This post is one of an occasional series inspired by Ha-Joon Chang’s iconoclastic and very readable book 23 Things They Don’t Tell You About Capitalism. The quote below is from ‘Thing 16’.
“People do not necessarily know what they are doing, because our ability to comprehend even matters that concern us directly is limited – or, in the jargon, we have ‘bounded rationality’. 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.”
Ha-Joon Chang (2012), 23 Things They Don’t Tell You About Capitalism, p.168
The argument that humans have ‘bounded rationality’ and experience uncertainty (as opposed to calculable risk), in which they simply do not know what is going to happen in the future, illustrates the importance of a range of institutions in modern society. These both constrain and enable human activity. The market is an institution, but one of many, even in what is often called a market economy. Continue reading →
Some more clear words of inspiration about the potential directions for capitalism from institutionalist economist Geoffrey Hodgson:
“Thatcherism was seen by many Marxists as the only rational response by the capitalists to the crises of the 1970s. Hence the viable choices were either Thatcherism or a workers’ revolution to overthrow capitalism.
This view was profoundly anti-institutionalist. An institutionalist would argue that there is no reason to presume that Thatcherism is (or was in Britain at that time) the only viable version of capitalism. There are other versions of capitalism, and these can begin to develop at any point in time. After all, there are manifest varieties of capitalism throughout the world. The consequence is that we do face very real choices, even within capitalism. We are not confined to these rather narrow political alternatives proposed by many Marxists: either socialist revolution or accept an extreme and exploitative version of capitalism.
In contrast, there is the possibility of a politics that engages with the present more directly. It talks about real, immediate alternatives and opens up areas for discussion. These areas would include, for example, about different kinds of market, different degrees to which the market may operate, different kinds of planning, the role and limits of the state, different planning agencies, a pluralism of structures and agencies operating at the economic level, different types of mixed economy and so on. This debate becomes possible once you escape from the false dichotomy of accepting either the most rapacious version of capitalism or socialist revolution. This dichotomy disables serious discussion and analysis about what is possible in the present.”
Geoffrey M. Hodgson (2006), Economics in the Shadows of Darwin and Marx
A quote from my current reading on the nature of capitalism which I found particularly inspiring. Hodgson argues that many thinkers have neglected the institutional diversity of capitalism in their push to promote ‘pure’ versions of either market individualism or socialism:
“As long as we are trapped in the Tweedledum-and-Tweedledee debate between planning and markets, we shall be unable to appreciate the intermediating networks and institutions that have played a vital role in the development of modern capitalism. Experience reveals the limitations of both wholesale socialism and atomized individualism. Along with individual property rights, all successful capitalisms have embraced corporate organization and other intermediate layers of organized power as well as varying measures of state intervention. These are important for both its emergence and its vitality.
But while intermediate organization is necessary, it is not sufficient. It guarantees neither dynamism, democracy, nor legality. The experience of fascism in the twentieth century shows that big business can connive with autocracy against democracy and liberty. As US President Franklin D. Roosevelt argued: “The liberty of a democracy is not safe if the people tolerate the growth of private power to a point where it becomes stronger than their democratic state itself.” Excessive corporate or military power can also undermine or constrain democracy. Countervailing power has to balance rather than overwhelm other legitimate authority. The maintenance of politicoeconomic systems with their counterbalanced powers requires constant vigilance.”
Geoffrey M. Hodgson (2015), Conceptualizing Capitalism
This post continues an occasional series based on chapters in Ha-Joon Chang’s book 23 Things They Don’t Tell You About Capitalism. Chapter 12 aims to counter the idea among free market economists that the government should not be in the business of supporting particular firms or sectors, and should leave things, as far as possible, to the market. In other words, if industrial policy is at least partly about ‘picking winners’, then ministers and bureaucrats should stay out of the way, as those in business will inevitably know more about how to achieve economic success.
Chang notes that there are plenty of examples from across the world in the history of capitalism of the successful picking of winners by the state, from South Korea to the US. In another part of the book, he points out that what is good for one particular firm may not be good for the economy as a whole. After all, economic growth and development under capitalism involves a process of creative destruction and structural change, as some firms succeed and others fail, expanding and creating new jobs in some cases, and stagnating or shrinking in others, going bankrupt or being taken over and restructured, with jobs being lost. There is constant change in a successful economy, and this is essential to rising productivity and overall living standards. If the state can play a role in facilitating this process, then this may involve intervention and not simply deregulation and leaving it all to the market. Continue reading →
I said I would post something on Paul Mason’s thought-provoking book, Postcapitalism – a guide to our future, which has just come out in paperback. It makes a good read, and contains a wealth of ideas from economics, political economy, and futurism, all mixed together in the author’s aim to inspire a progressive transition beyond capitalism, but not to socialism, which he admits has been a huge failure for the left. Instead, he calls his utopian vision ‘postcapitalism’.
Mason starts by describing the current political economic paradigm, neo-liberalism, as having reached its limits with the crisis of 2008 and the subsequent tepid, or in many cases absent, recovery. There has been sluggish output and productivity growth, alongside wage rises for those at the very top of the income distribution but barely any change for the middle and bottom. In fact, these trends were only temporarily overcome by the excessive expansion of credit prior to the crisis which allowed consumption to grow in countries such as the US and UK despite stagnant wages. Continue reading →
How much investment is optimal for sustained economic growth? Two recent blog posts present contrasting views on the answer to this question. The first, from Michael Burke on the Socialist Economic Bulletin, puts forward a simple theory: the greater the share of investment in GDP, the faster is economic growth, within certain limits. Furthermore, he argues that widespread economic stagnation in the growth of output and productivity among the richest countries today can be remedied by a large increase in public investment. In other words, the state can lead a recovery.
The second, by Michael Pettis on his blog China Financial Markets, discusses the role of what he calls ‘social capital’, or economic, social and political institutions in a broad sense. For Pettis, it is not enough for governments to enact policies which raise the investment share in output, if the institutional framework leads to it not being utilized effectively. If there is a high level of social capital, which might include levels of education, government competence, a lack of corruption, law and order, property rights etc, then policies which increase investment should have a better chance of increasing productivity and output. If these institutions are lacking, then more investment is not enough, and it will be used unproductively. Continue reading →
Power and its distribution matter in society, not least in economic processes and outcomes. Neo-classical theory, with its starting point of perfect competition in the theory of the firm, only really addresses power as departures from this point. Oligopoly and monopoly power are examples of this. In these two cases, firms have a greater degree of power to set market prices and sustain ‘excess’ profits than is desirable for the maximum social welfare.
In contrast to the theory of perfect competition and its ‘imperfection’ offshoots, Marx proposed that competition under capitalism would lead to larger and larger firms engaged in production. The prospect of increased profitability is a major incentive to firm expansion. Continue reading →