This is my article in MINT on Tuesday, after I had finished reading ’23 things they don’t tell you about capitalism’ (Ha-Joon Chang) and ‘Managed by Markets’ (Gerald F. Davis). My friend Srinivas Thiruvadanthai, Chief Economist at Levy Forecasting Institute wrote a series of mails to me after reading my article. With his permission, I have compiled them and am posting them as a single guest post next.
Mon, Jun 02 2014. 05 17 PM IST
Let Modi be Modi, not Thatcher or Reagan
Policy-making ought to be a context-specific, open-minded empirical exercise not driven by ideology of any kind
This column is not so much a review of professor Ha-Joon Chang’s book, 23 Things They Don’t Tell You About Capitalism as it draws heavily from it. In his book published in 2010, Ha-Joon argues that capitalism is a bad way to organize an economic system but for all others. He is sceptical of the ability of free-market capitalism to deliver economic prosperity as its proponents claim, as the evidence for it is thin. As of November 2013 when he had his Lunch with FT, his book had sold about 650,000 copies and had been translated into thirty-two languages.
His book makes for very interesting reading for the nuggets of information it contains. Andrew Jackson, the conservative former president of the US cancelled the license of the Second Bank of the US. One of the excuses was that foreigners owned too much of it (30%). At his inauguration, George Washington insisted on wearing only “Made in America” clothes. The US was one of the most protectionist countries in the world during its phase of ascendancy (from the 1830s to the 1940s) as was Britain during its rise (1720s to 1850s). Between the 1930s and 1980s, Finland used to classify all enterprises with more than 20% foreign ownership officially as “dangerous enterprises”.
His characterization of the welfare state for workers as one that provides a second chance for them just as the bankruptcy law offers a second chance to capitalists appears sound. He notes that the Scandinavian countries have higher social mobility than the UK, which in turn has higher mobility than the US. It is no coincidence that the stronger the welfare state, the higher the mobility. In his view, what distinguishes rich from poor countries is their ability to channel individual entrepreneurial energy into higher productivity. Towards that end, he calls for a range of institutions that encourage investment and risk-taking—a trade regime that protects and nurtures firms in “infant industries”, a financial system that provides “patient capital” necessary for long-term productivity-enhancing investments, institutions that provide a second chance for both capitalists (a good bankruptcy law) and for the workers (a good welfare state), public subsidies and regulation regarding R&D and training and so on.
He finds support from Professor Gerald Davis of the University of Michigan. In his book, Managed by the Markets, Davis argued that markets played little part in pre-modern societies and were regarded with great suspicion throughout the Middle Ages in Europe due to their disruptive effects.
What these books show is that the philosophy of free markets was more a self-serving argument for capitalists to enrich themselves at the expense of workers and for rich nations to prise open markets in the developing world and less a coherent philosophy of economic growth and prosperity. Just as labour unions tested the limits of their powers in the 1970s and failed, the socially harmful effects of unbridled capitalism came to the fore with its extension to financial liberalization since the 1980s, culminating in the global financial crisis of 2008. As the world had not learnt the lessons of the crisis, it may suffer something worse than the last crisis yet.
The problem with these arguments, if copied by developing country policymakers, is that they may not do everything else that the rich countries did on their way to richness—on education, on land reforms, on science and technology, etc., on incentives for infrastructure building, etc. As part of such a comprehensive policy package that had many other elements, infant industry protection, trade protectionism and anti-foreign investment might have worked. But, politicians in poor countries engage in populist cherry-picking leading to sub-optimal outcomes.
As D. Subbarao put it in a speech in 2010, economics cannot stand the scrutiny of the falsifiable hypothesis test since empirical results in economics are a function of the context. So are economic policies. That is why attempts to characterize India’s prime minister as a Ronald Reagan or a Margaret Thatcher or a Lee Kuan Yew are misguided. They were products of the situations that their countries faced. They made use of them.
Reagan and Thatcher’s free market policies failed spectacularly as the financial industry proved singularly incapable of self-regulation. Western countries have bailed out banks, automobile companies and extended subsidies favouring particular sectors.
Ultimately, economic policies—whether they are of the interventionist kind or not—must pass the tests of feasibility, viability and sustainability. They must also be demonstrably superior to other alternatives considered and rejected. Finally, they must be discarded if they did not deliver the outcomes sought within reasonable time-frame. Policy-making ought to be a context-specific, open-minded empirical exercise not driven by ideology of any kind. If the Indian government’s decisions and actions were based on this recognition, then the prime minister would become the benchmark against which future heads of governments will be judged.
V. Anantha Nageswaran is co-founder of Aavishkaar Venture Fund and Takshashila Institution.