10tonfunk LITE

On March 21, NYU’s Institute for Public Knowledge (IPK) hosted economist Ha-Joon Chang, author of 23 Thing They Don’t Tell You About Capitalism. It was the second awesome economics talk I’ve seen in about as many weeks. You should definitely buy the book. In the meantime, here’s my copius notes from the talk. Chang is really funny, and the density of pop culture references was awesome — two slides with pictures of Monty Python within the first five minutes. If you get a chance to see him speak do that too.

Apologies to Prof. Chang if I misrecorded or misrepresent his ideas in any way. 

——

The book was criticized by a reviewer as being Keyne’s General Theory written by Borges. Chang was very flattered by this. The chapters are named ‘Thing 1’ ‘Thing 2’ etc. in homage to dr Seuss.

Thing 1: “there is no such thing as a free market”

In 1890, England’s laws prevented child laborers under 9 from working. Kids 10-16 had working hours restricted to 12 hours a day. These laws only applied to cotton factories. Even this met strict opposition from free market types who felt freedom of contract superseded this. Child labor is the strongest regulation of labor markets — it could be keeping 40% of the workforce (kids 5-16 or 18) out of the labor market. But we accept this as standard, not regulation.

In contrast, this is still seen as a regulation in poor developing countries. Like beauty, freedom of market in the eye of the beholder. It’s only when you totally accept the values behind the regulations that you don’t see them.

Stock market is not remotely free market. Can’t show up with a bag of shares and trade, closed on holidays, etc. We see it as free because we approve of these regulations. Free market types categorize regulations they don’t like as politically motivated. But since markets don’t exist freely, that view is totally political. When you break from the myth of market objectivity you can really understand capitalism.

Thing 2: “Companies should not be run in the interests of their owners”

Maybe this worked in the 1800s with small companies. Now companies can have hundreds or thousands of shareholders who are free to leave whenever they feel like, and can do so with a click of the mouse. Floating shareholders very impatient as a result. This impacts company managers who turn to shareholder value maximization — short term value. They fire, cut spending and slash R&D. Then give max of profit in dividends to shareholders. In the 70s, dividends were 30-40% of profits and companies invested the rest. Now 60% goes to dividends. There are also huge buybacks of shares to bolster share price. This was uncommon until until the 1980s — accounted for around 5% of profit. Up to 90% in the 90s. Now it’s 237%, companies are giving away 2.5x of what they make [not sure how this works, may have this totally wrong]. This leads to the falling apart of companies like GM, who did everything to make money other than make good cars. The part of the company that financed individual car sales went major and was producing half of GM profits. Jack Welch is credited with inventing shareholder profit maximization but later denounced it as, “the dumbest idea ever.” This is like Marx denouncing communism.  

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

Comparing Swedish bus driver Sven and Indian bus driver Ram. Sven makes 50x more than Ram, is Sven 50x better at his job? (Chang then showed a slide comparing the roads of Sweden and India and argued Ram was probably a much better driver since he to deal with crazy traffic jams, cattle, etc.) In reality, Sven makes 50x because of protectionism i.e. immigration policy. If removed, 80% of work force in rich countries would lose their jobs — and not just the manual laborers, this would extend up through the labor market.

“Markets are fundamentally political constructs.” If capital and goods should flow freely, why not people? Chang isn’t arguing for the abolishment of immigration policy, just pointing out the contradictions inherent to the free market view.

Thing 3: “Poor countries are poor because of their rich, not their poor”

It’s the failure of the rich to pull the country up and together — the world’s poor hold their own vs their counterparts in rich countries very well. Most rich are rich because of where they were born. Warren Buffet said in 1995, ‘most of my money I didn’t earn myself, society earned for me. If I was dropped into Bangladesh, I’d be a farmer and a pretty bad one one.’

Our individual productivity is fundamentally collective. Buffet happened to be born in country that ‘(over)valued his financial skills.’

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

Gotta read the book for this bad boy.

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

George W. Bush: “The problem with the French is they don’t have a word for entrepreneurship.” Lot of people like to say you need entrepreneurs to make a rich country, the problem with poor countries is the lack of entrepreneurs.

In fact, developing countries teem with micro-entrepreneurs selling things you didn’t know could be bought and sold. Like professional line queuers who get in line early and sell the place. If full of entrepreneurs, why are these countries poor? Rich countries have many people doing specialized jobs for large companies.  In rich countries 1/8 people is self employed. The rate is 2-3x that in poor countries. Ratio of rich to poor is 4:2. Bangladesh to US is 10:1 . Norway to Benin is 13:1.

The reason this doesn’t result in wealth is entrepreneurship is rarely an individual event now, if it ever was. You need social infrastructure; corporate, legal and financial systems. This is why microfinance has had such little result. Poor country’s with high self employment numbers prove this — you need structure.

For example: a Croatian microfinance group, helped everyone buy cows. As a result the milk market (which is based on perishable goods) flooded and collapsed, and everyone ended up in more debt. In Denmark, during last century, they bought cows, but had cooperative creameries, made cheese for export, and fed whey to pigs which were then slaughtered in collective slaughterhouse. Individual farmers couldn’t set up creamieres or slaughterhouses themselves.

95% of economics is common sense made deliberately complicated . Priests used to do in Latin, economists do it with numbers. All professions build jargon to keep people away, but it’s more advanced in economics. Why treat economists with kid gloves when we have strong opinions on everything else? … “I’m like the magicians that show you how tricks are done on TV.” There are certainly some secondary things only trained economists can and should do. However we’re often lacking facts that would help us make decisions — the purpose of the book is to help educate people about economics and encourage them to be “active economic citizens.”

Things you might not have known:

Switzerland doesn’t live off finance and tourism, it actually has the highest per capita industrial production in the world.

Singapore has free market but the gov’t owns all land and 20% of enterprises. Gov’t owned Singapore Air airline has never lost money in 38 years, while private ones like United [this may have been a different major airline] live on gov’t subsidies.

Points from the Q&A

Thing 22 is that financial markets need to be less efficient, not more. All these are meant to be provoking, but the point is markets have become too efficient for their own good. They’re great at shifting money at the slightest change, but the easy movement of capital can make long term investment difficult. Markets should be slowed, but not completely synced with the real economy — that kind of destroys point of market. You can’t compare exactly, but for the sake of example: In the late 70s, worldwide financial assets were around 2x world output. Now it’s 4.4, but the underlying sector is the same. It’s like building a building up four times without strengthening the foundation. If we don’t make changes, we’ll experience another crisis like the current one.

Re Q on NGOs that help people buy a cow or goat:

Sadly, economic disparity means a small amount of money for rich can do much in a poor country. However, these things alone don’t lead to development. These countries still need fundamental development. These kinds of programs help people live in the current structure, not change it. Is aid good or bad? Total aid is barely $100bil, but forcing countries to strengthen IPR on goods/patents owned by rich countries is equal to  taking away 50bil. Marginal help within the given structure is helpful, but won’t solve problems.  

Q: What do you recommend develping countries do?

Wrote about this in detail in early book Bad Samaritans. Developing countries need more policy space. Rich countries levy policies against poor countries, even though they used them to drive their own development. (Many of these policies were apparently invented by Alexander Hamilton). Policies like protectionism, use of state owned companies, etc. From (?) until WWII, the US was the most protected economy in the world. Japan basically banned foreign investment until the 1970s.

Current policies in developing countries haven’t worked. We need to allow countries to use policies that fit the local culture. Can’t use a one size fits all approach and then blame the countries — their corruption, climate, etc. —when it doesn’t work.

What needs to happen to make room for the things discussed in his book to happen?

Need to take a long term view. 500 years ago you were burned for at the stake if you thought the earth went around the son. 400 years ago people thought abolishing slavery was nuts. 100 years ago women were jailed fro trying to vote…

Chang lives by Gramsci’s: Pessimism of the intellect, optimism of the will (a quote also brought up by Pranab Bardhan).

He doesn’t push his 6 yr old son into the labor market (from another of Chang’s books, I think) for economic reasons — it’s an investment. Sure, he could be working, Chang would save a lot of money, his son would improve from exposure to competition, it’s a great idea. But if he supports him for 15 more years the kid might become a brain surgeon — good return on the investment.

Economics is political. You can’t argue it is just when it suits you. At this point in time in society, there might no broadly defined boundary between economic and political things. [Hope I got this latter part right]

Q: Comment on the perception that the US needs to return to a manufacturing society:

In US and Britain, barely 10% work in factories. It used to be 40-50. But we’re not post-industrial because our increased dependence on manufactured goods. Pialr capita, Switzerland swaps year to year with Japan for the number one spot in industry production. Advances in tech economies are often due to advancements in industrial production — like cheaper better computers.

Financial sector based economies are bound to decline. He won’t go as far as Volker, but much deregulation and many financial products have harmed society.  

Q: So you’re suggesting protectionism and traditional factory industries for developing economies?

If everyone does same thing it doesn’t work. The notion that protectionism reduces trade is misleading. There’s an important difference between trade and free trade. Had China adopted free trade in the 80s its industries probably would’ve been destroyed. We shouldn’t confuse the benefits and need for trade vs same benefits/need for free trade. There was actually faster growth of free trade during the more regulated 1950-60s.  

Q: Opinion on who companies should work for if not shareholders?

Did Singapore work because of a specific set of circumstances? In fact, it’s just an example to counter traditional economists. However, SEOs have worked enough in France, Taiwan, etc that it raises interesting questions. We then then need to ask relative questions about why they work someplaces and not others. Re shareholder companies: they still need to do for shareholders but different countries do it in different ways — in some countries labor unions have voice.

Q: Institutions needed for entrepreneurship. What makes good institutions and what about early stage policies like land reform?

Good institutions for production capabilities (and there are many other aspects of life to consider) have long term focus. Development banks (which the World Bank also is), groups that encourage cooperation between producers like farmer co-ops, etc., are good. You can cooperate on some things, like R&D and marketing, and compete fiercely on others. Institutions that better produce and collect knowledge — like universities — are good. Knowledge often makes countries more productive. Land reform was taboo but coming back. In fact, the Homestead Act was land reform. Land reform has 2 effects: 1) direct effect on the agricultural sector 2) indirect effect on politics and policy. Lot of individual farmers tend to lead to more push for democracy; big landlords can block indusrrialiation. US’s Civil War was about that — why protect inefficient Yankee production when we can sell or cotton and import goods for cheaper?

Buy the book.

The cheese and crackers were proper.