Summary
Through 23 Things They Don't Tell You About Capitalism , author Ha-Joon Chang breaks down the economic conventions we've come to see for so long. He explains why there are so many misconceptions in the free market of capitalism, even though most economists believe in the background. Besides pointing out the problems, the author Chang also offers solutions to build a better and more just world.
Who should read this book?
- Economics students who want to learn more than classroom lectures,
- Those who are curious about economic crises and wonder why no one predicted these crises,
- Those who want to find out why the gap between rich and poor is widening.
About the author
Ha-Joon Chang is one of the leading critics of free market economics. Ha-Joon Chang is currently a professor of institutional and development economics at the University of Cambridge and has published books that discuss economic development extensively, such as Bad Samaritans and Kicking Away the Ladder .
What did you learn from this book?
You will discover that the capitalist free market is not what you think it is
Most of the economic experts who appear on television have a common theory: Free market economics. Therefore, we mistakenly believe that in economics, there is only one path to development.
But you are wrong, the reality is that a lot of things go wrong in the free economy. Not only is it imperfect and not a scientific method, it also reveals many flaws in the way the economy and society operate. Moreover, there are other ways to run the economy that the media ignores.
In this summary we will explore the flaws of the free capital market and explore ways to help us find more effective alternatives. After reading the issues presented in the book, your view of economics will forever change.
In this book you will learn:
- Why government plans are not always as successful as Soviet Russia.
- Why economists say you should avoid spending money on taxis.
- Why winning the Nobel Prize in economics doesn't mean becoming a financial expert.
No matter what free-market economists say, economics is not an objective natural science.
You probably remember the financial crisis that swept the world in 2008. You probably also remember that in the months that followed, economics academics - with the exception of banking - were the least trusted profession in the world. . While this backlash was somewhat unfair to economists, it was entirely understandable given their arrogance in previous years. They were simply too proud of themselves.
One sign of their pride is their belief that only they can understand the intricacies of economic theories. This has led them to dismiss any criticism of their method, which they consider too simplistic.
The fact is that 95% of the foundation of economics is basic knowledge, not as complicated as we think.
Just like when you go to a restaurant, you don't have to be an epidemiologist to know hygiene standards. Economics is the same, everyone understands the basic principles. After all, you don't have to be the governor of a state-owned bank to know that you shouldn't put all your money into venture capital.
This arrogance also led to the exclusion of new economic theories from the formal educational system.
For the past few decades, neoclassical free-market theory has dominated economics. This theory assumes that each individual in society acts as a selfish and rational agent who always makes economic decisions based on calculating their own profits. The economics profession has treated this theory almost as a natural science. Since then, they have focused on the theoretical normative rather than the practical application of the theory.
In fact, economics is not an objective natural science (like physics) but a social science. This means that there are many theories that are equivalent or capable of completely replacing the free market theory. In the next chapter, we will explore in more depth the shortcomings of the free market theory.
No matter what economists say, individuals cannot make purely rational economic decisions on their own.
Back in 1997, two economists Robert Merton and Myron Scholes won the Nobel Prize in their fields. Their theory is built on the notion that when it comes to economic decisions like where to invest money or what to buy – people rely entirely on reason.
After winning the prestigious award, they excitedly put their theory into investment. However, instead of succeeding in business, their companies repeatedly lost money and went bankrupt, not once but twice over the span of more than 10 years.
The failure of Merton and Scholes teaches us something important, that people do not always act rationally.
Why?
To make a completely rational decision, each individual needs to consider every detail carefully. For example, when considering where to invest our savings, we need to know all the possible scenarios. Only when we have all this information can we make the best choice.
In the modern world, it is impossible to grasp information and anticipate every situation before making a decision, so the choices we make cannot be rational.
This is not to say that they are purely emotional actions. We obey certain rational limits . We try our best to be rational, but we don't have the mental capacity to make a perfect decision. If so, how do we change our economic thinking to accommodate this?
To help us make more informed decisions, the government needs to intervene in the market to limit options. If we understand our choices and their implications, we will make better decisions. Indeed, government intervention has benefited other sectors. For example, the authorities prevent the spread of drugs with unknown side effects or unsafe vehicles. So why not introduce these legislation into the financial sector.
Humans are not completely selfish, we often act out of altruism
Have you ever tried to rob a taxi? Because unless the driver is as strong as Usain Bolt, there is a high chance that you will run away before he can catch you. Yet although you think about this many times, you always ignore that thought and pay the freight in full. While paying a taxi fare is a logical thing to do, free-market economists would argue that it makes no sense at all. They reason that we are programmed to act selfishly, so we are always looking for ways to steal money when we can. To explain this lack of rationality, free-market economists point out that our actions are influenced by rewards and discipline.hidden. They are costs and benefits that may not be obvious to us right now, but have a lasting effect on us.
The reason we always pay for our taxi fare out of pocket is because we don't want to be known as a sly swindler. A guy with such a reputation would be shunned by drivers and never be able to hail another taxi. Clearly, however, this implicit discipline and reward theory makes no sense in a society where everyone is selfish.
Back to the example of paying a taxi fare. If you run away, the punishment will be entirely up to the driver. He will have to chase you for the fare and perhaps take a picture of your face by the way so other drivers know which way to go. Chasing us means leaving the car unattended, so it will be possible for others to break or steal the car.
If the driver only thinks for his own good, there is no benefit in chasing you. The money you stole is probably not worth much. But why does he have to work so hard to chase you to help other drivers?
The truth is that we pay for the taxi because we have other concerns, like honesty, honor, respect, and pure selfishness.
Economies don't pay people what they deserve
The saying "what we get should be worth the effort" sounds very reasonable, doesn't it? However, if you are living in a wealthy country you should think carefully about this expectation. Because if you want to be paid at a rate the market deems reasonable, you will quickly find your salary dropping alarmingly. Why so?
The reason is that the wages of civil servants in developed countries are protected and not affected by the market. That is, their salary is guaranteed to always be high, regardless of how their performance in the workplace is assessed. For example, whatever your job is, there will always be someone else, in another country, willing to do it for a cheaper price. You are not affected by this competition because your work is protected by the state. The state uses tight immigration policies to control the influx of people from poor countries into their workforce. Secure your job, so your salary is always maintained at a high level.
This example also shows that it is not your ability that determines the salary, but the society in which you live will determine that salary. If you live in a prosperous and affluent society, your salary will be pulled up evenly with the common ground. Even if you are the laziest and least productive, you still earn more than hard workers in poor countries.
This fact of injustice also exists in societies themselves. Compared to those in the lowest quintile in society, those in the top quintile earn more than they deserve. In the early 1990s, for example, top managers saw their salaries rise 100 times above the median income. 20 years later, that gap has increased to 400 times.
Is it because managers are becoming more valuable than ordinary workers? The evidence shows that this is not the case. The average productivity of managers is not 400 times greater than that of the average employee. Therefore, put in market conditions, their gains are not worth it.
A strong manufacturing sector is more essential for economic growth than a service economy or a technology economy.
What do you think when you walk past an abandoned, dilapidated factory? If you live in a developed country, the media will associate this factory with an economic downturn. Accordingly, you would immediately think that manufacturing is almost dying in the West. You are wrong.
People often assume that the industry is in decline because they misunderstand the statistics.
Even the number of workers working in factories has been decreasing in recent times. However, not because the industry is declining, but because it has become more efficient.
Despite this, many policymakers have suggested that developing countries seriously think about orienting their economies towards non-industrialism and shift to a service economy and a knowledge economy. But, this is clearly a tough course for the economy as a whole.
Let's take the service industry as an example. Service economies like retail or the technology industry have grown in size over the past few decades. However, if only relying on these industries, the economy will face significant risks.
One problem with the service industry is the slow rate of growth in productivity. In most cases, an increase in service sector productivity means a decline in service quality. If Macbeth had a better performance, completing the job in 10, the quality of work would certainly have been greatly affected. Therefore, an economy that depends on services will have a very low growth rate compared to other industries. There is also a knowledge economy . This economy is characterized by the creation and transmission of information. Ever since the invention of the internet, people have firmly believed that the knowledge economy has enormous potential for growth.
In fact, it's just an overrated statement. Not only is it not a revolutionary invention, the influence of the internet compared to previous inventions in the media is negligible. Take the telegraph, for example, an invention that shortened the transmission time from 2 weeks to 7.5 minutes, 2,500 times faster.
What about the internet? The time we can shorten is from 10 seconds to 2 seconds, 5 times faster.
Financial crises are caused by intentional hazards and risks that are accumulated in the system
The financial crisis of 2008 affected the global economy severely. It ended a period of prosperity that lasted more than a century and pushed many financial companies to the brink of bankruptcy. But it was the companies hardest hit by the crisis — insurance firm AIG or investment bank Lehman Brothers, for example — that played a big role in the collapse.
How did it happen?
Years before the crisis hit, the financial system had become incredibly complex. In order to find new products to increase trading, a type of bond was created, called a financial derivative . Although these tools generate great profits at first, their complexity implies a large degree of risk.
Derivatives contracts are created by combining various securities such as equity mortgages. The more derivatives created from an initial mortgage, the greater the degree of risk.
It's like building a house on a tiny piece of land. Because you can't expand, you decide to build high, you pile up many floors on a small piece of land. If you keep building, what do you think will happen? With each additional floor you build, the durability of the house will decrease, and it becomes more and more wobbly.
Not only that, another problem is that with each additional financial product created from the original mortgage, the level of risk increases. Let's go back to see our narrow but tall house. It's like the higher we build, the more we use less quality materials than the lower floor, instead of concrete we start building more floors out of plastic and paper. Obviously, with such a structure the house will soon collapse.
While the crisis took its toll around the world, the hardest hit were in those countries that let their markets grow too freely on these new financial instruments. In Ireland and Latvia, both of which opened up to the market just a few years before it collapsed, both suffered heavily. The Irish economy slipped 7.5% and Latvia 16%.
Economists have always been skeptical of the government's economic plans, but these plans are coming to fruition and are progressing well.
Should the government intervene in the running of the economy? Market-comparative economists are quick to disprove it. They argue that state intervention only makes the economy chaotic. They will give eloquent examples such as failures when the economy is controlled as happened in Russia. They claim this is the inevitable outcome when the economy is interfered with. Whatever the theory of free market theory, the reality is that government can and will always play an important role in economic development. The government always has a better overview and captures the statistics than individual businesses. This understanding helps the government make decisions to develop the most profitable industries. This is the direction of South Korea's development. Electronics giant LG initially wanted to focus on developing the textile industry, but the government rejected and reoriented this business. They knew the company was going to achieve success in the electronics sector and pushed LG in that direction.
This is not only true for developing countries. The United States also soon considered carefully and decided to focus on developing the information technology industry, the biochemical industry and the aircraft manufacturing industry.
If government planning really worked, why did Soviet Russia fail? The difference here is not exerting too much control.
When the state controls all aspects of the economy, as in communist countries, the linkages of the economy are broken. However, when only a few guiding aids in the system, such as the general goals of the inflation index, the interest rate, will help the economy achieve certain success.
The state plays a strategic role as the chief executive officer of companies. Directors set goals and make sure their company stays on track. The same is true of the state's goals for the economy as a whole.
Social welfare is essential for the strong development of the economy
In many parts of the world, liberal economists are calling for the state to cut social welfare. They think that paying social benefits such as unemployment allowance or convalescence allowance is no different than spending money to keep people from working.
Contrary to what their theory suggests, practice proves that social welfare is essential for strong economic growth.
Let's look at the labor market. In countries that provide unemployment support, their economies are much more dynamic than in countries without this support.
The reason for this is quite clear. In countries with less unemployment support, workers often face the fear of losing their jobs. So they look for work where they feel the most regular and secure work. They race to choose stable professions such as health care or law. While these are essential industries in society, they do not contribute greatly to the development of the economy.
To achieve growth, the labor market needs to move towards higher risk and more entrepreneurial industries. It is not surprising that countries that encourage and support human resources that dare to fail will grow faster than others, where the cost of failure is poverty.
Contrary to the evidence that social welfare helps economic growth, free market theory also has a similar concept called the flow effect .
Free-marketers testify that if the state doesn't invest in social welfare, it doesn't need to collect taxes. The rich in society will directly invest in the economy. This cash flow will create a flow effect as investments will create growth and jobs.
The theory seems to make a lot of sense but where the theory is practiced, the results are not as expected. In countries that have adopted free market policies, such as the US and UK in the 1980s, growth has stagnated. And when the economy stops growing, the cash flow does not continue to flow but stagnates in the rich.
Between 1979 and 2006, the top 1% of America's earners more than doubled their share of national income, from 10% to 22.9%.
We should stop trying to change developing countries with useless tools
Many Western politicians, economists and entertainment stars claim that they know the tools to help fight poverty in the developing world. No matter how confident they are in their knowledge, it seems that their very developed world views of poor countries are rooted in distorted ideas.
A very common misconception among Western planners is that the cause of poverty in developing countries lies in structure. These include extreme weather, not being close to the sea, or unfavorable terrain. If so, shouldn't the mountainous and non-coastal countries like Austria and Switzerland be poor too?
Another misconception of the West is that developing countries do not have the same dynamic entrepreneurial spirit as in developed countries. Again this is completely wrong: self-employed people make up 30-50% of the workforce in developing countries. Meanwhile, this figure in developed countries is 10%. It is clear that there is no entrepreneurship in developing countries. Westerners should seek answers to the question of why developing countries are poor in their own countries. In fact, the imposition of free market policies in the West is the cause of poverty.
Between the 1960s and 1970s, sub-Saharan Africa enjoyed relatively favorable growth thanks to government protection: domestic industry was subsidized and protected from competition. paintings from abroad. However, just as the West forced them to open up their economies in the 1980s, the domestic economy stagnated and fell into recession.
If we are to change this situation and help developing countries move forward, we - the West - need to remember how we have become more prosperous. In the 19th century, Western countries began to protect their economies from foreign competition. In the US, foreigners cannot hold major positions such as chief financial officer and import tax is kept at 50%. Wouldn't it be better if developing countries followed suit?
Capitalism is not an obstacle, it is the way we impose it
After reading this summary you are probably very angry with capitalism. But before you join the communist party, you need to know: not all capitalism is wrong, only one form of market - free market capitalism.
Practice shows that capitalism works very effectively in managing the economy.
For example , the profit motive , or the desire to make money, is an effective engine. Many inventions and innovations are created from the desire to build successful businesses.
Not only that, capitalism is also an effective way to coordinate the economy. The market is the place to ensure human resources, labor and capital are recycled to where they are needed most. If the market doesn't send people to the right places, to the right jobs, we'll be stuck in a system with a surplus of rock stars and a shortage of plumbers.
Although capitalism can bring enormous advantages, it can also be dangerous when we do not manage it properly.
We can think of the capitalist economy as a car. If a car is built without safety functions, like brakes or seat belts, sooner or later the car will cause an accident and injure many people.
Unfortunately, the dominant method in capitalism proposes that we create a free, unregulated system. However we have other options. Breaking away from the free market and building a better, fairer, safer system than capitalism is possible.
One way is that we can manipulate the concept of rational limitation – we will make better choices when there are only options within a certain range.
To do that, we need to empower the government to run the economy. These rights include the right to restrict banks from creating high-risk investment products. From there, we can choose options that we know enough about and choose the safe ones.
Final Summary
The main message of the book:
Don't believe the economists that the free market is the only way to manage the economy, there are other, fairer options for us to choose from. We can focus our resources on exploring these alternatives to create a better, more stable, and more equal world.
What can you do after reading this book?
Be careful when choosing who to vote for
Politicians often try to please voters by promising tax breaks. This promise sounds good at first, but keep in mind that cutting taxes means that everything else will have to be cut to make up for the loss of tax revenue. If you need community service, consider voting for another candidate.
Other economic books to read by Ha-Joon Chang
Economics: a guide for economists to discuss fundamental knowledge in an easy to understand and convincing manner. The book also examines the history of economics and important changes in global economic institutions. Through this book you will learn all you need to know about how today's economy works.
