Forest of Dean & Wye Valley

“23 Things They Don’t Tell You About Capitalism” by Ha-Joon Chang

In John Wilmot, Reviews on July 7, 2014 at 8:55 pm

CAPITALISM UNDER THE MICROSCOPE: a Review by J. Wilmot

23 Things They Don’t Tell You About Capitalism”, by Ha-Joon Chang. Penguin edition published 2011.

This is a rather strange book. The author was born in South Korea, but is now based at Cambridge University. His brief here is to expose the kind of claims made by ardent supporters of the free market capitalist model, from Adam Smith onwards.

But he’s no Socialist. Indeed, he hardly mentions Socialism – or that other alternative model, the co-operative movement.  He does, though present a critique of the kind of central planning imposed within the Soviet Union which he sees as distorting priorities.  Writing within a capitalist framework, he’s simply there to debunk a range of assertions made by those who go over the top in praise of the system, and perhaps to bring them down to earth. But in his introduction, he writes: “Being critical of  free-market ideology is not the same as being against capitalism.  Despite its problems and limitations, I believe that capitalism is still the best economic system that humanity has invented”.

Hmm. Well, we’ll have to agree to differ on that point won’t we?

THE FREE MARKET: DOES IT  EXIST?

His opening gambit is a scrutiny of the monetarists’ much vaunted “free market”. Only when markets are free can the economy flourish, they would claim.

But the author asserts that there’s no such thing as a “free market” (certainly not in latter-day capitalism). For example, there is always some level of control over the economy by governments.  And there are restrictions on the use of child labour in what’s euphemistically called the developed world.  There are controls over what we can buy or sell – such as drugs that are deemed to be harmful. We have environmental controls over such things as creating pollution (OK not as many as there should be) – and all these are accepted by those who espouse the “free market”.

Of course it’s been the task of such “freemarket” supporters as Thatcher (and now the dynamic duo of Cameron and Osborne) to reduce such regulations and legal restrictions to the minimum. But there’s a limit to what even they could manage. And financial regulations (such as fixing bank interest rates) are constantly being imposed in order to influence the direction of the economy.

A SHAREHOLDING SOCIETY?

The days when any big firm could be owned by a single individual are, of course, long since over. We’re now in the age of the public limited company, or “plc” for short. In other words a company is ostensibly owned by its shareholders.

Anyone of course can buy shares. Indeed, Thatcher actively encouraged it when she flogged off such public utilities as British Gas. And a host of others. But in practice shares are usually held in large blocks, often by those who buy or sell simply to make short-term profit.

The orthodox view is that as shareholders own companies, they should be run specifically in their interests. It’s an assertion that Ha-Joon Chang is critical of.

Shareholders, he argues, are the “stakeholders” who are likely to have the least interest in the long-term future of the company they’ve invested in.  Their interest is in making a swift buck. Thus they favour strategies based on making higher short-term profits rather than the long-term interests of the company.

After all, if the company’s not making a swift buck, the shareholder can pull out his/her shares and invest the cash elsewhere. As the writer says “running the company for the shareholders often reduces its long-term growth potential.”

He suggests that this state of affairs came about with the growth of  the public limited company, particularly in the 19th Century. The word “limited”, he says, stands for “limited liability”.  Rather than a businessman risking his home and everything he owns including the clothes he stands up in, he merely stands to lose the value of his shares in the company.

But of course, as a mere shareholder, you don’t want this to happen. You don’t have the long-term interests of the company at heart so at any sign of risk, you sell your shares and take your money elsewhere.

MANAGEMENT:

Now we’ve seen the emergence of a powerful managerial class, who (at least in theory) guide the company, and are rewarded for its success with high salaries and whacking great bonuses. Indeed, its been the emergence of the bonus culture that’s marked capitalism in recent decades. Provided that they keep making the profits, they are the masters now.  And, because the power of the shareholders is so dissipated, even if management doesn’t deliver the goods, it’s often difficult to get rid of it.

There is, of course, much more in this book, indeed too much to cover in a relatively short review. Just to dip in, for example, his argument that, contrary to popular belief, the invention of the washing machine changed the world more than the development of the internet.

He suggests that the development of the internet and the changes in information technology have been over-rated. But the development of household technology such as the washing machine and vacuum cleaner transformed the home – and in middle class homes it did away with the need for servants, thus practically eliminating a whole social class.

As for the internet, he claims that this is merely a continuation of earlier forms of communication – such as the telegraph and telephone. Before these were put in place it would take weeks or months to deliver a message across the Atlantic. But with the telegraph it shrunk dramatically to minutes and then seconds.  Can the internet beat that?

There are a whole lot of other points he makes about the disparity in wealth distribution (particularly between rich and poor nations), the notion that if rich people get even richer we all benefit through the “trickle down” effect,  and ends up with his own conclusions on how to rebuild the world economy.

WHAT TO DO:

These could possibly be summed up by saying “yes” to capitalism, but a resounding “no” to unrestrained free market capitalism.  He makes a number of points on how to reform the system. For example, financial innovations should be tried and tested before being put into practice (though he doesn’t spell out the criteria to be used).

We should aim for a system that brings out the best in people rather than the worst. Material self-interest is not enough. Perhaps “social need not greed” could be a motto here. After all, the NHS when it was first founded was capable of bringing out the best in people (and hopefully still is).

We need, he says, to end the belief that “people are always paid what they deserve”.  They’re not.  And we should emphasise the need to manufacture more. The notion of a “post-industrial knowledge economy” is a myth.

We must get away from “short-termism” and aim for a longer view of social, technological and financial development. And contrary to the views of politicians today, we need more active government, not less, prepared to regulate markets and restrict the greed of those doing well in an unequal, divisive society.

And lastly, we need to give sympathetic help to third world countries, particularly those that have suffered the ravages of free market policies imposed by such bodies as the IMF and World Bank.

JOHN WILMOT

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