23 Things They Don't Tell You About Capitalism - Book Review

The Book Review Series

Ah yes, the free market. We’ve heard about it a lot in the past few decades, as globalization has increased. It has been widely associated with capitalism and conflated with the only way to do it, but is that true?

I found this book while perusing the shelves of a used bookstore a while back. I didn’t even know it existed – but let me tell you how glad I am I found it. Ha-Joon Chang, a South Korean Economist who, according to his website, “I still keep my Korean nationality, but Britain is now my second home,” has written a book that I think EVERYONE should read.

And yes, I mean EVERYONE.

Unlike most books on economics, this one isn’t sterile, filled with academic theory, or like reading stereo instructions. It’s a vibrant take on a system that has become worshiped in our world today. Indeed, Peter Drucker had his finger on the pulse of capitalism worship when he wrote in his book Managing In The Next Society back in 2002:

“I am for the free market. Even though it doesn’t work too well, nothing else works at all. But I have serious reservations about capitalism as a system because it idolizes economics as the be-all and end-all of life. It is one-dimensional.”

Related: Read Managing In The Next Society – Book Review

Introduction

Ha-Joon Chang opens by telling us that it’s “free market” policies and their advocates that ultimately brought about the Great Recession. Noting that the global economy will be scarred for decades, he lays some good groundwork for the rest of the book, including these gems:

“This book is not an anti-capitalist manifesto. 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. My criticism is of a particular version of capitalism that has dominated the world in the last three decades, that is, free-market capitalism.” – Page xiii

“Once you know that there is really no such thing as a free market, you won’t be deceived by people who denounce a regulation on the grounds that it makes the market ‘unfree.'” – Page xiv

If I could sum up this book succinctly, it would be the two quotes above. First – and not to steal any thunder from the next chapter – there is no such thing as a “free market.”

Second, and even more important, is this idea that you cannot critique capitalism. Somehow, if you do, you are branded a socialist, communist, Marxist, or even a fascist – whatever shuts down the exchange of ideas when it comes to capitalism’s imperfections. The inability to have real and substantive conversations about the shortcomings of capitalism has led to massive inequality, civil unrest, a global rise in populism, and, ultimately, people so fed up with a system they want it torn down. For my part, I believe we are marching precipitously closer and closer every day.

Fortunately, for those interested and perhaps even those who aren’t (I STILL maintain everyone should read this book), Ha-Joon Chang has taken top-shelf economic theory and given us a wonderful book.

Let’s take a look at the 23 things he writes about – with my own thoughts added in, of course.

Thing 1: There is no such thing as a free market

There is no such thing as a “free market”

The author opens each “thing” with sections: “what they tell you” and “what they don’t tell you” – and this one starts it off. So-called “free market” supporters will tell you markets need to be free. Ha-Joon Chang informs the reader there is no such thing.

“The free market doesn’t exist. Every market has some rules and boundaries that restrict freedom of choice…How ‘free’ a market is cannot be objectively defined. It is a political definition. The usual claim by free-market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined ‘free market’ is the first step towards understanding capitalism.” – Pages 1, 2

He provides a great example to drive this point home, too.

In the early 1800s, Britain was considering passing child labor laws ONLY in the cotton factories, banning children under 9 from working altogether and limiting those 10 to 16-year-olds to a whopping 12 hours a day. It was considered too controversial and ultimately shelved because it would have interfered with the ‘free market.’

What are we to say about the child labor laws we have in place currently? How about the environmental regulations of today? The various labor laws we have in place now? Each of these we take for granted were ALL opposed – EVERY. SINGLE. ONE. – on the grounds that they impeded the “free market.”

“If the same market can be perceived to have varying degrees of freedom by different people, there is really no objective way to define how free that market is. In other words, the free market is an illusion.” – Page 3

Such is the work of this author: historical accuracy and world examples to demonstrate the points he puts on paper.

“There is no scientifically defined boundary for free market. If there is nothing sacred about any particular market boundaries that happen to exist, an attempt to change them is as legitimate as the attempt to defend them. Indeed, the history of capitalism has been a constant struggle over the boundaries of the market.” – Pages 8, 9

He ends this chapter by saying, “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 are as politically motivated as their opponents.” – Page 10

The author has hit a home run with this chapter – be sure to read it. Once you do, you’ll understand, and the stage will be set for the rest of the book.

**Thing 2: Companies should not be run in the interest of their owners**

The idea of maximizing shareholder value is in view here. Not surprisingly, free market advocates believe the company should be run to provide the maximum return for them. In other words, prioritizing one stakeholder group (shareholders) over the others (employees and customers) has increased since the 1980s.

The author rightly understands that maximizing shareholder value prioritizes short-term gain over long-term sustainability and investment. In fact, he argues that shareholders prefer this model, as they are always seeking the maximum value rather than the long-term health of the company. They can sell their shares and walk away; not so for the other stakeholders. This scheme, rightly understood, has effectively created the global crisis of 2008 and the downfall of the middle class.

“Writing in the 1950s, John Kenneth Galbraith, the Canadian-born American economist, also argued that the rise of large corporations managed by professional managers was unavoidable and therefore the only way to provide ‘countervailing forces’ to those enterprises was through increased government regulation and enhanced union power.” – Emphasis mine, Page 16

What has happened overall in the economy?

“Now, this unholy alliance alliance between the professional managers and the shareholders was all financed by squeezing the other stakeholders in the company (which is why it has spread much more slowly to other rich countries where the other stakeholders have greater relative strength). Jobs were ruthlessly cut, many workers were fired and re-hired as non-unionized labour with lower wages and fewer benefits, and wage increases were suppressed (often by relocating to or outsourcing from low-wage countries, such as China and India – or the threat to do so)…As a result, income inequality soared (see Thing 13) and in a seemingly endless corporate boom (ending, of course, in 2008), the vast majority of the American and the British populations could share in the (apparent) prosperity only through borrowing at unprecedented rates.” – Emphasis mine, Page 18

What have we seen play out in our economic landscape? The decline in the middle class and unionism. Put another way, they are one and the same. What’s more, many of the managers were shareholders, too (as part of their compensation package), and as such, their own wealth was increased – again, at the expense of other stakeholders.

Interesting, too, is the unlikely voices from the conservative right in the form of “American Compass” – a think tank denouncing the current American business model. In their brief they write,

“The defense of markets, though, has at times made us overly solicitous of businesses. As we advocate for owners and managers in their pursuit of profit, and celebrate the enormous benefits their efforts can generate for us all, we must accord the same respect to the concerns of workers and ensure that they too have a seat at the table. In a well-functioning and competitive market, participants meet as equals able to advance their interests through mutually beneficial relationships.”

I’ll end this chapter’s review by leaving you with Jack Welsh, former CEO of GE, and his thoughts on Maximum shareholder value:

“The dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal… Short-term profits should be allied with an increase in the long-term value of a company.”

Do you know when he said this? 2009, right after the global collapse of this strategy.

Thing 3: Most people in rich countries are paid more than they should be

Chang discusses the idea that people are paid for their productivity in this chapter. More specifically, the gap between the rich countries and poor ones regarding pay is largely determined by immigration control. Incidentally, this is why globalists WANT open borders; it drives the price of labor to nothing.

Immigration control – or, put another way, protectionism – is what promotes stability, wages, and the economy as a whole.

“All societies have limited capabilities to absorb immigrants, who often have very different cultural backgrounds, and it would be wrong to demand that a country goes over that limit. Too rapid an inflow of immigrants will not only lead to a sudden increase in competition for jobs but also stretch the physical and social infrastructures, such as housing and healthcare, and create tensions with the resident population.” – Page 27

He does a good job of evaluating the distinctions between poor people in poor countries and poor people in rich countries – and likewise the same for those rich, too. Indeed, he takes a look at the overall structure of an economy and its institutions that have been created which enable not only wages to be what they are, but also the rich to make what they do.

“They achieve this because they live in economies that have better technologies, better organized firms, better institutions and better physical infrastructure – all things that are in large part products of collective actions taken over generations (see Things 15 and 17). Warren Buffet, the famous financier, put this point beautifully, when he said in a television interview in 1995: ‘I personally think that society is responsible for a very significant percentage of what I’ve earned. If you stick me down in the middle of Bangladesh or Peru someplace, you’ll find out how much this talent is going to produce in the wrong kind of soil. I will be struggling thirty years later. I work in a market system that happens to reward what I do very well – disproportionately well.'” – Page 30

This chapter, building on the last, highlights the myth that market forces will ensure everyone gets paid correctly.

Thing 4: The washing machine has changed the world more than the internet has

The idea this chapter tackles is markets need more flexibility and freedom since the invention of the internet. While not overly dismissive of the impact of the internet, the truth is, the invention of the washing machine was more impactful.

“The emergence of household appliances, as well as electricity, piped water and piped gas, has totally transformed the way women, and consequently men, live. They have made it possible for far more women to join the labour market. For example, in the US, the proportion of married white women in prime working ages (35-44 years) who work outside the home rose from a few per cent in the late 1890s to nearly 80 per cent today.” – Page 35

He makes a compelling argument. Moreover, the pill and other contraceptives have had their effect, also. These things, coupled together, created substantial change in the way work was approached.

Remarkable is his comparison that the washing machine AND the telegraph beat the internet in terms of impact overall. The reason for this is twofold. First, it has led some to think the internet as more important that manufacturing, and that “this belief in ‘post-industrial society’ has led those countries to unduly neglect their manufacturing sector, with adverse consequences for their economies.” – Page 39

Secondly, it has led to the over prioritization of digital goods and services at the expense of others. For example, he writes that “perhaps giving money for those less fashionable things such as digging wells, extending electricity grids, and making more affordable washing machines would have improved people’s lives more than giving every child a laptop computer or setting up internet centres in rural villages.” – Page 39

This chapter puts some much-needed perspective on things we take for granted, and therefore, we should read it happily.

Thing 5: Assume the worst about people and you get the worst

Economists Adam Smith and Milton Friedman made the argument that because people are selfish – looking out for number 1 (and maybe their families) – the economic model of capitalism understands this and puts that selfishness to work for everyone involved.

Chang disagrees.

Business leadership workshops, books, and training fly in the face of the current economic thought, too.

“Pick up any book on business leadership or any autobiography by a successful businessman published in the West and see what they say. Do they say that you have to suspect people and watch them all the time for slacking and cheating? No, they probably talk mostly about how to ‘connect’ with the employees, change the way they see things, inspire them, and promote teamwork among them.” – Page 46

The author also notes that the nature of work necessitates that we have employees who act in good faith; after all, we cannot write every single job requirement into a description. Toyota, the most successful car company in the world, is one such example.

“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 behaviours, if only for the simple reason that they would not exist if we were entirely selfish.” – Page 30

Instead of assuming the worst about people, we should assume the best – and I agree.

Thing 6: Greater macroeconomic stability has not made the world economy more stable

Inflation – the main word for this chapter.

Chang posits we conflate inflation with hyper. Moreover, he believes that a rabid anti-inflation policy leads to economic harm. After giving some data, he writes,

“Why is this? It is because the policies that are aimed to reduce inflation actually reduce investment and thus economic growth, if taken too far. Free-market economists often try to justify their highly hawkish attitude towards inflation by arguing that economic stability encourages savings and investment, which in turn encourage economic growth…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.” – Pages 55, 56

Chang also points out there is another problem with measuring economic stability by inflation: metrics like job security (or insecurity if you are a worker) are completely taken out of the picture. The idea that we have fixated on one singular point of reference has obscured from the average citizen what’s really going on:

“The free-market policy package often known as the neoliberal policy package, emphasizes lower inflation, greater capital mobility and greater job insecurity (euphemistically called greater labour market flexibility), essentially because it is mainly geared towards the interests of the holders of financial assets.” – Page 60

Sounds like Chang is hinting at the elites creating policy that benefits them over the people.

Thing 7: Free-market policies rarely make poor countries rich

The idea that free-market absolutists are what made poor countries rich is not true, according to the author. He writes,

“The truth is more or less the opposite. 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 policies that today they advise the developing countries not to adopt. Free market policies made few countries rich so far and will make few rich in the future.” – Page 63

Prominent Americans of history proposed, endorsed, or held to a belief that was antithetical to today’s free market capitalists. Benjamin Franklin and Alexander Hamilton (along with many other prominent founding fathers) supported a protectionist view of American industry. Free market capitalists support patent rights, but Thomas Jefferson did not. Andrew Jackson supported high tariffs – and so did Benjamin Franklin.

“Therefore, Franklin argued, the American manufacturers could not survive unless they were protected from low-wage competition – or what is known as ‘social dumping’ today – from Europe. This is exactly the logic that Ross Perot, the billionaire-turned-politician, used in order to oppose the NAFTA (North American Free Trade Agreement) in the 1992 presidential election campaign – a logic that 18.9 per cent of the American voters were happy to endorse.” – Page 67

Chang spends the rest of this chapter dismissing the oft-repeated claim that the US was always destined to succeed due to special conditions – and then diving into examples of government protectionism and how it has been used extensively to grow economies.

“Arguing that patents are artificial monopolies that go against the principle of free trade (a point in which is strangely lost on most of today’s free-trade economists), the Netherlands and Switzerland refused to protect patents until the early twentieth century” – Page 71

“To sum up, the free-trade, free-market policies are policies that have rarely, if ever, worked. Most of the rich countries did not use such policies when they were developing countries themselves, while these policies have slowed down growth and increased income inequality in the developing countries in the last three decades. Few countries have become rich through free-trade, free-market policies and few ever will.” – Page 73

Thing 8: Capital has a nationality

This is an interesting chapter, full of companies that are seemingly multinational (or transnational as they’ve been coined), and for some, they are celebrated as the heroes of globalization. Because they are transnational, we are in a borderless world and countries should not seek to promote or protect a national company over a transnational one – so goes the argument.

Ha-Joon Chang, in response to this, writes,

“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.” – Page 79

Piling on, he continues:

“Why is there a home-country bias in this globalized world? The free-market view is that nationality of capital does not – and should not – matter, because companies have to maximize profit in order to survive, and therefore that patriotism is a luxury they can ill afford. Interestingly, many Marxists would agree. They also believe that capital willingly destroys national borders for greater profits and for the expanded reproduction of itself. The language is radically different, but the message is the same – money is money, so why should a company do less profitable things simply because they are good for its home country?” – Pages 79, 80

Despite the coziness that free market capitalists seem to have with Marxists here, Chang explains that many top executives feel some patriotism and duty to their home country. Moreover – and even more importantly – many of the companies (both here in America and abroad) have a duty since they were supported by public money, had enormous investments into their R&D, were recipients of favors from the government (through tariffs, investment, etc.), and, even more recently, have been bailed out by tax money for their participation in free market policies that led to a near total economic collapse.

Read this chapter.

Thing 9: We do not live in a post-industrial age

“Have we really entered to post-industrial age? Is manufacturing irrelevant now? The answers are: ‘only in some ways’. and ‘no’.” – Page 91

Ranging from the social perspective to the demand for services, the author does a fantastic job exploring why, in many cases, developed countries appear to be de-industrialized.

“To sum up, even the rich countries have not become unequivocally post-industrial. While most people in those countries do not work in factories any more, the manufacturing sector’s importance in their production systems has not falled very much, once we take into account the relative price effects. But even if de-industrialization is not necessarily a symptom of industrial decline (although it often is), it has negative effects for long-term productivity growth and the balance of payments, both of which need reckoning. The myth that we now live in a post-industrial age has made many governments ignore the negative consequences of de-industrialization.” – Page 101

Thing 10: The US does not have the highest living standard in the world

“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. Higher inequality is also behind the poorer health indicators and worse crime statistics of the U.S. Moreover, the same dollars buys more things in the US in most other rich countries mainly because it has cheaper services than in other comparable countries, thanks to higher immigration and poorer employment conditions.” – Pages 102, 103

“One reason why we get that impression is that the US is much more unequal than the European countries and therefore looks more prosperous to foreign visitors than it really is – foreign visitors to any country rarely get to see the deprived parts, of which the US has many more than Europe.” – Page 105

In a 2017 Newsweek article, a United Nations official – visiting Alabama – declared it had the worst poverty in the developed world. This corroborates the author and the inequality in America, today. What’s more, the United States is a very large country; there are many places where poverty can be swept under the rug, hidden from visitors. This, too, allows for the perception that the United States has the highest living standard.

Tell that to those who, according to Time, live in poverty. In 2021 it was 7.4 percent, and in 2022? It had grown to 12.4 percent.

“Given that the US has by far the most unequal distribution of income among the rich countries, we can safely guess that the US per capita income overstates the actual living standards of more of its citizens than in other countries.” – Page 108

Discussing other developed countries and how their economies are set up, This chapter is a MUST READ for anyone who really wants to understand this.

“In other words, the higher purchasing power of average US income is bought at the price of lower income and inferior working conditions for many US citizens.”

Thing 11: Africa is not destined for underdevelopment

“The real cause of African stagnation in the last three decades is free-market policies that the continent has been compelled to implement during that period.” – Page 113

“So, after nearly thirty years of using ‘better’ (that is, free-market) policies, its per capita income is basically at the same level as it was in 1980.” – Page 119

In the end, Chang does a great job effectively addressing each of these conditions, highlighting how, in every part of the world, those same conditions can be found – they were just overcome. And, in the case of Sub-Saharan Africa (which, as the author notes, is what most people think when they say “Africa”), they can be overcome, too.

Indeed, in the 1960s and 1970s, Africa as a whole had a modest economic growth rate. The adoption of free-market policies, however, has effectively stalled any growth since.

“The main reason for Africa’s recent growth failure lies in policy – namely, the free-trade, free-market policy that has been imposed on the continent through the SAP.” – Page 124

The SAP refers to the Structural Adjustment Programs imposed on it by the World Bank and the IMF. Wanna guess who is at the helm of them? Yeah, free-market advocates. Read this chapter.

Thing 12: Governments can pick winners

“Even while it pretends that it does not, the US government has picked most of the country’s industrial winners since the Second World War through massive support for research and development (R&D). The computer, semiconductors, aircraft, internet and biotechnology industries have all been developed thanks to subsidized R&D from the US government.” – Page 132

He concludes this chapter by writing,

“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. In all types of winner-picking – private, public, joint – there are successes and failures, sometimes spectacular ones. If we remain blinded by the free-market ideology that tells us only winners-picking by the private can succeed, we will end up ignoring a huge range of possibilities for economic development through public leadership or public-private joint efforts.” – Page 136

I’d only add that free-market capitalists are FANTASTIC at double-talk here in the United States; denouncing this type of approach and DIVING HEAD FIRST in it WHEN IT BENEFITS THEM. There are MANY examples, but I’ll list just one, here: Economic Incentives (something multiple state governments in the southern United States engage in) = Corporate Welfare.

This chapter blows the lid off the idea all the government does is interfere. Read it.

Thing 13: Making rich people richer doesn’t make the rest of us richer

Often referred to as trickle-down policies, the idea says that as the rich get richer, the wealth will trickle down to the rest of the citizenry through investment, work, etc. The first problem with this model is that it doesn’t work – not in a meaningful sense, anyway.

The author details this when he writes: “The above idea, known as ‘trickle-down economics’, stumbles on its first hurdle. 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.” – Page 137

Throughout this book, Ha-Joon Chang has continually referred to the slowdown or slowing of growth due to these policies. Its use in this chapter is no different. He also takes the time to compare, once again, where free-market advocates agree with Marxists. I found the comparison interesting.

He continues:

“Following the Second World War, there was a rapid growth in progressive taxation and social welfare spending in most of the rich capitalist countries. Despite this (or rather partly because of this – see Thing 21), the period between 1950 and 1973 saw the highest-ever growth rates in these countries – known as the ‘Golden Age of Capitalism’. Before the Golden Age, per capita income in the rich capitalist economies used to grow at 1-1.5 per cent per year. During the Golden Age, it grew at 2-3 per cent in the US and Britain, 4-5 per cent in Western Europe, and 8 per cent in Japan. Since then, these countries have never managed to grow faster than that.” – Page 142

By the end of the 1970s, many free-market advocates had convinced others that the problem was a lack of money for the rich. We’ve seen a wealth transfer upward ever since.

“Moreover, if wages are not stuck at or below subsistence levels, additional income may encourage workers’ investment in education and health, which may raise their productivity and thus economic growth. In addition, greater income inequality may promote social peace by reducing industrial strikes and crime, which may in turn encourage investment, as it reduces the danger of disruption to the production process and this to the process of generating wealth. Many scholars believe that such a mechanism was at work during the Golden Age of Capitalism, when low income inequality coexisted with rapid growth.” – Pages 146, 147

Parts of the above have been adapted to varying degrees in developed countries, and many would argue – myself included – that to the degree it’s been adapted, you see a more cohesive and humanizing society, with less inequality.

“Simply making the rich richer does not make the rest of us richer. If giving more to the rich is going to benefit the rest of the society, the rich have to be made to deliver higher investment and thus higher growth through policy measures (e.g., tax cuts for the rich individuals and corporations, conditional on investment), and then share the fruits of such growth through a mechanism, such as the welfare state.” – Page 147

One of the best chapters in this book – read it twice.

Thing 14: US managers are over-priced

“The average CEO compensation (salaries, bonuses, pensions and stock options) in the US is 300-400 times the average worker compensation (wages and benefits).” – Page 149

In the 1960s and 70s, it was 30-40 to 1. And even that is too much, according to another author, Peter Drucker:

“For example, I have often advised managers that a 20-1 salary ratio is the limit beyond which they cannot go if they don’t want resentment and falling morale to hit their companies. I worried back in the 1930s that the great inequality generated by the Industrial Revolution would result in so much despair that something like fascism would take hold. Unfortunately, I was right.”

“Contrast this to the changes in what the American workers get. According to the Economic Policy Institute (EPI), the Washington-based centre-left think-tank, the average hourly wage for the US workers in 2007 dollars (that is, adjusted for inflation) rose from $18.90 in 1973 to $21.14 in 2006. That is a 13 per cent increase in thirty-three years, which is around 0.4 per cent growth per year. The picture is even bleaker when we look at overall compensation (wages plus benefits) and not just wages. Even if we look at only the recovery periods (given that worker compensation falls during recessions), median worker compensation rose at the rate of 0.2 per cent per year during 1983-9, at the rate of 0.1 per cent per year between 1992 and 2000 and did not grow at all during 2002-7.

In other words, workers pay in the US has been virtually stagnant since the mid 1970s.” – Page 150

Moreover, Chang also dismisses the idea that the all-knowing market self-corrects, including bad behavior:

“Despite this [the process of the market eliminating bad managers], little is done to check excessive and biased (in that failures are hardly punished) executive pay packages because the managerial classes in the US and Britain have become so powerful, not least because of the fat paycheques they have been getting over the last few decades.” – Page 155

There is ample evidence for this. Chang details how the United States and Britain – both countries that had to bail out institutions due to poor management, speculation, and risk-taking – failed to impose limits on salaries, payouts, and overall compensation for the very people and institutions that were a major part of the problem in the first place.

“Moreover, even if they are eventually weeded out, one-sided managerial compensation packages impose huge costs on the rest of the economy while they last. The workers have to be constantly squeezed through downward pressure on wages, casualization of employment and permanent downsizing, so that the managers can generate enough extra profits to distribute to the shareholders and keep them from raising issues with high executive pay (for more on this, see Thing 2). Having to maximize dividends to keep the shareholders quiet, investment is minimized, weakening the company’s long-term productive capabilities.” – Page 157

Need we say more? This chapter is worth every penny of the book’s price.

Thing 15: People in poor countries are more entrepreneurial than people in rich countries

The chapter starts off by stating a prominent free-market talking point: “Entrepreneurship is at the heart of economic dynamism.” – Page 157

While this is certainly true, it’s an irony that big business has abused noncompete agreements and trapped Americans, stifling the very dynamism free-market advocates claim to appreciate.

“The point is that what really makes the rich countries rich is their ability to channel the individual entrepreneurial energy into collective entrepreneurship.” – Page 165

“If effective entrepreneurship ever was a purely individual thing, it has stopped being so at least for the last century. The collective ability to build and manage effective organizations and institutions is now far more important than the drives or even the talents or a nation’s individual members in determining its prosperity (see thing 17). – Page 167

Thing 16: We are not smart enough to leave things to the market

“However, in this Thing, I can at least point out that the problem with the free market does not end with the fact that the individually rational actions can lead to a collective irrational outcome (that is, market failure). The problem is that we are not even rational to begin with. And when the rationality assumption does not hold, we need to think about the role of the market and of the government in a very different way even from the market failure framework, which after all also assumes that we are rational.” – Page 170

The market is complex and nuanced, numerous people who profess to know things don’t, and those who should confess they often are in the dark. What does this point to? The author believes it’s an indication of the world’s total complexity.

“So what do we do, when the world is so complex and our ability to understand it so limited? Simon’s answer was that we deliberately restrict our freedom of choice in order to reduce the range and the complexity of the problems that we have to deal with.

This sounds esoteric, but when you think about it, this is exactly what we do all the time. Most of us create routines in our life so that we don’t have to make too many decisions too often.” – Page 175

With the above in mind, when the government limits the complexity of things, this lets those in the market make better decisions. The financial collapse of 2008 illustrated this well. There were layers of complexity that were unknown and coupled with bad decisions being made by gambling managers, it sent the entire economy into a freefall.

“Unless we deliberately restrict our choices by creating restrictive rules, thereby simplifying the environment that we have to deal with, our bounded rationality cannot cope with the complexity of the world. It is not because the government necessarily knows better that we need regulations. It is the humble recognition of our limited mental capability that we do.” – Page 177

Another great chapter.

Thing 17: More education in itself is not going to make a country richer

“What really matters in the determination of national prosperity is not the educational levels of individuals but the nation’s ability to organize individuals into enterprises with high productivity.” – Page 179

Education IS important – just not in the way many in the free market believe it is – like when it comes to productivity and innovation. The author does a good job diving into the examples often used – East Asia and their excelling at higher education is well known, along with Sub-Saharan Africa (as an example, that is). Overall, I’m left to agree with him when he writes,

“From a strictly economic point of view, teaching these subjects is a waste of time. We teach our children those subjects [literature, history, philosophy, music, etc.] because we believe that they will eventually enrich their lives and also make them good citizens. Even though this justification for educational spending is increasingly under attack in an age in which everything is supposed to justify its existence in terms of its contribution to productivity growth, it remains a very important – in my view, the most important – reason to invest in education.” – Page 182

It is also in this chapter that Chang raises a couple of my pet points overall about education. For example:

“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.” – Page 187

Related: Read Education Vs Experience

Indeed. we have conflated education with experience and have done so at our own peril. We need to take a fresh look at education in light of this understanding.

“If not just basic education but also higher education does not matter so much in determining a nation’s prosperity, we must seriously rethink the role of education in our economy.”

In the case of rich countries, their obsession with higher education has to be tamed. This obsession has led to unhealthy degree inflation and the consequent over-investment of huge scale in higher education in many countries.”

– Page 188

“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. If we expanded education in the belief that it will make our economies richer, we will be sorely disappointed, for the link between education and national productivity is rather tenuous and complicated. Our overenthusiasm with education should be tamed, and, especially in developing countries, far greater attention needs to be paid to the issue of establishing and upgrading productive enterprises and institutions that support them.” – Page 189

I couldn’t agree more – another great chapter by Chang.

Thing 18: What is good for General Motors is not necessarily good for the United States

A common free-market trope is, “Without a vibrant corporate sector, there is no economic dynamism. What is good for business, therefore, is good for the national economy.” – Page 190

The truth is, like Chang writes, “In fact, not all regulations are bad for business. Sometimes, it is in the long-run interest of the business sector to restrict the freedom of individual firms so that they do not destroy the common pool of resources that all of them need, such as natural resources or the labour force.” – Page 190

For example, it wasn’t in corporate America’s best interest to clean up the Hudson River due to their pollution; they continued polluting without any penalty or check. They had to be made to clean up due to litigation efforts of advocacy groups and prominent lawyers – like Robert Kennedy Jr. Remember – there is no such thing as a free market.

“More importantly, all those actions that have enabled GM to get out of difficulties with the least effort have ultimately not been good even for GM itself – unless you equate GM with its managers and a constantly changing group of shareholders. These managers drew absurdly high salaries by delivering higher profits by not investing for productivity growth while squeezing other weaker ‘stakeholders’ – their workers, supplier firms and the employees of those firms. They bought the acquiescence of shareholders by offering them dividends and share buybacks to such an extent that the company’s future was jeopardized. The shareholders did not mind, and indeed many of them encouraged such practices, because most of them were floating shareholders who were not really concerned with the long-term future of the company because they could leave at a moment’s notice (see Thing 2).” – Page 195

Indeed, this example demonstrates that what is “good” for a company is not “good” for a country – AND even what is “good” for some stakeholders (managers and shareholders) is not “good” for other stakeholders (workers and suppliers).

Don’t skip this chapter.

Thing 19: Despite the fall of communism, we are still living in planned economies

The idea that planned economies – largely equated with communism – do not work is untenable. They, in fact, do work – and, what many people in the United States do not grasp, is that the same people who denounce it ACTUALLY LOBBY FOR IT.

“Capitalist economies are in large part planned. Governments in capitalist economies practise planning, too, albeit in a more limited basis than under communist central planning. All of them finance a significant share of investment in R&D and infrastructure. Most of them plan a significant chunk of the economy through the planning of the activities of state-owned enterprises. Many capitalist governments plan the future shape of individual industrial sectors through sectoral industrial policy or even that of the national economy through indicative planning.” – Page 199

“Moreover, in all capitalist economies, the government plans the national technological future by funding a very high proportion (20-50 per cent) of research and development. Interestingly, the US is one of the most planned capitalist economies in this regard. Between the 1950s and the 1980s, the share of government funding in total R&D in the supposedly free-market US accounted for, depending on the year, between 47 per cent and 65 per cent, as against around 20 per cent in Japan and Korea and less than 40 per cent in several European countries (e.g., Belgium, Finland, Germany, Sweden).” – Page 206

Bottom line? The author is absolutely right: capitalist economies (and especially the United States) are EVERYWHERE. This isn’t the mythical “free market” its proponents echo.

According to Adam Morgan, it sounds like Socialism.

Once you read this chapter and understand the underlying principle, you’ll see it everywhere: an unholy alliance between big business and big government.

Thing 20: Equality of opportunity may not be fair

“Equality of opportunity is something to be highly cherished.” – Page 213

This is how the author finishes the first section of the chapter. He takes you through some East Asian examples to help demonstrate this. Indeed, it is something to be regarded when we consider the unfairness all around us.

This chapter, however, also suffers the same problem that capitalism does: the second you try and critique it (in this case, equality of opportunity is a good starting point but not enough), you are automatically accused of being a proponent of opportunity of outcome.

In other words, you can’t criticize, or you are a socialist.

However, as Chang notes,

“The point is that, in order to benefit from the equal opportunities provided to use them, people require the capabilities to make use of them.”

– Page 216

Moreover, writing about the determination against all odds, and the circumstances they find themselves in, he notes that people and their respective choices are important and should not be discounted. He continues, however:

“This argument is correct. We cannot, and should not, explain someone’s performance only by the environment in which he has grown up. Individuals do have responsibilities for what they have made out of their lives.

However, while correct, this argument is only part of the story. Individuals are not born into a vacuum. The socio-economic environment they operate in puts serious restrictions on what they can do. Or even on what they want to do. Your environment can make you give up certain things even without trying…

While it is silly to blame everything on the socio-economic environment, it is equally unacceptable to believe that people can achieve anything if they only ‘believe in themselves’ and try hard enough, as Hollywood movies love to tell you. Equality of opportunity is meaningless for those who do not have the capabilities to take advantage of it.” – Page 217

You may have reservations going in on this chapter, but give him the chance to change your mind here.

Thing 21: Big government makes people more open to change

Building off the last chapter, he makes a case for bigger government:

“Europeans know that, even if their industries shut down due to foreign competition, they will be able to protect their living standards (through unemployment benefits) and get re-trained for another job (with government subsidies), whereas Americans know that losing their current jobs may mean a huge fall in their living standards and may even be the end of their productive lives. This is why the European countries with the biggest welfare states, such as Sweden, Norway, and Finland, were able to grow faster than, or at least as fast as, the US, even during the post-1990 ‘American Renaissance.'” – Pages 221, 222

This is a perspective many never consider. Be sure to read this chapter with an open mind.

Thing 22: Financial markets need to become less, not more, efficient

This is one of the most important chapters in the whole book – and if you want to gain a better understanding of the economic meltdown in 2008, make sure you read it thoroughly.

“This meant that more and more financial claims were being created for each underlying real asset and economic activity…but the point is that the same underlying assets (that is, the houses that were in the original mortgages) and economic activities (the income-earning activities of those mortgage-holders) were being used again and again to ‘derive’ new assets.” – Page 238

In other words, creating new assets out of thin air with a complicated formula and using taxpayer money to bail out these insane choices.

“This enormous gap has created huge problems, because finance capital is ‘impatient’ and seeks short-term gains (see Thing 2). In the short run, this creates economic instability, as liquid capital sloshes around the world at very short notice and in ‘irrational’ ways, as we have recently seen. More importantly, in the long run, it leads to weak productivity growth, because long-term investments are cut down to satisfy impatient capital.” – Page 240

The author does a good job explaining this, so be sure to read this chapter even if finances aren’t your thing.

Thing 23: Good economic policy does not require good economists

“Good economists are not required to run good economic policies…

Indeed, during the last three decades, the increasing influence of free-market economics has resulted in poorer economic performances all over the world, as I have shown throughout this book – lower economic growth, greater economic instability, increased inequality and finally, culminating in the disaster of the 2008 global financial crisis.” – Pages 240, 241

Written in 2010, this response is not just timely but accurate when assessing the reason(s) for 2008.

“Over the last three decades, economists played an important role in creating the conditions of the 2008 crisis (and dozens of smaller financial crisises that came before it since the 1980s, such as the 1982 Third World debt crisis, the 1995 Mexican peso crisis, the 1997 Asian crisis and the 1998 Russian crisis) by providing theoretical justifications for financial deregulation and the unrestrained pursuit of short-term profits. More broadly, they advanced theories that justified the policies that have led to slower growth, higher inequality, heightened job insecurity and more frequent financial crisis that have dogged the world in the last three decades (see Things 2, 6, 13 and 21). On top of that, they pushed for policies that weakened the prospects for long-term development in developing countries (see Things 7, and 11). In the rich countries, these economists encouraged people to overestimate the power of the new technologies (see Thing 4), made people’s lives more and more unstable (see Thing 6), made them ignore the loss of natural control over the economy (see Thing 8) and rendered them complacent about de-industrialization (see Thing 9). Moreover, they supplied arguments that insist that all those economic outcomes that many people find objectionable in this world – such as rising inequality (see Thing 13), sky-high executive salaries (see Thing 14) or extreme poverty in poor countries (see Thing 3) – are really inevitable, given (selfish and rational) human nature and the need to reward people according to their productive contributions.” – Pages 247, 248

Lastly, it’s worth ending this chapter on the simple notion that there is no such thing as the free market. And, moreover, it doesn’t take an economist to understand that, either.

Another great chapter by the author.

“In other words, economics has been worse than irrelevant. Economics, as it has been practised in the last three decades, has been positively harmful for most people…It is a particular type of economics – that is, free-market economics as it has been practised in the last few decades – that is dangerous.

– Page 248

Conclusion

“So capitalism, yes, but we need to end our love affair with unrestrained free-market capitalism, which has served humanity so poorly, and install a better-regulated variety.” – Page 254

When you look at the data, the decline in unionism and erosion of the middle class, the massive transfer of wealth that’s taken place since the 1980s, and the massive amount of insecurity that’s been in play, it’s hard to deny Ha-Joon Chang’s words. For my part, I believe he is absolutely right. What’s more, people NEED to read, educate themselves, and understand just how much has taken place – AND the talking points that keep people from collectively organizing for some form of power and pushback.

“Moreover, by glorifying the pursuit of material self-interest by individuals and corporations, we have created a world where material enrichment absolves individuals and corporations of other responsibilities to society. In the process, we have allowed our bankers and fund managers, directly and indirectly, to destroy jobs, shut down factories, damage our environment and ruin the financial system itself in the pursuit of individual enrichment.” – Page 255

In the Postscript (written in 2011), he confesses his confusion with people and writes,

“Puzzlingly, many of the people who suffer the most under free-market policies support those approaches because they have come to believe that small governments, fiscal rectitude, business freedom, and self-help are the foundations of a dynamic economic and a decent society. Such is the power of free-market ideology that people vote for politicians who do things to hurt them, often electing leaders who are even more committed to free-market ideology than those that ruled before the crisis.” – Page 266

This book, initially published in 2010, calls the economic conditions that led to the meltdown for what they are. Moreover, to many people, the 2008 economic collapse is nothing more than a bad memory. As far as I’m concerned, this is a recipe for history to repeat itself. Only this time, the ramifications will be of a scale that – at least to me, anyway – will completely eradicate the global economy, including all of the “wealth” the free market advocates acquired.

THIS BOOK SHOULD BE ON EVERYONE’S BOOKSHELF – IT’S THAT IMPORTANT.

If you have not purchased it yet (you should have ordered it in the middle of reading this 😎 you can find it, here.

Let me know your thoughts in the comments – and happy reading.