Ha-Joon Chang's Points 4 to 20

Thing Four says that the washing machine has changed the world more than the internet has. “Washing machine” stands for labor-saving devices including vacuum cleaners, dishwashers, and so on. These have freed mainly women from many hours of unpaid work, enabling them to work for money outside the home. This has had far-reaching effects in society.

Chang characterizes the effects of the internet mostly in terms of speeding up communication, and points out that the telegraph had a much bigger proportional effect: communication time decreased from days or weeks to minutes. I think the internet has started to catch up with the washing machine since the book was written in 2005. Consider the current

election: now everyone gets to choose their own reality. Only a small minority are well enough trained in critical thinking to discern the real facts from the partisan noise machines. And even that minority often doesn’t work hard enough to resist the human urge to confirmation bias. https://en.wikipedia.org/wiki/Confirmation_bias

Thing Five takes on the simple-minded assumption from Econ 101 which says that people act selfishly in their economic activities, but the magic of the market transforms greed into social benefit. In reality, self-interest is often not our primary motivation. Chang cites an executive from a giant Japanese steel company who explains that no individual can understand enough about the company to manage it on their own; they have to trust that their subordinates are acting for the good of the company. A personal experience illustrates another of Chang’s points. A borrowed car that my wife and I were driving broke down in Leipzig, Germany. The repair shop we chose at random knew that they would never see us again. If they were working purely selfishly, they should have cheated us blind. But they did the repair right and charged a fair price – and isn’t that what happens most of the time?

Who hasn’t goofed off from time to time at work? But most workers’ main motive is not to maximize their leisure during work hours or steal from the company. Any book on business leadership will say the way to get the best performance is not to distrust and micromanage employees, but to connect with them, inspire them, and promote teamwork. Consider that one form of labor strike is to work exactly according to company rules. This reduces production by 30 to 50%. Ordinarily, employees work creatively to get more done.

Government workers are not subject to normal market forces, and tend to have job security even when political offices change hands.

“Free-market” apostles worry that this gives them a wide scope to act selfishly to increase their own power and wealth. Therefore free-marketeers promote reducing the size of government, contracting out government services whenever possible, and introducing performance-related incentives for government employees. My personal observations are that government employees are at least as committed to doing a good job as workers in the private sector, and that morale is harmed by money rewards keyed to supposed better performance. Studies have shown that contracting out increases government costs.

Chang provides several more examples and arguments that support his

point: morality is not an illusion, and if we design our economic system to recognize people’s honesty, duty, altruism, self-respect, etc. we will do better than if we expect the worst.

Thing Six says “Greater macroeconomic stability has not made the world economy more stable.” Say what? “Greater macroeconomic stability” means control of inflation. Most Americans are too young to remember the out-of-control inflation in the 1970s. Chang argues that the measures that have kept inflation low have suppressed economic growth and have helped create many crises, including the 2008 collapse. More inflation would produce a better quality of life for most people.

Thing Seven says that free-market policies do not make poor countries rich. Free-marketeers claim that developing countries stagnated in the 1960s and 70s because of protectionism, industrial subsidies, and government ownership of banks and industries. Chang uses an entertaining description of two countries that broke all the free-market rules and derived stellar economic growth: present-day China, and the U.S. around 1880. He says that, starting in the 1980s, free-market policies imposed by rich countries have led to slower growth, more inequality, and more financial crises in the developing world.

Thing Eight is “Capital has a nationality.” Here, Chang rebuts the idea that it doesn’t matter where a corporation is headquartered, and any barriers to movement of capital are economically harmful. He argues that most of the benefits from a corporation go to its home country. This book was written before the issue of “inversion” became prominent, where a big American company might be “bought” by a small company in, say, Ireland, to avoid paying U.S. taxes. I wonder if that would change his analysis.

Thing Nine says that we don’t live in a “post-industrial age.” You will hear that advanced countries have moved away from manufacturing into a knowledge-based economy based on finance and services. Chang says maybe most of us no longer work in factories, but manufacturing is still the engine of the economy, because productivity growth is fast in manufacturing. Unlike most services, manufacturing can be mechanized and automated.

Thing Ten is that the U.S. doesn’t have the world’s highest standard of living. This one is kind of technical and I can’t explain it briefly.

Some of the facts supporting Chang’s argument are: Seven European countries have greater GDP per capita. The U.S. distribution of wealth is far more unequal than in any other wealthy country (so most people’s income is considerably below average). Twenty-nine countries have longer life spans and lower infant mortality. Americans work 10% to 30% more hours than people in most wealthy countries. We are getting less for more – could it have anything to do with the trickle-down economic policies that have been in place to varying degrees since the 1980s??

Thing Eleven refutes the idea that Africa’s lack of economic progress is due to inherent factors like climate, culture, its many landlocked countries, weak institutions, ethnic conflict, and the “resource curse”.

Chang shows that all of these factors were operating in the past in economic powerhouses such as France, Japan, Korea, and the U.S.

Furthermore, until 1980 Africa was making decent economic progress, equal to what today’s rich countries did during their industrial revolutions. 1980 is when the World Bank and IMF began requiring African countries to instate free-trade, free-market policies in order to get capital. This is another brick in the structure Chang is building to show that neoliberal, trickle-down, free-market policies are harmful all over the world.

Thing Twelve says “Governments can pick winners.” Deregulators and free-market evangelists like to say that government is lousy at industrial policy. Chang easily demolishes that claim with examples from France, Japan, and Korea (which forced companies like LG to go into the electronics business, Hyundai to enter shipbuilding, and POSCO to make steel – all hugely successful). The U.S. government shaped industrial development by subsidizing R&D in computers, biotech, aerospace, etc. An observation not in Chang’s book: there was plenty of ridicule when a solar-energy company supported by the Obama administration failed, but nobody can pick winners every time. Rescuing the auto industry was a resounding success.

Thing Thirteen says “making rich people richer doesn’t make the rest of us richer.” In other words, trickle-down doesn’t work. Paul Ryan, Scott Walker, and Donald Trump say giving rich people more money through tax cuts will get them to invest more money, which will increase economic growth and ultimately benefit us all. The last 30 years prove that is false. First of all, rich people don’t invest much of the income from tax cuts unless the cuts are conditioned on the money being invested.

Also, the rich were heavily taxed – up to 90% marginal tax rates – during the greatest era of growth in the U.S. (the 1950s and 60s).

Unfortunately, the entire federal government is now in the hands of a party that has a religious faith in trickle-down economics. Better brace yourself for another period of poor economic performance and no progress for the middle and lower classes.

Thing Fourteen is that U.S. managers are overpaid. The free-market position is that executve pay is determined by market forces, and if CEOs are paid a lot, it’s because they add a lot of value to their companies and it costs a lot to hire the best. Chang responds that executive pay in the U.S. has ballooned during a period when their companies’ performance has decreased; U.S. managers are paid 2 to 20 times as much as managers in countries that are outperforming us; and they win with huge severance packages even when they are fired for mismanagement. The real explanation for the high pay is that they have leveraged their big paychecks into political and boardroom power that protects and amplifies their pay.

Thing Fifteen: people are more entrepreneurial in poor countries than in rich countries. We are told that one reason poor countries stay poor is because too many people are sitting around drinking tea or whatnot. But the statistics show that people in poor countries are many times likelier to own their own business than in rich countries. The problem isn’t lack of individual entrepreneurship. Poor countries lack the institutions that enable people to work together – collective entrepreneurship. Part of this chapter is an explanation of why microcredit, which seemed to show so much promise around the turn of the century, had to fail at getting countries out of poverty.

Thing Sixteen is that we’re not smart enough to leave things to the market. What does that mean? Chang is taking on the notion that the market is a self-correcting system, and investors have the best information about their activities, therefore government should not interfere. He refutes that by pointing out how the very best economic minds, including Economic Nobel laureates, repeatedly bankrupted hedge funds that were based on financial instruments too complex for ANYONE to understand. The only way to prevent future market collapses is to limit the complexity by prohibiting exotic derivatives, credit default swaps, etc. until their safety can be demonstrated. That’s what we do with new medications, for the exact same reason.

Thing Seventeen says that more education isn’t enough to make a country richer. Actually it goes further and argues that many rich countries, including the U.S., are sending way too many people to college and to graduate school. This is not what I would have expected!

For the first point, he looks at some pairs of countries in the 1960s, like Taiwan and the Philippines. The Philippines had considerably greater literacy and per-capita income, but Taiwan’s economy grew much faster and today it is far richer than the Philippines. When you look at rich countries, many countries that do great on tests of math and science achievement, like Lithuania, Latvia, Russia, and Kazakhstan, are economically way behind the U.S., Germany, Norway, etc., where test scores are a lot lower.

For the second point, consider how much of the subjects you learned in high school or college you actually use at your job – probably not too much. Skills learned on the job are usually more relevant. Chang discusses Switzerland, which has a high income and strong economy, but where until recently only about 15-20% of young people went to college.

The rate has increased since the 1990s, but is still much lower than in the U.S. and other wealthy western countries. From a purely economic point of view, too many people go to college in the other countries.

College functions more to demonstrate qualities such as general intelligence, organization, and diligence than to instill job-related skills. But when the college-educated population reaches a critical threshold, it’s hard to get any decent job without a college degree, and a positive feedback loop sets in. When practically everyone has a bachelor’s degree, now a graduate degree is needed to stand out in the crowd.

Chang acknowledges that college is not just vocational education, and that education can produce better citizens and can enrich people’s lives. But the economic claims made for the value of education are greatly exaggerated.

Thing Eighteen says “What is good for General Motors is not necessarily good for the United States.” We all know that, but Chang is making a wider point, i.e., that regulation can be good for business. GM slowly sank from a technological leader to bankruptcy. It illustrates how a firm can make decisions that may maximize short-term returns for executives and stockholders, but are terrible for the company’s long-term prospects as well as other stakeholders such as workers, suppliers, and the national economy. However, Chang does not explain what kind of regulations could have prevented GM’s failure. From other parts of the book I infer that he might suggest the government should have prevented GM from becoming a finance company, and perhaps forced it to conduct research to stay ahead of its industry instead of falling behind overseas car companies. He also discusses how regulations such as environmental protection and prohibiting child labor protect factors of production that all businesses need, benefiting them all. His conclusion is that the amount of regulation is not what matters, it’s the intent and content of the regulations.

Thing Nineteen: although communism is gone, we still live in planned economies. Chang explains in some detail that the soviet system failed because, while there was some logic to the idea of central planning, the economy quickly became far too complex for planners to get things right. However, most capitalist countries apply considerable government planning to their economies. Through much of the 20th century, countries including France, Norway, and Finland successfully used “indicative planning” to set goals for things like exports, infrastructure development, and growth of key industries. Many countries (but not the

U.S.) have significant state-owned enterprises in sectors such as banks, railroads, and energy. And even in the U.S., the government controls the lion’s share of scientific research. We all know that every firm plans – it would be highly inefficient for every element within a firm to respond independently to market forces. Chang says the same principle applies to a national economy, and some central planning could improve efficiency without going whole hog and creating a soviet-style collapse.

Thing Twenty says “equality of opportunity may not be fair.” We often hear that meritocracy leads to the best outcomes, and any company, college, or other organization that acts in a racist or sexist way will be uncompetitive because it excludes talented individuals. According to this view, imposing “equality of outcomes” takes away incentives for talented people to work hard, and makes poor people lazy. However, meritocracy does not lead to fairness, because poor people don’t have the prerequisites to take advantage of equal opportunity. A poor kid may be too hungry to concentrate properly in school, probably has access to bad schools, in many countries can’t afford school, and probably has parents who can’t help, or are too tired to help, with homework. Chang cites Alejandro Toledo, a poor Peruvian shoeshine boy who, through sheer grit, got himself a Ph.D. from Stanford and became president of Peru, and asks if that means the millions of other poor Peruvian kids were lazy good-for-nothings. (I have relatives who seem to think so.) Chang’s conclusion is that some “equality of outcome” is needed to give disadvantaged kids a fair shake.