For the majority of economic specialists in the media; the liberal, private enterprise is the most popular guide in the world of capitalism. This idea is so popular that it might wrongly lead you to believe that it is the only absolute truth when it comes to financial well-being.
However, thinking that a liberal economy is the only path to follow is in fact not true. Not only this view contains many faulty aspects especially in terms of staying true to the sciences, but believing in the absolutism of these views also denies the existence of different ways it is possible to tackle the economy.
By reading this overview, you will know all the faulty aspects of liberalist economic views and the ways we can find different ways of approaching the economy. How you understand capitalism is never going to be the same.
In this summary you’ll find out:
● why it is impossible for a communist regime to turn over by governmental intervention
● what the reasons experts don’t believe that you should be giving your money to taxifare are
● why the Nobel Prize in an economy category does not equal mastery
Chapter 1 – As opposed to what finance experts believe, their area of study is not that complicated.
The economic crisis of 2008 probably sounds familiar to you. It would also be easy to remember how most workers in finance, except for bank employees, had lost the reliability they had before. Even though this adverse reaction these professionals faced was undeserved, it also made sense because of their egotistical behaviors prior to this. In short, their wings burned when they attempted to reach the sun.
A factor that contributed to their hubristic attitude was the notion that they were the only ones who knew all the ins and outs of economics, which they deemed others incapable of. This belief made the economists disregard any negative thoughts viewing their ways as not complex enough.
But, this was actually not true. For others economics was not too difficult to understand, in contrast, the majority of it is everyday logic.
For instance, when you eat out you know the rules to follow to ensure public health and cleanliness, although you are not an expert on it. This also applies to the economy, the main function of it can be understood by whoever wants to. In other words, it is not necessary for you to be in charge of a country to guess that gambling away its wealth is not a good move.
The dismissal of different approaches to the economy was caused by this hubris too.
In the study of economics, liberalist theory has been the most prevalent one for quite some time. According to this theory, each person is an instrument in the capitalist world, determined to figure out the best self-serving outcome when they participate in the economy. In the field of economics, this idea is seen very much like an indisputable fact, which is why economists tend to pay more attention to the theoretical part of this idea rather than observing how it works in the world, with people.
However, economics is not a natural science; in fact, it can be actually seen as part of humanities. Then, the possibility that another way of approach can be used in economics is not actually ridiculous.
In the rest of the overview, we will what the main dysfunctions of liberalist theory in economics are.
Chapter 2 – The belief that human beings are completely capable of making logical financial decisions is not true.
Robert Merton and Myron Scholes were given the Nobel Prize for economics in 1997. The principles they presented were for the most part based on the belief that people decided logically when it came down to their participation in the economy.
With the confidence this award gave them, Myron and Scholes put their ideas to use in the physical environment. Yet, what happened next was them losing all their money in their investments two times, while they were hoping to get rich.
This mistake shows us how you can never suppose that people will act logically for the most time.
Since in forming a logical conclusion, we have to consider all the ins and outs of something, it cannot be expected for this process to be quick. In order to make rational decisions, individuals need to take every possible detail into consideration. When we think about how it takes long considerations and thorough research to give our money to an investment in order to feel secure in it, this notion seems even clearer.
However, this cannot be always done today as there is always this rapid wave of facts coming to us. So, making a logical decision in this sea of information, though possible, is not easy.
But, it also cannot be suggested that we always behave illogically. We do try to be logical with our best efforts however we also have a limited capacity of intelligence that brings us to perfection. Then, what steps should we take to shape our financial choices in accordance with this?
It should be the state’s job to regulate the economy in a way that sets certain boundaries for us. By the government providing limited choices to us, our financial choices will have to be good ones, as they will be the only ones available to us. This task is also not foreign to the authorities that govern us. It is already their job to make regulations in various areas, like narcotics or traffic rules for instance. There is no reason why a similar attitude can be taken in economics as well.
Chapter 3 – Humans are not always self-centered; there are often good intentions behind their actions.
Has the…thought of getting off a taxi without giving money to the driver ever crossed your mind? In fact, if you did that, you would most likely get away with it. However, even you think about doing this, you never take it to action.
Even though giving the driver his fair amount of cost is what sits right with the conscious, liberal economy theorists would suggest that this doing was not rational on your part. Because they believe that our minds are wired in a way that makes us self-serving, and that is why we should do what we have to do to get away from giving our money.
Then, why do we seem to not act in accordance with this belief? These theorists explain it as a concealed pay-off that our actions bring about. Although these losses and gains seem hidden at first, they will have a lasting impact.
Therefore, why we don’t avoid the cost of our ride can be explained as not wanting to be painted as an immoral person, which would harm others’ judge of our character and also make it harder to find a ride next time.
But, this idea does not function with self-centered people.
Consider the cab case again. If we choose to get away, the owner of the taxi would need to come after us to be able to get his money. Then, if he was successful he would disclose us as a “stealer” to his colleagues. This would mean that he would also leave his car out and open while he was chasing us, putting his vehicle in great danger.
Had the driver only think for himself and not for his colleagues as well, he would not feel the need come after for such a little amount of money, at the probable expense of his car.
So, the truth is that we do not try to get away from giving the cost of our drive for other reasons like integrity, virtue, and trustfulness.
Chapter 4 – People are not being given the money that they should in this economic system.
Do you think that we should all be entitled to given what is our worth? Seems fair right? But, if you live in a wealthy state, you may want to reconsider this wish. If you got the money that is rightfully your worth, the amount that you are usually given may decrease highly. Why does this happen?
The reason is that governments are protective of the payments of blue collars from the capitalist world. So, these wages always stay consistent, regardless of the significance of the labor.
For instance, it does not matter what your profession is, there will always be others from different countries that are willing to get less pay for it. Governmental intervene makes you more secure in your profession. Regulations immigrants from 3rd world countries face is one of the reasons for this. This way, your income remains perhaps undeservedly costly.
This case also demonstrates how it is the environmental factors that dictate your wage, not your abilities. If you are from a well-developed country, chances are you will still get more money than the most dedicated employee in a poorly developed country, even though you might be the worst kind of employee in your country.
This unjust way of paying workers is observed within nations too.
The upper classes will be always given more money for their jobs than the lower classes do. Towards the end of the 20th century, people who work in administrative jobs have gained a hundred times more than a typical laborer. In recent years, this gap has increased even further.
Does this reflect the value these employees possess? Probably not. It can actually be suggested that their productivity is not that far apart. So, in the economic sense, this income gap is not fair.
Chapter 5 – A country being able to produce things is more important than its technological or business sectors.
What crosses your mind when you see an old, factory that is falling apart? If you are from a wealthy, prosperous state, it might lead you to think about the diminishing of the manufacturing sector, which may cause you to wrongly conclude that this sector is a done deal today.
This miscalculation is often a result of faulty evaluations of data regarding this sector.
Even though it is observed that fewer workers are present at the production end of things, this does not show the disappearance of this sector, but rather the effectiveness of it.
Still, for a big chunk of legislators, areas that are less developed should consider switching to other sectors. However, this action would affect the financial state of the country negatively in general.
Let’s consider the service sector. This sector has shown a significant amount of expansion for a long time now. But it is still hazardous to become bounded to services too much.
Another issue within this branch is its lack of growth in terms of efficiency. In the majority of the end product, the condition of it will be poor. For instance, a production of Macbeth that ends before half an hour would be considered an efficient creation, but its value would majorly drop. So, a country that is bound to this sector, will have to have a very sluggishly developing financial status.
We also have an information-driven way of managing economics. In this cyber age, this way of staying on top of financial status is very promising.
But this economy is also very overhyped. Not only is it not actually innovative, but cyberspace also has had way less effect on information transmission in comparison to prior improvements. When it was first introduced faxing technology made it possible to deliver information within minutes, which in the past had taken days.
However, within cyberspace, the reduction of time that takes to send a message in comparison to gadgets like the telegraph is not as apparent as this instance.
Chapter 6 – The thickened tension in the structure of economics was the cause of the economic crash.
In 2008, the economics of the entire world was severely damaged because of the economic crash. More than ten years of financial development were over and several huge companies were on the verge of collapse.
But, with many corporations that were hit the hardest by this crisis, like AIG or Lehman Brothers, they had been partly to blame for their own collapses.
Prior to this economical crash, economics had become way too complex. To be able to keep the market alive, “financial derivatives” were invented. Even though they were financially very beneficial at the beginning, they were also highly risky which was covered up because of their complicated ways.
To produce these derivatives, other safer options, like house credits, were made up. The more this practice was followed the riskier it was to participate in finances.
In order to create these derivatives, pools of securities such as mortgage loans were used to create more and more types of financial derivatives. As the number of these increased, so did the danger surrounding them.
Think of this as putting up a tall structure on a small area. You would have to build something that goes more and more upwards, which would also make it lose its stability. With each floor, the building would become less and less stable.
There was one more issue too. As the number of financial products was increasing, there was a decrease in their value. Consider the building example. Think about what would happen if the house’s substances were becoming poorer with each floor. It is clear that it would not stand that long- if it did at all.
So, even though every inch of the globe was affected by this crisis, it affected who participated in free-market more than all.
For instance, as countries that embraced this free-market system, Irelan and Latvia were severely affected, drawing back respectively, 7,5, and 16 percent.
For example, Ireland and Latvia, which had both opened up their markets in the years before the crash, suffered greatly; the Irish economy shrunk by 7.5 percent and the Latvian by 16 percent.
Chapter 7 – Even though finance experts are wary of government intervention, it is at work at the moment with promising and positive results.
Is it right for the state to intervene in the country’s economic situation?
Liberal theorists would firmly disagree. Because they believe that this practice is bound to lead to disorder. According to these experts, government intervention in the economy always equals what transpired in the Soviets.
However, in spite of these claims, state control can and does have a huge part in the financial betterment of a country.
For starters, governments are usually more familiar with the general financial situation of the country than privately owned corporations. This places the state in an advantageous position as it helps them see what the sectors with more potential for growth are.
South Korea is an example of this situation. Although LG, a huge company, was designed to invest in the clothing sector, the state did not agree to it. They sensed that LG would be more profitable in the tech industry, and they have driven them in that direction.
Moreover, this is valid for countries at every level of growth. For example, American affairs backed several projects in their early stages in the tech industry too.
Then, what are the reasons these practices backfired in the Soviets? The answer lies with not placing too many restrictions.
If the government tries to have a hand in all financial issues of the country, this control will eventually get loose. But, if it acts like a conductor, by making regulations and laying down aims and tasks to follow, it will become prosperous.
Think of this like being a CEO. What a CEO does is placing a plan of action and making sure it is being followed to protect the company’s stable growth. The aim of the government is to also follow this principle for the general financial policy of the country.
Chapter 8 – For financial development, public well-being is essential.
All over the so-called 1st world countries, experts are warning the states for the aids they put out for the lower classes. They suggest that payments like ones that are given to jobless people encourage them to stay as an unproductive member of society.
However, it is been proven that these payments actually help countries in the betterment of their financial state in spite of what the experts argue.
It can be clearly observed that in places where lower classes are supported with financial aid their economies stay active whereas in places where the support is not effective their financial state is not as active.
Then why is that? Because in countries where welfare is not a common practice, the workers often choose to stay at jobs that provide security for them. They tend to choose jobs in areas like the medical field, for instance, to secure themselves as there is no unemployment paycheck if things fell through. Although these professions are also essential in society, they bear no risk, therefore no betterment, for a country’s finances.
You have to push people to get jobs in fields that may result in failure but would ensure economic growth. The countries that take this path are often more economically successful than the ones that don’t.
Whereas these aids ensure financial development, the liberalist attitude of “trickle-down-effect” functions in complete contrast.
This idea can be described as how financial aid to the lower classes causes the existence of taxes to continue. Then, if taxing was a thing, wealthy people could have made investments that could greatly benefit the country. With this capital, the finances of a country would develop naturally and new employment opportunities would be founded.
However, when this idea was put to use, it did not work in the way it was provisioned. For instance, this theory caused a halt in UK and US economies during the 80s. While these economies stumbled, the capital did not come down to the country.
From that point to the beginning of the 21st century, the wealthiest people in the USA have gained twice the value of wealth that they held.
Chapter 9 – Attempting to mend poor nations of the world with misdiagnoses should come to an end.
The majority of influential people of the developed world are not aware of what regulations should take place regarding lower classes affects the rest of the world even if they may not think so.
In spite of this self-assuredness, their views around this issue come from wrong perceptions.
Thinking that the economic unrest in these countries is a result of system failures is a commonly made mistake. These systematic issues consist of external factors. But if this was the situation, wouldn’t remote areas like Swiss countrysides also be a part of this toil?
Believing that these poor nations do not have the same innovative nature as wealthy nations is also a common misjudgment. However, this is not correct as self-employment is more popular in these nations than in the West by about forty percent. So, this belief is simply proven to be wrong.
The West should look for the solution to this poverty rest of the globe faces no further than their own nations. It is true that these wealthy nations bringing their economic codes to the developing countries is one of the main factors in their economic defect.
For instance, when Sub-Saharan Africa was in an ample economic condition towards the 70s, it was a result of the country preserving its functioning sectors from external forces. Then, the moment developing states started to interfere with their economic functions, the financial state of the area was shaken up once again.
To make a stop to this practice, it is necessary for us to recall how the developed world became wealthy at the beginning. This was a result of the West preserving their markets from outside interference. In the US, this was possible with necessary precautions that were taken to ensure at least half of the capital was owned by the state.
Why should poor nations not use these same tactics?
Chapter 10 – Searching for the fault in capitalism is hopeless; it lies with how we manage this system.
This summary may cause you to get upset with the establishment of capitalism. However, you should understand that all these mistakes do not come from capitalism, but from liberalist ways of it.
Actually, capitalism has the potential to be a very sufficient way of organizing a country’s financial state.
To be more profitable or the want of possessing more capital are both great motivators. Entrepreneurship is born from a state of wanting to achieve great things, which leads to new ideas and reforms.
Not to mention that capitalism is an effective system to organize economics. With its management, society’s participation in the economy does not become disordered and misplaced.
Yet, even though capitalism has many benefits, its improper application may result in big risks.
In that sense, capitalism resembles an automobile. Without taking necessary precautions, an automobile can be a piece of dangerous machinery whose use can even lead to deadly accidents.
Sadly, today’s capitalism is managed in a highly unregulated way for the most part. However, there are other paths that can be taken too. We can step away from this current state of capitalism and create more reliable and efficient capitalism.
An approach to this can be making use of “bounded rationality”- in other words, restricting the choices we have to ensure making good decisions.
This would require us to give the state more control when it comes to the economy which would able them to intervene with unwise financial decisions of big finance actors. As a result, the nation as a whole would have to make more secure and wise economic moves.
23 Things They Don’t Tell You About Capitalism by Ha-Joon Chang Chapters Overview
Think twice when an expert suggests that liberalist ways of handling financial affairs is the only way to go. We have other alternatives that are more preferable. Everyone must pay attention to these options to create a more livable, and just world.
Know that who you choose to elect matters.
In politics, it is not unusual for a candidate to make false economic promises like lower taxes. Even though at first this may seem like something desirable, think about what the consequences of this action could be. If governmental assistance is important to you, you might rather change the candidate that you are in favor of.