The worldwide economic meltdown has upended many long-held beliefs about how economics and finance really work.  Since 2008, a wide assortment of authors has started to question the standard explanations that the economics gurus have been offering us about globalization, free trade, and free markets.  The growing controversy is hardly surprising.  America’s recession and economic decline is the most serious economic crisis since the Great Depression—and its direct effects are likely to last for most of this decade.  Few, if any, recognized economists had any idea that a world financial crisis and economic implosion was imminent.  Many writers now are warning of a euro meltdown; others believe a second U.S. recession is lurking like Banquo’s ghost, ready to emerge at just the wrong time.

Cambridge economist Ha-Joon Chang is a professor who maintains that he provides much more truthful explanations for our present quandary in 23 Things They Don’t Tell You About Capitalism.

As the title might suggest, 23 Things is not written primarily for professionals with economics degrees but is more of a primer for the average reader.  The author explains that he aims to get past the jargon that often makes economics so opaque to nonexperts.  At times the book requires a leap of faith, and it can be short on details.  Yet, despite its flaws, the professor clearly hits the bullseye in more than a few instances.  Dr. Chang is not the first to reveal that the wealthier countries did not achieve success by sticking to free trade or free-market economics.  On the contrary, he points out, prosperous nations like England, France, Germany, and (more recently) Japan and Korea used a combination of protectionism, subsidies, and often state control of industry in the early stages of their development.

In the 19th century, the United States became the world’s economic behemoth, racing past England and France by the skillful application of free-market policies, combined with prudent nationalist laws that protected infant industries.  At one time, U.S. tariffs reached 40-55 percent, among the world’s highest.  Our first treasury secretary, Alexander Hamilton, deserves credit for designing the so-called American System, based on his 1791 paper “A Report on Manufactures.”  Adopted by President Washington and the First U.S. Congress, it promoted the use of protectionism, public investment in infrastructure (such as roads and canals), and a robust national-banking system.  Some historic examples of the American System are the U.S. patent laws, the intercontinental railroads, the land-grant colleges, and, more recently, the U.S. space program—a prime mover in creating the computer revolution.

Like many similar fantasies of the Aquarian generation, the dream of a “post-industrial” age was based on fuzzy logic.  We are learning the hard way, Chang says, that a massive shift to financial products and services creates a hornet’s nest of problems.  Compared with manufacturing, services have low productivity potential, which makes them a poor engine for growth.  The low tradability of services means that a country committed to a service economy runs a growing trade deficit and has difficulties buying new advanced technologies, leading to even slower growth.  The result is low wages.  Of course, when the same country welcomes in 12 million illegal immigrants to compete for any job at any wage, that doesn’t help.  For developing nations as well, a service-based model is a disaster.

In several crucial areas, 23 Things presents arguments that need to be approached with caution.  A number of Dr. Chang’s ideas are either exaggerated or erroneous.  A prime example is his suggestion that high inflation is not an impediment to growth and development.  He credits Milton Friedman, the influential free-market economist, with convincing the rest of the world that price stability is essential and that inflation should be held to one-to-three percent per year.  In spite of that, several countries that bucked this advice achieved success.  Dr. Chang cites the case of Brazil, which had rapid economic growth during the 60’s and 70’s in the face of 42-percent average inflation.  In South Korea, during the same period, income rose 7 percent, combined with nearly 20-percent annual inflation.  Based on IMF data, 97 countries reduced inflation during the two periods (1970-89 and 1990-2008) from an average of nearly 8 percent to only 2.6 percent.

Surprisingly, lower inflation in the wealthier nations was accompanied by a decline in the growth rate, from 3 percent to only 1.3 percent.  Chang concludes from this that control over inflation has been a mixed blessing.  However, his assertion that stable prices are not essential to a sound economy is not supported by any other data.  Many factors are necessary to achieve strong growth rates.  Countries that control inflation always have great advantages, especially in encouraging business development and foreign investment.  Economists now agree that, for decades, the IMF and the World Bank blundered in their hasty and overzealous efforts in combatting inflation.  The agencies’ infamous austerity model, designed by bureaucrats, often left countries with economies on life support.  But it is equally pernicious to imply, as Chang does, that the threat of hyperinflation is a bogeyman and that nations that fail to control prices have little to fear.  Inflation undermines initiative and deprives people of their earnings.  It is despised by honest persons of all classes, and by the poorest as well as the wealthiest countries.  Persistent inflation creates resentment and demoralizes citizens, who understand that it is nothing but state-sponsored theft.

Similarly, although he makes a good case showing that a basic level of social insurance can have real benefits to society, Chang seems oblivious to the gathering storm of the worldwide debt crisis.  On both sides of the Atlantic, the burgeoning costs of the modern welfare state have created an unprecedented social explosion.  Heavily indebted nations like Ireland, Italy, and Spain are desperate to avoid bankruptcy.  In Greece, citizens are in open revolt, as the government tries to make deep budget cuts and avoid a default that could destroy the euro and trigger a worldwide depression.  In each case, the cost of the bloated welfare state and government corruption has been identified as a primary cause of the crisis.  In America, the massive public debt, now $15.5 trillion, has quadrupled in less than a decade.  As the cost of entitlements like Medicare and Social Security has accelerated, Congress and the White House have been immobilized, unable to find an appropriate solution.

Chang believes that there is no direct link between social-welfare spending and a growing economy.  According to his research, various Western European economies, where social spending is at least 50-percent higher than that of the United States, have had growth rates roughly comparable to America’s.  At a minimum, this assertion should be bolstered with much broader data.  In addition, Chang claims that such social-insurance programs as unemployment compensation, job-retraining assistance, and continued health insurance can be very effective in giving people a second (or third) chance to succeed.  Social spending, he says, also helps to prevent families from falling into destitution, while encouraging people to be more open to risk in choosing a profession or making a career change.  Chang also reveals a curious anomaly: During the mid-19th century, bankruptcy statutes were radically altered.  “When combined with institutions like limited liability,” says Chang, “this new bankruptcy law reduced the danger of business undertaking and thus encouraged risk-taking, which has made modern capitalism possible.”  Oddly enough, there has never been any well-financed campaign to remove or reduce the government safety net that benefits big corporations, bondholders, investors, and small business.

Ha-Joon Chang manages to dissect quite a few economic “truisms” based on what he calls the “[l]azy assumptions and blinkered thinking” of the mainstream media.  Clearly, Professor Chang remains enthusiastic regarding the benefits of private initiative and enterprise.  Despite his unorthodox thinking, Chang’s 23 Things should not be dismissed as another antibusiness book with a biased agenda.  The market, he assures us, is an extremely effective and efficient method for coordinating complex economic activities.  As he writes, “The profit motive is still the most powerful and effective fuel to power our economy and we should exploit it to the full.”  He agrees that international trade and open markets have increased the well-being of the world’s population.  Nonetheless, Chang declares bluntly that, “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.”  Each nation’s path to economic independence and prosperity is the result of dozens of factors and is linked closely to its unique history and culture.  There has never been a simple interchangeable design or formula for economic development.

In some respects, Chang’s realism can be likened to that of the venerated champion of free markets F.A. Hayek: Both agree that economics and government require a healthy skepticism.  In public policy, ambition needs to be tempered by a healthy respect for the welfare of communities and families and the socially responsible use of resources.


[23 Things They Don’t Tell You About Capitalism, by Ha-Joon Chang (New York: Bloomsbury Press) 263 pp., $25.00]