Ha Joon Chang Quotes

Once you realize that trickle-down economics does not work, you will see the excessive tax cuts for the rich as what they are -- a simple upward redistribution of income, rather than a way to make all of us richer, as we were told.

People 'over-produce' pollution because they are not paying for the costs of dealing with it.

The best way to boost the economy is to redistribute wealth downward, as poorer people tend to spend a higher proportion of their income.

Equality of opportunity is not enough. Unless we create an environment where everyone is guaranteed some minimum capabilities through some guarantee of minimum income, education, and healthcare, we cannot say that we have fair competition. When some people have to run a 100 metre race with sandbags on their legs, the fact that no one is allowed to have a head start does not make the race fair. Equality of opportunity is absolutely necessary but not sufficient in building a genuinely fair and efficient society.

People who live in poor countries have to be entrepreneurial even just to survive.

When I give food to the poor, they call me a saint. When I ask why the poor have no food, they call me a communist.

95% of economics is common sense

Running the company for the shareholders often reduces its long-term growth potential.

A well-designed welfare state can actually encourage people to take chances with their jobs and be more, not less, open to changes.

The top 10 per cent of the US population appropriated 91 per cent of income growth between 1989 and 2006, while the top 1 per cent took 59 per cent.

If we assume the worst about people, we will get the worst out of them.

Once poor people are persuaded that their poverty is their own fault, that whoever has made a lot of money must deserve it and that they too could become rich if they tried hard enough, life becomes easier for the rich.

Economics is a political argument. It is not – and can never be – a science; there are no objective truths in economics that can be established independently of political, and frequently moral, judgements. Therefore, when faced with an economic argument, you must ask the age-old question ‘Cui bono?’ (Who benefits?), first made famous by the Roman statesman and orator Marcus Tullius Cicero.

The widely accepted assertion that, only if you let markets be will everyone be paid correctly and thus fairly, according to his worth, is a myth. Only when we part with this myth and grasp the political nature of the market and the collective nature of individual productivity will we be able to build a more just society in which historical legacies and collective actions, and not just individual talents and efforts, are properly taken into account in deciding how to reward people.

Markets weed out inefficient practices, but only when no one has sufficient power to manipulate them.

95 per cent of economics is common sense – made to look difficult, with the use of jargons and mathematics.

If the world were full of the self-seeking individuals found in economics textbooks, it would grind to a halt because we would be spending most of our time cheating, trying to catch the cheaters, and punishing the caught. The world works as it does only because people are not the totally self seeking agents that free-market economics believes them to be. We need to design an economic system that, while acknowledging that people are often selfish, exploits other human motives to the full and gets the best out of people. The likelihood is that, if we assume the worst about people, we will get the worst out of them.

Since the 1980s, we have given the rich a bigger slice of our pie in the belief that they would create more wealth, making the pie bigger than otherwise possible in the long run. The rich got the bigger slice of the pie all right, but they have actually reduced the pace at which the pie is growing.

all technical professions have an incentive to make themselves look more complicated than they really are so that they can justify the high fees their members charge for their services.

Above a certain level of income, the relative value of material consumption vis-a-vis leisure time is diminished, so earning a higher income at the cost of working longer hours may reduce the quality of your life. More importantly, the fact that the citizens of a country work longer than others in comparable countries does not necessarily mean that they like working longer hours. They may be compelled to work long hours, even if they actually want to take longer holidays.

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.

why do we need to make the rich richer to make them work harder but make the poor poorer for the same purpose?

In no country does the average income give the right picture of how people live but in a country with higher inequality it is likely to be particularly misleading. 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....The much higher crime rate than in Europe or Japan -- in per capita terms, the US has eight times more people in prison than Europe and twelve times more than Japan -- shows that there is a far bigger underclass in the US.

Harry S. Truman, in his typical no-nonsense style, once said that ‘An expert is someone who doesn’t want to learn anything new, because then he would not be an expert.’ Expert knowledge is absolutely necessary, but

Between the Great Depression and the 1970s, private business was viewed with suspicion even in most capitalist economies. Businesses were, so the story goes, seen as anti-social agents whose profit-seeking needed to be restrained for other, supposedly loftier, goals, such as justice, social harmony, protection of the weak and even national glory.

Gore Vidal, the American writer, once famously described the American economic system as ‘free enterprise for the poor and socialism for the rich’.

Breaking away from the illusion of market objectivity is the first step towards understanding capitalism.

The free market doesn't exist. Every market has some rules and boundaries that restrict the freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How 'free' a market is cannot be objectively defined. It is a political definition.

free trade economists have argued that the mere co-existence of protectionism and economic development does not prove that the former caused the latter. This is true. But I am at least trying to explain one phenomenon - economic development-with another that co-existed with it - protectionism. Free trade economists have to explain how free trade can be an explanation for the economic success of today's rich countries, when it simply had not been practised very much before they became rich.

Government exists to protect us from each other. Where government has gone beyond its limits is in deciding to protect us from ourselves.

95 per cent of economics is common sense made complicated,

When some people have to run a 100 metre race with sandbags on their legs, the fact that no one is allowed to have a head start does not make the race fair. Equality of opportunity is absolutely necessary but not sufficient in building a genuinely fair and efficient society.

Britain also banned exports from its colonies that competed with its own products, home and abroad. It banned cotton textile imports from India ('calicoes'), which were then superior to the British ones. In 1699 it banned the export of woolen cloth from its colonies to other countries (the Wool Act), destroying the Irish woolen industry and stifling the emergence of woollen manufacture in America.

In fact, most successful people are those who have been well supported, financially and emotionally, by their parents when they were children. Likewise, as I discussed in chapter 2, the rich countries liberalized their trade only when their producers were ready, and usually only gradually even then. In other words, historically, trade liberalization has been the outcome rather than the cause of economic development.

The issue of false consciousness is a genuinely difficult problem that has no definite solution. We should not approve of an unequal and brutal society because surveys show that people are happy. But who has the right to tell those oppressed women or starving landless peasants that they shouldn’t be happy, if they think they are? Does anyone have the right to make those people feel miserable by telling them the ‘truth’? There are no easy answers to these questions, but they definitely tell us that we cannot rely on ‘subjective’ happiness surveys to decide how well people are doing.

Take the following potent and less-is-more-style argument by the rogue economist Ha-Joon Chang. In 1960 Taiwan had a much lower literacy rate than the Philippines and half the income per person; today Taiwan has ten times the income. At the same time, Korea had a much lower literacy rate than Argentina (which had one of the highest in the world) and about one-fifth the income per person; today it has three times as much. Further, over the same period, sub-Saharan Africa saw markedly increasing literacy rates, accompanied with a decrease in their standard of living. We can multiply the examples (Pritchet’s study is quite thorough), but I wonder why people don’t realize the simple truism, that is, the fooled by randomness effect: mistaking the merely associative for the causal, that is, if rich countries are educated, immediately inferring that education makes a country rich, without even checking. Epiphenomenon here again.

In recommending free trade to developing countries, the Bad Samaritans point out that all the rich countries have free(ish) trade. This is, however, like people advising the parents of a six-year old boy to make him get a job, arguing that successful adults don't live off their parents and, therefore, that being independent must be the reason for their successes. They do not realize that those adults are independent because they are successful, and not the other way around.

Audite et alteram partem

Even in the richer countries, what happens at work can make people fulfilled, bored, valued or stressed. At the deepest level work shapes who we are.

It always seems impossible until it is done.’ NELSON MANDELA

The most important assumption underlying HOS is that all countries have equal productive capabilities – that is, they can use any technology they want.3

It is a law of competition that people who can do difficult things which others cannot will earn more profit.

the demands of a highly organized industrial society made people behave in more disciplined, calculating and cooperative ways.

... the human tendency to be seduced by a theory that supposedly explains everything.

All technical professionals have an incentive to make themselves look more complicated than they are so that they can justify the high fees their members charge them for their services.

Free trade economists have to explain how free trade can be an explanation for the economic success of today’s rich countries, when it simply had not been practised very much before they became rich.

Not being able to see this, culture-based explanations for economic development have usually been little more than ex post facto justifications based on a 20/20 hindsight vision. So, in the early days of capitalism, when most economically successful countries happened to be Protestant Christian, many people argued that Protestantism was uniquely suited to economic development. When Catholic France, Italy, Austria and southern Germany developed rapidly, particularly after the Second World War, Christianity, rather than Protestantism, became the magic culture. Until Japan became rich, many people thought East Asia had not developed because of Confucianism. But when Japan succeeded, this thesis was revised to say that Japan was developing so fast because its unique form of Confucianism emphasized co-operation over individual edification, which the Chinese and Korean versions allegedly valued more highly. And then Hong Kong, Singapore, Taiwan and Korea also started doing well, so this judgement about the different varieties of Confucianism was forgotten. Indeed, Confucianism as a whole suddenly became the best culture for development because it emphasized hard work, saving, education and submission to authority. Today, when we see Muslim Malaysia and Indonesia, Buddhist Thailand and even Hindu India doing well economically, we can soon expect to encounter new theories that will trumpet how uniquely all these cultures are suited for economic development (and how their authors have known about it all along).

Ricardo's theory is absolutely right-within its narrow confines. His theory correctly says that, accepting their current levels of technology as given, it is better for countries to specialize in things that they are relatively better at. One cannot argue with that. His theory fails when a country wants to acquire more advanced technologies so that it can do more difficult things that few others can do- that is, when it wants to develop its economy. It takes time and experience to absorb new technologies, so technologically backward producers need a period of protection from international competition during this period of learning. Such protection is costly, because the country is giving up the chance to import better and cheaper products. However, it is a price that has to be paid if it wants to develop advanced industries. Ricardo's theory is, thus seen, for those who accept the status quo but not for those who want to change it.

The Roman politician and philosopher Cicero once said: ‘Not to know what has been transacted in former times is to be always a child. If no use is made of the labours of past ages, the world must remain always in the infancy of knowledge.

As the saying goes, ‘he who has a hammer sees everything as a nail’. If you approach a problem from a particular theoretical point of view, you will end up asking only certain questions and answering them in particular ways. You might be lucky, and the problem you are facing might be a ‘nail’ for which your ‘hammer’ is the most appropriate tool. But, more often than not, you will need to have an array of tools available to you. You are bound to have your favourite theory. There is nothing wrong with using one or two more than others — we all do. But please don’t be a man (or a woman) with a hammer — still less someone unaware that there are other tools available. To extend the analogy, use a Swiss army knife instead, with different tools for different tasks.­

In the prologue, I explained the gradual and subtle process in which history is re-written to fit a country's present self-image. As a result, many rich-country people recommend free-trade, free-market policies in the honest belief that these are policies that thier own ancestors used in order to make their countries rich. When the poor countries protest that those policies hurt, those protests are dismissed as being intellectually misguided or as serving the interests of their corrupt leaders. It never occurs to those Bad Samaritans that the policies they recommend are fundamentally at odds with what history teaches us to be the best development policies. The intention behind their policy recommendations may be honourable, but their effects are no less harmful than those from policy recommendations motivated by deliberate ladder-kicking.

The rich countries also contribute to the brain drain from developing countries by more willingly accepting people with higher skills. These are people who could have contributed more to the development of their own countries than unskilled immigrants, had they remained in their home countries.

To sum up, the truth of post-1945 globalization is almost the polar opposite of the official history. During the period of controlled globalization underpinned by nationalistic policies between the 1950s and the 1970s, the world economy, expecially in the developing world, was growing faster, was more stable and had more equitable income distribution than in the past two and a half decades of rapid and uncontrolled neo-liberal globalization. Nevertheless, this period is protrayed in the official history as a one of unmitigated disaster of nationalistic policies, especially in developing countries. This distortion of the historical record is peddled in order to mask the failure of neo-liberal policies.

The place to start is with a true history of capitalism and globalization, which I examine in the next two chapters (chapters 1 and 2). In these chapters, I will show how many things that the reader may have accepted as ‘historical facts’ are either wrong or partial truths. Britain and the US are not the homes of free trade; in fact, for a long time they were the most protectionist countries in the world. Not all countries have succeeded through protection and subsidies, but few have done so without them. For developing countries, free trade has rarely been a matter of choice; it was often an imposition from outside, sometimes even through military power. Most of them did very poorly under free trade; they did much better when they used protection and subsidies. The best-performing economies have been those that opened up their economies selectively and gradually. Neo-liberal free-trade free-market policy claims to sacrifice equity for growth, but in fact it achieves neither; growth has slowed down in the past two and a half decades when markets were freed and borders opened.

As these contrasts show, capitalism has undergone enormous changes in the last two and a half centuries. While some of Smith’s basic principles remain valid, they do so only at very general levels. For example, competition among profit-seeking firms may still be the key driving force of capitalism, as in Smith’s scheme. But it is not between small, anonymous firms which, accepting consumer tastes, fight it out by increasing the efficiency in the use of given technology. Today, competition is among huge multinational companies, with the ability not only to influence prices but to redefine technologies in a short span of time (think about the battle between Apple and Samsung) and to manipulate consumer tastes through brand-image building and advertising.

I would go one step further and say that the willingness to challenge professional economists - and other experts - should be the foundation of democracy. When you think about it, if all we have to do is to listen to the experts, what is the point of having a democracy at all? Unless we want our societies to be run by a body of self-elected experts, we all have to learn economics and challenge professional economists

The age-old trick of transfer pricing Taking advantage of the fact that they operate in countries with different tax rates, TNCs [transnational corporations] have their subsidiaries over-charge or under-charge each other – sometimes grossly – so that profits are highest in those subsidiaries operating in countries with the lowest corporate tax rates. In this way, their global post-tax profit is maximized. A 2005 report by Christian Aid, the development charity, documents cases of under-priced exports like TV antennas from China at $0.40 apiece, rocket launchers from Bolivia at $40 and US bulldozers at $528 and over-priced imports such as German hacksaw blades at $5,485 each, Japanese tweezers at $4,896 and French wrenches at $1,089. The Starbucks and Google cases were different from those examples only in that they mainly involved ‘intangible assets’, such as brand licensing fees, patent royalties, interest charges on loans and in-house consultancy (e.g., coffee quality testing, store design), but the principle involved was the same. When TNCs evade taxes through transfer pricing, they use but do not pay for the collective productive inputs financed by tax revenue, such as infrastructure, education and R&D. This means that the host economy is effectively subsidizing TNCs.

But it is far more important that we allow developing countries to use protection, subsidies, and regulation of foreign investment adequately in order to develop their own economies, rather than giving them bigger agricultural markets overseas. Especially if agricultural liberalization by the rich countries can only be 'bought' by the developing countries giving up their use of the tools of infant industry promotion, the price is not worth paying. Developing countries should not be forced to sell their future for small immediate gains.

Joseph Schumpeter emphasized that all analysis in economics is preceded by a pre-analytical cognitive act, called vision, in which the analyst ‘visualise[s] a distinct set of coherent phenomena as a worth-while object of [his] analytic efforts’. He pointed out that ‘this vision is ideological almost by definition’, as ‘the way in which we see things can hardly be distinguished from the way in which we wish to see them’. The quote is from J. Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954), pp. 41–2. I thank William Milberg for pointing me to this quote.

If there are so many successful public enterprises, why do we rarely hear about them? It is partly because of the nature of reporting, whether journalistic or academic. Newspapers tend to report bad things – wars, natural disasters, epidemics, famines, crime, bankruptcy, etc. While it is natural and necessary for newspapers to focus on these events, the journalistic habit tends to present the public with the bleakest possible view of the world. In the case of SOEs, journalists and academics usually investigate them only when things go wrong – inefficiency, corruption or negligence.Well-performing SOEs attract relatively little attention in the same way that a peaceful and productive day in the life of a ‘model citizen’ is unlikely to make front-page news. There

But the conclusion of the HOS theory critically depends on the assumption that productive resources can move freely across economic activities. This assumption means that capital and labour released from any one activity can immediately and without cost be asbsorbed by other activities. With this assumption-known as the assumption of 'perfect factor mobility' among economists-adjustments to changing trade patterns pose no problem. If a steel mill shuts down due to an increase in imports because, say the government reduces tariffs, the resources employed in the industry (the workers, the buildings, the blast furnaces) will be employed (at the same or higher levels of productivity and thus higher returns) by another industry that has become relatively more profitable, say, the computer industry. No one loses from the process.

Hamilton provided the blueprint for US economic policy until the end of the Second World War. His infant industry programme created the condition for a rapid industrial development. He also set up the government bond market and promoted the development of the banking system (once again, against opposition from Thomas Jefferson and his followers.) It is no hyperbole for the New-York Historical Society to have called him 'The Man Who Made Modern America' in a recent exhibition. Had the US rejected Hamilton's vision and accepted that of his archrival, Thomas Jefferson, for whom the ideal society was an agrarian economy made up of self-governing yeoman farmers (although this slave-owner had to sweep the slaves who supported this lifestyle under the carpet), it would never have been able to propel itself from being a minor agrarian power rebelling against its powerful colonial master to the world's greatest super power.

To begin with, even though the rich countries have low average protection, they tend to disproportionately protect products that poor countries export, especially garments and textiles. This means that, when exporting to a rich country market, poor countries face higher tariffs than other rich countries. An Oxfam report points out that 'The overall import tax rate for the USA is 1.6 percent. That rate rises steeply for a large number of developing countries: average import taxes range from around four per cent for India and Peru, to seven per cent for Nicaragua, and as much as 14-15 percent for Bangladesh, Cambodia and Nepal. As a result, in 2002, India paid more tariffs to the US government than Britain did, despite the fact that the size of its economy was less than one-third that of the UK. Even more strikingly, in the same year, Bangladesh paid almost as much in tariffs to the US government as France, despite the fact that the size of its economy was only 3% that of France.

In 1832, Andrew Jackson, today a folk hero to American free-marketeers, refused to renew the license for the quasi-central bank, the second bank of the USA - the successor to Hamilton's Bank of the USA (see chapter 2). This was done on the grounds that the foreign ownership share of the bank was too high -30% (the pre-EU Finns would have heartily approved!). Declaring his decision, Jackson said: 'should the stock of the bank principally pass into the hands of the subjects of a foreign country, and we should unfortunately become involved in a war with that country, what would be our condition?........Controlling our currency, receiving our public moneys, and holding thousands of our citizens in dependence, it would be far more formidable and dangerous than the naval and military power of the enemy. If we must have a bank...it should be purely American.' If the president of a developing country said something like this today, he would be branded a xenophobic dinosaur and blackballed in the international community.

This neo-liberal establishment would have us believe that, during its miracle years between the 1960s and the 1980s, Korea pursued a neo-liberal economic development strategy. The reality, however, was very different indeed. What Korea actually did during these decades was to nurture certain new industries, selected by the government in consultation with the private sector, through tariff protection, subsidies and other forms of government support (e.g., overseas marketing information services provided by the state export agency) until they 'grew up' enough to withstand international competition. The government owned all the banks, so it could direct the life blood of business-credit. Some big projects were undertaken directly by state-owned enterprises-the steel maker, POSCO, being the best example-although the country had a pragmatic, rather than ideological, attitude to the issue of state ownership. If private enterprises worked well, that was fine; if they did not invest in important areas, the government had no qualms about setting up state-owned enterprises (SOEs); and if some private enterprises were mismanaged, the government often took them over, restructured them, and usually (but not always) sold them off again.

Hong Kong became a British colony after the Treaty of Nanking in 1842, the result of the Opium War. This was a particularly shameful episode, even by the standards of 19th-century imperialism. The growing British taste for tea had created a huge trade deficit with China. In a desperate attempt to plug the gap, Britain started exporting opium produced in India to China. The mere detail that selling opium was illegal in China could not possibly be allowed to obstruct the noble cause of balancing the books. When a Chinese official seized an illicit cargo of opium in 1841, the British government used it as an excuse to fix the problem once and for all by declaring war. China was heavily defeated in the war and forced to sign the Treaty of Nanking, which made China 'lease' Hong Kong to Britain and give up its right to set its own tariffs. So there it was-the self-proclaimed leader of the 'liberal' world declaring war on another country because the latter was getting in the way of its illegal trade in narcotics. The truth is that the free movement of goods, people, and money that developed under British hegemony between 1870 and 1913-the first episode of globalization-was made possible, in large part, by military might, rather than market forces. Apart from Britain itself, the practitioners of free trade during this period were mostly weaker countries that had been forced into, rather than had voluntarily adopted, it as a result of colonial rule or 'unequal treaties' (like the Nanking Treaty), which, among other things, deprived them of the right to set tariffs and imposed externally determined low, flat-rate tariffs (3-5%) on them.

Like all best supporting actors, the state may also step centre stage, taking entrepreneurial risks where the market and commons can’t or won’t reach. The extraordinary success of tech companies such as Apple is sometimes held up as evidence of the market’s dynamism. But Mariana Mazzucato, an expert in the economics of government-led innovation, points out that the basic research behind every innovation that makes a smart phone ‘smart’—GPS, microchips, touchscreens and the Internet itself—was funded by the US government. The state, not the market, turns out to have been the innovating, risk-taking partner, not ‘crowding out’ but ‘dynamising in’ private enterprise—and this trend holds across other high-tech industries too, such as pharmaceuticals and biotech.42 In the words of Ha-Joon Chang, ‘If we remain blinded by the free market ideology that tells us only winner-picking by the private sector can succeed, we will end up ignoring a huge range of possibilities for economic development through public leadership or public-private joint efforts.

La causa principal de que los países pobres sean pobres no hay que buscarla en ningún factor estructural inalterable, como el clima tropical, una ubicación inoportuna o una cultura defectuosa (véanse los capítulos 7 y 11). Son las decisiones humanas, sobre todo las de quienes tienen el poder de dictar normas, la causa de que pase lo que pasa, como explicaré. Aunque los que deciden nunca puedan tener la certeza de que sus actos den los resultados esperados, las decisiones que se toman no tienen nada de inevitables.

Después de la crisis financiera de 2008, el precio de los créditos (para quien los consiga o quien ya tenga uno a tipo variable) bajó en muchos países, gracias al recorte drástico y continuado de los tipos de interés. ¿Fue porque de golpe nadie quiso créditos y los bancos tuvieron que bajar el precio para colocarlos? No, la causa fueron decisiones políticas encaminadas a fomentar la demanda reduciendo los tipos de interés. Incluso en épocas normales, la mayoría de los países fijan los tipos de interés a través del banco central, es decir, que intervienen consideraciones políticas. Por decirlo de otra manera, los tipos de interés también están condicionados por la política.

El mercado libre no existe. Todos los mercados tienen reglas y límites que acotan la libertad de elección. Si un mercado parece libre, solo es porque aceptamos tan incondicionalmente sus restricciones de base que ya no las vemos. No se puede definir con objetividad lo «libre» que es un mercado.

algunos mercados parecen libres, solo es porque aceptamos tanto las regulaciones en las que se apoya que se vuelven invisibles.

Es curioso que uno de los primeros que entendieron la importancia de la responsabilidad limitada en el desarrollo del capitalismo fuese Karl Marx, supuestamente su mayor enemigo. A diferencia de muchos defensores del libre mercado de la misma época (como el propio Adam Smith), que eran contrarios a la responsabilidad limitada, Marx se dio cuenta de que permitiría movilizar las grandes sumas de capital necesarias para la industria pesada y la industria química, que justo entonces empezaban a despuntar, porque reducían el riesgo para cada inversor. En un texto de 1865, época en que el mercado de valores aún desempeñaba un papel muy secundario en la dramaturgia del capitalismo, Marx tuvo la clarividencia de definir a las sociedades anónimas como «la producción capitalista en su máximo desarrollo». Como sus adversarios defensores del libre mercado, reconocía la tendencia a que la responsabilidad limitada fomentase riesgos excesivos entre los gestores y la criticaba; la diferencia es que él la consideraba un efecto secundario del enorme progreso material que estaba a punto de provocar aquella innovación institucional. También tenía otros motivos para defender al «nuevo» capitalismo de las críticas de los defensores del libre mercado, por supuesto: la sociedad anónima le parecía una «fase de transición» al socialismo, en la medida en que separaba la propiedad de la gestión y, al hacerlo, posibilitaba la eliminación de los capitalistas (que no gestionan la empresa) sin poner en jaque el progreso material alcanzado por el capitalismo.

En los años cuarenta, el economista norteamericano de origen austríaco Joseph Schumpeter, famoso por su teoría del espíritu emprendedor (véase el capítulo 15), adujo que el aumento de la escala de las compañías, y la introducción de principios científicos en la investigación y el desarrollo empresariales, llevarían a la sustitución de los empresarios heroicos del primer capitalismo por gestores profesionales y burocráticos, cosa que según él reduciría el dinamismo del sistema, aunque lo consideraba inevitable. En los años cincuenta, el economista de origen canadiense John Kenneth Galbraith también sostuvo que el ascenso de las grandes compañías dirigidas por gestores profesionales era inevitable, y que por consiguiente la única manera de introducir «fuerzas compensatorias» era aumentar la regulación gubernamental y el poder de los sindicatos. En las décadas siguientes, sin embargo, otros defensores más acérrimos de la propiedad privada han considerado que los incentivos a los gestores deben tener como objetivo que estos aumenten al máximo los beneficios. A este problema del «diseño de incentivos» se aplicaron grandes inteligencias, pero no se acababa de dar con el «Santo Grial». Los directivos siempre podían encontrar el modo de cumplir la letra del contrato, pero no su espíritu, sobre todo porque a los accionistas no les resulta fácil averiguar si los malos resultados de un directivo en lo referente a los beneficios se han debido a su poca atención a los números o a fuerzas que no podía controlar. ¿

El billete de un dólar lleva la efigie del primer presidente, George Washington, que en su ceremonia de investidura insistió en llevar ropa norteamericana (tejida especialmente para la ocasión en Connecticut), no británica, que era de mayor calidad. Hoy en día infringiría la norma de transparencia en las adquisiciones del gobierno que propugna la OMC. No olvidemos, por otro lado, que fue Washington quien nombró secretario del Tesoro a Hamilton, con pleno conocimiento de sus ideas sobre política económica, puesto que Hamilton fue ayuda de campo de Washington durante la guerra de Independencia y su más estrecho aliado político tras ella. En el billete de cinco dólares tenemos a Abraham Lincoln, proteccionista de sobra conocido, que durante la guerra de Secesión elevó los aranceles a sus máximos históricos.1 En el de cincuenta figura Ulysses Grant, el héroe de la guerra de Secesión convertido en presidente, que en cierta ocasión, desafiando la presión británica para que Estados Unidos adoptase el libre comercio, comentó que «dentro de doscientos años, cuando América haya sacado de la protección cuanto puede ofrecer, también adoptará el libre comercio». Pese a no compartir la doctrina de Hamilton sobre la industria naciente, Benjamin Franklin tenía otra razón para insistir en la adopción de aranceles elevados: por aquel entonces, la existencia de tierras casi libres en Estados Unidos hacía que los fabricantes norteamericanos tuvieran que ofrecer sueldos unas cuatro veces más altos que la media europea, puesto que, de lo contrario, los trabajadores se habrían ido a crear su propia granja (y

pesar de todo, no está demostrado que una inflación moderada sea mala para la economía. Hasta hay estudios de economistas pro libre mercado vinculados a instituciones como la Universidad de Chicago o el FMI, por ejemplo, que dan a entender que por debajo del 8-10 por ciento la inflación no está relacionada con la tasa de crecimiento de un país.2 Otros estudios elevan aún más el umbral, hasta el 20 por ciento, e incluso hasta el 40 por ciento.3 Las experiencias de países concretos también parecen indicar que una inflación bastante alta es compatible con un crecimiento económico rápido. En los años sesenta y setenta, Brasil presentó una tasa media de inflación del 42 por ciento, pero fue una de las economías que más rápidamente crecieron en el mundo, y su renta per cápita aumentó el 4,5 por ciento anual.

hay datos que apuntan a que las políticas excesivamente antiinflacionistas pueden ser perjudiciales para la economía. Desde 1996, año en que Brasil (tras una fase traumática de rápida inflación, aunque sin llegar del todo a magnitudes hiperinflacionarias) empezó a controlar la inflación subiendo los tipos efectivos de interés (los tipos de interés nominales menos la tasa de inflación) hasta cifras que figuraban entre las más altas del mundo (10-12 por ciento al año), la inflación del país bajó al 7,1 por ciento anual, pero también se resintió su crecimiento económico, con un aumento de la renta per cápita de solo el 1,3 por ciento al año. También Sudáfrica ha tenido una experiencia parecida desde 1994, cuando empezó a dar prioridad absoluta al control de la inflación y elevó los tipos de interés a los niveles brasileños que acabo de mencionar. ¿A qué se debe? Pues a que las políticas encaminadas a reducir la inflación, cuando se llevan demasiado lejos, lo que hacen es reducir las inversiones, y por consiguiente el crecimiento

Cuentan que el ex presidente de Estados Unidos George W. Bush se quejó de que el problema de los franceses es que en su idioma no existe una palabra equivalente a entrepreneurship, término de origen francés. Más allá de su escaso dominio de ese idioma, lo que hizo Bush fue expresar un prejuicio bastante extendido entre los angloamericanos, que ven Francia como un país poco dinámico y de aspecto atrasado, lleno de trabajadores perezosos, granjeros que queman ovejas, intelectuales de izquierdas pretenciosos y funcionarios entrometidos, sin olvidar en ningún caso a los camareros pedantes.

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. When you learn that large and active governments can promote rather than dampen economic dynamism, you will see that the widespread distrust of government is unwarranted. Knowing that we do not live in a post-industrial knowledge economy will make you question the wisdom of neglecting, or even implicitly welcoming, industrial decline of a country, as some governments have done. Once you realize that trickle-down economics does not work, you will see the excessive tax cuts for the rich for what they are: a simple upward redistribution of income, rather than a way to make all of us richer, as we were told.

So the two champions of free trade, Britain and the US, were not only not free trade economies, but have been the two most protectionist economies among rich countries, i.e. until they each in succession became the world's dominant industrial power.

Unlike what neo-liberals say, market and democracy clash at a fundamental level. Democracy runs on the principle of 'one man (one person), one vote'. The market runs on the principle 'one dollar, one vote'.

The view that the world has now entered a new era of the ‘knowledge economy’, in which making things does not confer much value, is based upon a fundamental misreading of history. We have always lived in a knowledge economy.

Under the new regime, the financial sector has become much more profitable than the non-financial sector, which had not always been the case.16 This has enabled it to offer salaries and bonuses that are much higher than those offered by other sectors, attracting the brightest people, regardless of the subjects they studied in universities. Unfortunately, this leads to a misallocation of talents, as people who would be a lot more productive in other professions – engineering, chemistry and what not – are busy trading derivatives or building mathematical models for their pricing. It also means that a lot of higher-educational spending has been wasted, as many people are not using the skills they were originally trained for.

However, if everyone were really only out to advance his own interest, the world would have already ground to a halt, as there would be so much cheating in trading and slacking in production. More importantly, if we design our economic system based on such an assumption, the result is likely to be lower, rather than higher, efficiency.

The welfare state is the bankruptcy law for workers

Trade liberalization has created other problems, too. It has increased the pressures on government budgets, as it reduced tariff revenues. This has been a particularly serious problem for the poorer countries. Because they lack tax collection capabilities and because tariffs are the easiest tax to collect, they rely heavily on tariffs (which sometimes account for over 50% of total government revenue).7 As a result, the fiscal adjustment that has had to be made following large-scale trade liberalization has been huge in many developing countries – even a recent IMF study shows that, in low-income countries that have limited abilities to collect other taxes, less than 30% of the revenue lost due to trade liberalization over the last 25 years has been made up by other taxes.8 Moreover, lower levels of business activity and higher unemployment resulting from trade liberalization have also reduced income tax revenue.When countries were already under considerable pressure from the IMF to reduce their budget deficits, falling revenue meant severe cuts in spending, often eating into vital areas like education, health and physical infrastructure, damaging long-term growth. It

De-industrialization also has a negative effect on a country’s balance of payments because services are inherently more difficult to export than manufactured goods. A balance of payments deficit means that the country cannot ‘pay its way’ in the world. Of course, a country can plug the hole through foreign borrowing for a while, but eventually it will have to lower the value of its currency, thereby reducing its ability to import and thus its living standard.

The fact that de-industrialization is mainly caused by the comparative dynamism of the manufacturing sector vis-à-vis the service sector does not tell us anything about how well it is doing compared to its counterparts in other countries. If a country’s manufacturing sector has slower productivity growth than its counterparts in other countries, it will become internationally uncompetitive, leading to balance of payments problems in the short run and falling standards of living in the long term. In other words, de-industrialization may be accompanied by either economic success or failure. Countries should not be lulled into a false sense of security by the fact that de-industrialization is due to comparative dynamism of the manufacturing sector, as even a manufacturing sector that is very undynamic by international standards can be (and usually is) more dynamic than the service sector of the same country. Whether or not a country’s manufacturing sector is dynamic by international standards, the shrinkage of the relative weight of the manufacturing sector has a negative impact on productivity growth.

If we are going to avoid similar financial crises in the future, we need to restrict severely freedom of action in the financial market. Financial instruments need to be banned unless we fully understand their workings and their effects on the rest of the financial sector and, moreover, the rest of the economy. This will mean banning many of the complex financial derivatives whose workings and impacts have been shown to be beyond the comprehension of even the supposed experts. You may think I am too extreme. However, this is what we do all the time with other products – drugs, cars, electrical products, and many others. When a company invents a new drug, for example, it cannot be sold immediately. The effects of a drug, and the human body’s reaction to it, are complex. So the drug needs to be tested rigorously before we can be sure that it has enough beneficial effects that clearly overwhelm the side-effects and allow it to be sold.

More importantly, in most countries there were also many policies that ended up redistributing income from the poor to the rich. There have been tax cuts for the rich – top income-tax rates were brought down. Financial deregulation has created huge opportunities for speculative gains as well as astronomical paycheques for top managers and financiers (see Things 2 and 22). Deregulation in other areas has also allowed companies to make bigger profits, not least because they were more able to exploit their monopoly powers, more freely pollute the environment and more readily sack workers. Increased trade liberalization and increased foreign investment – or at least the threat of them – have also put downward pressure on wages. As a result, income inequality has increased in most rich countries. For example, according to the ILO (International Labour Organization) report The World of Work 2008, of the twenty advanced economies for which data was available, between 1990 and 2000 income inequality rose in sixteen countries, with only Switzerland among the remaining four experiencing a significant fall.1 During this period, income inequality in the US, already by far the highest in the rich world, rose to a level comparable to that of some Latin American countries such as Uruguay and Venezuela.

The world is too complex, Simon argued, for our limited intelligence to understand fully. This means that very often the main problem we face in making a good decision is not the lack of information but our limited capability to process that information – a point nicely illustrated by the fact that the celebrated advent of the internet age does not seem to have improved the quality of our decisions, judging by the mess we are in today.

If chess is this complicated, you can imagine how complicated things are in our economy, which involves billions of people and millions of products. Therefore, in the same way in which individuals create routines in their daily lives or chess games, companies operate with ‘productive routines’, which simplify their options and search paths. They build certain decision-making structures, formal rules and conventions that automatically restrict the range of possible avenues that they explore, even when the avenues thus excluded outright may have been more profitable. But they still do it because otherwise they may drown in a sea of information and never make a decision. Similarly, societies create informal rules that deliberately restrict people’s freedom of choice so that they don’t have to make fresh choices constantly. So, they develop a convention for queuing so that people do not have to, for example, constantly calculate and recalculate their positions at a crowded bus stop in order to ensure that they get on the next bus.

Mexico is a particularly striking example of the failure of premature wholesale trade liberalization, but there are other examples. In Ivory Coast, following tariff cuts of 40% in 1986, the chemical, textile, shoe and automobile industries virtually collapsed. Unemployment soared. In Zimbabwe, following trade liberalization in 1990, the unemployment rate jumped from 10% to 20%. It had been hoped that the capital and labour resources released from the enterprises that went bankrupt due to trade liberalization would be absorbed by new businesses. This simply did not happen on a sufficient scale. It is not surprising that growth evaporated and unemployment soared.

It is perfectly possible that some degree of gradual trade liberalization may have been beneficial, and even necessary, for certain developing countries in the 1980s-India and China come to mind. But what has happened during the past quarter of a century has been a rapid, unplanned and blanket trade liberalization. Just to remind the reader, during the 'bad old days' of protectionist import substitution industrialization (ISI), developing countries used to grow, on average, at double the rate that they are doing today under free trade. Free trade simply isn't working for developing countries.

Modern free trade argument is based on the so-called Heckscher-Ohlin-Samuelson theory (or the HOS theory). The HOS theory derives from David Ricardo's theory, which I outlined in chapter 2, but it differs from Ricardo's theory in one crucial respect. It assumes that comparative advantage arises from international differences in the relative endowments of 'factors of production' (capital and labour), rather than international differences in technology, as in Ricardian theory.

Most free trade economists would accept that there are winners and losers from trade liberalization but argue that their existence cannot be an argument against trade liberalization. Trade liberalization brings overall gains. As the winners gain more than what is lost by the losers, the winners can make up all the latters' losses and still have something left for themselves. This is known as the 'compensation principle'-if the winners from an economic change can fully compensate the losers and still have something left, the change is worth making. The first problem with this line of argument is that trade liberalization does not necessarily bring overall gain. Even if there are winners from the process, their gains may not be as large as the losses suffered by the losers-for example, when trade liberalization reduces the growth rate or even make the economy shrink, as has happened in many developing countries in the past two decades. Moreover, even if the winners gain more than the losers lose, the compensation is not automatically made through the workings of the market, which means that some people will be worse off than before. Trade liberalization will benefit everyone only when the displaced workers can get better (or at least equally good) jobs quickly, and when the discharged machines can be re-shaped into new machines-which is rarely.

So the two champions of free trade, Britain and the US, were not only only not free trade economies, but had been the two most protectionist economies among rich countries-that is, until they each in succession became the world's dominant industrial power.

Despite being the most protectionist country in the world throughout the 19th century and right up to the 1920s, the US was also the fastest growing economy. The eminent Swiss economic historian, Paul Bairoch, points out that there is no evidence that the only significant reduciton of protectionism in the US economy (between 1846 and 1861) had any noticeable positive impact on the country's rate of economic growth. SOme free trade economists argue that the US grew quickly during this period despite protectionism, because it had so many other favourable conditions for growth, particularly its abundant natural resources, large domestic market and high literacy rate. The force of the counter-argument is diminished by the fact that, as we shall see, many other countries with few of those conditions also grew rapidly behind protective barriers. Germany, Sweden, France, Finland, Austria, Japan, Taiwan, and Korea come to mind.

It was only after the Second World War that the US-with its industrial supremacy now unchallenged- liberalized its trade and started championing the cause of free trade. But the US has never practised free trade to the same degree as Britain did during its free trade period (1860 to 1932). It has never had a zero-tariff regime like Britain. It has also been much more aggressive in using non-tariff protectionist measures when necessary. Morever, even when it shifted to freer (if not absolutely free) trade, the US government promoted key industries by another means, namely, public funding of R&D. Between the 1950s and the mid-1990s, US federal government funding accounted for 50-70% of the country's total R&D funding, which is far above the figure of around 20%, found in such 'governemen-led' countries as Japan and Korea. Without federal government funding for R&D, the US would not have been able to maintain its technological lead over the rest of the world in key industries like computers, semiconductors, life sciences, the internet and aerospace.

It was only after the Second World War, when the US became top dog and liberalized its trade, that countries like France came to look protectionist.

Countries like Finland, Norway, Italy and Austria-which were relatively backward at the end of the Second World War and saw the need for rapid industrial development-also used strategies similar to those used by France and Japan to promote their industrie. All of them had relatively high tariffs until the 1960s. They all actively used SOEs to upgrade their industries. This was particularly successful in Finland and Norway. In Finland, Norway and Austria, the government was very much involved in directing the flow of bank credit to strategic industries. Finland heavily controlled foreign investment. In many parts of Italy, local government provided support for marketing and R&D to small and medium-sized firms in the locality.