A thought-provoking quote from Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism (p.190-191), part of my occasional series of brief excerpts from his bestselling book:
“Despite the importance of the corporate sector, allowing firms the maximum degree of freedom may not even be good for the firms themselves, let alone the national economy. In fact, not all regulations are bad for business. Sometimes, it is in the long-run interest of the business sector to restrict the freedom of individual firms so that they do not destroy the common pool of resources that all of them need, such as natural resources or the labour force. Regulations can also help businesses by making them do things that may be costly to them individually in the short run but raise their collective productivity in the long run – such as the provision of worker training. In the end, what matters is not the quantity but the quality of business regulation.”
Michael Hudson’s latest book J is for Junk Economics is a treasure trove of, by current mainstream standards, radical economic ideas. Here he is on Big Government, that much-maligned feature of modern capitalist economies (p.41-2):
“Europe’s 1848 revolutions by the bourgeoisie against Europe’s royalty, landed aristocracies and their allied vested interests sought to transfer power away from government bodies controlled by these classes (eg., Britain’s House of Lords). Subsequent democratic reform movements favored progressive taxation, consumer protection and general economic regulation. These original liberals fought to tax special interests, not to free them from taxation. The thrust of parliamentary reform since the 19th century accordingly has been to make governments strong enough to tax rent extractors such as landlords, high finance and monopolists.
These rentiers have fought back by wrapping themselves in the rhetoric of individualism. Accusing politicians of corruption and insider dealing, populist demagogues assert that government is by nature incompetent as compared to private management – which turns out to be giant Wall Street corporations and trusts. The effect (indeed, the lobbying aim) of downsizing democratic government is to turn the economy over to the financial sector and its allied rentiers to administer in their own interest. The wealthy are all in favor of Big Government when it is oligarchic.
Trickle-down economists accuse social spending programs of leading to budget deficits that are inherently inflationary, but applaud tax cuts and bank bailouts that benefit primarily the FIRE (finance, insurance and real estate) sector. Their lobbyists craft a demagogic rhetoric to attack progressive taxation, regulation and social spending programs by insisting that public management is inherently inefficient as compared to private ownership of basic infrastructure, banking and health care. Claiming that public services are not a proper function of government, they advocate privatization of state-run enterprises, roads and the post office.
Frederick Hayek’s Road to Serfdom (1944) argued that public planning to subsidize basic needs or regulate “the market” (rent extractors, banksters and fraudsters) to protect consumers and employees leads to socialist or fascist autocracy. His libertarian followers insist that government regulation violates their personal rights to charge whatever the market will bear. Their oligarchic alternative to big government is to roll back democratic reforms by attacking social spending programs, replacing progressive taxes with a low flat tax and sales taxes that fall on labor/consumers; abolishing minimum wage protection, Social Security and other public services; and privatizing public infrastructure to turn it into feudal-style rent-extraction opportunities. The aim is to un-tax the FIRE sector (mainly the One Percent) and eliminate the consumer protection and labor reforms put in place in the early 20th century Progressive Era. The meaning of the word “reform” has been inverted, using libertarian-style language coined in the late 19th century against Big Government under the control of aristocrats and other rentiers.
The real question is thus whether governments will be democratic or oligarchic. Will they subsidize the economy and undertake public infrastructure investment, or will they tax the population at large to subsidize the FIRE sector and other special interests?”
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 →
A key lesson from my reading of the volume ‘Systems of Production‘ is that economic policy-making must always look beyond the simplicities of ‘deregulation‘ as an ideology and concentrate instead on more effective regulation. In some instances this might mean a re-regulation of business and labour markets for example, in other words the removal of some laws and the creation of new ones, which are more appropriate to a changed environment, and which can stimulate productive efficiency and contribute to social progress.
‘Systems of production’ contains a number of chapters written with Frank Wilkinson‘s original 1983 article from the Cambridge Journal of Economics entitled ‘Productive Systems’ very much in mind. His chapter opens the main body of the book and a working paper with the same content can be downloaded here.
A point that several of the chapters in the book make is that cooperation between capital and labour in the productive process is necessary for efficiency and that adverserial industrial relations are likely to impede economic progress. What is more controversial is the form this cooperation should take. The authors of a number of the chapters clearly support trade unions and the role they can play in safeguarding social rights, ‘decent’ wages, and productive efficiency. Where wages sometimes need to be cut in a company or across an industry during a recession for example, trade union agreements can ensure a more equitable outcome in securing a ‘voice’ for labour. They can press for social rights in the workplace and help firms and economies adjust to structural change in which workers need to be re-allocated from declining to growing industries. Government has a role to play here too, in providing training and re-training, assisting with worker mobility and setting the macro- and microeconomic framework for the economy in which productivity grows and improves the standard of living of as wide a majority as possible.
In the chapter on German industrial relations, it is argued that what is often needed more than ‘deregulation’ is ‘re-regulation’; new laws should replace older ones to enhance the flexibility of the workforce and stimulate innovation. The productive system should therefore evolve from where it is rather than fit into a textbook prescription. In some ways this is a conservative view, in which history and past successes are taken very much into account in designing new policies and systems of regulation. Occasionally radical change may be needed however, but history and insitutions still need to be studied carefully in the process.
One of the important lessons from Wilkinson’s original article (see above) and the updated piece from 2003 is that history and institutions matter and should be analysed fully in formulating theories in economics and using those theories to make effective policy.