Systemic Defects in Capitalism

BOOK REVIEW

23 Things they Don’t Tell You about Cpitalism by Ha-Joon Chang; Penguin Publisher, London; January 2011; pages: 304; Hardcover Price: $ 25.

Through his two thought provoking books, Kicking Away the Ladder: Development Strategy in Historical Perspective (2002) and Bad Samaritans—Rich Nations, Poor Policies and Threat to the Developing World, Han Joon Chang, the Korean economic historian teaching at Cam-bridge University over the last twenty years, has emerged as an inveterate critic of unbridled capitalism allegedly based on the economic doctrines of the free-market economic ideology which has ruled the world recently. Under the influence of that ideology supported by the World Bank, IMF and WTO, most countries have introduced free-market policies over the last three decades. The policies have led to harmful consequences like slower growth, inequality and instability ultimately culminating in the financial meltdown of 2008 out of whose shadow the USA and Europe are still struggling to emerge. This has made it necessary to look critically at the basic premises of capitalism. In this book Chang has drawn attention to the systemic defects of capitalism. In successive succinct chapters he has drawn pointed attention to these defects—which he calls ‘things’! They are as follows.

Thing 1

THERE is no such thing as Free Market. Every market has rules and boundaries which restrict the freedom of choice. Those have evolved over time—like the Regulation of Child Labour Act. Licenses are required for professions that have significant impact on human life. Immigration is restricted affecting the wage level in a country. Interest rates are also decided by politics. ‘Fair trade’ too is a matter of political decisions. The US Government under Bush used $ 700 billion of taxpayers’ money to save the free-market financial system from toxic assets.

Thing 2

COMPANIES should not be run in the interest of their owners. They least care about the long-term future of the company—they are only interested in short-term profits. They are not interested in investments necessary for long-term growth. John Welch, Chairman of the GE for a long time, coined in a speech in 1981, the word ‘share-holder value’ to define the corporate goal. This short-term oriented strategy led to the bankruptcies of 2009.

Thing 3

MORE people in rich countries are paid more than they should get. The big gaps between rich and poor countries exist not because of difference in individual productivity but because of immi-gration control; for example, the earnings of a bus driver in New Delhi and the one in Stock-holm. Also productivity is greater in richer countries because of better technology, organisa-tion, institutions, infrastructure and the system.

Thing 4

EXCESSIVE importance is given to the internet revolution. The washing machine has changed the world more than the internet. With economic development people have become more ‘expen-sive’ than things. In rich countries, therefore, domestic service becomes a luxury. Hence the importance of electric washing machine and electric iron.

Thing 5

ASSUME the worst about the people and you get the worst. Economics starts with the assumption that self-interest is the primary motivation not only in the market but also in the government. Hence it is argued that the government officials make policies as self-seeking agents for expanding their own power and prestige. But this is not correct. Government intervention worked in the East Asian countries because they had selfless and capable bureaucrats. As the Kobe steel manager said, “if we assumed that everyone is out to promote his own interest, the company work would ground to a halt”. The world works because people are not the self-seeking agents that free-market economists believe them to be. Self-interest is not the only human motivation. There are other motives like honesty, self-respect, altruism, love, faith, sense of duty, solidarity, loyalty, public spiritedness, patriotism etc.
Free-market economists (the so-called New Public Management School) recommend that the management of the government should be exposed to the market forces—performance-related pay, short-term contracts for bureaucrats, contracting-out government services, and active exchange of personnel between public and private sectors.

Thing 6

FREE-MARKET economics has not made the world economy more stable. Inflation has been tamed but the world economy is shakier. There was a global financial crisis in 2008. Employment has been short term and more unstable in the name of labour flexibility. Policies aimed to reduce inflation have actually reduced investment and economic growth. Job insecurity is a direct consequence of free-market policies.

Thing 7

FREE-MARKET policies rarely make poor countries rich. Contrary to what is commonly believed, the performance of developing countries in the period of state-led development was superior to what they have achieved during the subsequent period of market-oriented reform. Rich countries like the US and Britain, the supposed home of free-market reforms, became rich through a combi-nation of protection, subsidies and other policies they are advising developing countries not to adopt.

Thing 8

CAPITAL has no nationality. Despite increasing ‘trans-nationalisation’ of capital, most of the so-called multinational companies remain national companies with international operations. They conduct bulk of their core activities such as high-end research and strategising at home. The home country appropriates bulk of the benefits. Of course, they have broken up national boundaries, for example, Nestle was originally of Switzerland. Also companies merge: Daimler Benzen, the German automobile company, took over Crysler of the US. A quintessential American company is run by Germans.

Thing 9

WHY don’t we live in the post-industrial age as claimed? With the relative demand for services rising with prosperity and rise of high produc-tivity, knowledge-based services like banking and management, manufacturing enterprises have gone into decline. However, it is a fantasy that developing countries can skip industrial-isaton, build prosperity and enter the post-industrial age directly. China has now become the workshop of the world while since 1970 British manufactures have sharply declined in importance. It is a fantasy for developing coun-tries to think that they can skip industrialisation and build prosperity on the basis of service.

Thing 10

THE US does not have the highest living standard in the world anymore. Americans work considerably harder than Europeans. They may have more material goods but less leisure time. Several European countries have higher per capita income. Person-to-person services are expensive in Europe but cheap in the US because of immigration. The US has greater inequality. The higher purchasing power of the US citizens owes in large part to the poverty and insecu-rity of many fellow citizens.

Thing 11

AFRICA is not destined for underdevelopment because its people are lazy, corrupt and conflict-prone. The real cause of African stagnation in the last three decades is free-market policies that the countries of the region have been compelled to implement. By suddenly exposing them to international competition, these policies led to the collapse of what little industrial sectors they had managed to build in the 1960s and 1970s.

Thing 12

GOVERNMENTS are not always erroneous in judgement as alleged by the free-market advocates.

There are several successful examples of winner-picking by governments. There are ways for the government to acquire better information and improve the quality of decisions. Korea did not have iron ore deposits and coking coal, the two ingredients of steel-making, and these had to be imported from Australia, Canada and the US. Yet the Korean Government set up POSCO (Pohang Iron and Steel Co.) in 1968 (an SOE) though the high-potential foreign donors were not forthcoming. The company did well. Another example is LG engaged in electronics (1960). The electronic giant was forced by the government to enter into electronics even though it wanted to set up a textile unit. Countries like Singapore, France, Australia, Norway and Finland have set up many successful SOEs.

Thing 13

MAKING rich people richer does not make the rest of us richer. The trickle-down theory has not worked. Pro-rich policies have failed to accelerate growth in the last three decades. Income inequa-lities have increased in most rich countries. Des-pite rising inequality, since the 1980s investment as a ratio of national income has not risen. In the US the top 10 per cent of the US population appropriated 91 per cent of income growth between 1989 and 2006. The top one per cent took 59 per cent.

Thing 14

US managers are overpriced. Top managers draw obscene amounts as salaries plus stock options in the name of getting best talents. They are also overprotected, not punished for poor perform-ance. On the other hand, they get hefty severance cheques. The managerial class has gained economic, political and ideological power. It has been able to manipulate the business forces through interlocking directorship and access to information that determines the pay. The average CEO compensation is 300-400 times the pay of an average worker.

Thing 15

PEOPLE in poor countries are more entrepreneurial than people in rich countries. They are teeming with work entrepreneurs. What they lack are technologies and social organisations.

Thing 16

IT is claimed that we are not smart enough to leave things to the market. Even Milton Friedman has admitted that markets fail. Robert Merton and Myron Scholes, both Nobel Prize winners in Economics for their new method to determine the value of derivatives, thoroughly mismanaged the huge hedge funds. The supposedly smartest people in the financial market did not know what they were doing. They all had ‘bounded’ rationality to use the term of Herbert Simon and found the financial world too complex. Hence the financial market needs regulation so that the safety of the financial product is ensured.

Thing 17

MORE education itself is not going to make a country richer. The idea of “knowledge economy” is problematic. Knowledge has always been the main source of wealth. What matters in determ-ination of national prosperity is not the edu-cational level of individuals but the ability to organise individuals into enterprises with high productivity. Of course, the exceptionally high educational achievements of the miracle economies in East Asia (Japan, Korea, Hongkong, Taiwan), not just growth but quality as well, is acknow-ledged. But much that you learn in schools or university is not directly related to practical work. Switzerland, one of the top industrial countries, has one of the lowest university enrol-ment (16 per cent). Education helps to develop potential but not by raising productivity.

Thing 18

THE government needs to give maximum freedom to business, it is alleged, because that is in the national interest. Charles Wilson said: “What is good for GM is good for the US and vice versa.” It is not so. In five decades GM in 2009 was bankrupt and the government took over the company. It spent $ 57 billion of taxpayers money for extensive restructuring.

Thing 19

CENTRAL planning in the USSR became difficult as products diversified. It had to be abondoned but that does not mean planning has ceased to exist. Despite the fall of communism, we are still living in planned economies. Governments even in capitalist economies engage in planning; so do SOEs in R&D and infrastructure. Modern capitalist companies plan their activities in great detail.

Thing 20

EQUALITY of opportunity may not be fair in the free market. Economists argue that if we equalise, we will create disincentive. But for a genuinely free society, a certain degree of equalisation is necessary: not just quality of opportunity—but in upbringing as well provided by the universal welfare provision and basic income guarantee.

Thing 21

BIG government, a well-designed welfare state (health care, insurance) make people more open to change. Welfare states like Sweden, Norway and Finland, the biggest welfare states, were able to grow faster than the US and are more dynamic.

Thing 22

FINANCIAL markets need to become less, not more, efficient. Recent financial innovations—new financial instruments—have generated more profits in the short run. But the system has become more unstable as shown by the financial crisis of 2008. Icaland’s economy got a boost in 1990 when the financial sector was liberalised and privatised and even the most basic regu-lations like reserve requirement were abolished. It became a global hub of the financial system. But in the financial crisis of 2008, its three biggest banks became bankrupt and had to be taken over by the government. Walter Bulfet, the American financier, called finance derivations “weapons of mass destruction”. The financial system should be rewritten to allow long-term investment in physical capital, human skills and organisation, which are the sources of economic development.

Thing 23

GOOD economic policy does not require good economists. During the ‘miracle years’ Japan and Korea were run by lawyers and in Taiwan and China by engineers. On the other hand, free economies, as advocated by economists, have led to poor economic performance, inequality and the financial crisis of 2008. What is required in running economic policy is general intelligence than specialised knowledge in economics. Queen Elizabeth of Britain asked: “How come nobody could force the economic crisis of 2008?”

Conclusion

THE daunting task ahead is to rebuild the world economy. Nothing short of re-envisioning the way we organise is necessary. We should have a long-term perspective and deliberate state action towards larger objectives. At present in the economy and society, short-term interests rule which have destroyed the entire system.

Dr Dubhashi, IAS (Retd.), is a former Secretary to the Government of India and an erstwhile Vice-Chancellor, Goa University. He is currently the Chairman, Bharatiya Vidya Bhavan’s Pune Kendra. He can be contacted at: dubhashi@giaspn01. vsnl.net.in