23 Things they don't tell you about Capitalism

“So, when free-market economists say that a certain regulation should not be introduced because it would restrict the ‘freedom’ of a certain market, they are merely expressing a political opinion that they reject the rights that are to be defended by the proposed law.”

While some analysts attempt to separate economics and politics into different spheres, Chang argues that they are inextricably linked. Judgments about political values necessarily inform analysis of economic policies. In his argument, Chang takes a favorite rhetorical and semantic stance of free-market capitalists, who equate free markets with freedom in general, and turns it against them, suggesting that such policies are founded on rejecting, not protecting, rights.

“Just think about the way in which General Motors has squandered its absolute dominance of the world car industry and finally gone bankrupt while being on the forefront of shareholder value maximization by constantly downsizing and refraining from investing.”

This quote demonstrates Chang’s pattern and aptitude for using historical anecdotes to support his ideas. Of course, history’s events are subject to multiple interpretations, but Chang’s commentary is at least sufficient to offer one viable interpretation within the context of his informal (nonacademic) tone. A large company with a storied history and a wide consumer base, General Motors is at once a symbol of US industry and a warning about potential decline.

“Only when we part with this myth and grasp the political nature of the market and the collective nature of individual productivity will we be able to build a more just society in which historical legacies and collective actions, and not just individual talents and efforts, are properly taken into account in deciding how to reward people.”

In this passage, Chang works to dismantle the myth of the all-important individual entrepreneur as the lifeblood of the economy. Instead, as an institutional economist, Chang hints at the larger structures that help or hinder individual success in various environments. In this light, his comments about choosing how to reward people imply that the world is not a pure meritocracy and also suggest that people have the power to construct a more just society.

“I have made this point deliberately provocatively by pitting the humble washing machine against the internet, but my examples should have shown you that the ways in which technological forces have shaped economic and social developments under capitalism are much more complex than is usually believed.”

Chang explicitly acknowledges one of the hallmarks of his rhetorical style: provocation. Instead of merely setting forth safe, qualified opinions, Chang is intent on surprising readers through stark contrasts and startling paradoxes. By doing so, Chang hopes to move readers to examine deeply held assumptions and amend them as necessary.

“Morality is not an optical illusion.”

The author takes issue with the notion that moral behavior is simply an outgrowth of rational self-interest, or the notion that people are kind or honest only out of self-interest—that is, they expect that being kind or honest will ultimately benefit them. Instead, Chang suggests that people are capable of acting in socially responsible ways for noble reasons, something that traditional economic models fail to consider. Chang even implies that, by idealizing self-interested behavior, such models actively encourage self-centeredness.

“Inflation has become the bogeyman that has been used to justify policies that have mainly benefited the holders of financial assets, at the cost of long-term stability, economic growth, and human happiness.”

Chang compares inflation to a bogeyman, implying that it is an imaginary, rather than real, threat to economic welfare. Additionally, he characterizes anti-inflationary policies as having real and widespread negative consequences. Chang’s tendency to evaluate policies by their perceived effects and to support policies that produce the desired effects, regardless of whether they involve government policy or not, marks him as a pragmatist.

“In promoting policies that they themselves did not use when they were developing countries themselves, they are saying to the developing countries, ‘Do as I say, not as I did.’”

The author paints the rich countries of the world as hypocrites for using their clout to induce developing countries to adopt free-market policies, many of which the rich countries ignored during their high-growth periods in the past. By presenting rich countries’ position as advice that a someone might jokingly give a child, Chang makes the situation relatable, as readers may recall times when a parent or other authority figure made a similarly hypocritical statement.

“While a blind rejection of foreign capital is wrong, it would be very naïve to design economic policies on the myth that capital does not have national roots anymore.”

Chang illustrates that some of what motivates free-market policymaking is pure wishful thinking. While globalization has led to greater economic interconnections among countries than ever before, such connections are not all created equal. This principle thus fits into Chang’s larger pattern of breaking down some of the false dichotomies of free-market capitalism and replacing them with more nuanced, middle-of-the-road approaches.

“The myth that we now live in a post-industrial age has made many governments ignore the negative consequences of de-industrialization.”

The author questions the notion that advanced economies can and should move away from real economic activities, such as manufacturing, into knowledge-based sectors. In this context, belief in a postindustrial age is a form of self-deception, leading governments to make poor policy decisions. By highlighting the potential for government to respond to or ignore deindustrialization, Chang implies that government can have a meaningful role in counteracting this and other harmful trends.

“While there is no question that the US has one of the highest living standards in the world, its alleged superiority looks much weaker once we have a broader conception of living standards than what the average income of a country will buy.”

Free-market economists have traditionally pointed to the US as the most obvious and prominent example of the success of free-market economics. However, Chang questions the extent to which the US actually implemented free-market policies during its growth into a world economic superpower, as well as the assertion that the standard of living in the US is superior to that in other countries. By drawing attention to other countries that have performed as well as—or better than—the US in various aspects despite allowing significant government intervention, Chang seeks to upset the traditional narrative about which kinds of policies are most positively impactful for everyday citizens.

“It is no coincidence that structural factors came to be cited as the main explanations of poor African economic performance only after growth evaporated in the early 1980s.”

Chang implies that the structural considerations commonly cited as barriers to growth in Africa are, in fact, afterthoughts conjured up by free-market economists seeking to defend the purity of their theories after they apparently failed to produce the desired economic growth. Here and elsewhere, Chang characterizes the proponents of such policies as clinging to their cherished principles despite mounting evidence to the contrary.

“However, in the same way that the success stories do not allow us to support governments picking winners under all circumstances, the failures, however many there are, do not invalidate all government attempts to pick winners.”

The author again vouches for a moderate, nuanced perspective in analyzing the results of government efforts to prop up certain companies or industries. While some critics have accused Chang of selection bias in presenting evidence to support his claims, this passage reveals that he sees himself in a different light. In his view, his work serves as a much-needed corrective to the selection bias of those who insist that every governmental intervention is doomed to failure, despite plenty of examples to the contrary.

“The problem is that concentrating income in the hands of the supposed investor, be it the capitalist class or Stalin’s central planning authority, does not lead to higher growth if the investor fails to invest more.”

Chang draws an unusual parallel between certain capitalist and communist economists, showing that both were concerned with the potential for profits to be reinvested into the economy as a pathway to further growth. Instead of merely offering tax breaks to the rich in the hopes that they might invest some of it, Chang suggests that more robust mechanisms are necessary to guarantee that such investment takes place.

“Markets weed out inefficient practices, but only when no one has sufficient power to manipulate them.”

The author points to excessive executive pay in the US and Great Britain as a market outcome that is clearly wasteful yet has remained over decades due to manipulation by powerful figures. The implication is that markets do not self-correct as fully or quickly as free-market economists would suggest. Meanwhile, astute government interventions could speed up the process. Chang’s use of weeding as a metaphor highlights the wastefulness of high executive pay as well as the difficulty of dislodging such practices because they spread like weeds and put down roots.

“In the course of capitalist development, entrepreneurship has become an increasingly collective endeavor.”

Chang argues that supporting individuals who have entrepreneurial inclinations will never be enough to lift nations out of poverty. Instead, examining the social and institutional contexts of economic endeavors is critical to apprehending the barriers to growth. Additionally, with the rise of large, multinational corporations, cooperation has only become more important.

“When the Nobel Prize-winners in financial economics, top bankers, high-flying fund managers, prestigious colleges and the smartest celebrities have shown that they do not understand what they are doing, how can we accept economic theories that work only because they assume that people are fully rational?”

Using a rhetorical question, the author expresses his frustration about the assumptions underlying free-market policies. Chang’s question highlights the ridiculousness of the assumption that the people who make up any economic system are fully rational beings. If even those with the best training and education make significant and repeated mistakes, the average individual is even more likely to do so. Without the central assumption of rationality, Chang implies, many of free-market capitalists’ claims about efficiency and optimal outcomes begin to fall apart.

“What really distinguishes the rich countries from the poorer ones is much less how well educated their individual citizens are than how well their citizens are organized into collective entities with high productivity.”

Chang questions the seemingly self-evident observation that increased access to education leads to increased productivity. This can seem counterintuitive, since in rich countries education often signals fitness for employment and is associated with higher income. However, as Change relates, such signals often have more to do with demonstrating character than with productivity per se. Instead, the institutions that support a country’s organizational capacity impact productivity most directly.

“The first explanation for the puzzle is that, strange as it may seem to most people without business experience, businesspeople will get 299 permits […] if there is enough money to be made at the end of the process.”

The author posits that free-market economists overestimate the potential for regulations to disincentivize economic activity. In fact, Chang implies that given the strength of the profit motive, economies might as well take advantage of it by attaching meaningful regulations. His citation of 299 permits sounds extreme but derives from an actual estimate of the number of permits required to open a factory in Korea at one time. While such a high number of regulations may or may not be desirable, Chang implies that regulations should be evaluated on their own merits, not rejected out of hand.

“Without markets we will end up with the inefficiencies of the Soviet system. However, thinking that we can live by the market alone is like believing that we can live by eating only salt, because salt is vital for our survival.”

Chang exposes a false dichotomy between planned economies and free, open markets. Just as most would agree that implementing a fully planned economy would be a mistake, Chang suggests that the same is true of a pure market economy. His comparison with salt aptly demonstrates the difference between what is essential and what is sufficient. Market economics may be essential, but they are not sufficient to obtain an optimal outcome.

“Yes, in theory, a shoeshine boy from a poor provincial town in Peru can go to Stanford and do a PhD, as the former Peruvian President Alejandro Toledo has done, but for one Toledo we have millions of Peruvian children who did not even make it to high school.”

The author suggests that, exceptional outliers aside, equality of opportunity is meaningless without some equalization of outcome, at least to guarantee a baseline quality of life. In addition, he emphasizes the need to look at the big picture, taking into account real-world data about outcomes, instead of relying solely on abstract theories to guide thinking.

“We can drive our cars fast only because we have brakes. If cars had no brakes, even the most skillful drivers would not dare to drive at more than 20-30 miles per hour for fear of fatal accidents. In the same way, people can accept the risk of unemployment and the need for occasional re-tooling of their skills more willingly when they know that those experiences are not going to destroy their lives.”

Chang compares the social safety net of welfare to the brakes in a car; one allows us to travel faster safely, while the other allows an economy to become more nimble. Those who accept the comparison are all but forced to accept his conclusion, just as driving a car without brakes would be highly dangerous. In nuanced fashion, this simile captures a paradoxical aspect of social welfare as the author represents it: Although brakes slow a car, having brakes increases a driver’s willingness and ability to travel at high speeds and ultimately leads to a faster arrival at the destination; likewise, while a period of unemployment and transition may slow the economy in the short run, reallocating workers into more productive industries strengthens the economy in the long run.

“The result was an increasingly tall structure of financial assets teetering on the same foundation of real assets. […] If you make an existing building taller without widening the base, you increase the chance of it toppling over.”

The author compares the proliferation of financial assets to the construction of an increasingly tall and increasingly unstable building. A higher center of gravity leads to a greater risk of the building’s falling over. As this metaphor suggests, the 2008 financial crisis was not an isolated, random event. Rather, it was the inevitable result of instability stemming from misguided decisions and policies in the years and decades leading up to it.

“Economics, as it has been practiced in the last three decades, has been positively harmful for most people.”

In the book’s final essay, Chang explicitly states what he implies throughout much of the text: In his view, free-market policies are not just misguided; they are actively harmful. Using the backdrop of the 2008 financial crisis to add urgency to his claims, Chang calls for a new type of economic leadership, one rooted in common sense rather than complex economic theories.