In ‘Bad Samaritans’, Ha-Joon Chang takes a historical approach in attempting to answer the question, how do poor countries become rich? Chang provides his answers  by looking closely at how today’s rich countries constructed and managed their economic and industrial policy. He traces the history of the UK, US, the Scandinavian countries, and other more recent rich countries, such as Japan and Chang’s native South Korea. The result is an important work with conclusions that sharply contradict the current neoliberal free market orthodoxy peddled by rich countries and international organizations today.

 

It should be stated right from the outset that Chang is no ideologue: he is no diehard lefty, no commie fundamentalist, no anti-capitalist iconoclast. He simply calls it as he sees it, and is refreshingly honest – and entertaining – in his commentary on the current of the economic ideals prescribed by the rich countries, and how they differ so starkly from the policies that they themselves pursued in their infancy.

 

Chang challenges orthodox policy recommendations in a number of different areas. He looks at tariffs, subsidies and protected industries, and the idea that they should not be tolerated in the name of free trade; he looks at the destructive tendencies of unregulated capital flows and foreign direct investment, and finds that the benefits they provide are often incidential and modest, far outweighed by the damage they usually cause; he examines the idea that public enterprise is inferior to private and finds the evidence to be wanting, and in certain important circumstances contrary; he looks at the concept of intellectual property, and how it has often been taken too far, leading to a stifling of creativity; and so on.

 

Chang’s conclusions, as mentioned, frequently and consistently go against neoliberal doctrine. He argues that free trade is antithetical to a poor country’s development. He details the history of how rich countries used such trade barriers as tariffs and subsidies for key industries liberally, and were crucial to their development of industries that could compete at the international level. Without them, he states, these rich countries would not be where they were today. He also tackles the almost religious obsession we see today about private enterprise at all costs (see my earlier post on this topic, inspired by Chang’s chapter on this in the book).

 

One particularly interesting chapter is on intellectual property rights. While not against them in principle (or even in practice), Chang warns of the dangers of over-protection, and how a scenario has arisen in the developed world where the criss-crossing of property rights has actually led to a stifling of creativity. An important innovation may often involve the violation of a number of very simple processes that have nonetheless been copyrighted. He also argues that poor countries are impeded by international copyrights – and that the rich countries all violated or did not protect international copyrights in their development.

 

Ha-Joon Chang writes in a style that is both understandable to the layman, yet thorough and comprehensive enough to be convincing for non-economists and economists alike. He makes important examples using humor, such as the idea that his son should not go to school but rather enter the job market at the age of six, because free trade demands it.

 

Chang has written an illuminating and important book, and I cannot recommend it strongly enough. Through simple, historical examples and balanced and non-ideological language, he tells the story of how rich countries developed, and how the game has changed today to deny today’s developing countries the opportunities to develop in the same way. Nonetheless, I have a number of criticisms of Chang’s work.

 

- There is a growing recognition amongst serious economists that GDP is a limited measure of economic well-being, and reliance on this measure obscures other important elements of economic prosperity. Chang recognizes this limitation of GDP in this book…and promptly forgets about it. Throughout the book, he compares GDP growth rates of countries under different policies and regimes as proof of their success or failure. His main metric in the book, consistently and throughout, is GDP. While it does not significantly detract from his arguments – we all know that rich countries by and large have lower poverty and inequality than their poorer counterparts – but we will never move beyond GDP as the main measure of prosperity of important economists such as Chang if do not chip away at its superiority in their works.

 

- Chang paints a picture of industrial policy as being central to development, as opposed to more ‘micro’ elements as health, education, and credit for the poor. He acknowledges their importance, but dismisses the idea that they alone will magically lead to development. And he’s right, without doubt, that a country needs overarching economic objectives, such as investing in research in certain strategic sectors. But nonetheless, and related to the point above, I would have liked to see a greater discussion of greater health and education and better individual outcomes as an ends unto itself. A detailed discussion is probably beyond the scope of the book, however.

 

- Ha-Joon Chang does not discuss the environmental importance of a proper development strategy, and this is important. He contrasts how the rich countries developed with the options open to the poor countries today, but does not look at the changing ecological realities today. He advocates a policy of manufacturing and industry, but does not provide solutions, or even suggestions, of how this may be possible without us trashing the environment (as the rich countries did over the decades and centuries) and pushing the world over the precipice. This is important: it’s all well and good arguing that the poor countries should be allowed the same developmental opportunities as the rich had, but we have to be responsible. Economics as a discipline has consistently failed to recognize humanity’s place in the world and its role in maintaining ecological balance; this has to change. Development policy must be formulated with the ecology and the environment in mind. If this means a new paradigm of development, then so be it. Ha-Joon Chang does not touch on this.

 

Despite these criticisms, this book is a must-read for pretty much anyone. If for no other reason, read this book and understand that mainstream economics does not have all the answers. Neither does Chang, but after reading this book, a non-economist would have a better appreciation of economics as a discipline (and that it is not a science, but rather, has evolved to serve certain interests).

9.5/10

 

Ever since the financial crash of 2008, the subject of global economics has been at the tip of everyone’s tongues. A period of remarkable economic growth came to an abrupt end, and to this day most of us are feeling the effects of it. Now when it comes to understanding the strange and often contradictory world of economics, there are definitely worse people to look to than Paul Krugman. Professor of Economics at Princeton University, New York Times columnist and Nobel Prize winner aside, Krugman was voted 6th in a poll of the world’s 100 top intellectuals by Prospect.

The Conscience of a Liberal (also the name of Krugman’s blog) traces the path of inequality in the United States from the late 19th century to the present day, and how – after a period of relative economic equality in the 60’s – income distribution in the United States today is as bad as, if not worse than, it was in the early 20th century. By inequality, we’re essentially talking about the difference in the income of the richest and poorest members of society.

Over the course of the book, Krugman describes the evolution of the two main political parties in the US, the Democrats and the Conservatives. He shows how during the 70’s and 80’s, the Republican party was hijacked by ‘movement conservatives’, or as some have described it, the ‘conservative labrynth’ – a network of media outlets, right-wing think tanks and corporations supported by wealthy benefactors dedicated to spreading a version of conservatism that is vehemently opposed to the tenets of the New Dealintroduced by Roosevelt in the 1930’s.

Krugman spends much of the book discussing the rise of movement conservatives and their hijack of the Republican Party. He also talks about how they were able to achieve so much support – to the extent that they were able to win elections consistently – with such unpopular economic policies. The economics of these movement conservatives, Krugman argues, increased inequality as they decreased taxes for the richest segments of society while weaking social safety nets. So how did a party with such policies manage to consistently win elections?

Krugman discusses a number of interesting and valid methods in which the Republican party were able to convince voters to vote for them, but the most influential – and ugliest – of their tactics, he argues, was for them to play the race card. According to him, the Republicans were able to convince a majority of voters to choose them despite unfair economic policies was to play on the fears of white voters, at a time when racism, whether hidden or overt, was a major factor in American life. Now to those of us who did not grow up in America during this time, it can seem a strange argument, particularly when reading a book written by a prominent Economist, not a sociologist or historian. However, Krugman backs his argument strongly, and convinces the reader of the validity of his argument.

Towards the end of the book, the author looks to the future, and claims that progressives and liberals need to focus on one major issue in the coming years: healthcare. Krugman claims that achieving universal healthcare is a must. Every other developed economy has universal healthcare, and so the US lags behind. Krugman outlines the main features that a healthcare plan must have, and the difficulties that would be involved in trying to implement this in the US. Now this book was written before the recent healthcare bills were passed, and so comparing Krugman’s ideas with the actual details of the current healthcare would certainly make for interesting reading for those interested in the subject.

Krugman packs many a punch in this book, and is not afraid to tread on any toes. Theodore Roosevelt once uttered these words:

“We had to struggle with the old enemies of peace – business and financial monopoly, speculation, reckless banking, class antagonism, sectionism, war profiteering. They had begun to consider the Government of the United States as a mere appendage to their own affairs.

We know that Government by organized money is just as dangerous as Government by organized mob. Never before in history have these forces been so united against one candidate as they stand today. They are unanimous in their hatred for me – and I welcome their hatred.”

Krugman shares Roosevelt’s spirit in this regard, and offers a stinging indictment of the state of the modern Republican party. While Obama may be attempting a bipartisan approach, reaching out to a Republican party that has no interest in playing ball, Krugman argues that in many cases a bipartisan approach is simply unworkable.

The focus of the book is ultimately inequality in the US, but by demonstrating the direct effect of movement conservatism’s harmful economic ideology, Krugman shows us how this inequality came about, and why a progressive Government must focus on healthcare reform (which Obama has now done) in order to halt the rise in inequality and take major step towards a fairer society. The book provides a fascinating look at the rise of the Republicans in their current form, and Krugman makes a strong argument for the rejuvination of public institutions in the US. A must read.

Privatization, in a broad sense, refers to the transfer of a business, enterprise, or social function from public control to private ownership. It has been a cornerstone of the neoliberal economic mantra that has gripped policymakers for the last 3-4 decades, alongside private property, intellectual property rights, and the free market. In this time, hundreds of state-owned enterprises (SOEs) have been fully or partially privatized, in the belief that doing so would make them more efficient, and as a result serve to promote economic growth, and by highly questionable extension, prosperity.

Economists of the current orthodoxy will tell you that the theory is solid, and that the case for privatization is well grounded. The theoretical idea supporting privatization rests on three main pillars:

1) The Principal-Agent Problem: This broadly refers to the situation where the owners of an enterprise are disconnected from its operations. Instead, managers are hired to run them. The owners are the ‘principals’, and the managers are the ‘agents’. While it is in the interest of the owners to have the enterprise run as efficiently as possible, it is in the managers’ interest to work as little as possible while picking up a wage. Thus, the enterprise is inefficiently managed. With SOEs, the citizenry/taxpayers are the owners and so by privatizing, as the theory goes, the principal-agent problem will cease to exist.

2) Free Rider Problem: Individual citizens will not bother themselves with the day-to-day monitoring of hired managers, since they only own a fraction of the enterprise. If everyone owns a fraction and nobody is monitoring, then inefficiencies will arise. Since everyone is trying to ‘free ride’ but nobody is doing any actual monitoring, poor performance will result.

3) Soft Budget Constraint Problem: since SOEs are government owned, they are often available to work outside their budgets since they can rely on government assistance or bail-outs if they make losses or face bankruptcy. Therefore, they are able to get away with lax and inefficient management.

These are the arguments made against SOEs and in support of privatization. But do they hold on closer examination?

1) With regards to the principal-agent problem, it does appear to hold true for SOEs, but there is nothing in the theory to say that it does not also hold true for private firms! Most large corporations are held by varied and dispersed owners – think of the stock market, and how many different individuals, groups and organizations have ownership of a company. Private enterprises are thus also owned by a large number of shareholders, and management is delegated to a group of managers that are hired. Thus, there is little difference in ownership structure that would alleviate the principal-agent problem.

2) Similar to the above point, with diverse and widely spread ownership, the free-rider problem will exist for large, privately-held corporations as well. If I own 10 shares in Microsoft, I will not expend my time and effort to dilligently ensure that operations are being managed effectively – I leave it to someone else to do.

3) Politically generated soft budget constraints are not confined to just SOEs, as large, ‘important’, or politically influential companies can obtain funding and support from governments in times of trouble. We need not look further than the infamous bank bailouts in the US to know that this is just as true for private enterprises as SOEs.

So it seems that all the arguments made for privatization are in fact nothing of the sort. True, they are all valid arguments of pitfalls that can arise in public corporations, and should be kept in mind in their management. But they are also just as valid when it comes to private companies, and there is plenty of empirical evidence to back this up. Regardless, the conception is that SOEs are generally inefficient, after all we always hear about examples of bad state companies on the news, right?

What we rarely hear about are the well-run, highly effective SOEs that exist and operate all around the globe. To give just one example, Singapore Airlines is often talked of as one of the most highly regarded airlines in the world, and yet it is an SOE – 57% owned by Singapore’s Ministry of Finance. In fact Singpore – widely touted as one of the successes of the free market ideology – has an SOE sector that is four times larger than that of Argentina, widely cited as a state that has failed in its development due to the overextension of the state*.

So what gives? Why do only ever hear about bad SOEs, when there are in fact many, many good ones? Part of the reason is the sad nature of reporting. The news tends to focus on bad things: war, famine, sex scandals, and the like. Nobody cares about the ordinary decent citizen living out her life. And nobody cares about the silent, successful SOE, providing water or electricity or anything else to its customer base.

While these arguments do not strictly support state ownership, they make clear that the case against state ownership is highly misleading. The arguments made are, in fact, arguments in favor of effective systems of governance and regulation. The choice between private enterprise and SOE will always depend on many factors that are unique to the country, the industry, the time and the place. But there are specific situations where having an SOE is in fact the right choice:

1) When there are low short-term profitability prospects: the nature of private money is that it seeks a quick buck. As students are taught in economics 101, money now is worth money later, and so no investor will be willing to wait 15 years just to see a return on investment, even if the long-term prospects are sound. Such industries may be set up as SOEs, especially if they are in the strategic interests of the country.

2) ‘Natural Monopoly': A natural monopoly exists when, due to technological conditions, having only one supplier is the most ideal way to serve a market. Such industries include water provision, or railroads (in the 19th century in the US, different railroad companies used to set up parallel tracks leading to the same places, a horrible inefficiency and waste of money). The main cost of production in these industries is building a distribution network. When there is a natural monopoly, especially in the case of a key service or product such as water, enterprises can charge whatever they want and customers must pay that price, as they have no other choice. This generates a social loss, as the item is priced so as to extract maximum profit, and at the same time, consumers are served less than they would ideally want. Introducing competition has no effect, as the incumbent has all the power. In natural monopolies, SOEs are strictly the best form of ownership.

3) Questions of equity: If left to the private sector, many essential services would not be delivered to those who are not profitable. For example, water provision to the poor, or delivering mail to those in rural locations. In this case, a SOE is necessary to provide these services, as the profit motive is overruled by the equity motive.

In conclusion, there is a time and a place for private enterprise. Only strict ideologues would, in today’s world, propose the strict outlawing of private enterprise. At the same time, only strict ideologues – like those at the World Bank, the IMF, and many academic institutions – would call for privatization at all costs, empirical evidence and common sense be damned. SOEs can often be inefficent and perform badly – but so can SOEs. The solution in both cases is effective regulatory structures, which take incentives into account. It is also crucial to accurate identify and prioritize objectives.

SOEs are often a very useful tool for governments, particularly developing country governments, in the industrial development of a country. Dogmatic ideology that insists at privatization at all costs is both ill informed and harmful to the prosperity of nations.

*in terms of its share of national income, not absolute terms.

** the ideas and data in this article are heavily drawn from Ha-Joon Chang’s excellent book “Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism.” Go read it now.

Today’s economic orthodoxy is heavily dependent on the idea of utilitarianism, because it is a convenient mechanism that allows economics to be taken more seriously as a natural science. It allows economists to bypass all the inconvenient complications that arise when delving into deeper considerations of ethics and human behavior. The adoption of utilitarianism allows for the use of an additive system that fits well into an economics that is based on mathematics, as we have today.

Before going further, it’s worth briefly exploring who Jeremy Bentham was, and what we mean by utilitarianism.

Utilitarianism, or the “greater good” argument, is the belief that is the idea that the “right” course of action is the one that maximizes the overall “good” of a situation. So actions should be judged right or wrong depending on whether they increase or decrease human happiness, or utility. In economic-speak, utilitarian is used as the rationale behind the crucial assumption of rationality of consumers – that agents (i.e. people) consume so as to maximize their “utility”. Bentham put it thus: “Nature has placed mankind under the governance of two sovereign masters, pain and pleasure. It is for them alone to point out what we ought to do.”

On the face of it, utilitarianism has some appeal. But a simple thought experiment, first articulated by American philosopher Robert Nozick in 1974, puts the simplicity of utilitarianism in stark focus. Nozick hypothetically proposes the “experience machine”: a machine that would give you any experience you so desire. So if you wanted to experience the thrill of climbing Machu Picchu, so be it. But all the while you would be hooked up to this machine, not knowing that you were there. In other words, you would actually believe you were climbing Machu Picchu. Would you plug yourself into the machine? As long as you’re living your hearts desire, does it matter whether its real or not?

Nozick believes that most people would choose not to be plugged into this experience machine. This implies that it is somehow important whether these experiences are real or not. The reality of life is important: people want to actually do certain things, achieve certain goals, rather than simply feel the pleasure associated with it. However, if utilitarianism held strong, then the pleasure associated with actions would be all that mattered, and we would choose the machine. It is clear then, that there are other things besides simple pleasure that people consider intrinsically valuable.

While different forms of utilitarianism have attempted to come to grips with this and other complications, this was not so for Jeremy Bentham. He proposed a form of ‘felicity calculus’, where the pleasure and pain that arises from different actions could be quantified and and determined by addition and subtraction. This sort of simplistic rationale is too tempting to resist for orthodox economists. For Bentham, different pleasures vary only in their intensity and duration, and not quality. He even said himself, “the game of push-pin is of equal value with the arts and sciences of music and poetry.” Reductionism at its finest. This form of thinking has given rise to “homo economicus”: economic man. Homo economicus, meant to represent each and every one of us, is a narrow, self-interested individual who’s only concern is to maximize his or her consumption of goods and services. In physical terms, the assumption that we are all homo economicus is akin to the assumption that, for practical purposes, all cows are spheres.

The concept of utility is core to understanding economic orthodoxy today, and yet the assumption of rationality is based on an outdated and unrealistic form of utilitarianism that is not, and has never been, applicable to real life. Luckily, we have fields of economics, such as behavioral economics, that have attempted to move beyond this mode of thinking, and incorporating knowledge from other fields such as psychology in altering models to be more realistic. But neo-classical economic theories are still based on this idea, and despite strong attempts from many directions to reform the discipline, it clings stubbornly to such discredited beliefs.

By now, you’ve probably read about Storm, the baby who’s parents have caused quite the controversy by not sharing the baby’s sex with the world, for now. For me, this is a non-story. It’s a peculiarity, and something a bit strange, but the media shitstorm that has been stirred up is, sadly, not surprising.

 

Kathy Witterick and David Stocker, the parents, sent an email to friends saying “we’ve decided not to share Storm’s sex for now – a tribute to freedom and choice in place of limitation”. Considering the baby is far too young to know what sex or gender even is, there’s nothing here really. While I agree with many of the comments made that raising a baby ‘genderless’ is a dangerous experiment, I’ve read nothing from the family that suggests that this is their attention.

 

Patricia J. Williams, regular contributor to The Nation Magazine, makes some interesting observations at are worth reposting:

While it seems to me that “not sharing Storm’s sex for now” is hardly a full-fledged commitment to lifelong gender suppression or neutered identity, I will leave to mental health experts the propriety of Storm’s parents’ stance. As a purely philosophical matter, however, the situation is intriguing. After all, it is a much under-interrogated political truism that “we’re all just people,” or “we’re all equal” or “it doesn’t matter what your religion is” or “I don’t see race.” Who cares about anything else if “we’re all American citizens”?

Yet when some intrepid souls actually follow such identity-erasing truisms to their logical, uncomfortable ends—refusing altogether to engage in the conventions of gendered identity, as with baby Storm—it is profoundly unsettling.

 

And this:

 

 In English, there is no adequately humanizing yet universal pronoun, no general reference to common humanity; in order to speak comfortably, we automatically must yield to the partitions of him, of her, of gender. In the absence of pronouns, address necessarily becomes specific, individual, even intimate.

 

The idea of raising a child genderless (which, again should be stressed, is not what the parents said in their email) is something that goes against all our common perceptions of raising children. Could there ever be a world where that is possible? Probably not.

Is University Education Missing the Point?

Posted: May 31, 2011 by Zeddington in General
Tags: ,

Up until high school, we’re trained in a variety of different disciplines: mathematics, natural sciences, language, art, and others. But once we pass the 12th grade, we’re forced to choose a specialization – although in some systems, such as in the US, you can put off declaring your major for a year or two while you decide what you want to do, which in my opinion is a very good thing. In other systems, such as the British system, you are afforded no such luxury. Why the rush? In order to make us ‘employable’, as soon as possible.

I’ve found that this approach – in particular with the British system – is harmful in the sense that it does not provide a rounded education which is important in being a citizen of the world. Worse, students are trained to think in a particular way. I am a trained economist, and so I can speak with more familiarity about this discipline than others such as law or medicine. In economics, everything in monetized. The whole perspective of the economist is about efficiency in all that is done: maximizing output while minimizing posts, reaching equilibrium. Maximizing “utility” – a useful theoretical concept that has absolutely no bearing in reality. Utility is a measure of “happiness” – if you do something that makes you happy, it increases your utility. In economics, the language of utility is consumption. So consumption of more apples, more oranges, more iPhones means more utility.

Any non-economist can see the benefits of such an approach, but also the limitations. Well, you say, life doesn’t really work like that, does it? And you’d be right in saying that, but after three, four, five… maybe even ten years being trained as an economist, you lose perspective. Having been tried for much of your academic (and professional) life to think like an economist, it becomes hard to think like a normal person.

But it’s not just economics. If you’ve been trained as a lawyer, chances are that you’ll see problems in life in the framework of existing laws and precedents – what is legal and what isn’t. A student of management (and, by optimistic extension, a big-shot CEO) is trained to thing of nothing but the bottom line. Sure, there’s a lot involved in management in order to maximize that bottom line, and that involves a lot of areas and a lot of creativity – but in the end of the day its about the bottom line. And so on.

Sometimes I wonder if those without a university education are in fact in the best position to understand our world. They have not been trained to see the world from a certain angle (at least not academically). For all the fuss about higher education and the virtues of it, perhaps it is those who have not been forced into adopting a certain method of thought that are best placed to understand the world around us.

There is a problem with the way that economics is taught in classrooms today … it’s wrong. There are whole books written about the question of what exactly is wrong with economics today, but this blog post will focus on just one simple, yet extremely important aspect: reductionism. The dictionary defines reductionism as “the practice of simplifying a complex idea, issue, (or) condition … especially to the point of minimizing, obscuring, or distorting it.” We observe a degree of reductionism in every aspect of what we do, so why is it such a big deal, particularly in economics?

Lets start at the basic building blocks of textbook economics. An ‘market’ is a system where buyers and sellers meet. Buyers want something, and sellers offer that something to buyers, in exchange for currency. Suppose its a market for cars. Lets assume its a perfectly competitive market, meaning that all sellers are selling an identical product, have identical costs, and sell for an identical price, so that, for Joe Consumer, it doesn’t matter who he buys the car from, he’ll always pay the same price for the same car.

How much does a car cost? Well, in a perfectly competitive market, the price of a car equals the cost of producing that car (the marginal cost). Suppose that the cost of the car is made up of fixed costs (the factory, fixtures, etc) and variable costs (labor, materials, etc). The total cost of the car is the sum of all these costs for that car.

Economics, as taught in classrooms across the world, has little to add beyond that, in our small example. It is seen as a closed system, with no relations to other systems. The unit of measurement is the dollar (or whatever currency we choose), and it is about the flow of goods and services between firms and households. The impacts of economic activity on the environment, the ecosystem, society and culture are all ignored. But how can they be? Without the biosphere, there could be no economic activity! Oil is pulled up from out of the ground, and used to create goods and services, and transport them across the globe. Trees are felled for paper, wood, and other products. Coal from under the earth is used as a source of energy. The fish of our oceans are decimated for the satisfaction of our deep bellies. The biosphere is also crucial to absorb the products of our economic activity – no, not the goods and services, but the pollutants, the greenhouse gases, and other harmful byproducts.

In that sense, we cannot reduce the economy to a simple exchange of a few products without looking at the wider – and most certainly important – effects that result directly from our activity. The discipline has made some half-assed attempts at factoring these in, there the concept of “externalities”, i.e. stuff that is external to economic theory. And still the concept of monetizing these externalities is used, as if you can ever accurately put a price on such things. Can you put a price of climate change? On species extinction? No, you can’t.

The economy needs to be seen as a system within a system: a human system of trading goods and services, within the greater biosphere of our planet. It is especially crucial to recognize the role of economic activity in today’s world, where the threat of climate change looms larger than ever – according to this report, carbon emissions have hit a record high despite the recent recession. Economic policies can no longer be made in isolation of the global reality.

But frankly, its inconvenient. It’s not just a case of ignorance. Its a matter of interests. There is a reason that the economic discipline looks the way it does, and a reason why it is so powerful and well respected. We’ll leave that to future posts.

***

Before I go, have a look at this blog post about Strauss-Kahn and the maid who accused him of sexual assault. It makes the very good point that, without union backing, she would likely have never been able to make such a complaint against such a powerful man.