23 THINGS THEY DON'T TELL YOU ABOUT CAPITALISM by Ha-Joon Chang

• Being critical of free-market ideology is not the same as being against capitalism.
• Human decisions, especially decisions by those who have the power to set the rules, make things happen in the way they happen,
• We do not live in the best of all possible worlds.
• 95 per cent of economics is common sense made complicated, and even for the remaining 5 per cent, the essential reasoning, if not all the technical details, can be explained in plain terms.
• There is no such thing as a free market
• The free market doesn’t exist. Every market has some rules and boundaries that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them.
• Overcoming the myth that there is such a thing as an objectively defined ‘free market’ is the first step towards understanding capitalism.
• 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.
• Breaking away from the illusion of market objectivity is the first step towards understanding capitalism.
• Companies should not be run in the interest of their owners
• Shareholders may be the owners of corporations but, as the most mobile of the ‘stakeholders’, they often care the least about the long-term future of the company (unless they are so big that they cannot really sell their shares without seriously disrupting the business). Consequently, shareholders, especially but not exclusively the smaller ones, prefer corporate strategies that maximize short-term profits, usually at the cost of long-term investments, and maximize the dividends from those profits, which even further weakens the long-term prospects of the company by reducing the amount of retained profit that can be used for re-investment.
• Running the company for the shareholders often reduces its long-term growth potential.
• Limited liability means that investors in the company will lose only what they have invested (their ‘shares’), should it go bankrupt.
• Most people in rich countries are paid more than they should be
• The wage gaps between rich and poor countries exist not mainly because of differences in individual productivity but mainly because of immigration control. If there were free migration, most workers in rich countries could be, and would be, replaced by workers from poor countries. In other words, wages are largely politically determined.
• We should reject the myth that we all get paid according to our individual worth, if we are to build a truly just society.
• What an individual is paid is not fully a reflection of her worth.
• Most people, in poor and rich countries, get paid what they do only because there is immigration control.
• The washing machine has changed the world more than the internet has
• In perceiving changes, we tend to regard the most recent ones as the most revolutionary. This is often at odds with the facts.
• The emergence of household appliances, as well as electricity, piped water and piped gas, has totally transformed the way women, and consequently men, live.
• We vastly overestimate the impacts of the internet only because it is affecting us now.
• Human beings tend to be fascinated by the newest and the most visible technologies.
• 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.
• Greater macroeconomic stability has not made the world economy more stable
• Hyperinflation undermines the very basis of capitalism, by turning market prices into meaningless noises.
• However, there is actually no evidence that, at low levels, inflation is bad for the economy.
• The experiences of individual countries also suggest that fairly high inflation is compatible with rapid economic growth.
• Moreover, there is evidence that excessive anti-inflationary policies can actually be harmful for the economy.
• However, the truth of the matter is that policies that are needed to bring down inflation to a very low – low single-digit – level discourage investment.
• Anti-inflationary policies have not only harmed investment and growth but they have failed to achieve their supposed aim – that is, enhancing economic stability.
• Another sense in which the world has become more unstable during the last three decades is that job insecurity has increased for many people during this period.
• Free-market policies rarely make poor countries rich
• With only a few exceptions, all of today’s rich countries, including Britain and the US – the supposed homes of free trade and free market – have become rich through the combinations of protectionism, subsidies and other policies that today they advise the developing countries not to adopt.
• Free-market policies have made few countries rich so far and will make few rich in the future.
• Virtually all of today’s rich countries used protectionism and subsidies to promote their infant industries.
• To sum up, the free-trade, free-market policies are policies that have rarely, if ever, worked.
• Few countries have become rich through free-trade, free-market policies and few ever will.
• Capital has a nationality
• People migrate in search of a better life, sometimes literally to the other side of the world,
• A business will do what it has to do in order to increase its profit, even if it means hurting its home country by shutting plants down, slashing jobs, or even bringing in foreign workers.
• As long as the company generates wealth and jobs within its borders, the country should not care whether the company is owned by its citizens or foreigners.
• In short, few corporations are truly transnational. The vast majority of them still produce the bulk of their outputs in their home countries. Especially in terms of high-grade activities such as strategic decision-making and higher-end R&D, they remain firmly centred at their home countries. The talk of a borderless world is highly exaggerated.
• Different activities have different potentials for technological innovation and productivity growth, and therefore what you do today influences what you will be doing in the future and what you will get out of it.
• We do not live in a post-industrial age
• We may be living in a post-industrial society in the sense that most of us work in shops and offices rather than in factories. But we have not entered a post-industrial stage of development in the sense that industry has become unimportant.
• The US does not have the highest living standard in the world
• The average US citizen does have greater command over goods and services than his counterpart in any other country in the world except Luxemburg. However, given the country’s high inequality, this average is less accurate in representing how people live than the averages for other countries with a more equal income distribution.
• The US is not the richest country in the world any more. Now several European countries have higher per capita incomes.
• There is no simple way to compare living standards across countries.
• Africa is not destined for underdevelopment
• Having more detailed information does not guarantee better decisions – it may actually be more difficult to make the right decision, if one is ‘in the thick of it’.
• The reality is that winners are being picked all the time both by the government and by the private sector, but the most successful ones tend to be done in joint efforts between the two.
• Making rich people richer doesn’t make the rest of us richer
• Despite the usual dichotomy of ‘growth-enhancing pro-rich policy’ and ‘growth-reducing pro-poor policy’, pro-rich policies have failed to accelerate growth in the last three decades.
• The problem is that concentrating income in the hands of the supposed investor, be it the capitalist class or Stalin’s central planning authority, does not lead to higher growth if the investor fails to invest more.
• Even when upward income redistribution creates more wealth than otherwise possible (which has not happened, I repeat), there is no guarantee that the poor will benefit from those extra incomes.
• However, the trouble is that trickle down usually does not happen very much if left to the market.
• Simply making the rich richer does not make the rest of us richer.
• US managers are over-priced
• US managers are over-priced in more than one sense.
• American managers are not only over-priced but also overly protected in the sense that they do not get punished for poor performance.
• worker pay in the US has been virtually stagnant since the mid 1970s.
• Markets weed out inefficient practices, but only when no one has sufficient power to manipulate them.
• People in poor countries are more entrepreneurial than people in rich countries
• People who live in poor countries have to be very entrepreneurial even just to survive.
• What makes the poor countries poor is not the absence of entrepreneurial energy at the personal level, but the absence of productive technologies and developed social organizations, especially modern firms.
• In contrast, most citizens of rich countries have not even come near to becoming entrepreneurs.
• most people from rich countries spend their working lives implementing someone else’s entrepreneurial vision, and not their own.
• The point is that what really makes the rich countries rich is their ability to channel the individual entrepreneurial energy into collective entrepreneurship.
• Even at the firm level, entrepreneurship has become highly collective in the rich countries.
• We are not smart enough to leave things to the market
• People do not necessarily know what they are doing, because our ability to comprehend even matters that concern us directly is limited – or, in the jargon, we have ‘bounded rationality’.
• The world is very complex and our ability to deal with it is severely limited.
• Most of us create routines in our life so that we don’t have to make too many decisions too often.
• More education in itself is not going to make a country richer
• There is remarkably little evidence showing that more education leads to greater national prosperity.
• The importance of apprenticeship and on-the-job training in many professions testifies to the limited relevance of school education for worker productivity.
• mechanization is the most important way to increase productivity.
• In many lines of work, what counts is general intelligence, discipline and the ability to organize oneself, rather than specialist knowledge, much of which you can, and have to, actually pick up on-the-job.
• Education is valuable, but its main value is not in raising productivity. It lies in its ability to help us develop our potentials and live a more fulfilling and independent life.
• What is good for General Motors is not necessarily good for the United States
• Despite the importance of the corporate sector, allowing firms the maximum degree of freedom may not even be good for the firms themselves, let alone the national economy.
• not all regulations are bad for business.
• what is good for a company, however important it may be, may not be good for the country.
• Despite the fall of communism, we are still living in planned economies
• Capitalist economies are in large part planned.
• The fact that communism has disappeared for all practical purposes does not mean that planning has ceased to exist.
• In most capitalist countries, the government owns, and often also operates, a sizeable chunk of the national economy through state-owned enterprises (SOEs).
• Equality of opportunity may not be fair
• Equality of opportunity is the starting point for a fair society. But it’s not enough. Of course, individuals should be rewarded for better performance, but the question is whether they are actually competing under the same conditions as their competitors.
• Big government makes people more open to change
• A well-designed welfare state can actually encourage people to take chances with their jobs and be more, not less, open to changes.
• A weak welfare state was not such a big problem before, because many people had lifetime employment. With lifetime employment gone, it has become lethal.
• Financial markets need to become less, not more, efficient
• The problem with financial markets today is that they are too efficient. With recent financial ‘innovations’ that have produced so many new financial instruments, the financial sector has become more efficient in generating profits for itself in the short run.
• Labour services are expensive in high-income countries (unless they have a constant supply of low-wage immigrants, as the US or Australia), making everything more expensive than what the official exchange rate should suggest
• What makes financial capital necessary for economic development but potentially counterproductive or even destructive is the fact that it is much more liquid than industrial capital.
• A financial system perfectly synchronized with the real economy would be useless. The whole point of finance is that it can move faster than the real economy. However, if the financial sector moves too fast, it can derail the real economy.
• Good economic policy does not require good economists
• Good economists are not required to run good economic policies. The economic bureaucrats that have been most successful are usually not economists.
• Economics, as it has been practised in the last three decades, has been positively harmful for most people.
• 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.
• The profit motive is still the most powerful and effective fuel to power our economy and we should exploit it to the full. But we must remember that letting it loose without any restraint is not the best way to make the most of it, as we have learned at great cost over the last three decades.
• Likewise, 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.
• Second: we should build our new economic system on the recognition that human rationality is severely limited.
• The fundamental problem is not our lack of information but our limited ability to process it.
• Third: while acknowledging that we are not selfless angels, we should build a system that brings out the best, rather than worst, in people.
• Material self-interest is a powerful motive.
• Fourth: we should stop believing that people are always paid what they ‘deserve’.
• People from poor countries are, individually, often more productive and entrepreneurial than their counterparts in rich countries.
• Fifth: we need to take ‘making things’ more seriously. The post-industrial knowledge economy is a myth. The manufacturing sector remains vital.
• Sixth: we need to strike a better balance between finance and ‘real’ activities.
• A productive modern economy cannot exist without a healthy financial sector.
• Seventh: government needs to become bigger and more active.
• Eighth: the world economic system needs to ‘unfairly’ favour developing countries.