CHAPTER-BY-CHAPTER CRITIQUE OF 23 THINGS THEY DON’T TELL YOU ABOUT CAPITALISM

For the next few weeks I am writing and publishing a critique of Ha-Joon Chang’s book with the above title. In the introduction he stakes his claim:

What the free-marketers have promised is at best half true.

Free markets make economies worse off than the correct alternative policies.

Capitalism remains the answer, but government intervention is necessary to make it work.

The book is based on the formula that free-marketers are guilty of peddling myths, and the author’s business is to debunk those myths (“things” the reader presumably does not know) – one per chapter. For that reason it is convenient to follow the same formula to criticise the points the author makes.

Thing 1: There is no such thing as a free market

The point that is made here, is that no market is completely free from state intervention.

To this one’s instinctive response is to say: so what?

There is no such thing as a completely free market. Even hard-core libertarians allow for some state role in the economy. For example, today it is generally accepted amongst free-market advocates that a country practising free enterprise policy should have a court system; a law of contract; property laws; a sound monetary system, and so on.

In practice there are of course more interventions than those.  In Hong Kong, probably the freest economy on earth, the state pays for education and housing for example. But the state interferes less than in any other country.

The point is that economic freedom is a relative concept. And the evidence is overwhelming that as a rule the freest economies fare the best in terms of any criterion yet designed for measuring life quality, including income, poverty relief, happiness, environmental protection, health, education and human rights.

The author’s tacit subtext is of course that state intervention is a good idea, and works better.

For example, the bailout of Freddie Mac and Fannie Mae in the US is cited as examples that prove that the government in America intervenes in the economy. Whether this is a good thing, is seemingly taken for granted, without a shred of evidence. Who knows what the effect would have been if these institutions had been left to their own devices? We cannot assume what that would have been.

The argument is similar to the one about the so-called developmental state, of which the Asian Tigers are typical examples. It is assumed that Singapore proves the case. But between 1961 and 1997 the per capita GDP in constant dollar terms of Singapore and Hong Kong were almost identical. For all its developmental strategizing, Singapore was slightly behind in the race, while the freest country, with the least intervention of any in the world, was slightly ahead. That raises the question: Was Singapore effective because the state intervened, or in spite of it? Then Hong Kong was handed over to China, and investment rates dropped. But until then, the laissez faire economy of Hong Kong was at least as good as the slightly more interventionist one of Singapore.

It must be emphasised at the outset that, despite the activism of the Singaporean government, in the period that of 1960-2015, both Singapore and Hong Kong were two of the freest economies on earth – in fact, throughout most of this period they were numbers one and two on indices measuring economic freedom. To a large extent, this explains why they greatly outclass the other Asian tigers, and indeed all other states in the Far East.

As a further example, the author makes the point that all countries today have anti-child labour rules. The implication is that it is the anti-child labour rules that caused child labour no longer to be used. This inference is drawn because of the coincidence of both the rules and no child labour in the same country at the same time. There is of course a good chance that the opposite is true, namely that the country can afford the luxury of such laws because it is wealthy enough to send all its children to school. That is, wealthy, successful countries do not need these rules, and in failing, poor countries they do not work.

To confirm this, Wikipedia for example reports[1] that

“In Cambodia, the state had ratified both the Minimum Age Convention (C138)[3] in 1999 and Worst Forms of Child Labour Convention (C182) in 2006, which are adopted by the International Labour Organization (ILO). For the former convention, Cambodia had specified the minimum age to work to be at age 14.[4]

Yet, significant levels of child labour appear to be found in Cambodia. In 1998, ILO estimated that 24.1% of children in Cambodia aged between 10 and 14 were economically active.[5] Many of these children work long hours and Cambodia Human Development Report 2000 reported that approximately 65,000 children between the ages of 5 to 13 worked 25 hours a week and did not attend school.

Despite the laws implemented by government, economic necessity dictates that child labour be used. The converse is just as true. In a successful wealthy economy, there is barely any demand for child labour.

Here is a list of the worst offenders in terms of child labour out of 197 countries rated by Maplecroft[2], together with their free-market rating and GDP per capita:

Country Child labour rank Market freedom rating (out of 159) Per capita income (out of 198)
Eritrea 1 190
Somalia 1 198
DRC 3 147 195
Myanmar 3 151 133
Sudan 3 144
Afghanistan 6 180
Pakistan 6 127 141
Zimbabwe 8 144 170
Yemen 9 123 171
Burundi 10 125 196
Nigeria 10 114 134
Average   133 168.3

 

The offending countries are desperately poor without exception. The best of them is Myanmar at number 133 out of the total of 198. The poorest country in the world, Somalia, is also on the list. As for economic freedom, the offending countries whose economic freedom has been rated, all fall squarely in the bottom 25% of free countries.

The statistics for the countries with the least child labour are not readily available, but education quality is a good indicator of child welfare. The 10 best countries in terms of education, according to the OECD Better Life Index (with their free-market rankings out of 159 in brackets) are Finland (17), Australia (9), Denmark (15), Germany (23), Slovenia (73), Japan (39), Sweden (27), Poland (51), Ireland (5) and Korea (32). Their per capita GDP rankings (out of 197) are Finland (28), Australia (20), Denmark (23), Germany (19), Slovenia (41), Japan (31), Sweden (18), Poland (47), Ireland (7) and Korea (33). All the countries are relatively free-market countries with high incomes.

No one can seriously contend that it was child labour laws that were responsible for the wealth and well-being of children in these countries. The inference is irresistible that they would have been well off in any event. Children in wealthy countries are sent to school, not put to work in factories. Children are enabled to become as productive as possible. The converse is true in unfree, poor economies, where parents (sadly) choose to use their children’s labour to survive. .

The same applies to rules like labour standards and minimum wages. Poor people (the poorest 10% of the population) in free-market countries[3] earn about ten times as much as their counterparts in unfree countries[4]. Minimum wages have absolutely nothing to do with this. Productivity that comes with economic development, education and training has everything to do with it. A good example is the clothing industry, where – despite the threat of forced closure – hundreds of clothes factories for years operated below the levels imposed by bargaining council minimum wages. In poor countries these standards on the whole do not help.

In the US a study was done by the US Chamber of Commerce comparing states with high, intermediate and low levels of labour regulation (called ‘Poor’, ‘Fair’ and ‘Good’ respectively). When it came to assigning overall rank, 15 states were ranked ‘Good’, 20 ‘Fair’ and 15 ‘Poor’. In the five-year period from 2009 to 2014, I calculated the average employment growth in each group, which was as follows:

Good  2.72 per cent

Fair     0.6 per cent

Poor    0.49 per cent

Quite clearly it pays to be ranked ‘Good’. Average employment growth in this group is about 4.5 times higher than in the ‘Fair’ group, and 5.5 times higher than in the ‘Poor’ group.

A more dramatic illustration of the value of low regulation is to compare the percentage of jobs created over the same five-year period for all the states in each group combined. The ‘Good’ group’s employment growth was 4.4 per cent, while that of the ‘Poor’ group was a measly 0.6 per cent. In other words, the ‘Good’ states proportionally created more than seven times as many jobs as the ‘Poor’ states did. In actual numbers, the ‘Good’ states created 2 124 734 jobs (starting from about 47 million), while the ‘Poor’ states created only 390 551 jobs (starting from a much larger 62 million).

And in case you were wondering, per capita income growth is also better in the ‘Good’ states:[i]

Good  1.82 per cent

Fair     1.64 per cent

Poor    1.68 per cent

Labour laws and minimum wages not only had no beneficial effect on incomes in the Poor states; it exacerbated them drastically.

It is enough to conclude that while it is true that most, in fact all economies contain mixtures of freedom and state intervention, that tells us nothing about the superiority of either.

[1] https://en.wikipedia.org/wiki/Child_labour_in_Cambodia

[2] https://edition.cnn.com/2013/10/15/world/child-labor-index-2014/index.html

[3] The first quartile on the Economic Freedom of the World Index

[4] The fourth quartile on the Economic Freedom of the World Index

[i] ‘United States real per capita personal income growth by state: Average annual percent change, 1959-2015’, United States Regional Economic Analysis Project, November 2016, available at https://united-states.reaproject.org/analysis/comparative-indicators/growth_by_decade/per_capita_personal_income/reports/#page_3 (last accessed 1 April 2017).

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