Economics, Literature and Scepticism

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I am a PhD student in Economics. I am originally from South Africa and plan to return there after my PhD. I completed my M. Comm in Economics and my MA In Creative Writing (Poetry) at the University of Cape Town, where I worked as a lecturer before starting my PhD.

Saturday, July 11, 2009

Ha-Joon Chang - Bad Samaritans

Posted by Simon Halliday | Saturday, July 11, 2009 | Category: , | Chang - Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism [Unabridge Audiobook]
Customarily I write short reviews.  I felt, however, that given the extent of my simultaneous agreement and disagreement with the content in Chang's book, it would be worthwhile to write a lengthier piece discussing these competing sentiments.

First, I appreciate the history that Chang discusses when he assesses the paths that the UK and the US took toward their economic success. Contrary to popular belief, the UK and the US taxed imports widely (tariffs), subsidised specific industries, and undertook various policies of 'infant industry' style protection. The tale goes back in the UK to debates between Ricardo and Malthus on whether one should protect one's industry to promote its future capabilities, or whether one should expose it to free trade to ensure that it becomes efficient (Malthus argued in favour of tariffs because he felt that the poor would be adversely affected by complete liberalization, particularly that revoking the corn laws would hurt the British poor). So yes, good history. However, when discussing state-led interventions, he fails to recognise one of the great problems of such intervention - how does the state access information about which industries will succeed and which will fail? In a capitalist economy, individuals and firms fail at what they do all the time, when the state is heavily involved in several industries and a sufficient number of them don't 'hit the spot' the state fails. South Korea was remarkably lucky because the areas in which it invested are the areas in which world demand grew. It was also 'lucky' enough to have such autocratic control so as to force people not to consume imports, to work 54 hours a week, and more.

Second, the flaw of ignoring investment specificity links to the flaw of selection, and Chang seems to have ignored research on problems of investment specificity. The argument progresses as follows. If I do not know which of several potential investments will work (and I cannot monitor workers properly), there is a disincentive for me to invest in certain specific projects, or specific kinds of capital. My 'general' capital may allow me to spread risk, but have lower profit, whereas specific capital will be more risky, but might reap higher profits.  The problem is again one of information, one which the capitalist system (approximately) solves by allowing people to invest and succeed, or to invest and fail. Now, it is feasible for government to do this as long as it is willing to fail in at least as many circumstance, if not more, as it wants to succeed. But, once you have invested (in a State-Owned Enterprise) and people are employed, allowing a project to fail is a very difficult political beast to overcome, one that often requires autocratic power. this problem of 'failing' doesn't allow for the systems that would have failed had you, as government, not bailed them out.  Toyota was bailed out a few times by the Japanese government. Samsung was assisted by the Korean government. Nokia was protected by the Swedish government. They would have failed had they been exposed to market forces, but now they are amongst the leading companies of the world. How do you differentiate between those that will eventually succeed, but require assistance now, and those that will fail regardless. We have more data on those that have been successful than on those that have failed - a problem of sample selection bias in the final data with which we are dealing.  What about the failures? Where's this data?

Third, Chang makes a further error. He repeatedly discusses contemporaneous or sequential events and speaks of them as if one caused the other, when, instead, we probably have evidence of high correlation. Though evidence of some event causing another event - adherence to neoliberalism causing problems in the developing world - we cannot also dismiss the possibility of some underlying cause resulting in both of these outcomes. He does, however, admit this problem, but asserts that the burden of proof falls on free trade economists to prove their case when most of the developed world got to where it is now, with historically hefty tariffs and non-tariff barriers. To Chang, the analogy is as follows, 'If developed countries did not get to where they are with free trade, why should the developing world'. Crucially, I believe, advocates of neoliberal policies make exactly the same fallacious correlation-causation claims, so they're often no better than Chang. They also often fail to admit the history (which I have seen both Becker and Friedman do in discussions, they ignore the evidence and go on to comment about the contemporaneous small size of government in areas other than tariffs). Advocates of the free market laud Chile as their golden boy, advocates of statism and intervention exalt South Korea as theirs (though free market also try to claim SK every so often, I'm not sure how). But doing this misses the array of failures in between these extreme successes, the failures that get blamed on 'the other side' (whoever they might turn out to be).

Chang also displays a strange interpretation of Adam Smith's Wealth of Nations. First, he argues that Smith was a free market ideologue. This is false. Adam Smith argued in favour of market operations supported by government. The notion of laissez-faire was manufactured by the physiocrats, French 'economists' in contemporary parlance, but more than that they were thinkers on moral philosophy and political economy. Second, Chang argues that Smith promoted English interests against those of other countries when he favoured markets, an oddly mercantilist urge. But then Chang goes on to argue that England only reached its zenith in manufacturing industries during the 19th century some time after the Wealth of Nations was published, and after which the government followed some of Smith's advice many years after Smith's death. Notwithstanding whether Smith was being patriotic or not, these facts don't reconcile well., I did not understand Chang's occasional ad hominem attacks. Most decent readers of history know that Thomas Jefferson did not free his slaves. But they know, further, that he could not free them. Why? He was deeply, horribly, horrifically in debt. Slaves were capital, they had monetary value. He could not freely dispose of them because of his indebtedness. Jefferson could live and campaign for their emancipation. It does not serve a book on economics to attack Jefferson for owning slaves, when you are trying to engage his thoughts on America as a market economy, or his position on free trade. Though we may recognise that Jefferson was a racist who wanted Africans extradited from the Americas, Jefferson's position is irrelevant to a book on modern trade practices and the world economy.

Chang does, however, offer a high quality critique of the Hecksher-Ohlin(-Samuelson) model. One of the major problems with this theory of trade is that they assume 'perfect mobility of factors of production'. Factors of produdtion are labour and capital, the 'inputs' of the production process. However, they are often not approximately mobile, let alone perfectly mobile. Historically, many believed that labour was mobile, but capital was not. With theory from sociology and anthropology, however, we have seen that labour too, is not as mobile as people thought it was. Moreover, governments intervene to ensure that people cannot move between countries, which also precludes labour mobility. One of the great ironies of the United States free market ideology is that its ideologues amongst US Conservatives promote the free movement of capital, but heaven forbid the movement of Mexicans or other foreigners (as labour) into their market. argues lucidly on the topics of both intellectual property rights and 'corruption'. Intellectual property rights have received a lot of attention lately, a recent book by Boldrin and Levine tables the evidence Against Intellectual Monopoly. Chang promotes a similar cause, saying that historically most of the Bad Samaritans did not themselves apply others intellectual property rights and that they developed well as a consequence. He draws on Newton's 'Should of Giants' metaphor, and insists that patent and copyright law, as they stand, are barriers to innovation, to technology diffusion, and thus to development.

Segueing from intellectual property to corruption, he asserts that corrupt governments are not the boogeyman, but rather that certain kinds of corruption are bad, and that certain kinds of corruption can facilitate development (as they did in the cases of the US, the UK, many Europeoan countries, and even Indonesia). He argues further that the resources that developing countries are forced to dedicate to the eradication of corruption and graft would be better suited being invested, and, eventually, once the country becomes better off corruption will probably tend to ebb. Recent work on this (Dutt and Traca, 2009 also see Bardhan, 2006), suggests that, in corrupt countries (and especially in corrupt developing countries with high tariffs), corruption may lubricate the system and allow trade to occur more readily. 

Chang also emphasises strange trends in Power, Politics and Economics. We may believe in the moral value of democracy, but this does not imply that democracy is the best thing for growth. The evidence does not suggest that democracy favours growth more than autocracy does. We should therefore understand that we see democracy as morally superior, but we cannot argue that it is superior because it promotes growth. When looking at the rhetoric of democracy we need to understand this. If evidence was found that democracy was not as good for growth as autocracy, what kind of costs are we willing to bear to ensure a country is democratic but does not grow as well as an autocracy? One thing in the democrat's favour is that countries that develop tend to become more democratic once they reach a specific stage of development, but often that stage is historically contingent and country-specific. concludes the book with a discussion of recent trends in economics to discuss culture as a correlate of economic development and inequality, providing entertaining descriptions of the British by the Romans during the Roman Empire, and also offering descriptions by Westerners of the Japanese, Koreans, and other Asians.  I understand his quibbles with using culture as a fixed, exogenous characteristic of an economy, but we should understand in economics that culture, in its various and dynamic realisations, greatly affects how economies respond to stimuli, how each person in a society feels about a policy, how they react, how they engage with it - much of which can be culturally contingent.  I repeat, this is not to say that culture is inanimate, frozen, or unchanging, but that it invigorates their moral sentiments, that it affects how people respond to incentives, to constraints, and thus to policy.  I believe that Chang needed to give such nuanced analysis more credence.

The book stimulated me to think about Chang's arguments and to take steps to understand why I agree with his position on certain aspects of policy, disagree with others, and remain uncertain about the remainder.  Chang writes polemically, he is evidently committed to a certain position in Economics and his predictions ring true in the current crisis, particularly his insight that the developed world prescribes neoliberal policy to the developing world during its crises, but promotes Keynesian policies for itself during its crises.  Nothing could be more accurate about the current economic crisis.  We must recognise, though, that there has been a sea change in US politics and economics, and we will continue to feel these changes reverberate around and through us for some time.  I would recommend reading the book both because of its flaws, which help the reader to clarify thoughts on related issues, and because of its strengths which allow us to understand better contemporary economic policy and its surrounding debates. 

Currently have 2 comments:

  1. Simon, this is the best review of Chang's book I've read so far. Worthy mention of what Adam Smith really meant in his WON--you are spot on to say that Smith was never a proponent of free trade--a mistake all economists--heterodox or otherwise--commonly make.

  2. Thanks Jiesheng, I do my best.