23 Secrets Free Traders Won’t Tell You

During a presentation of the worldwide financial crisis three years ago, none other than Queen Elizabeth asked the best question “How come no one could foresee it?”  She was not alone; the worldwide economic recession has upended many sacrosanct beliefs about how finance and economics really work. This country is currently in its worst economic crisis since the 1930’s Depression. Ever since the 2008 meltdown, Americans are seriously debating the merits free trade dogma: namely that free markets and limitless globalization always produce the best and most desirable outcomes. Meanwhile, the crisis is wreaking havoc on the financial security of entire generations of Americans. A large cohort of young people is finding it impossible to begin a career or merely to earn a living. Due to the surge in unemployment, and the stock market plunge in 2009, many older Americans have exhausted their savings, and are putting off retirement indefinitely.  Currently, the total poverty rate is at levels not seen in decades — with 30% of all Americans children living in poor households.

Surely our leaders, government and business and academia, should put aside their relentless bickering and develop solutions. A Cambridge Economist, Dr Ha-Joon Chang,   claims he can help by cutting thru some of the typical economic gobbledygook. As the title of his book suggests, 23 Things They Don’t Tell You About Capitalism is written to provide real explanations for the average person. At times the book requires a leap of faith and it could use a bit more detail — however most of the professor’s 23 arguments hone in like a laser beam. To begin, Dr. Chang says it is ironic that none of the world’s advanced countries became wealthy by sticking to free trade or free market economics. On the contrary, he points out that prosperous nations like England, France, Germany and then Japan and Korea used a combination of protectionism, subsidies, and often state controlled industries, in the early stages of development.

It is historical fact that the U.S. became the world’s economic behemoth by skillfully combining free markets, with prudent nationalist laws that protected infant industries. At one time, U. S. tariffs at 40-55% were among the world’s highest. Our first treasury secretary, Alexander Hamilton deserves credit for designing the so called American System of Economics, based on his brilliant 1791 paper, A Report on Manufactures. Adopted by Congress, it promoted the use of protectionism, public investment in infrastructure (such as roads and canals) and a robust national banking system. Some historic examples of the American System are the U.S. patent laws, the intercontinental railroads, and land grant colleges. More recently, from 1950-80, the U.S. Government provided well over 50% of all spending on research and development (R&D) which is a primary reason the U.S. maintains its lead in high technology industries.

Although not breaking new ground, Chang is definitely on target about the vital role of manufacturing (Thing 9). Despite decades of fuzzy logic, he says we are finally learning that a massive shift to financial products and services creates a hornet’s nest of problems.  Compared to manufacturing, services have low productivity potential which makes them a poor engine for growth. The low tradability of services means that a country runs a growing trade deficit and has difficulties buying new advanced technologies, leading to even slower growth. The result is low wage economy. Of course, when the same country welcomes in 12 million illegal immigrants to compete for low paid jobs, it doesn’t help any either.

The author of 23 Things urges we use caution before we severely curtail or do away with the social safety net — something free trade fundamentalists on both sides of the Atlantic are promoting.  He presents a good argument that a basic level of social insurance can have real benefits to society. Chang believes that there is no direct link between social welfare spending and a growing economy. According to his research, various Western European economies, where social spending is at least 50% higher than the U.S., have had roughly comparable growth rates. The absolute size of the private and public sector appears to be a matter of history, culture, and the wishes of the voters. America’s history of Calvinism and individualism means we tend to favor somewhat less government than nations like Sweden, Denmark and Germany where the standard of living is about equal to the U. S. but wealth is more evenly distributed. In addition, the professor writes that social insurance programs like unemployment compensation, job retraining assistance and continued health insurance can be very effective. They give people a second (or third) chance to succeed — an important aspect of a truly Christian culture.

Social spending, he says, also helps to cushion families from falling into destitution, and at the same time it encourages people to be more open to risk in choosing a profession or making a career change. The professor also reveals a big disconnect in today’s “government is evil” rhetoric. He shows that during the nineteenth century, nations began to adopt enlightened bankruptcy statutes.  “When combined with institutions like limited liability,” says Chang, “[These] new bankruptcy laws reduced the danger of business undertaking and thus encouraged risk-taking, which has made modern capitalism possible.”  Oddly enough, he adds, there has never been any big hullaballoo to remove or reduce the big government safety net that gives privileges to large corporations, bondholders, investors, and other businesses.       

In some places, Mr Chang’s arguments are instructive but do not present the entire picture. He credits Dr. Milton Friedman, the free market economist, for convincing the rest of the world to hold inflation to 1-3 % per year. In spite of that, several countries who bucked the trend still achieved success. Using the IMF’s data, 97 countries reduced inflation during the two periods (1970 – 1989) and (1990-2008) from an average of nearly 8% to only 2.6%. But surprisingly, lower inflation in the wealthier nations was accompanied by a decline in the growth rate, from 3% to only 1.3 %.

However, Dr. Chang’s assertion that stable prices are not always essential for a sound economy is not backed up by other data. Many factors are needed in achieving strong growth rates. Countries that control inflation always have great advantages, especially in encouraging business development and foreign investment. Persistent inflation creates resentment and pessimism among citizens who understand that it is nothing but state sponsored theft. In addition, Chang’s book, published last year, does not attempt to analyze the unprecedented debt crisis that is facing Europe and the U.S. For example, in America the massive public deficit is now about $15 Trillion. As the cost of paying for entitlements like Medicare and Social Security has accelerated, Congress and the White House have become immobilized, unable to find an appropriate solution. Perhaps in a subsequent book, the author will offer better ways to overcome the ongoing dilemma.

Despite a few flaws, Professor Chang’s insights provide instant relief from dozens of half- baked economic truisms which are presented as holy gospel to millions of college students and the general public. Such theories are based on what he calls the “Lazy assumptions and blinkered thinking,” of the financial media. Clearly, Professor Chang remains very enthusiastic about the benefits of private initiative and enterprise. Despite his unorthodox thinking, it would be hasty to dismiss 23 Things as another anti-business book with a biased agenda. The market, he assures us, is an extremely effective and efficient method for coordinating complex economic activities. He adds, “The profit motive is still the most powerful and effective fuel to power our economy and we should exploit it to the full.” He agrees that international trade and open markets have opened the way to the well being of the world’s population. Nonetheless, he is blunt in declaring that, “by glorifying the pursuit of material self-interest by individuals and corporations, we have created a world where material enrichment absolves individuals and corporations of other responsibilities to society.” I would add that we must recognize that each nation’s path to economic independence and prosperity is due to dozens of factors and is linked closely to its unique history and culture. And, in matters of public policies, hubris needs to be minimized in favor of respect for communities, support for families and the use of our resources to on behalf of the common good.

David J. Peterson has a degree in economics and is a high school teacher in Chicago, IL. He is the author of Revoking the Moral Order, 1999 and he has written articles for the American Conservative, the New Oxford Review, the Wanderer among other magazines.