Monday, May 16, 2011

Thinking differently about capitalism

They want us to think things couldn't be any other way. Our economy, our society, are just manifestations of the natural order, how (good) human beings organize themselves. If there are problems, they are at the edges.

Ha-Joon Chang thinks there are other ways an economy and a society could work that Europe and the United States are failing to recognize. He's not some kind of hippie agitator. Raised in Korea, he has taught at the Faculty of Economics, University of Cambridge in the United Kingdom since 1990 and is the author of many academic articles and several books about how economic development happens.

In 23 Things They Don't Tell You About Capitalism, he cheerfully debunks many pillars of conventional Western economic wisdom. The book is short, pithy, easy to read and worth dipping into. It would make what I think of as a good "bathroom book" -- a volume best consumed in short chunks and mulled over, rather than read through at one sitting.

He begins by politely kicking over our defining economic myth:

Thing 1: There is no such thing as a free market.
...We accept the legitimacy of certain regulations so totally that we don't see them. More carefully examined, markets are revealed to be propped up by rules -- and many of them.

...Electoral votes, government jobs and legal decisions are not for sale, at least openly, in modern economies, although they were in most countries in the past. University places may not usually be sold, although in some nations money can buy them -- either through (illegally) paying the selectors or (legally) donating money to the university. Many countries ban trading in firearms or alcohol. Usually medicines have to be explicitly licensed by the government, upon the proof of their safety, before they can be marketed. All these regulations are potentially controversial -- just as the ban on selling human beings (the slave trade) was one and a half centuries ago. ...We see a regulation when we don't endorse the moral values behind it.

...Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect. If the boundaries of what you studying cannot be scientifically determined, what you are doing is not a science. ...

So, when free-market economists say that a certain regulation should not be introduced because it would restrict the 'freedom' of a certain market, they are merely expressing a political opinion that they reject the rights that are to be defended by the proposed law. Their ideological cloak is to pretend that their politics is not really political, but rather is an objective economic truth, while other people's politics is political. However, they're as politically motivated as their opponents. Breaking away from the illusion of market objectivity is the first step towards understanding capitalism.

Amen to that! Being more jaundiced than Chang, I'd simply propose that we always look at who benefits from a particular market-infringing law or regulation. Past winners are nearly always seeking to preclude anyone imagining novel alternatives -- and insurgents would do the same if we were in a position to do so.

Perhaps surprisingly for a thinker who reminds us to look for the political or profit motive that undergirds what we think are natural outcomes, Chang insists that free-market capitalism underestimates the power of non-economic motivations in human behavior.

Thing 5: Assume the worst about people and you get the worst.
Self-interest is a most powerful trait in most human beings. However, it's not our only drive. It is very often not even our primary motivation. Indeed, if the world were full of the self-seeking individuals found in economics textbooks, it would grind to a halt because we would be spending most of our time cheating, trying to catch the cheaters, and punishing the caught. The world works as it does only because people are not the totally self-seeking agents that free-market economics believes them to be. We need to design an economic system that, while acknowledging that people are often selfish, exploits other human motives to the full and gets the best out of people. The likelihood is that, if we assume the worst about people, we will get the worst out of them. ...

Morality is not an optical illusion. When people act in a non-selfish way -- be it not cheating their customers, working hard despite no one watching them, or resisting bribes as an underpaid public official -- many, if not all, of them do so because they genuinely believe that that is the right thing to do. Invisible rewards and sanctions mechanisms do matter, but they cannot explain all -- or, in my view, even the majority of -- non-selfish behaviors, if only for the simple reason that they would not exist if we were entirely selfish. Contrary to [former British Prime Minister Margaret] Thatcher's assertion that 'there is no such thing as society. There are individual men and women, and there are families,' human beings have never existed as atomistic selfish agents unbound by any society. We are born into societies with certain moral codes and are socialized into 'internalizing' those moral codes.

Economists are not supposed to point out the non-economic glue that holds societies together. To mention the obvious is to be unserious, perhaps less than properly "butch" -- not professionally dominant. But of course that moral glue is there. If our societies were really just nasty containers for Hobbesian wars of all against all, they'd have collapsed long ago. When times are tough, people routinely act beyond personal self-interest, narrowly conceived -- we rescue each other, share, lend a helping hand -- and society applauds these irrational actions.

Not every aspect of 23 Things will be comfortable to progressive Western readers. Chang points out -- accurately I think -- that the level of wages in a country is pretty much determined by immigration controls. If everyone could freely migrate where they'd get paid best, we'd all be stuck in a leveling process that would be radically downward for most people in what are now rich countries. (We are experiencing such a process when the work, instead of the people, migrates via international outsourcing.) This is not an argument for or against some level of legal migration, just something that needs to be understood.

Chang, no radical, thinks capitalism can be improved. He offers challenging conclusions.

To begin with: paraphrasing what Winston Churchill once said about democracy, let me restate my earlier position that capitalism is the worst economic system except for all the others. My criticism is of free-market capitalism, and not all kinds of capitalism. ...the market is an exceptionally effective mechanism for coordinating complex economic activities across numerous economic agents, but it is no more than that -- a mechanism, a machine. And like all machines, it needs careful regulation and steering.

There are different ways to organize capitalism. Free-market capitalism is only one of them -- and not a very good one at that. The last three decades have shown that, contrary to the claims of its proponents, it slows down the economy, increases inequality and insecurity, and leads to more frequent (and sometimes massive) financial crashes.

...while acknowledging that we are not selfless angels, we should build a system that brings out the best, rather than worst, in people. Free-market ideology is built on the belief that people won't do anything 'good' unless they are paid for it or punished for not doing it. This belief is then applied asymmetrically and reconceived as the view that rich people need to be motivated to work by further riches, while poor people must fear poverty for their motivation.

...Organizations -- be they corporations or government departments -- should be designed to reward trust, solidarity, honesty and cooperation among their members. The financial system needs to be reformed to reduce the influence of short-term shareholders so that companies can afford to pursue goals other than short-term profit maximization. We should better reward behavior with public benefits (e.g., reducing energy consumption, investment in training), not simply through government subsidies but also by bestowing it with a higher social status. This is not just a moral argument. It is also an appeal to enlightened self-interest. By letting short-term self-interest rule everything we risk destroying the entire system, which serves no one's interest in the long run.

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