23 Things they don't tell you about Capitalism

Nonfiction | Book | Adult | Published in 2010

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Themes

Deconstructing Free-Market Economics Dogma

The central purpose of Ha-Joon Chang’s book is to push back against some of the most common beliefs held by those who favor free-market capitalism. Accordingly, he highlights at least three ways that such views fall short: in theory, in practice, and in values. Chang repeatedly asserts that the theories and assumptions underlying free-market capitalism do not hold up under scrutiny. First, Chang somewhat mischievously questions whether any market can be truly free, since all markets are bound by certain rules, such as prohibitions against slavery, guidelines for child labor, or the sale of political favors. While this is a semantic point, it highlights the contradictory views held by neoliberal economists, who are not necessarily as opposed to regulations as they claim to be. Chang then proceeds to dismantle a central assumption shared by free-market economic models: that people are best described as rational, self-interested beings. Instead, Chang suggests that human rationality is severely limited and that many human emotions and motivations exist alongside mere self-interest. As that central assumption crumbles, argues Chang, so do the free-market economists’ claims that the market is best left to its own devices.

Additionally, Chang demonstrates the shortcomings of free-market economics from a more grounded, real-world viewpoint, suggesting that such policies rarely achieve optimal outcomes. From the dubious motivations of shareholders and the excessive pay of US CEOs to the instability induced by anti-inflation policies, Chang highlights multiple ways in which free-market practices have produced less-than-ideal results in the real world. While critics could no doubt cite counterexamples on each of these issues, doing so would play into Chang’s overarching point that the world is more complicated and nuanced than free-market economists would have us believe. Accordingly, not all government-sponsored enterprises are doomed to failure, just as not all private enterprises are guaranteed to succeed.

A third aspect of Chang’s critique of free-market capitalism comes from a values-based perspective. Free markets are often touted as meritocracies, in which everyone is rewarded fairly based on their talents and efforts. Drawing attention to the structural factors that increase or diminish individuals’ chances for success, Chang argues that a truly just society must consider the variety of circumstances that can prevent people from taking advantage of the opportunities open to them. While attempting to fully equalize outcomes across the board would be impossible and perhaps unwise, some amount of government control can help those from disadvantaged backgrounds close the gap between them and people born to more favorable circumstances.

The Path Forward for Developing Countries

In critically examining free-market economics, Chang draws particular attention to how associated policies have impacted developing countries throughout the world. In so doing, he highlights misconceptions that have negatively impacted growth, while hinting at a superior approach. Throughout the text, Chang identifies mistaken policies and priorities that have failed to generate growth in developing countries. Although policymakers have tended to prioritize increased access to education and communications technologies, including the internet, Chang finds little evidence that these initiatives have boosted productivity and competitiveness. Similarly, he suggests that the proliferation of microcredit in recent decades has had little impact because its scope is limited to small businesses and it fails to mobilize larger coordination. In addition, at the urging of the World Bank and the International Monetary Fund, many developing countries implemented free-market reforms, including trade liberalization, but these reforms failed to yield the desired results; in many such countries, growth has since stalled since the reforms. Even the advent of transnational corporations has been, at best, a mixed blessing, since such corporations almost always prioritize the welfare of their home countries.

Contrasting the current struggles of developing countries with the past growth of today’s rich countries, Chang highlights the discrepancy between the advice such rich countries provide and the policies they implemented when their economies were at similar stages. During the US’s growth into a world power, for instance, tariffs were common, and copyright law was weak. In this context, the increasingly prevalent viewpoint that certain countries, including many in Sub-Saharan Africa, are more or less doomed to economic stagnation due to cultural, geographic, and other factors is a fantasy invented by free-market economists to defend the integrity of the theories they hold sacrosanct.

While Chang recognizes that there are no easy answers or one-size-fits-all solutions to the challenges facing developing countries, he does offer some suggestions. Developing countries can learn from the histories of today’s rich countries by selectively implementing meaningful government interventions, whether these involve protecting fragile industries or even taking the lead through state-sponsored enterprises, as several East Asian countries did during the “Asian miracle.” Additionally, those who are sympathetic to the interests of developing countries can focus less on cultivating entrepreneurial spirit in individuals and more on building the institutions that enable the large-scale cooperation characteristic of the world’s most successful economies.

Learning From the 2008 Financial Crisis

Writing in the immediate aftermath of the 2008 global financial crisis, Chang presents and examines that crisis as a case study regarding free-market economics and government interventions. Throughout the text, Chang repeatedly characterizes the 2008 financial crisis as a direct result of certain free-market policies. Specifically, he highlights the role of the financial sector, which was deregulated during the 1980s and 1990s, in causing the crisis. Because of the high liquidity of financial capital, which can be transferred in moments, if not seconds, a strong incentive exists to seek short-term profits rather than holding onto assets for the long term. One way this is accomplished is through the development of additional financial assets on top of existing real assets. In the years leading up to the crisis, an increasing number of complex financial derivatives, including mortgage-backed securities and collateralized debt obligations, were packaged on top of the US real estate market. When housing prices fell, many borrowers defaulted on their loans. As a result, the financial securities based on these mortgages devalued, sending shockwaves throughout the financial sector and, eventually, the world economy. In Chang’s view, much of this could have been prevented had governments taken a more active role in regulating finance. He points out how crucial such regulation is to avoiding another economic downfall:

If we are going to avoid similar financial crises in the future, we need to restrict severely freedom of action in the financial market. Financial instruments need to be banned unless we fully understand their workings and their effects on the rest of the financial sector and, moreover, the rest of the economy. […] You may think I am too extreme. However, this is what we do all the time with other products—drugs, cars, electrical products, and many others (177).

In short, Chang suggests that attractive free-market ideologies can easily lull financial regulators into a false sense of security, when they should be on the alert. In addition to demonstrating the risks of unregulated financial speculation, Chang considers the government’s response to the crisis as an example of legitimate government intervention in the economy. In October 2008, President George W. Bush signed the Emergency Economic Stabilization Act of 2008 into law. This law, among other things, authorized $700 billion for the purchase of troubled assets. Although its merits were debated at the time, Chang suggests that this move may have made the difference between a relatively short recession and an extended downturn closer in scale to the Great Depression. From this, Chang argues, the world can learn the value of seeking out insights from a wide range of economists instead of adhering to a single, dogmatic outlook.