx remains the best known today. Marx objected to the class distinctions that grew out of capitalism, in which rich owners of capital exploited poor workers. He envisioned a system, known as communism, in which workers collectively own capital. Under this system, a central planner, rather than price signals, would direct the economy.

In the 20th century, the influence of liberal economists waxed and waned. Following the massive, decade-long economic downturn known as the Great Depression, governments increasingly turned to interventionist policies, following the influential recommendations of British economist John Maynard Keynes. In addition, the world wars necessitated significant government involvement in the economies of the involved countries.

By the 1970s and 1980s, however, in response to ongoing inflation, the pendulum began to swing back, and neoliberal economists such as Milton Friedman offered free-market policy recommendations to heads of state such as Ronald Reagan and Margaret Thatcher. Over the next few decades, policies such as tax cuts, deregulation, and free international trade held prominence. With the onset of the 2008 financial crisis, another moment of reckoning arrived, and in this context Chang composed 23 Things They Don’t Tell You About Capitalism as an indictment of the previous three decades of free-market economics.