<abstract>Disclaimer: these are notes I took while reading this book. They include citations I found interesting or enlightening or particularly well-written. In some cases, I've pointed out which of these applies to which citation; in others, I have not. Any benefit you gain from reading these notes is purely incidental to the purpose they serve of reminding me what I once read. Please see Wikipedia for a summary if I've failed to provide one sufficient for your purposes. If my notes serve to trigger an interest in this book, then I'm happy for you.</abstract> This is the second book I've read by Chang. The first was <i>Kicking Away the Ladder</i>, which discussed how the much-ballyhooed free-market practices forced on developing countries were not used by the first-world countries when they themselves were developing. This book kind of picks up where the other left off. Instead of viewing the obvious disparity between what the developed world says and what it does in a clinical manner, Chang uses a more class-based lens to examine how the rich manipulate the story to benefit themselves. A primary part of that story is the myth of capital-C Capitalism. His is a pragmatic and balanced take on what we for lack of a better word must call a global economy with a lot of useful insight and suggestions for how to break out of the vicious circle of servitude that most of us are in (all but the tippy top, of course, for whom the system works). This is absolutely a lovely companion book to Mark Blyth's <i>Austerity: The History of a Dangerous Idea</i>. The citations below give a better idea of what he's all about than I could possibly do by writing a summary. <h>Citations</h> <bq caption="Foreword">Human decisions, especially decisions by those who have the power to set the rules, make things happen in the way they happen, as I will explain. Even though no single decision-maker can be sure that her actions will always lead to the desired results, the decisions that have been made are not in some sense inevitable. We do not live in the best of all possible worlds. If different decisions had been taken, the world would have been a different place. Given this, we need to ask whether the decisions that the rich and the powerful take are based on sound reasoning and robust evidence.</bq> <bq caption="Page 1">Overcoming the myth that there is such a thing as an objectively defined ‘free market’ is the first step towards understanding capitalism.</bq> <bq caption="Page 7">All this does not mean that we need to take a relativist position and fail to criticize anyone because anything goes. We can (and I do) have a view on the acceptability of prevailing labour standards in China (or any other country, for that matter) and try to do something about it, without believing that those who have a different view are wrong in some absolute sense. Even though China cannot afford American wages or Swedish working conditions, it certainly can improve the wages and the working conditions of its workers.</bq> <bq caption="Page 10">Free-market economists may want you to believe that the correct boundaries of the market can be scientifically determined, but this is incorrect. If the boundaries of what you are studying cannot be scientifically determined, what you are doing is not a science.</bq> <bq caption="Page 10">Thus seen, opposing a new regulation is saying that the status quo, however unjust from some people’s point of view, should not be changed. Saying that an existing regulation should be abolished is saying that the domain of the market should be expanded, which means that those who have money should be given more power in that area, as the market is run on one-dollar-one-vote principle.</bq> <bq caption="Page 30">Warren Buffet, the famous financier, put this point beautifully, when he said in a television interview in 1995: ‘I personally think that society is responsible for a very significant percentage of what I’ve earned. If you stick me down in the middle of Bangladesh or Peru or someplace, you’ll find out how much this talent is going to produce in the wrong kind of soil. I will be struggling thirty years later. I work in a market system that happens to reward what I do very well – disproportionately well.’</bq> <bq caption="Page 41">[...] 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.</bq> Dude, you just described the U.S. of A. <bq caption="Page 50">If we did that, people would feel that they are not trusted as moral agents and refuse to act in moral ways, making it necessary for us to spend a huge amount of resources monitoring, judging and punishing people. If we assume the worst about people, we will get the worst out of them.</bq> <bq caption="Page 56">Real interest rates of 8, 10 or 12 per cent mean that potential investors would not find non-financial investments attractive, as few such investments bring profit rates higher than 7 per cent.5 In this case, the only profitable investment is in high-risk, high-return financial assets. Even though financial investments can drive growth for a while, such growth cannot be sustained, as those investments have to be ultimately backed up by viable long-term investments in real sector activities, as so vividly shown by the 2008 financial crisis</bq> <bq caption="Page 68">The dead presidents don’t talk. But if they could, they would tell Americans and the rest of the world how the policies that their successors promote today are the exact opposite of what they used in order to transform a second-rate agrarian economy dependent on slave labour into the world’s greatest industrial power.</bq> <bq caption="Page 71">For the same reason why we send our children to school rather than making them compete with adults in the labour market, developing countries need to protect and nurture their producers before they acquire the capabilities to compete in the world market unassisted. Second, in the earlier stages of development, markets do not function very well for various reasons – poor transport, poor flow of information, the small size of the market that makes manipulation by big actors easier, and so on.</bq> <bq caption="Page 94">For example, in the case of Britain, the share of manufacturing in total output, without counting the relative price effects (to use the jargon, in current prices), fell by over40 per cent between 1955 and 1990 (from 37 per cent to 21 per cent). However, when taking the relative price effects into account, the fall was only by just over 10 per cent (from 27 per cent to 24 per cent).3 In other words, the real demand effect – that is the demand effect after taking relative price changes into account – is small.</bq> <bq caption="Page 110">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. As I pointed out above, how long a person works is affected not only by his own preference regarding work – leisure balance but also by things such as welfare provision, protection of worker rights and union power. Individuals have to take these things as given, but nations have a choice over them. They can rewrite the labour laws, beef up the welfare state and effect other policy changes to make it less necessary for individuals to work long hours.</bq> <bq caption="Page 146">However, the trouble is that trickle down usually does not happen very much if left to the market. For example, once again according to the EPI, 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. In contrast, in countries with a strong welfare state it is a lot easier to spread the benefits of extra growth that follows upward income redistribution (if it happens) through taxes and transfers. Indeed, before taxes and transfers, income distribution is actually more unequal in Belgium and Germany than in the US, while in Sweden and the Netherlands it is more or less the same as in the US.3 In other words, we need the electric pump of the welfare state to make</bq> <bq caption="Page 146">However, the trouble is that trickle down usually does not happen very much if left to the market. For example, once again according to the EPI, 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. In contrast, in countries with a strong welfare state it is a lot easier to spread the benefits of extra growth that follows upward income redistribution (if it happens) through taxes and transfers. Indeed, before taxes and transfers, income distribution is actually more unequal in Belgium and Germany than in the US, while in Sweden and the Netherlands it is more or less the same as in the US.3 In other words, we need the electric pump of the welfare state to make the water at the top trickle down in any significant quantity.</bq> <bq caption="Page 146">For example, in an economic downturn like today’s, the best way to boost the economy is to redistribute wealth downward, as poorer people tend to spend a higher proportion of their incomes. The economy-boosting effect of the extra billion dollar given to the lower-income households through increased welfare spending will be bigger than the same amount given to the rich through tax cuts. Moreover, if wages are not stuck at or below subsistence levels, additional income may encourage workers’ investment in education and health, which may raise their productivity and thus economic growth. In addition, greater income equality may promote social peace by reducing industrial strikes and crime, which may in turn encourage investment, as it reduces the danger of disruption to the production process and thus to the process of generating wealth.</bq> <bq caption="Page 168">The world is very complex and our ability to deal with it is severely limited. Therefore, we need to, and usually do, deliberately restrict our freedom of choice in order to reduce the complexity of problems we have to face. Often, government regulation works, especially in complex areas like the modern financial market, not because the government has superior knowledge but because it restricts choices and thus the complexity of the problems at hand, thereby reducing the possibility that things may go wrong.</bq> <bq caption="Page 169">Of course, few people would argue that markets are perfect. Even Milton Friedman admitted that there are instances in which markets fail. Pollution is a classic example. People ‘over-produce’ pollution because they are not paying for the costs of dealing with it. So what are optimal levels of pollution for individuals (or individual firms) add up to a sub-optimal level from the social point of view.</bq> <bq caption="Page 174">According to Simon, we try to be rational, but our ability to be so is severely limited. 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.</bq> <bq caption="Page 177">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. There is nothing exceptional about proposing to ascertain the safety of financial products before they can be sold.</bq> <bq caption="Page 182">We teach our children those subjects because we believe that they will eventually enrich their lives and also make them good citizens. Even though this justification for educational spending is increasingly under attack in an age in which everything is supposed to justify its existence in terms of its contribution to productivity growth, it remains a very important – in my view, the most important – reason to invest in education.</bq> <bq caption="Page 185">But an influential Marxist school of thought argues that capitalists deliberately ‘de-skill’ their workers by using the most mechanized production technologies possible, even if they are not the most economical, in order to make the workers more easily replaceable and thus easier to control.7</bq> <bq caption="Page 187">In many lines of work, what counts is general intelligence, discipline and the ability to organize oneself, rather than specialist knowledge, much of which you can, and have to, actually pick up on-the-job. So, even if what you learn in a university as a history major or a chemist may not be relevant to your work as a prospective manager in an insurance company or as a government official in the Department of Transport, the fact that you have graduated from a university tells your potential employers that you are likely to be smarter, more self-disciplined and better organized than those who have not.</bq> <bq caption="Page 188">The higher education system in these countries has become like a theatre in which some people decided to stand to get a better view, prompting others behind them to stand. Once enough people stand, everyone has to stand, which means that no one is getting a better view, while everyone has become more uncomfortable.</bq> <bq caption="Page 198">For example, firms often do not invest enough in training their workers. This is because they are worried about their workers being poached by other firms ‘free-riding’ on their training efforts. In such a situation, the government imposing a requirement for worker training on all firms could actually raise the quality of the labour force, thereby ultimately benefiting all firms.</bq> <bq caption="Page 198">But you don’t need to be a Marxist to see that regulations restricting freedom for individual firms may promote the collective interest of the entire business sector, not to speak of the nation as a whole. In other words, there are many regulations that are pro- rather than anti-business. Many regulations help preserve the common-pool resources that all firms share, while others help business by making firms do things that raise their collective productivity in the long run. Only when we recognize this will we be able to see that what matters is not the absolute amount of regulation, but the aims and contents of those regulations.</bq> <bq caption="Page 203">The Marxists may have been right in thinking that the development in productive forces, by increasing interdependence among different segments of capital, makes it more necessary to plan centrally. However, they failed to recognize that it also makes the economy more complex, making it more difficult to plan centrally.</bq> <bq caption="Page 208">What Marx predicted was that the ‘rational’ planning approach of the capitalist firms would eventually prove superior to the wasteful anarchy of the market and thus eventually be extended to the whole economy. To be sure, he criticized planning within the firm as despotism by capitalists, but he believed that, once private property was abolished and the capitalists eliminated, the rational elements of such despotism could be isolated and harnessed for the social good.</bq> <bq caption="Page 217">Your environment can make you give up certain things even without trying. For example, many academically talented British working-class children do not even try to go to universities because universities are ‘not for them’. This attitude is slowly changing, but I still remember seeing a BBC documentary in the late 1980s in which an old miner and his wife were criticizing one of their sons, who had gone to a university and become a teacher, as a ‘class traitor’. While it is silly to blame everything on the socio-economic environment, it is equally unacceptable to believe that people can achieve anything if they only ‘believe in themselves’ and try hard enough, as Hollywood movies love to tell you.</bq> <bq caption="Page 219">Few American steelworkers or British shipbuilding workers who joined their industries in the 1960s, or for that matter anyone else, could have predicted that by the early 1990s their industries would be virtually wiped out by Japanese and Korean competition. Is it really fair that these people have to suffer disproportionately and be consigned to the scrapheap of history?</bq> <bq caption="Page 219">Yes, in theory, a shoeshine boy from a poor provincial town in Peru can go to Stanford and do a PhD, as the former Peruvian President Alejandro Toledo has done, but for one Toledo we have millions of Peruvian children who did not even make it to high school. Of course, we could argue that all those millions of poor Peruvian children are lazy good-for-nothings, since Mr Toledo has proven that they too could have gone to Stanford if they had tried hard enough. But I think it is much more plausible to say that Mr Toledo is the exception.</bq> <bq caption="Page 220">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.</bq> <bq caption="Location 4110-4112">Of these, Portugal and Korea are the richest, with around $18,000 per capita income (in 2006), and Turkey the poorest, with per capita income of $5,400 (in 2006). The next poorest OECD member after Portugal and Korea is Greece, which has a per capita income over $24,000.</bq> <bq caption="Page 107">In contrast, China’s 2007 income more than doubles from $2,360 to $5,370 and India’s by nearly three times from $950 to $2,740, when calculated in PPP terms.</bq> <bq caption="Page 226">As a result, worker resistance to any industrial restructuring that involves job cuts is much greater in the US than in Europe. Most US workers are unable to put up an organized resistance, but those who can – unionized workers – will, understandably, do everything they can to preserve the current job distribution.</bq> <bq caption="Page 230">We can drive our cars fast only because we have brakes. If cars had no brakes, even the most skilful drivers would not dare to drive at more than 20–30 miles per hour for fear of fatal accidents. In the same way, people can accept the risk of unemployment and the need for occasional re-tooling of their skills more willingly when they know that those experiences are not going to destroy their lives. This is why a bigger government can make people more open to change and thus make the economy more dynamic.</bq> <bq caption="Page 240">However, the very liquidity of financial assets makes them potentially negative for the rest of the economy. Building a factory takes at least months, if not years, while accumulating the technological and organizational know-how needed to build a world-class company takes decades. In contrast, financial assets can be moved around and rearranged in minutes, if not seconds. This enormous gap has created huge problems, because finance capital is ‘impatient’ and seeks short-term gains</bq> <bq caption="Page 247">But this understates it. Economists are not some innocent technicians who did a decent job within the narrow confines of their expertise until they were collectively wrong-footed by a once-in-a-century disaster that no one could have predicted. Over the last three decades, economists played an important role in creating the conditions of the 2008 crisis (and dozens of smaller financial crises that came before it since the early 1980s, such as the 1982 Third World debt crisis, the 1995 Mexican peso crisis, the 1997 Asian crisis and the 1998 Russian crisis) by providing theoretical justifications for financial deregulation and the unrestrained pursuit of short-term profits. More broadly, they advanced theories that justified the policies that have led to slower growth, higher inequality, heightened job insecurity and more frequent financial crises that have dogged the world in the last three decades (see Things 2, 6, 13 and 21).</bq> <bq caption="Page 248">Moreover, they supplied arguments that insist that all those economic outcomes that many people find objectionable in this world – such as rising inequality (see Thing 13), sky-high executive salaries (see Thing 14) or extreme poverty in poor countries (see Thing 3) – are really inevitable, given (selfish and rational) human nature and the need to reward people according to their productive contributions.</bq> <bq caption="Page 254">So capitalism, yes, but we need to end our love affair with unrestrained free-market capitalism, which has served humanity so poorly, and install a better-regulated variety. What that variety would be depends on our goals, values and beliefs.</bq> <bq caption="Page 254">If we are really serious about preventing another crisis like the 2008 meltdown, we should simply ban complex financial instruments, unless they can be unambiguously shown to benefit society in the long run. This idea will be dismissed by some as outrageous. It’s not. We do that all the time with other products – think about the safety standards for food, drugs, automobiles and aeroplanes. What would result is an approval process whereby the impact of each new financial instrument, concocted by ‘rocket scientists’ within financial firms, is assessed in terms of risks and rewards to our system as a whole in the long run, and not just in terms of short-term profits for those firms.</bq> <bq caption="Page 255">Free-market ideology is built on the belief that people won’t do anything ‘good’ unless they are paid for it or punished for not doing it. This belief is then applied asymmetrically and reconceived as the view that rich people need to be motivated to work by further riches, while poor people must fear poverty for their motivation.</bq>