Introduction
In "23 Things They Don't Tell You About Capitalism," economist Ha-Joon Chang challenges the prevailing wisdom of free-market capitalism. This book offers a fresh perspective on economics, debunking common myths and presenting alternative views on how the economy really works. Chang argues that the dominant free-market approach is not only flawed but also potentially harmful to society.
The book is divided into 23 "things" or key ideas that challenge conventional economic thinking. Chang's goal is to make economics accessible to everyone, arguing that the subject is not as complex as many economists would have us believe. He encourages readers to think critically about economic policies and their impact on society.
Key Ideas
1. Economics is not a science
Chang begins by challenging the notion that economics is an objective, scientific discipline. He argues that, unlike natural sciences, economics is a social science influenced by human behavior, cultural factors, and political ideologies. This means that there is no single "correct" economic theory, but rather multiple perspectives and approaches.
The author criticizes economists for their arrogance in dismissing alternative theories and viewpoints. He argues that 95% of economics is common sense and that ordinary people can understand and contribute to economic discussions. This democratization of economic knowledge is crucial for making informed decisions about policies that affect our lives.
2. Rational economic choices are a myth
One of the fundamental assumptions of free-market economics is that individuals always make rational choices based on self-interest. Chang argues that this assumption is flawed and does not reflect reality. Human beings are not capable of processing all the information needed to make perfectly rational decisions in complex economic situations.
Instead, Chang introduces the concept of "bounded rationality," which recognizes that people try to be rational but are limited by their cognitive abilities and the information available to them. This understanding has important implications for economic policy, suggesting that some government intervention may be necessary to help people make better decisions.
3. Altruism exists in economic behavior
Contrary to the belief that all economic actions are driven by self-interest, Chang argues that people often act out of altruistic concerns. He uses the example of paying for a taxi ride to illustrate this point. While free-market economists might argue that we only pay to avoid future sanctions, Chang suggests that values like honesty and respect play a significant role in our economic decisions.
This recognition of altruism in economic behavior challenges the core assumptions of free-market theory and suggests that economic models need to account for a broader range of human motivations.
4. The market doesn't always pay people what they deserve
Chang challenges the idea that the free market fairly determines wages based on productivity and skill. He argues that wages are often influenced by factors beyond individual merit, such as immigration policies and the overall prosperity of a society.
For example, workers in developed countries often earn much more than equally skilled workers in developing countries, not because they are more productive, but because they benefit from protective policies and the overall wealth of their societies. This insight challenges the notion of a "fair" free market and raises questions about global income inequality.
5. Manufacturing is crucial for economic growth
While many policymakers in developed countries have emphasized the importance of service and knowledge-based economies, Chang argues that a strong manufacturing sector remains essential for economic growth. He points out that the apparent decline in manufacturing in some countries is often due to increased efficiency rather than a genuine reduction in industrial output.
Chang criticizes the overemphasis on the service and knowledge economies, arguing that they have limitations in terms of productivity growth and economic impact. For instance, he suggests that the internet, while important, has not had the revolutionary economic impact that some have claimed, especially when compared to earlier innovations like the telegraph.
6. The financial crisis was a result of systemic risk-taking
Chang provides insights into the causes of the 2008 financial crisis, arguing that it was not simply a result of individual greed or mistakes, but a systemic problem rooted in the structure of the financial system. He explains how the creation of increasingly complex financial derivatives led to a buildup of risk in the system.
Using the analogy of building an increasingly tall and unstable house, Chang illustrates how the financial system became more fragile as new, riskier products were created on top of existing ones. He also points out that countries with more liberalized markets suffered more severely during the crisis, challenging the notion that free markets are always more stable and efficient.
7. Government economic planning can be effective
Chang challenges the widespread fear of government involvement in the economy, arguing that some level of state planning can be beneficial. He provides examples of successful government interventions in countries like South Korea, where the state played a crucial role in guiding industrial development.
The key, according to Chang, is finding the right balance. While total government control of the economy (as in the Soviet Union) is problematic, some level of state guidance can help steer the economy in positive directions. He compares the role of government in the economy to that of a CEO setting strategic goals for a company.
8. Social welfare supports economic growth
Contrary to the argument that social welfare programs hinder economic growth, Chang presents evidence that strong social safety nets can actually promote economic dynamism. He explains that countries with robust unemployment benefits and other forms of social support tend to have more innovative and entrepreneurial economies.
The reason, Chang argues, is that social safety nets give people the security to take risks and pursue new opportunities. Without such support, people tend to gravitate towards safer, less dynamic sectors of the economy. This insight challenges the "trickle-down" theory of economics and suggests that social welfare can be an investment in economic growth rather than a drag on it.
9. Rethinking development economics
Chang critiques common Western approaches to economic development in poor countries. He challenges the idea that poverty is primarily due to structural factors like geography or climate, pointing out that many prosperous countries face similar challenges.
He also debunks the myth that developing countries lack entrepreneurial spirit, noting that self-employment rates are often higher in these countries than in the developed world. Instead, Chang argues that many of the economic policies imposed on developing countries by Western institutions have hindered their growth.
The author suggests that developing countries should be allowed to use some of the protectionist policies that helped Western nations build their economies in the past, rather than being forced to adopt rapid market liberalization.
10. Capitalism can be redesigned
While Chang is critical of free-market capitalism, he does not reject capitalism entirely. Instead, he argues that capitalism can be an effective system for organizing economic activity, but it needs to be properly regulated and designed.
Chang compares capitalism to a car, suggesting that just as a car needs safety features to function well, an economic system needs regulations and safeguards to prevent crashes and protect people. He advocates for a more balanced approach to capitalism that recognizes both its strengths and its potential dangers.
Detailed Exploration of Key Concepts
The Myth of Rational Economic Behavior
Chang delves deeper into the concept of rational economic behavior, a cornerstone of free-market economic theory. He argues that the idea of humans as perfectly rational economic agents is not only unrealistic but also potentially harmful when used as the basis for economic policy.
The author explains that to make truly rational decisions, individuals would need to have perfect information about all possible outcomes and alternatives. In the complex modern economy, this is simply impossible. Instead, people make decisions based on limited information, personal biases, and emotional factors.
Chang introduces the concept of "bounded rationality," developed by economist Herbert Simon. This theory recognizes that while people try to make rational decisions, they are limited by cognitive constraints and the information available to them. As a result, people often use mental shortcuts or "rules of thumb" to make decisions, rather than engaging in complex calculations for every choice.
This understanding of human decision-making has important implications for economic policy. If people cannot always make rational choices, then the argument for completely free markets becomes weaker. Chang suggests that some level of government intervention may be necessary to help guide people towards better economic decisions.
For example, regulations on financial products can help protect consumers from making decisions they don't fully understand. Similarly, policies that simplify choices or provide clear information can help people make more informed economic decisions.
The Role of Altruism in Economics
Chang challenges another fundamental assumption of free-market economics: that all economic behavior is driven by self-interest. He argues that altruism and social considerations play a significant role in many economic decisions.
To illustrate this point, Chang uses the example of paying for a taxi ride. According to strict free-market theory, a rational, self-interested individual should always try to avoid paying if they can get away with it. The fact that most people do pay, even when they could easily run away, suggests that other factors are at play.
Free-market economists might argue that people pay to avoid future sanctions or to maintain a good reputation. However, Chang points out that in a truly selfish society, even these mechanisms would break down. For instance, why would a taxi driver bother to chase down a fare-dodger if doing so would leave their taxi unattended and at risk of theft?
Instead, Chang argues that people pay for their taxi rides (and engage in other seemingly "irrational" economic behaviors) because of values like honesty, fairness, and social responsibility. These altruistic motivations are not accounted for in traditional economic models but play a crucial role in how real economies function.
This recognition of altruism in economic behavior has important implications. It suggests that economic policies should not be based solely on assumptions of self-interest but should also consider how to foster and harness altruistic motivations for the benefit of society.
The Myth of Fair Market Wages
Chang challenges the idea that free markets naturally pay people what they deserve based on their skills and productivity. He argues that wages are often determined by factors beyond individual merit, including immigration policies, overall societal wealth, and historical circumstances.
One of Chang's key points is that workers in developed countries often earn much more than equally skilled workers in developing countries, not because they are inherently more productive, but because they benefit from protective policies and the overall prosperity of their societies. For example, strict immigration controls in wealthy countries prevent an influx of workers from poorer countries who would be willing to work for lower wages.
Chang also highlights the growing income inequality within developed countries, particularly the widening gap between top executives and average workers. He argues that this gap cannot be explained by differences in productivity alone and is more likely the result of social and political factors.
This analysis challenges the notion of a "fair" free market and raises important questions about global and domestic income inequality. It suggests that wages are not simply a reflection of an individual's economic value but are deeply influenced by broader societal structures and policies.
The Importance of Manufacturing
While many economists and policymakers in developed countries have emphasized the shift towards service and knowledge-based economies, Chang argues for the continued importance of manufacturing. He challenges the idea that developed countries should move away from manufacturing and focus entirely on services and high-tech industries.
Chang points out that the apparent decline in manufacturing in some countries is often due to increased efficiency rather than a genuine reduction in industrial output. In other words, fewer people are employed in manufacturing because automation and improved processes have made production more efficient, not because less is being produced.
The author criticizes the overemphasis on the service and knowledge economies, arguing that they have limitations in terms of productivity growth and economic impact. For instance, many service industries, such as healthcare or education, have limited potential for productivity increases without compromising quality.
Chang also challenges the hype around the "knowledge economy" and the transformative power of information technology. While acknowledging the importance of these sectors, he argues that their economic impact has been overstated. For example, he compares the impact of the internet to earlier communication innovations like the telegraph, suggesting that the internet's effect on productivity has been less revolutionary than often claimed.
The author argues that a strong manufacturing sector remains crucial for several reasons:
- Manufacturing tends to have higher productivity growth rates than services.
- It provides a wider range of jobs, including for less-skilled workers.
- It often drives innovation in other sectors of the economy.
- It can help balance trade deficits, as manufactured goods are more easily exported than services.
Chang's analysis suggests that countries should strive for a balanced economy that includes a robust manufacturing sector, rather than focusing exclusively on services and high-tech industries.
Understanding the Financial Crisis
Chang provides valuable insights into the causes of the 2008 financial crisis, arguing that it was not simply a result of individual greed or mistakes, but a systemic problem rooted in the structure of the financial system.
He explains how the creation of increasingly complex financial derivatives led to a buildup of risk in the system. These derivatives were created by bundling together various financial products, such as mortgage loans, and then creating new financial products based on these bundles. While this process created highly profitable new investment opportunities, it also hid and multiplied the underlying risks.
Chang uses the analogy of building an increasingly tall and unstable house to illustrate this process. Each new financial product built on top of existing ones was like adding another story to an already precarious structure. Moreover, as more derivatives were created, the quality of the underlying assets often decreased, further weakening the entire system.
The author also points out that countries with more liberalized financial markets suffered more severely during the crisis. This observation challenges the notion that free markets are always more stable and efficient. Instead, it suggests that some level of regulation and oversight is necessary to prevent the buildup of systemic risks.
Chang's analysis of the financial crisis highlights the dangers of excessive financial innovation and the importance of robust regulatory frameworks. It also underscores the need for a more holistic understanding of economic systems, one that considers not just individual actions but also the broader structures and incentives that shape economic behavior.
The Role of Government in the Economy
Chang challenges the widespread fear of government involvement in the economy, arguing that some level of state planning can be beneficial. He provides examples of successful government interventions in countries like South Korea, where the state played a crucial role in guiding industrial development.
The author acknowledges the failures of centrally planned economies like the Soviet Union but argues that these examples shouldn't lead us to reject all forms of government economic involvement. Instead, he advocates for a balanced approach where the state plays a strategic role in guiding economic development without micromanaging every aspect of the economy.
Chang compares the role of government in the economy to that of a CEO setting strategic goals for a company. Just as a CEO doesn't control every decision made within a company but provides overall direction, governments can set broad economic goals and create policies to achieve them.
Some examples of effective government economic involvement that Chang discusses include:
Industrial policy: Governments can support the development of key industries through targeted investments, subsidies, or protective measures.
Research and development: Many important technological innovations have come from government-funded research programs.
Infrastructure development: Government investment in infrastructure can create the conditions for economic growth.
Education and training: Public education systems play a crucial role in developing human capital.
Regulation: Appropriate government regulations can help prevent market failures and protect consumers.
Chang argues that the key is finding the right balance between government involvement and market forces. He suggests that different approaches may be appropriate for different countries and at different stages of economic development.
The Economic Benefits of Social Welfare
Contrary to the argument that social welfare programs hinder economic growth, Chang presents evidence that strong social safety nets can actually promote economic dynamism. He challenges the "trickle-down" theory of economics, which suggests that reducing taxes and social spending will lead to greater economic growth that will benefit everyone.
Chang argues that countries with robust unemployment benefits and other forms of social support tend to have more innovative and entrepreneurial economies. The reason, he explains, is that social safety nets give people the security to take risks and pursue new opportunities.
Without such support, people tend to gravitate towards safer, less dynamic sectors of the economy. For example, in a country with weak social protections, individuals might be more likely to seek stable jobs in established industries rather than starting new businesses or pursuing innovative but risky career paths.
Chang provides several examples to support his argument:
Nordic countries: Despite high taxes and generous social welfare systems, countries like Sweden and Denmark have highly competitive and innovative economies.
Labor market flexibility: Countries with strong unemployment benefits often have more flexible labor markets, as people are more willing to change jobs or industries if they know they have a safety net.
Education and training: Social welfare systems often include support for education and retraining, which can help workers adapt to changing economic conditions.
Health outcomes: Better social support often leads to better health outcomes, which in turn contributes to a more productive workforce.
Chang's analysis suggests that social welfare should be seen as an investment in economic growth rather than a drag on it. This perspective challenges conventional economic wisdom and has important implications for policy debates about taxation and social spending.
Rethinking Development Economics
Chang critiques common Western approaches to economic development in poor countries, arguing that many of the policies promoted by international institutions like the World Bank and International Monetary Fund have been counterproductive.
He challenges several common misconceptions about economic development:
Structural factors: Chang argues against the idea that poverty is primarily due to structural factors like geography or climate. He points out that many prosperous countries face similar challenges, suggesting that policy choices play a more significant role in development.
Lack of entrepreneurship: The author debunks the myth that developing countries lack entrepreneurial spirit, noting that self-employment rates are often higher in these countries than in the developed world.
Free market solutions: Chang criticizes the push for rapid market liberalization in developing countries, arguing that this approach often leads to economic instability and increased poverty.
Instead, Chang suggests that developing countries should be allowed to use some of the protectionist policies that helped Western nations build their economies in the past. He points out that many now-developed countries used tariffs, subsidies, and other forms of government intervention to support their growing industries.
The author also emphasizes the importance of building strong institutions and investing in education and infrastructure. He argues that these factors are often more important for long-term economic development than simply opening markets to international trade and investment.
Chang's approach to development economics emphasizes the need for tailored solutions that take into account each country's unique circumstances and historical context. He advocates for giving developing countries more policy space to experiment with different economic strategies, rather than imposing a one-size-fits-all model of development.
Redesigning Capitalism
While Chang is critical of free-market capitalism, he does not reject capitalism entirely. Instead, he argues that capitalism can be an effective system for organizing economic activity, but it needs to be properly regulated and designed.
Chang compares capitalism to a car, suggesting that just as a car needs safety features to function well, an economic system needs regulations and safeguards to prevent crashes and protect people. He advocates for a more balanced approach to capitalism that recognizes both its strengths and its potential dangers.
Some key elements of Chang's vision for a redesigned capitalism include:
Stronger regulations: Particularly in the financial sector, to prevent the buildup of systemic risks.
Progressive taxation: To reduce income inequality and fund social programs.
Investment in public goods: Such as education, healthcare, and infrastructure.
Support for workers: Including strong labor rights and social safety nets.
Environmental protections: To ensure long-term sustainability.
Limits on corporate power: To prevent monopolies and ensure fair competition.
Chang argues that this more balanced form of capitalism can deliver better outcomes for society as a whole, combining the dynamism of markets with the stability and fairness provided by well-designed institutions and regulations.
Conclusion
"23 Things They Don't Tell You About Capitalism" offers a thought-provoking critique of free-market economic theory and presents alternative perspectives on how economies really work. Ha-Joon Chang challenges readers to think critically about economic policies and their impacts on society.
Key takeaways from the book include:
Economics is not an exact science, and there are multiple valid approaches to economic policy.
Human behavior is more complex than simple self-interest, and economic models should account for this.
Free markets don't always lead to fair or efficient outcomes, and some level of government involvement can be beneficial.
Social welfare programs can support economic growth rather than hinder it.
Developing countries need tailored economic strategies, not one-size-fits-all prescriptions.
Capitalism can be redesigned to be more stable, fair, and sustainable.
Chang's work encourages readers to question conventional economic wisdom and consider alternative approaches to creating prosperous and equitable societies. By demystifying economics and making it accessible to a broader audience, Chang empowers people to engage more critically with economic debates and policies that affect their lives.