Interview: What they don’t tell you about capitalism

Ha-Joon Chang, James Stafford

Ha-Joon Chang is Reader in the Political Economy of Development at the University of Cambridge, and the author of two popular and influential critiques of approaches to development advocated by major international institutions: Kicking Away the Ladder (2002) and Bad Samaritans (2007). Since the global financial crisis, Chang has adopted a still-higher public profile as a critic of the economic orthodoxies that brought about the global financial crisis. His most recent book, 23 Things They Don’t Tell You About Capitalism (2010) aimed to debunk some widely accepted arguments put forward by what he terms the ‘priesthood’ of the economics profession, and redefine the boundaries of the discipline.

Chang’s writing is polemical and frequently amusing, but also features a sharp analytical intelligence. Avoiding jeremiads about the state of the world economy, it combines persistent optimism with flashes of anger at the consequences of mistaken policies. His underlying conviction is that there are few ‘realities’ in economics that cannot be changed by human agency.

Responsible capitalism?

British political parties now seem to be converging around a rhetoric of ‘responsible capitalism’. Is this a positive development? Is it likely to cause any real change?

It’s positive of course, but really what do they exactly mean by it?

Take the case of high pay. Whether the pay gap is growing and so on of course is an important issue, but I think the bigger issue is what these people are being paid for. In my view the bigger problem is that these people are being paid for running companies in short-term orientated ways, and then in that process very often (if not always) destroying the firm in the long run by not investing in technology, in training. They are making money by increasing market power through take-overs, when mergers and acquisitions don’t necessarily result in better performance. They get paid high salaries for paying high dividends and engaging in share buybacks, once again weakening the company in the long run and in the process squeezing workers, suppliers, and other stakeholders.

I think that’s the bigger problem. We really need to question those practices. But I think the Tories are not interested and Labour, so far, only marginally so. It’s good that people talk about ‘responsible capitalism’, but when they say the solution is to give more power to shareholders I have a huge problem. The increased power of short-term floating shareholders is at the root of this problem.

What other forms of accountability are likely to be more effective?

You would have to weaken the short-term shareholders by making mergers and acquisitions more difficult, by making it – through regulatory measures – compulsory for managers to take care of other stakeholders; we have to reform this very notion that companies are properties of shareholders. They are the property of every stakeholder.

We also need to make sure that managers do not get compensated well for doing things that harm society, harm the long term future of the company, exploiting the weaker stakeholders. I think it’s actually quite sad to hear people say that the shareholders can take care of all these problems because it’s in their own interest. What is being forgotten is that, unlike the traditional capitalist, the shareholders don’t have any long-term commitment to the company.

Do the shareholders themselves lose out in the long term from this ‘shareholder value’ approach?

Yes, they also suffer; but they have more options. They can go buy a Korean company or invest in Chinese assets. They think that if this particular goose that lays the golden eggs dies, we can get another goose. But if you are the goose, you are in trouble.

You’ve written that the values of a more responsible capitalism are not necessarily of the left or of the right, and that those political labels are shifting and contingent in political economy. Do you think that conservative parties, not just in Britain but also in Europe and America, have an equal capacity to undertake the reforms you want to happen?

Funnily enough conservative parties have often brought about the biggest changes – Otto Von Bismarck introduced the first welfare state in the world, Disraeli nearly doubled the British electorate with the 1867 Reform Act. Paradoxically, exactly because these people represented the ruling class, the ruling class went along with it, because they think ‘if these guys think this is necessary, then maybe it is necessary’. If the people advocating reform are supposed to be on the other side, then the ruling class becomes suspicious and resists it. Depending on the particular issue and the political forces involved, sometimes it can be the supposedly more conservative party that is more effective in bringing about changes.

Unfortunately I don’t think this is the case in the current British setting. The Conservatives dominate the Coalition, and the Conservative ideology is still basically Thatcherite. I don’t see that these people have an actual vision to reform society in the way that people like Bismarck had.

In making that case for reform, there seem to be two sorts of rhetoric in play. There’s the ‘moral’ or ‘fairness’ case that advocates reform so that people receive ‘just rewards’ in the economy, but there are also arguments for increased efficiency and performance.Which one is more important?

The bland answer is that both are equally important. But my real answer is that actually the dichotomy itself is the problem. As I tried to argue in my book and in other writings the very notion that there is this neatly separable, through scientific method, domain of economics (or the market sphere) that has its own logic and shouldn’t be tampered with by political or moral considerations – that notion itself is at the heart of this free market ideology. If we really want to change this we have to break this distinction. Efficiency cannot be defined without reference to some shared sense of justice and fairness.

So the question really is ‘efficiency for whom’?

Yes, exactly. If you believe that there’s no justification for, say, protecting children and educating them and so on, banning child labour is a huge infringement on efficiency. In some developing countries, close to half the population are children under sixteen. In that kind of context banning child labour would be equivalent to the British government banning anyone with an odd-numbered National Insurance number fromworking from tomorrow. But if we accept those values about education, child protection and so on, it doesn’t appear to be intervention, and there is no question of efficiencythere. You cannot define efficiency without discussing for whom. You cannot define fairness and justice without some discussion of the economic parameters.

That’s the fundamental point, but another important point is that this alleged trade-off between justice and efficiency does not exist. If being fair and equitable is so bad for economic growth, how do you explain that countries like Sweden and Finland, with welfare states more than double the size that of the US, have been growing faster than the US? The famous slogan of the Swedish Social Democrats is ‘secure people dare’. Providing security and second changes through retraining actually enables people to be more flexible, more willing to accept changes, which help Sweden and Finland restructure their economy quickly in response to changes in conditions.

There are good reasons why fairness and efficiency go hand in hand, but it is often completely ignored, even by many people (if not necessarily the majority) on the left, who buy into this false trade-off and say: yes, it might reduce growth but we need a fairer society; even if people created less wealth that would be OK if it brings about a fairer society. I think we should be aggressive and say that a fairer society is also a more efficient society. Except, of course, the whole notion of efficiency is meaningless without a shared sense of fairness andjustice.

The EU and the crisis

How much scope is there for Britain to pursue a more expansionary fiscal policy in the world economy as it stands today? Is the government right to say that they can’t spend any more on a discretionary basis without the bond markets coming down on them? Is that a ‘real’ economic constraint?

Put it this way: if you are Ecuador or Guinea-Bissau you cannot really change the economic reality. But Britain is a big country and has a big role in forming the international discourse. It could have changed the reality by adopting a completely different narrative from the beginning.

But when you have already said that in the past eighteen months, and done quite a bit of it to show your commitment to cutting spending, now if you suddenly say you are going to spend more, then you will be subject to the wrath of the bond market. When the government first got into power, as a right-wing coalition, had it advocated a different approach, not least because Britain has its own currency, it could have done a lot that was different. But it is too late now: they have tied their hands. They have dug their own grave. But you never know – if there is a collapse in the eurozone, or something big, then there might be a chance to change the narrative without losing credibility. Short of that kind of event, I think this country is stuck with this really bad plan.

What factors are likely to determine whether or not the Euro survives in its current form?

It depends on whether or not the Germans decide that the EU, or at least the eurozone, is their own economy. California gets into terrible financial trouble but no-one thinks that the United States will break up, because somehow the federal government will patch it up and make it sustainable. The Germans do not adopt this attitude to the Greeks or Spaniards, so unless they adopt this attitude that now we are not Germany, we are a United States of Europe, then this will be insoluble.

The plan they have come up with is completely depressionary. They will allow a 0.5 per cent structural budget deficit; even in cyclical terms it will be no more than 3 to 3.5 per cent. This is ridiculously low. What if there is another crisis like the one today, where countries need to run 10 per cent, 11 per cent budget deficits? Would Germany then invade Greece?

Do the attitudes have to change before the institutions change? Can institutions will the attitude into existence?

These things are a little inter-related, although attitude is the ultimate problem. If the ECB or another institution did certain things differently and they seemed to be working, then people might begin to have a slightly different view as to how to treat these different economies. It is an interactive process.

The problem is bundling up very different economies under a monetary regime without fiscal transfers and effective freedom of labour migration. Obviously, there is legal freedom of labour migration, but the language barriers are such that an unemployed Greek labourer cannot move to Finland. It could have worked to an extent if the surplus countries had a commitment to treat the other countries as part of their own economy, as the people of New York and New Jersey treat Mississippi or Arkansas, which in some respects are practically Third World economies. But without that kind of attitude, I think that, even if this particular crisis passes, in the future there will be events which continuously test that resolve.

Are social democrats in Europe right to say that social and economic reform now has to be pursued without significant new public spending?

This is basically a defeatist attitude, buying in to your opponents’ agenda. I am perfectly happy to say that until the financial crisis is over we cannot definitelypromise to spend much more. But to say this should be permanent is unacceptable – when is the word ‘permanent’ acceptable in politics? Even if you don’t follow Harold Wilson and say that ‘a week is a long time in politics’, by talking about a permanent reduction in the welfare state then you are getting into something highly dangerous.

Having said that, the view that was prevalent in New Labour-type social democratic parties was that ‘in the end it is about money’. If you tax the rich more, then you can improve society more, and in order to get more tax you let the rich do whatever they want. That was a critical flaw. I sometimes liken it to traffic rules. If the government said that we need to abolish speed limits so that people can get from A to B quickly and make more money, then you would probably have a bit more money going around and you can spend more on people in need. But by abolishing the traffic rules you wouldhave created more needy people because there are more traffic accidents! I think that approach was deeply flawed: you actually have to change the way some of these financial and corporate institutions work. You are not going to solve these problems by collecting more taxes from under-regulated businesses. So in that sense overemphasis on spending itself was the problem.

But then instead of realising that this wasn’t a fundamental solution, and that structural change is necessary, the move has been to buy into the other side’s fundamental solution, which is shrinking the state. I don’t know what other solutions are being advocated as a substitute for social spending.

As I understand it, it’s an emphasis on putting more resources into industrial and regulatory policy and less into clearing up the traffic accidents.

If that’s the line, then it is not totally negative. But I would have to see what exactly is being proposed to ascertain whether it is a viable alternative social democratic agenda.

Is the EU, as it is currently constituted, a legal and institutional obstacle to member states pursuing active national economic policies of the sort you have defended, involving infant-industry protection, state grants and state-owned enterprises? Does the EU institutionalise free market approaches?

Unfortunately the EU has fundamentally changed its character. In the early days it was a collection of economies at very similar levels. This was equivalent to the customs union in Germany in 1834. Countries at similar levels having bigger markets and more competition can be positive. But for countries that are not yet fully developed – the poorer Eastern economies that supply cheap service labour to the rich countries in the EU – they will never become rich in a nationalistic way. The only alternative is for the richer countries really to treat the whole of the European Union as a single economy and believe that they really need to invest in a major way to lift the poorer countries to rich levels. We are talking about a nationalistic policy but for a nation that has beenexpanded to the EU level. But that kind of attitude does not exist.

The incomes squeeze

Why do you think real incomes have stagnated for so many workers in Britain over the past decade? What are the sorts of jobs that are likely to escape this trend in future?

A common view is that this is all because of competition from China. But it wasn’t an inevitable outcome. That was used as an excuse and as a threat to dissenting workers, but essentially what has happened is that the floating shareholders and professional managers went into a kind of alliance: ‘We give you huge dividends, in return you give us mega salaries. We need more money for that, so we will squeeze everybody else’. So in my view it is more about the corporate-financial structure rather than simple competition from China, although there is some of that there.

So in that sense very few jobs are immune from that kind of pressure. Let’s face it, how many jobs are there that cheaper immigrants cannot perform? I’m an example of that, I have a PhD! A lot of high-tech firms now have highly skilled scientists and workers who are immigrants from poorer countries. When those people come here, you cannot pay them Chinese wages or Brazilian wages, but it still exerts downward pressure. There is no job that can be safe from this.

The whole point is that in no country are these outcomes inevitable. If you had more restrictions on corporate dividends, more emphasis on worker training, more regulation on immigration, if you did not bring the Eastern countries into the EU and permit full mobility of labour... These are all deliberate decisions. I am not debating whether or not they are on balance good decisions. But they are all results of active human decisions. Unless you realise that, you will never change it. If you think that my income is squeezed because someone is working in Beijing for a lower wage and kids are being exploited in Pakistan, then you cannot change that.

Do you see a trade off between equitable, continued prosperity in advanced countries and development in the Global South? The choice is often framed that either you allow these countries to compete with the rest on cost and labour or they will never develop. Is it a zero-sum game?

No, because if these economies become larger, then richer countries cansell more to them. The question of internal distribution – both in China and in Britain – is crucial. Economic growth in China didn’t have to mean the kind of income inequality that it has today, which is now equivalent to those found in the lower division of the Latin American income distribution league – that is, Latin American countries that have relatively low income inequality by the standard of the continent, which is very high by international standards. In both countries decisions have been made that benefited certain groups much more than others. Apart from that, there is nothing inevitable about it being a zero sum game. Somehow, in both sets of countries those who have money and power have rigged the game so that only they benefit.

In relative terms the biggest losers have been the workers of the rich countries, because in poorer countries similar levels of growth (and the growth in poorer countries has been more rapid) have a greater power to improve people’s lives. In the rich countries you have reached a certain level of income that means additional income means more things, but in poorer countries it means better nutrition, longer life, a shorter working day.

But there doesn’t have to be a trade off. In Switzerland, inequality has fallen over the past couple of decades. Switzerland is a famously open economy – it cannot simply be international trade with China that is lowering wages.

How significant are the constraints imposed by resources and climate change on further economic growth, even in a reformed world economy? Does this make development more difficult?

On that front I think we need to be a bit less dogmatic. What is a ‘resource’ is dependent on technology.

I still remember when I was a little kid in the early 1970s I heard a report from the Club of Rome – I only understood it in a very primitive, simplified way – but to me the message was that by the year 2000 we will run out of oil and we will all die. Actually the prediction came true. Oil, as defined by the technologies of the early 1970s, has more or less run out. But since then we have found ways to find even more oil, so we still haven’t run out. This mineral called Coltan, which is very rare and used in the making of microchips for mobile telephones. This didn’t used to be a valuable resource, but now there are warlords in the DRC who fight wars to control this particular mineral and use captured enemies as slaves to extract it. So that has become a resource. I have more faith in human ingenuity than many other people.

But when it comes to global warming we are racing against the clock. For all I know maybe we will have perfect alternative energy technologies in five years. If it takes five hundred, then we are all dead. But I would be strongly against preventing poorer countries from developing for these reasons. People who have worked on this have come to the conclusion that countries reaching the $8,000, $9,000 level of per capita income have very little impact on climate change. That would still make a big difference to those countries. It would be wrong for rich countries to say that those countries have to live in poverty because we have used up the atmosphere.

This then means significant changes in consumption patterns in rich countries like the United States. ManyAmericans seem to think that wasting energy is their God-given right. And frankly the country is organised in such a way that it is more difficult to change that. Europeans find it easy to feel virtuous compared to Americans when they hop on their bikes and commute in the greenest way, but if you are stuck in a suburb in Texas you cannot cycle seventy miles to get to work. Changes in consumption patterns also have to involve more equitable income distribution. Countries with more than, say, $25,000 per capita GDP can easily provide a decent living standard for everybody. But even in those countries there are significant pockets of poverty. This has to be solved through redistribution. Politicians love growth because it allows them to avoid difficult choices. But when you have reached the level of income we have in most OECD countries, you have reached a point where that kind of easy way out is not feasible.

Are you saying then that it would be difficult to achieve this kind of adjustment away from carbon in advanced economies without simultaneously constraining growth?

Yes, but growth is measured in a particular way. Having less growth doesn’t necessarily mean people living less comfortably. There are lots of ways in which you can improve society without increasing the output. But all of this assumes that there won’t be any huge technological innovation that solves the problem in the new future. If this doesn’t come quickly, then we will have to change our understanding of growth and welfare.

The strange non-death of neo-liberalism

Is economics teaching in universities culpable for what has happened in economic policy over the past thirty years?

It is one of the main reasons, yes. The spread of free-market economic theories, and even more importantly, the kind of quasi-religious status that these doctrines have assumed, has been culpable.

I see orthodox free-market economics today as the equivalent of Catholic theology in medieval Europe. A lot of academic economics is harmless enough, if usually useless – ‘how many angels can dance on the head of a pin’ kind of questions – andyou might think that economists are weird people working on weird problems.

Unfortunately, that is not all. There is a very strong core, basically a priesthood, that preach certain kinds of doctrines. After you have flooded the world with that kind of view for thirty years, you have a whole generation of government officials, business managers, journalists – all spouting these views. Unfortunately when you begin to work in the world outside the universities, you don’t have much time to reflect on the basic theories and what you think are facts. Once they are released into the world, they operate with what they learned at university. They popularise these things as journalists or economists working for think tanks, and that’s been hugely harmful, basically making people think that you can leave things to the market and everything will be sorted out. That has been at the root of the crisis.

Apart from the specifics of the doctrine, it strikes me that the majority of that could have been said by a neo-liberal economist in the 1960s or 1970s. There was an interview with Colin Crouch in the last issue of Renewal about his book The Strange Non-Death of Neo-liberalism (2011). What explains the comparative resilience of neo-liberalism? Welfare economics and Keynesianism had its crisis in the 1970s and largely disappeared as an economic paradigm.

The ‘resilience’ of this economic theory is explained by the fact that it says things that support the interests of the rich and powerful – those who disproportionately benefit from the system. If most of the media say ‘no, this theory is still OK’, then ordinary people don’t have time to dispute this. If most professors are neo-liberals and they either pretend that nothing has happened, or argue that we need at most minor tinkering, then that will be accepted as the professional consensus.

The fundamental problem is that economics is not a science, in the sense that physics or chemistry is a science. Even those are affected by the political climate – it was a heresy to say that the sun doesn’t circle the earth. But economics is not a science in the much more fundamental sense; there is no clear boundary that says what should be in economics. Who decides what goes into economics itself is a political struggle: economics is a fundamentally political project. What is considered the right economic theory is fundamentally affected by politics. Approaches such as Keynesianism, and to a lesser extent welfare economics, were just about acceptable when there was a political consensus on the need for a more controlled capitalism and the need fora more credible alternative to socialism. When the political climate changed they went into decline because they didn’t have inherent systemic support, which neo-liberalism has today.

If any other profession failed in the way the economics profession has failed as it has in the last three decades – most dramatically manifested in the 2008 financial crisis, but even before that in the repeated failure of IMF structural adjustment programmes, the Mexican peso crisis, and the 1997 Asian crisis – it would havebeen banned. If it was proven that, say, homeopathy had created 80 million unemployed people, people would hunt down the homeopaths and hang, draw and quarter them! But because this kind of economics is so integral to the system, this doesn’t happen.