Most of all you've got to hide it from the kids

Review of 23 Things They Don’t Tell You about Capitalism

By Ha-Joon Chang

 It may have been uttered in 1980 but the meaning of Margaret Thatcher’s mantra, ‘there is no alternative’ is only now becoming clear. For the global elite there really is no alternative to corporate capitalism, even when that system is entirely discredited. Privatise, drive the sick into non-existent jobs, outsource public services to the private sector. More of the same medicine that nearly killed the patient in the first place.

Albert Einstein said a long time ago that you can’t solve a problem with the same kind of thinking that created it. As a matter of interest, Einstein was a socialist

Chang's 23 Things is an attempt to rouse the sleepers from their ideological slumbers. It is a sustained attack on the assumptions behind the economic thinking that has been dominant for the past 30 years. But it is not an anti-capitalist manifesto. It is an argument for a different kind of capitalism. 

Here is Chang talking about the ideas of the book:

Noam Chomsky once said that before you can change the world you have to understand it. He has described Chang as a “fine economic historian” and his respect stems from the fact that Chang doesn’t believe in convenient myths, such as the fallacy that rich countries have always believed in free trade 

In 23 Things the myth Chang attacks is that neoliberalism works. The raft of policies that constitute neoliberalism – tax cuts for the rich, degregulation for the financial sector, privatisation, dismantling of all protection against the  freedom to speculate in things like food and currencies – were sold as a pill that had to be swallowed because everyone would benefit in the end. But the result turns out to be all pain and no gain, or only gain for a minority.

Chang’s point is that neoliberalism, the way the world has been run economically for the last 30 years, has resulted in slower growth. In the 1960s and 1970s, when countries protected native industries and speculation was heavily restricted, the world economy grew at 3 per cent a year. In the post-1980 neo-liberal era, the growth rate is 1.4 per cent.

Britain, which exported many of neoliberal practices to the rest of the world, grew economically by 1.7 per cent between 1990 and 2009. But during the 1960s and ‘70s, when the country suffered from the “British Disease” of high taxation of the rich and strong trade unions, the growth rate was 2.4 per cent. Economically, neoliberalism is a confirmed flop.

Chang says that this failure has been masked by a huge expansion of borrowing and the fact that both partners in a household invariably work now. In the US, average hourly wages are barely more than they were in 1973.

The failure is even more dramatic in poor countries where a lack of democracy meant neoliberal policies could be imposed in a purer form. In the 1960s and ‘70s Sub-Saharan Africa grew at 1.6 per cent a year. But after 1979 these countries, through the World Bank and IMF, were forced to adopt neo-liberal policies.

Industries collapsed because of foreign competition. Countries were forced back to exporting basic commodities like cocoa and coffee and the large increase in supplies caused a collapse of prices. During the 1980s and 1990s income in Sub-Saharan Africa fell by 0.7 per cent a year. Only after this failure of neoliberal policies, Chang says, did excuses for African underdevelopment, such as laziness and too much ethnic diversity, gain currency.

The core justification for neoliberalism, that if you give corporations maximum freedom and make rich people richer, everyone will benefit in the long run, turns out to be just plain wrong. “We have to question an assumption that has dominated economic thinking over the last three decades” he says, “The belief that maximising market freedom is the best way to generate wealth.”

The economic rationale was that the investing class (corporations and the very rich) have to keep more of their money or they won’t invest. In plain terms, you have to create wealth before you distribute it.

In line with this dogma, there were tax cuts for the rich, exemplified by New Labour's cutting of capital gains tax to encourage investment. In the UK, after 13 years of a Labour government the richest   10 per cent paid less tax than everyone else. More money to shareholders only interested in short-term gains and executive salaries went through the roof.

But through it all, Chang says, investment fell rather than rose. Investment, as a proportion of national output, has dropped in all G7 countries and in most developing countries. “The rich got a bigger share of the pie all right, but they have actually reduced the pace at which the pie is growing,” he says.

Neoliberalism was also supposed to make the economy more stable. It was an alternative to the turbulence of the 1970s. But it’s feted taming of inflation was bought at a price of more instability. 

The financial crisis that has engulfed the world since 2008 did not “fall out of a clear blue sky" in the words of Bank of England governor Mervyn King. Despite what Gordon Brown wants us to believe, it was not the first crisis of globalisation but the latest.  

There were virtually no banking crises, Chang points out, between the end of the Second World War and the 1970s. In the 1980s, 5-10 per cent of countries had a banking crisis. In the 1990s, it was 20 per cent. After the latest financial crisis, the figure went up to 35 per cent of countries.

Why are banking crises more frequent? Because it is far easier to move capital around the world in search of quick financial gain than it was before the 1980s.

Job insecurity and intensity have increased. One in five private sector workers in the UK are employed by a company owned by a private equity firm.The purpose is to “restructure” the firm, frequently through mass job losses so it can be sold again for a profit.

As Chang shows, the logic of these economic changes, though presented as benefiting the majority, are just self-serving. The beneficiaries are the holders of financial assets. Greater labour market “flexibility” is needed because hiring and firing workers more easily enables companies to be restructured and sold more quickly. Capital mobility is required because higher returns are depended upon the ability to move financial assets around at speed.

But 23 Things is not anti-capitalist. Capitalism run in the interests of capitalists doesn’t work, says Chang, but it can deliver the goods if controlled in the public interest. Companies should be owned by shareholders interested in long-term investments. The shareholders might be representatives of the government or the workforce.

Governments should reassert their capacity to direct the economy. He gives the example of the South Korean government in the 1960s banning the LG group from going into the textile industry, as it wanted to, and compelling it to enter the electric cable industry. The result, decades later, is world-famous mobile phones.

Most of all finance should be reined in because it weakens productivity growth by directing resources to short-term gains. Complex products like derivatives should be banned, hostile company takeovers made more difficult, and restrictions reintroduced on the cross-border movements of capital.

If the “machine” of capitalism is properly regulated, says Chang, it can be force for good. Chang, a South Korean, can’t help but point to the success of the “Asian Tiger” economic model, before it dismantled after the 1997 Asian financial crisis. South Korea was a prime example with the highest economic growth rate of any country in the world for three decades.

The “Korean model” was based on preserving domestic ownership of its business conglomerates and joint planning between Korean banks and government ministries.

Chang points to the income growth rate of Asian Tiger economies (of which South Korea was one) of 6-7 per cent a year between the 1950s and mid-1990s. This “deserves to be called a miracle”, he says.

The only comparable country now is China. But, as Chang says in the introduction to the book, China, while liberalising its economy, has not introduced full-blown free-market policies.

Here lies the flaw in the Chang approach. 23 Things is an extremely lucid, persuasive account of why free-market economics fails on its own terms. Why corporations, shareholders and the very rich benefit, but investment is reduced and economic growth and productivity held down. In short, why neoliberalism is an ineffective form of capitalism.

The problem is that the world cannot take a miraculous form of capitalism. China has achieved double digit growth rates but it is also, according to the Guardian newspaper "the world's biggest greenhouse gas emitter, number one energy user and arguably most polluted nation on earth".  But if Chang’s prescriptions were adopted there would be 10 or 15 Chinas, in economic terms, around the globe. If what we have now is capitalist economic failure, thank heavens we don’t have success.

The limits of Chang’s thinking are seen in his take on Soviet communism. The communist central planning system failed because there were no markets, no-one knew what consumers really wanted. Many unwanted things were produced and the second largest cause of fires in Moscow in the 1980s was exploding televisions. There were, Chang says, many dedicated managers and workers who tried to make the system work. Despite this, it failed because of its unavoidable inefficiency. It was, institutionally, flawed.

Quite true, but what about capitalism? There are lots of dedicated managers and workers toiling away for corporations who don’t want to destroy the biosphere and who want to represent the interests of consumers. But what do they end up doing after their efforts are filtered through the profit-dedicated institutions that they work for?

It’s one of the things that they don’t tell you about capitalism that the needs of consumers aren’t represented by it. But Chang chooses not to contest this convenient myth. As economist Harry Shutt has noted conventional economics says that competition between enterprises means the customer gets the best deal because nobody buys bad products. In a market system, restaurants that serve terrible meals don’t survive.

 However the truth is that the customer is not always king, but there to soak up as many products as possible. The imperative is not what the consumer wants, but what he or she can be persuaded to buy. To that there is no limit. The aim is always to raise the level of consumption to the maximum that production will allow for, by advertising and credit, rather than adjusting production to satisfy what consumers need and want.

And despite the myth-busting quality of 23 Things there is one way in which Chang give credence to an idea that has become a convenient excuse for an establishment that wants to change as little as possible.

This is the idea of free-market economics that, in order to make its models work, treats all people as if they were purely calculating and selfish.

But self-interest is not all that counts. ““The bottom line is that companies, and thus our economy, would grind to a halt if people acted in totally selfish way, as they are assumed to do in free-market economics,” says Chang.

Chang gives the example of the work to rule, which reduces output by 30 to 50 per cent, to conclude that production depends on workers’ goodwill, and that they will go beyond what is required by their contracts.

This idea, that the roots of the economic crisis lie in a denial of capitalism’s moral dimension, has been expounded by UK Conservatives like Jessie Norman (see review below).

It has been seized on by people like Bank of England governor Mervyn King who has obviously read Norman’s book. Nissan, in Sunderland, asks all its workers how to raise productivity, he says.

Chang, as a supporter of Japanese and South Korean capitalism, would agree. But the obvious question is how do workers who help raise the profit levels of corporations like Nissan, benefit in return? The answer is that they don’t. It’s a one way exchange of give and then give some more.

People, who are workers and consumers, are naturally moral agents. Corporations aren’t. They are institutionally selfish institutions only interested, as institutions, in making profit. But humans, acting in moral way, keep the system working, and permit inhuman institutions to flourish.

It was the economic historian, Karl Polanyi, a great influence on Chang, who pointed out the obvious. He said that if workers followed faithfully the free market doctrine of only selling commodities at the highest price you can get, they should almost permanently be on strike. Because what they are selling is their labour and they should get the highest price for it.

The problem with capitalism isn’t that people are too selfish but that they are not selfish enough. Of course if people were truly selfish, capitalism would grind to a halt. Which would be a terrible shame.

The most pithy response to this question was made by the American community organiser, Saul Alinsky. He was asked by the President of a US corporation why he saw everything in terms of power and conflict instead of goodwill and cooperation, when he seemed such as nice guy personally.

"When you and your corporation approach competing corporations in terms of goodwill, reason and cooperation instead of going for the jugular, then I'll follow your lead," was his answer

But this is one lacuna in Chang’s assault on the triumphalism of neo-liberalism. His answer is that we should look back to the state capitalist economies of Japan and South Korea, and to the welfare economies of Scandinavia.

23 Things is an assault on conventional economics. But another unconventional economist, Harry Shutt, argues that we can’t go back. That capitalism, the incessant search for returns on investment, has become dysfunctional. For the sake of taxpayers and consumers, we need a more rational economic system. To his ideas, we turn in the next review.