Why Free Market Capitalism is not as Good as they say

 

Eating Economics Better - Ha Joon Chang

 

Bad Samaritans, The Myth of Free Trade and the Secret History of Capitalism by Ha Joon Chang, AudioBook

 

The Political Economy of South Korea

 

Free Market Economics for Dummies - Cambridge University Lecture

 

Economics for Non Economists 1: What is a free market economy?

by Girish Menon

Suma, you have asked a really fundamental question and I will try to answer it in two parts viz;

-         What is a market economy?

And

-         What does free mean in the context of free market economy?

So let’s start with the first aspect – What is a market economy?

The activity of buying or selling a good is called a market transaction or a market activity. Thus a market is a set of arrangements where goods are exchanged for money.

Today most countries in the world adopt the market model for the production and consumption of goods and services. They believe in the Adam Smith quote, ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’

Google Dictionary defines self interest (own interest) as ‘one's personal interest or advantage, especially when pursued without regard for others.’ Some economics texts assume that the self interest of a goods producer is to earn profits whereas the self interest of a consumer is to maximise her happiness by paying for goods she requires.

Adam Smith’s theory expects citizens in an economy to be both producers and consumers of goods. As a producer you are expected to generate a profit from your toils. You, as a consumer, are expected to use the profits to buy other goods to live your life.

Based on the above logic, market theory predicts that if all the citizens of an economy are left to pursue their self interest then it will result in the automatic production of all goods and services that citizens require in order to be happy.

Though Adam Smith preferred the word ‘invisible hand’, I have used the term automatic. Google dictionary defines automatic as ‘working by itself with little or no direct human control’. In other words producers make and sell goods which they think will be demanded and hope to profit from it. There is no authority other than their anticipation of consumer needs that guide their decision to produce and sell goods. Similarly, consumers pay for a good because they think it will make them happier and there is nobody telling them what to buy and consume.

Thus, a market economy would be an economy where the production and consumption of all/most goods and services is determined by the self interest of its producers and consumers. This system is also known as capitalism.

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So, what is a free market economy?

These days it’s not only the UK, USA etc. but many other countries who call themselves free market economies. But are they truly free market economies where the production and consumption of all goods are determined automatically with its citizens unabashedly following their self interest?

I notice that you seem to be shaking your head. Especially in this Covid climate you will have noticed the role that the UK government has played in your life and the way it has affected your pursuit of self interest and happiness. So what I will now do is list the conditions necessary for Adam Smith’s theory of the invisible hand to work:

1. There are many buyers for a good in the market and no buyer is large enough to get a discount on the price.
2. There are many small sellers of a good in the market and no seller is large enough to set its own price.
3. The goods produced and consumed are identical or homogeneous. In other words a consumer cannot recognise the producer of the good.
4. There must be freedom of entry to the market – or no barriers that prevent a potential producer from entering the market.
5. There must be freedom of exit from a market – if a producer wishes to quit a market then s/he should be able to do so freely and without any sunk costs.
6. There must be perfect knowledge. Producers must have full knowledge of the technologies used by its rivals and consumer preferences. Consumers must be aware of the short and long term benefits and costs from consuming a good.
7. The factors of production must be mobile. It means that the land, workers, machines used for producing a good should be easily redeployed to producing any other good when demand changes,
8. There must be no transport costs.
9. There must be independence in decision making. No external forces affect the decision making ability of producers and sellers.
10. No externalities. The act of production and consumption based on self interest should not result in benefits or costs to third parties.

I am sure that after you have read the above conditions you will agree that neither the UK economy nor for that matter the Indian economy is anywhere close to being a free market economy. I don't think there is a single economy in the whole world that satisfies most of the conditions of a free market.

I will now let Ha Joon Chang have the final word on free markets:

“The free market (economy) does not exist. Every market has some rules and boundaries (by governments) that restrict freedom of choice. A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How ‘free’ a market is cannot be objectively defined. It is a political definition. The usual claim by free market economists that they are trying to defend the market from politically motivated interference by the government is false. Government is always involved and those free-marketeers are as politically motivated as anyone. Overcoming the myth that there is such a thing as an objectively defined ‘free market’ is the first step towards understanding capitalism.’

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• When I presented this article to Suma she said, 'Girish, you have not understood my question. I meant where can I find the free goods that should by definition be there in a free market?' 

Ha Joon Chang speaks: Economics for the people

Lecture 1.1 - The Nature of Economics

Lecture 2 - What is wrong with Globalisation?

Lecture 1.2 - Why all economics is political

Lecture 7 - Inequality - What is it and why does it matter

Lecture 9 - The role of the state

Lecture 5 - Why are some countries rich and others poor?

Lecture 8 - Understanding Production

Lecture 10 - Finance and financial crises

Lecture 3 - Conceptualising the individual

Lecture 12 - Industrial policy

Lecture 4 - Can economics save the planet?

Lecture 6 - Will robots take your job?

Lecture 11 - Can economics save the planet?

Economic development

Are Indian businessmen being unfairly targeted?

By Girish Menon

Following revelations in the suicide note of V G Siddhartha - the founder of Cafe Coffee Day, the corporate world has started a whispering campaign that Indian businessmen are being unfairly targeted by government bureaucracies. This piece will try to examine the elephant in the room.

Indian businessmen are not one cohesive group. There are many sub groups varying in size and population; from the one man tea vendor to Ambani who aspires to be the biggest tycoon in the world. Not all business-persons receive the same treatment from the governments they have to encounter in their daily endeavour.

As far as the Ambanis are concerned, it was rumoured that his office would receive a copy of any government initiative even before it was announced in parliament. Some even suggest that policies are often drafted in their offices. Clearly, such businessmen are like the Goldman Sachs of the USA i.e. too big to fail. Rivals of Ambani envy the unfair distribution of advantages to this group. However, they don’t want it to be stopped but wish they could replace him instead. This group is large and growing.

If the free market mantra is to be applied then governments should not be indulging in such behaviour. This logic states that governments should recognise property rights, make necessary rules and let citizens pursue their self interest. They should not favour any businessperson.

Economist Ha Joon Chang attributes the growth of Toyota, Samsung and many other global MNCs due to the nexus between governments and businesses. He suggests that developing countries follow this strategy else their domestic firms will lose out to already existing western MNCs. Others term this government corporate nexus as crony capitalism.

The Indian corporate world has enjoyed the benefits of crony capitalism since 1947. Under the socialist policies till 1990s the Tatas, Birlas and Bajajs were among the few recipients of licences to do business. In the 40 years of their protected status they did not produce any world beaters. They even formed ‘The Bombay Club’ to lobby against the opening up of the Indian economy.

Even after the Indian economy opened up corporates lobbied the government to make arbitrary rules that gave them an advantage over their rivals. These corporates received loans from government banks and even more loans to avoid loan defaults. It is almost thirty years since the opening up of the economy and yet there are no world class products that have emerged from these corporates. Often, such corporates have only aspired to the takeover of monopoly public sector firms so that social profit can be converted to private profit.

However, the above group do not represent Indian business-persons. The largest group of Indian business-persons run small and medium enterprises. They definitely have a rightful claim to harassment by the government. They are victimised by the government’s bureaucracy in so many ways that I am surprised they still continue to do business. S Gurumurthy, the RSS ideologue on the board of the Reserve Bank of India, is right when he advocates that the Indian government should ease the conditions of doing business for this large group. Demonetisation was a recent  tsunami that further overwhelmed this group of drowning businesspersons. Often, their only plea is that their outfits should be outside the scope of government bureaucrats. And there is some merit in their argument.

It is an irony that the pleas of persecution by large Indian corporates are being aired when the real victims of government harassment, i.e. the small and medium enterprises, die a silent death. It used to be said of the Christian church,’The church complains of persecution whenever it is not allowed to persecute’. The cries of India’s large business houses seem to echo the Christian church.

India, the Cricket World Cup and Revenge for Pulwama, Pathankot, Mumbai…

by Girish Menon

Some elements in India egged on by TV anchors and with persuasion from Whatsapp University have urged the Indian government to militarily avenge the latest bombing in Pulwama, Kashmir on Valentines Day. This car bomb resulted in the death of 42 paramilitary personnel. However, some of these people appear opposed to India boycotting a cricket match with Pakistan scheduled for June 16 in Manchester, England. In this article I will examine the weaknesses of such a position.  

Sports and Politics don’t mix: In his book ‘23 Things they don’t tell you about Capitalism’ writer Ha Joon Chang talks about a humbug on free markets:

A market looks free only because we so unconditionally accept its underlying restrictions that we fail to see them. How ‘free’ a market is cannot be objectively defined. It is a political definition.

There is a similar kind of deception involved in India being ready to fight a war with Pakistan, withdraw its MFN status on trade but be willing to play a world cup cricket match.

Sports and politics have always been thick as thieves. The apartheid boycott of South Africa, the suspension of Zimbabwe, the super trio at the ICC, the bilateral boycott of Pakistan by India have all been political decisions. India’s refusal to play Pakistan will be another such political decision.

Arm Chair Nationalists: Having been sold dreams about the power of its rising GDP there are many Indians who wish to right historical wrongs by sheer military power. They have urged the Indian government to retaliate against Pakistan’s undeclared war with overt military action.

Such nationalists however do not realise that any military retaliation will help Pakistan’s armed forces to justify their hold on the state and continue with their unaccounted access to resources.

Secondly, I wonder if they have considered the fallout of any overt war.

Break-up Pakistan: Bakistan, as she is known after separation from Bangladesh in 1971, is a motley crowd of dominant Punjabis who are hated by the Mohajirs, Sindhis, Balochis and Pashtuns. These oppressed groups need support in their fight for self determination.

India with Iran should help these oppressed groups rise up against the military apparatus and free them from the yoke of the Punjabi.

As for the cricket match on June 16, India should not only boycott it but also boycott the final should she reach there along with Pakistan. Is there a better way to isolate the Pakistan military?

To Save Western Capitalism - Look East

The East could have something to offer the mighty West, where we are seeing glimpses into capitalism's true nature. Antara Haldar (The Independent) on the rise and fall of civilisation as we know it

 

Photos Getty


Once upon a time, not so long ago, there was a place where peace and prosperity reigned. Let’s call this place the West. These lands had once been ravaged by bloody wars but its rulers had, since, solved the puzzle of perpetual progress and discovered a kind of political and economic elixir of life. Big Problems were relegated to either Somewhere Else (the East) or Another Time (History). The Westerners dutifully sent emissaries far and wide to spread the word that the secret of eternal bliss had been found –and were, themselves, to live happily ever after.

So ran, until very recently, the story of how the West was won.

The formula that had been discovered was simple: the recipe for a bright, shiny new brand of global capitalism based on liberal democracy and something called neoclassical economics. But it was different from previous eras – cleansed of Dickensian grime. The period after the two world wars was in many a Golden Age: the moment of Bretton Woods (that established the international monetary and financial order) and the Beveridge report (the blueprint for the welfare state), feminism and free love.

It was post-colonial, post-racial, post-gendered. It felt like you could have it all, material abundance and the moral revolutions; a world infinitely vulnerable to invention – but all without picking sides, all based on institutional equality of access. That’s how clever the scheme was – truly a brave new world. Fascism and class, slavery and genocide – no one doubted that, in the main, it had been left behind (or at least that we could all agree on its evils); that the wheels of history had permanently been set in motion to propel us towards a better future. The end of history, Francis Fukuyama called it – the zenith of human civilisation. 

Austerity in Athens: the eurozone crisis hit Greece not once but twice (Getty)

While liberal democracy was the part of the programme that got slapped on to the brochure, it was a streamlined paradigm of neoclassical economics that provided the brains behind the enterprise. Neoclassical economics, scarred by war-era ideological acrimony, scrubbed the subject of all the messy stuff: politics, values – all the fluff. To do so it used a new secret weapon: quantitative precision unprecedented in the social sciences.

It didn’t rest on whimsical things like enlightened leadership or invested citizenship or compassionate communities. No, siree. It was pure science: a reliable, universally-applicable maximising equation for society (largely stripped of any contextual or, until recently, even cognitive considerations). Its particular magic trick was to be able to do good without requiring anyone to be good.

And, it was limitless in its capacity to turn boundless individual rationality into endless material wellbeing, to cull out of infinite resources (on a global scale) indefinite global growth. It presumed to definitively replace faltering human touch with the infallible “invisible hand” and, so, discourses of exploitation with those of merit.

When I started as a graduate student in the early 2000s, this model was at the peak of its powers: organised into an intellectual and policy assembly line that more or less ran the world. At the heart of this enterprise, in the unipolar post-Cold War order, was what was known as the Chicago school of law and economics. The Chicago school boiled the message of neoclassical economics down to a simpler formula still: the American Dream available for export – just add private property and enforceable contracts. Anointed with a record number of Nobel prizes, its message went straight to the heart of Washington DC, and from there – via its apostles, the International Monetary Fund and the World Bank radiated out to the rest of the globe. 

It was like the social equivalent of the Genome project. Sure the model required the odd tweak, the ironing out of the occasional glitch but, for the most part, the code had been cracked. So, like the ladies who lunch, scholarly attention in the West turned increasingly to good works and the fates of “the other” – spatially and temporally.

One strain led to a thriving industry in development: these were the glory days of tough love, and loan conditionalities. The message was clear: if you want Western-style growth, get with the programme. The polite term for it was structural adjustment and good governance: a strict regime of purging what Max Weber had called mysticism and magic, and swapping it for muscular modernisation. Titles like Daron Acemoglu and James Robinson’s Why Nations Fail: The Origins of Power, Prosperity and Poverty and Hernando de Soto’s The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else jostled for space on shelves of bookstores and best-seller lists.

Another led to esoteric islands of scholarship devoted to atonement for past sins. On the US side of the Atlantic, post-colonial scholarship gained a foothold, even if somewhat limp. In America, slavery has been, for a while now, the issue a la mode. A group of Harvard scholars has been taking a keen interest in the “history of capitalism”.

Playing intellectual archaeologists, they’ve excavated the road that led to today’s age of plenty – leaving in its tracks a blood-drenched path of genocide, conquest, and slavery. The interest that this has garnered, for instance Sven Beckert’s Empire of Cotton, is heartening, but it has been limited to history (or worse still, “area studies”) departments rather than economics, and focused on the past not the present. 

As far back as the fifties ... the economy was driving the society, when it should have been the other way around (Getty)

Indeed, from the perspective of Western scholarship, the epistemic approach to the amalgam of these instances has been singularly inspired by Indiana Jones – dismissed either as curious empirical aberrations or distanced by the buffer of history. By no means the stuff of mainstream economic theory.

Some of us weakly cleared our throats and tried to politely intercede that there were, all around us, petri dishes of living, breathing data on not just development – but capitalism itself. Maybe, just maybe – could it be? – that if the template failed to work in a large majority of cases around the globe that there may be a slight design error. 

My longtime co-author, Nobel Prize winner in Economics and outspoken critic, Joseph Stiglitz, in his 1990 classic Globalisation and Its Discontents chronicled any number of cases of leaching-like brutality of structural adjustment. The best-selling author and my colleague at Cambridge, Ha-Joon Chang, in Kicking Away the Ladder, pointed out that it was a possibility that the West was misremembering the trajectory of its own ascent to power – that perhaps it was just a smidgen more fraught than it remembered, that maybe the State had had a somewhat more active part to play before it retired from the stage.

But a bright red line separated the “us” from the “them” enforcing a system of strict epistemic apartheid. Indeed, as economics retreated further and further into its silo of smugness, economics departments largely stopped teaching economic history or sociology and development economics clung on by operating firmly within the discipline-approved methodology.

So far, so good – a bit like the last night of merriment on the Titanic. Then the iceberg hit.

Suddenly the narratives that were comfortably to do with the there and then became for the Western world a matter of the here and now.

In the last 10 years, what economic historian Robert Skidelsky recently referred to as the “lost decade” for the advanced industrial West, problems that were considered the exclusive preserve of development theory – declining growth, rampant inequality, failing institutions, a fractured political consensus, corruption, mass protests and poverty – started to be experienced on home turf.

The Great Recession starting 2008 should really have been the first hint: foreclosures and evictions, bankruptcies and bailouts, crashed stock markets. Then came the eurozone crisis starting in 2009 (first Greece; then Ireland; then Portugal; then Spain; then Cyprus; oh, and then Greece, again). But after an initial scare, it was largely business as usual – written off as an inevitable blip in the boom-bust logic of capitalist cycles. It was 2016, the year the world went mad, that made the writing on the wall impossible to turn away from – starting with the shock Brexit vote, and then the Trump election. Not everyone understands what a CDO (collateralised debt obligation) is, but the vulgarity of a leader of the free world who governs by tweet and “grabs pussy” is hard to miss.

So how did it happen, this unexpected epilogue to the end of history?

I hate to say I told you so, but some of us had seen this coming – the twist in the tale, foreshadowed by an eerie background score lurking behind the clinking of champagne glasses. Even at the height of the glory days. In the summer before the fall of Lehman Brothers, a group of us “heterodox economists” had gathered at a summer school in the North of England. We felt like the audience at a horror movie – knowing that the gory climax was moments away while the victim remained blissfully impervious.

The plot wasn’t just predictable, it was in the script for anyone to see. You just had to look closely at the fine print.

In particular, you needed to have read your Karl Polanyi, the economic sociologist, who predicted this crisis over 50 years ago. As far back as 1954, The Great Transformation diagnosed the central perversion of the capitalist system, the inversion that makes the person less important than the thing – the economy driving society, rather than the other way around.

Polanyi’s point was simple: if you turned all the things that people hold sacred into grist to the mill of a large impersonal economic machinery (he called this disembedding) there would be a backlash. That the fate of a world where monopoly money reigns supreme and human players are reduced to chessmen at its mercy is doomed. The sociologist Fred Block compares this to the stretching of a giant elastic band – either it reverts to a more rooted position, or it snaps.

It is this tail-wagging-the-dog quality that is driving the current crisis of capitalism. It’s a matter of existential alienation. This problem of artificial abstraction runs through the majority of upheavals of our age – from the financial crisis to Facebook. So cold were the nights in this era of enforced neutrality that the torrid affair between liberal democracy and neoclassical economics resulted in the most surprising love child – populism.

The simple fact is that after decades on promises not delivered on, the system had written just one too many cheques that couldn’t be cashed. And people had had just about enough.

 

The Brexit vote in 2016 followed by the election of Trump ... and the world had finally gone mad (Getty)

The old fault lines of global capitalism, the East versus West dynamics of the World Trade Organisation’s Doha Round, turned out to be red herrings. The axis that counts is the system versus the little people. Indeed, the anatomies of annihilation look remarkably similar across the globe – whether it’s the loss of character of a Vanishing New York or Disappearing London, or threatened communities of farmers in India and fishermen in Greece.

Trump voters in the US, Brexiteers in Britain and Modi supporters in India seek identity – any identity, even a made-up call to arms to “return” to mythical past greatness in the face of the hollowing out of meaning of the past 70 years. The rise of populism is, in many ways, the death cry of populations on the verge of extinction – yearning for something to believe in when their gods have died young. It’s a problem of the 1 per cent – poised to control two-thirds of the world economy by 2030 – versus the 99 per cent. But far more pernicious is the Frankenstein’s monster that is the idea of an economic system that is an end in itself.

Not to be too much of a conspiracy theorist about it, but the current system doesn’t work because it wasn’t meant to – it was rigged from the start. Wealth was never actually going to “trickle down”. Thomas Piketty did the maths.

Suddenly, the alarmist calls of the developmentalists objecting to the systemic skews in the process of globalisation don’t seem quite so paranoid.

But this is more than “poco” (what the cool kids call postcolonialism) schadenfreude. My point is a serious one; although I would scarcely have dared articulate it before now. Could Kipling have been wrong, and might the East have something to offer the mighty West? Could the experiences of exotic lands point the way back to the future? Could it be, could it just, that it may even be a source of epistemic wisdom?

Behind the scaffolding of Xi Jinping’s China or Narendra Modi’s India, sites of capitalism under construction, we are offered a glimpse into the system’s true nature. It is not God-given, but the product of highly political choices. Just like Jane Jacobs protesting to save Washington Square Park or Beatrix Potter devoting the bulk of her royalty earnings to conserving the Lake District were choices. But these cases also show that trust and community are important. The incredible resilience of India’s jugaad economy, or the critical role of quanxi in the creation of the structures in what has been for the past decade the world’s fastest-growing nation, China. A little mysticism and magic may be just the thing.

The narrative that we need is less that of Frankenstein’s man-loses-control of monster, and more that of Pinocchio’s toy-becomes-real-boy-by-acquiring-conscience; less technology, and more teleology. The real limit may be our imaginations. Perhaps the challenge is to do for scholarship, what Black Panther has done for Hollywood. You never know. Might be a blockbuster.

The myths about money that British voters should reject

Ha Joon Chang in The Guardian


Illustration: Nate Kitch


Befitting a surprise election, the manifestos from the main parties contained surprises. Labour is shaking off decades of shyness about nationalisation and tax increases for the rich and for the first time in decades has a policy agenda that is not Tory-lite. The Conservatives, meanwhile, say they are rejecting “the cult of selfish individualism” and “belief in untrammelled free markets”, while adopting the quasi-Marxist idea of an energy price cap.

Despite these significant shifts, myths about the economy refuse to go away and hamper a more productive debate. They concern how the government manages public finances – “tax and spend”, if you will.

The first is that there is an inherent virtue in balancing the books. Conservatives still cling to the idea of eliminating the budget deficit, even if it is with a 10-year delay (2025, as opposed to George Osborne’s original goal of 2015). The budget-balancing myth is so powerful that Labour feels it has to cost its new spending pledges down to the last penny, lest it be accused of fiscal irresponsibility.

However, as Keynes and his followers told us, whether a balanced budget is a good or a bad thing depends on the circumstances. In an overheating economy, deficit spending would be a serious folly. However, in today’s UK economy, whose underlying stagnation has been masked only by the release of excess liquidity on an oceanic scale, some deficit spending may be good – necessary, even.

The second myth is that the UK welfare state is especially large. Conservatives believe that it is bloated out of all proportion and needs to be drastically cut. Even the Labour party partly buys into this idea. Its extra spending pledge on this front is presented as an attempt to reverse the worst of the Tory cuts, rather than as an attempt to expand provision to rebuild the foundation for a decent society.

The reality is the UK welfare state is not large at all. As of 2016, the British welfare state (measured by public social spending) was, at 21.5% of GDP, barely three-quarters of welfare spending in comparably rich countries in Europe – France’s is 31.5% and Denmark’s is 28.7%, for example. The UK welfare state is barely larger than the OECD average (21%), which includes a dozen or so countries such as Mexico, Chile, Turkey and Estonia, which are much poorer and/or have less need for public welfare provision. They have younger populations and stronger extended family networks.

The third myth is that welfare spending is consumption – that it is a drain on the nation’s productive resources and thus has to be minimised. This myth is what Conservative supporters subscribe to when they say that, despite their negative impact, we have to accept cuts in such things as disability benefit, unemployment benefit, child care and free school meals, because we “can’t afford them”. This myth even tints, although doesn’t define, Labour’s view on the welfare state. For example, Labour argues for an expansion of welfare spending, but promises to finance it with current revenue, thereby implicitly admitting that the money that goes into it is consumption that does not add to future output.

 ‘It is a myth that, despite their negative impact, we have to accept cuts in such things as disability benefit, unemployment benefit, child care and free school meals.’ Photograph: monkeybusinessimages/Getty Images/iStockphoto

However, a lot of welfare spending is investment that pays back more than it costs, through increased productivity in the future. Expenditure on education (especially early learning programmes such as Sure Start), childcare and school meals programmes is an investment in the nation’s future productivity. Unemployment benefit, especially if combined with good publicly funded retraining and job-search programmes, such as in Scandinavia, preserve the human productive capabilities that would otherwise be lost, as we have seen in so many former industrial towns in the UK. Increased spending on disability benefits and care for older people helps carers to have more time and less stress, making them more productive workers.

The last myth is that tax is a burden, which therefore by definition needs to be minimised. The Conservatives are clear about this, proposing to cut corporation tax further to 17%, one of the lowest levels in the rich world. However, even Labour is using the language of “burden” about taxes. In proposing tax increases for the highest income earners and large corporations, Jeremy Corbyn spoke of his belief that “those with the broadest shoulders should bear the greatest burden”.

But would you call the money that you pay for your takeaway curry or Netflix subscription a burden? You wouldn’t, because you recognise that you are getting your curry and TV shows in return. Likewise, you shouldn’t call your taxes a burden because in return you get an array of public services, from education, health and old-age care, through to flood defence and roads to the police and military.

If tax really were a pure burden, all rich individuals and companies would move to Paraguay or Bulgaria, where the top rate of income tax is 10%. Of course, this does not happen because, in those countries, in return for low tax you get poor public services. Conversely, most rich Swedes don’t go into tax exile because of their 60% top income tax rate, because they get a good welfare state and excellent education in return. Japanese and German companies don’t move out of their countries in droves despite some of the highest corporate income tax rates in the world (31% and 30% respectively) because they get good infrastructure, well-educated workers, strong public support for research and development, and well-functioning administrative and legal systems.

Low tax is not in itself a virtue. The question should be whether the government is providing services of satisfactory quality, given the tax receipts, not what the level of tax is.

The British debate on economic policy is finally moving on from the bankrupt neoliberal consensus of the past few decades. But the departure won’t be complete until we do away with the persistent myths about tax and spend.

‘Living within our means’ makes no economic sense. Labour is right to oppose it

Ha Joon Chang in The Guardian

Some have called it a U-turn; others have described it as a shambles. But John McDonnell’s volte face was the right thing to do, even though it meant losing face, big time.

On the eve of the Labour party conference, McDonnell surprised detractors and supporters alike by saying that Labour should vote for George Osborne’s new fiscal charter, which requires the country to run budget surplus in “normal times”. Now McDonnell says his party should vote against it.

Admittedly, even when proposing to vote in favour of Osborne’s charter, McDonnell advocated a different vision of fiscal responsibility from what the chancellor was proposing. McDonnell pointed out that running a budget surplus means taking demand out of the economy, so there is an economic illiteracy in wanting to run one more or less permanently. He also argued that surplus should be run only on the current (consumption) component of the budget, and that deficit could – and should – be run on the capital (investment) component of it. His view was that if you borrow to invest, the debt will more than pay for itself in the long run as the investment matures and raises the economy’s output, and thus tax revenue.

The shadow chancellor was also insistent that, even while reducing the deficit, he would do it in a more equitable way. Rather than mainly squeezing the most vulnerable groups, as the Conservatives have been doing, the fiscal gap would be closed by raising taxes on the top earners and, especially, being much tougher on tax avoidance and tax evasion.

However, these are all part of the fine print. Once you accept that you have to run a budget surplus in order to be “responsible”, you have, as an anti-austerity politician, already lost the debate. You win a political debate by making people accept your vision, not by pointing out that you offer them better terms in the fine print – which they are unlikely to read anyway.

So if McDonnell is going to win the economic debate, he needs to change its terms. He has to start by doing another U-turn on the statement: “We accept we are going to have to live within our means, and we always will do – full stop.”Because this is simply wrong. This view assumes that our means are given, and we cannot spend beyond them. However, our means in the future are partly determined by what we do today. And if our means are not fixed, then the very idea of living within them loses its meaning.

For example, if you borrow money to do a degree or get a technical qualification, you will be spending beyond your means today. But your new qualification will increase your future earning power. Your future means will be greater than they would have been if you hadn’t taken out the loan. In this case, living beyond your means is the right thing to do.

Now: if you are a government, your means are even more flexible.

Like individuals, of course, a government can increase its means in the long run by borrowing to invest in things that will make the economy more productive, and thus increase the tax revenue. If a government invests in improving the transport system, it will make the country’s logistics industry more efficient. Or if it invests in healthcare and education, that will make the workers more productive.

More importantly, unlike individuals, a government has the ability to spend “money it does not have”, only to find later that it had the money after all. The point is that deficit spending in a stagnant economy will increase demand in the economy, stimulating business and making consumers more optimistic.

If enough businesses and consumers form positive expectations as a result, they will invest and spend more. Increased investment and consumption then generate higher incomes and higher tax revenues. If the tax take increases sufficiently, the government deficit may be eliminated, which means that the government had the money that it spent after all.

If Labour wants to re-establish its credentials for economic management, it needs to start by rejecting the “living within our means” mantra. The idea may have as much obvious appeal as other examples of homespun philosophy, but it is one that is more fitting for 18th-century household management than for the management of a complex 21st-century economy.

Unless the Labour party changes its foundational belief in the virtue of the government living within its means, British voters will never be convinced of the finer points of Keynesian economics, or of the ethics of inequality, that John McDonnell is trying to make.

Why are Asians under represented in English cricket?

by Girish Menon

A recent ECB survey found that 30 % of the grass root level cricket players were of Asian origin while it reduces dramatically to 6.2 % at the level of first class county cricketers. Why?

When this question was asked to Moeen Ali, he opined among other things, "I also feel we lose heart too quickly. A lot of people think it is easy to be a professional cricketer, but it is difficult. There is a lot of sacrifice and dedication," While some may view Ali's views as suffering from the Stockholm syndrome, in my personal opinion it resembles the 'Lazy Japanese and Thieving Germans' metaphor highlighted by the economist Ha Joon Chang. Hence, Ali's views should not be confused with what in my perspective are some of the actual reasons why there is a dearth of Asian faces in county cricket.

The Cambridge economist Ha Joon Chang has acquired a global reputation as a myth buster and is a must read for all those who wish to contradict the dogmatic neoliberal consensus. Chapter 9 of Ha Joon Chang's old classic Bad Samaritans actually discusses this metaphor in detail. He quotes Beatrice Webb in 1911 describing the Japanese as having 'objectionable notions of leisure and a quite intolerable personal independence'. She was even more scathing about the Koreans: '12 millions of dirty, degraded, sullen, lazy and religionless savages who slouch about in dirty white garments...'  The Germans were typically described by the British as a 'dull and heavy people'. 'Indolence' was a word that was frequently associated with the Germanic nature.

But now that the economies of Japan, Korea and Germany have become world leaders such denigration of their peoples has disappeared. If Moeen Ali's logic was right then Pakistanis, Sri Lankans and Indians living in their own countries should also not amount to much in world cricket. But the evidence is to the contrary. So the right question to ask would be why has English cricket not tapped into the great love for cricket among its citizens from the Indian subcontinent?

If it wants the truth, English cricket should examine the issue raised by the Macpherson report on 'institutional racism in the police' and ask if this is true in county cricket as well. Immigrants, as the statistics suggest, from the subcontinent can be found in large numbers in grassroots cricket from the time they joined the British labour force. There are many immigrants only cricket leagues in the UK, e.g in Bradford, where players of good talent can be found. But, as Jass Bhamra's father mentioned in the film Bend it Like Beckham they have not been allowed access to the system. Why, Yorkshire waited till the 1990s to select an Asian player for the first time.

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Of course, if the England team is intended to be made up of players of true English stock only then we need not have this discussion. Some of the revulsion towards Kevin Pietersen among some of the establishment could be better understood using this lens. However, now due to its dwindling base if the ECB  wishes to get the support of Asian cricket lovers it will have to transform the way the game is run.

Secondly, to make it up the ranks in English cricket it is essential to have an expensive well connected coach. Junior county selections are based on this network and any unorthodox talent would be weeded out at the earliest level either because of not having a private coach or because the technique is rendered untenable as it blots the copybook. So, many children of Asian origin from weaker economic backgrounds are weeded out by this network.

This is akin to the methods adopted by parents in the shires where grammar schools exist. Hiring expensive tutors for their wards is the middle class way of crowding out genuinely academic oriented students from weaker economic backgrounds. Better off Asians are equally culpable in distorting the grammar school system and its objectives.

So what could be done. I think positive discrimination is the answer. We only need to look at South African cricket to see what results it can bring. My suggestion would be that every team should have two places reserved: one for a minority player and another for an unorthodox player. This should to some extent break up the parent-coach orthodoxy and breathe some fresh air and dynamism into English cricket.

Personally, I have advised my son that he should play cricket only for pleasure and not to aspire for serious professional cricket because of the opacity in the selection mechanism which means an uncertain economic future. He is 16, a genuine leg spinner with little coaching but with good control on flight and turn. Often he complains about conservative captains and coaches who were unwilling to gamble away a few runs in the hope of getting wickets. Many years ago, when my son was not picked by a county side, I asked the coach the reason and he said because, 'he flights the ball and is slower through the air'. With what conviction then could I have told my lad that you can make a decent living out of cricket if you persevere enough?

Why did Britain’s political class buy into the Tories’ economic fairytale?

Falling wages, savage cuts and sham employment expose the recovery as bogus. Without a new vision we’re heading for social conflict

• 
• • Ha-Joon Chang
  • The Guardian, Sunday 19 October 2014 17.46 BST

Demonstrators among tens of thousands who protested about austerity in London on Saturday. Photograph: Mary Turner/Getty Images

The UK economy has been in difficulty since the 2008 financial crisis. Tough spending decisions have been needed to put it on the path to recovery because of the huge budget deficit left behind by the last irresponsible Labour government, showering its supporters with social benefit spending. Thanks to the coalition holding its nerve amid the clamour against cuts, the economy has finally recovered. True, wages have yet to make up the lost ground, but it is at least a “job-rich” recovery, allowing people to stand on their own feet rather than relying on state handouts.

That is the Conservative party’s narrative on the UK economy, and a large proportion of the British voting public has bought into it. They say they trust the Conservatives more than Labour by a big margin when it comes to economic management. And it’s not just the voting public. Even the Labour party has come to subscribe to this narrative and tried to match, if not outdo, the Conservatives in pledging continued austerity. The trouble is that when you hold it up to the light this narrative is so full of holes it looks like a piece of Swiss cheese.

First, let’s look at the origins of the deficit. Contrary to the Conservative portrayal of it as a spendthrift party, Labour kept the budget in balance averaged over its first six years in office between 1997 and 2002. Between 2003 and 2007 the deficit rose, but at 3.2% of GDP a year it was manageable.

More importantly, this rise in the deficit between 2003 and 2007 was not due to increased welfare spending. According to data from the Office for National Statistics, social benefit spending as a proportion of GDP was more or less constant at about 9.5% of GDP a year during this period. The dramatic climb in budget deficit from there to the average of 10.7% in 2009-2010 was mostly a consequence of the recession caused by the financial crisis.

First, the recession reduced government revenue by the equivalent of 2.4% of GDP – from 42.1% to 39.7% – between 2008 and 2009-10. Second, it raised social spending (social benefit plus health spending). Economic downturn automatically increases spending on many social benefits, such as unemployment benefit and income support, but it also increases spending on things like disability benefit and healthcare, as increased unemployment and poverty lead to more physical and mental health problems. In 2009-10, at the height of the recession, UK public social spending rose by the equivalent of 3.2% of GDP compared with its 2008 level (from 21.8% to 24%).

When you add together the recession-triggered fall in tax revenue and rise in social spending, they amount to 5.6% of GDP – almost the same as the rise in the deficit between 2008 and 2009-10 (5.7% of GDP). Even though some of the rise in social spending was due to factors other than the recession, such as an ageing population, it would be safe to say that much of the rise in deficit can be explained by the recession itself, rather than Labour’s economic mismanagement.

When faced with this, supporters of the Tory narrative would say, “OK, but however it was caused, we had to control the deficit because we can’t live beyond our means and accumulate debt”. This is a pre-modern, quasi-religious view of debt. Whether debt is a bad thing or not depends on what the money is used for. After all, the coalition has made students run up huge debts for their university education on the grounds that their heightened earning power will make them better off even after they pay back their loans.

The same reasoning should be applied to government debt. For example, when private sector demand collapses, as in the 2008 crisis, the government “living beyond its means” in the short run may actually reduce public debt faster in the long run, by speeding up economic recovery and thereby more quickly raising tax revenues and lowering social spending. If the increased government debt is accounted for by spending on projects that raise productivity – infrastructure, R&D, training and early learning programmes for disadvantaged children – the reduction in public debt in the long run will be even larger.

Against this, the advocates of the Conservative narrative may retort that the proof of the pudding is in the eating, and that the recovery is the best proof that the government’s economic strategy has worked. But has the UK economy really fully recovered? We keep hearing that national income is higher than at the pre-crisis peak of the first quarter of 2008. However, in the meantime the population has grown by 3.5 million (from 60.5 million to 64 million), and in per capita terms UK income is still 3.4% less than it was six years ago. And this is even before we talk about the highly uneven nature of the recovery, in which real wages have fallen by 10% while people at the top have increased their shares of wealth.

But can we not at least say that the recovery has been “jobs-rich”, creating 1.8m positions between 2011 and 2014? The trouble with this is that, apart from the fact that the current unemployment rate of 6% is nothing to be proud of, many of the newly created jobs are of very poor quality.

The ranks of workers in “time-related unemployment”, doing fewer hours than they wish due to a lack of availability of work – have swollen dramatically. Between 1998 and 2005, only about 1.9% of workers were in such a position; by 2012-13 the figure was 8%.

Then there is the extraordinary increase in self-employment. Its share of total employment, whose historical norm (1984-2007) was 12.6%, now stands at an unprecedented 15%. With no evidence of a sudden burst of entrepreneurial energy among Britons, we may conclude that many are in self-employment out of necessity or even desperation. Even though surveys show that most newly self-employed people say it is their preference, the fact that these workers have experienced a far greater collapse in earnings than employees – 20% against 6% between 2006-07 and 2011-12, according to the Resolution Foundation – suggests that they have few alternatives, not that they are budding entrepreneurs going places.

So, in between the people in underemployment (6.1% of employment) and the precarious newly self-employed (2.4%), 8.5% of British people in work (or 2.6 million people) are in jobs that do not fully utilise their abilities – call that semi-unemployment, if you will.

The success of the Conservative economic narrative has allowed the coalition to pursue a destructive and unfair economic strategy, which has generated only a bogus recovery largely based on government-fuelled asset bubbles in real estate and finance, with stagnant productivity, falling wages, millions of people in precarious jobs, and savage welfare cuts.

The country is in desperate need of a counter narrative that shifts the terms of debate. A government budget should be understood not just in terms of bookkeeping but also of demand management, national cohesion and productivity growth. Jobs and wages should not be seen simply as a matter of people being “worth” (or not) what they get, but of better utilising human potential and of providing decent and dignified livelihoods. Ways have to be found to generate economic growth based on rising productivity rather than the continuous blowing of asset bubbles.

Without a new economic vision incorporating these dimensions, Britain will continue on its path of stagnation, financial instability and social conflict.

Economics is too important to leave to the experts

Citizens may be able to see the world more clearly than narrowly focused professional economists

• 
• • Ha-Joon Chang
  • The Guardian, Wednesday 30 April 2014 17.30 BST

'Thatcher's big bang in 1986 laid the ground for freewheeling financial capitalism, whose destructive nature is at the heart of the current mess.' Photograph: PA Archive

You wouldn't have guessed it, given the fanfare surrounding the 0.8% growth figure for the first quarter of 2014, but people in the United Kingdom have been living through a period worse than Japan's infamous "lost decade" of the 1990s.

During that time, Japan's per capita GDP grew at 1% per year. This means that in 2000, Japan's per capita GDP was 10.5% higher than in 1990. In the UK, per capita GDP at the end of 2013 was 6.6% lower than that in 2007. This means that, unless the UK economy miraculously grows at around 5% a year for the next four years (factoring in population growth rate of around 0.7% a year), it is going to have a decade that is even more "lost" than Japan's 1990s.

The costs of the 2008 crisis in terms of human welfare have been even greater than the growth figures suggest. Unemployment is still nearly 7%, or at 2.24 million, depriving people of dignity and putting them under huge stress. Real wages have had some of the biggest falls in the OECD bloc of 34 countries and have a long way to go before they can recover to pre-crisis levels.

Steep cuts in welfare spending have hit many of the poorest hard. Increasing job insecurity, symbolised by the rise of zero-hours contracts, has been making workers' lives more stressful. The spread of food banks, the popularity of "poverty recipes" in cookery, and the advance of German discount supermarket chains, such as Aldi and Lidl, are the more visible manifestations of this pressure on the living standards of citizens.

What is more, even this sorry achievement has been made on the reversion to the economic model whose bankruptcy was laid bare by the 2008 crisis. That model was predicated on the deregulated financial system fuelling unsustainable growth by creating asset bubbles, one of the highest household debts in the world (as a proportion of GDP), and a large current account deficit.

How has this mess been created? The mismanagement of the crisis by the coalition government means it has to bear significant blame, but the main cause lies in the nature of the economic model that the UK has pursued for three decades.

This model started, as is well known, with Margaret Thatcher. She ripped up the post-second world war consensus on the mixed economy and started establishing one of the most deregulated economies in the rich world. Full employment was ditched as a goal and worker rights were weakened. State-owned enterprises were privatised, often with very negative consequences, as in the railways, water, and energy. Most importantly, her big bang financial deregulation laid the ground for the development of freewheeling financial capitalism, whose destructive nature is at the heart of the current mess.

Subsequent Labour governments took the roughest edges off Thatcherism by, for example, increasing social welfare spending and introducing the minimum wage. However, the underlying economic model remained intact; the New Labour thinking was that we should let the City maximise its profits by minimising regulation, and then help the poor with the taxes on those profits. There was no realisation that the financial system itself may be a problem.

After a brief period when it made noises about rebalancing the economy and the "big society", the coalition government has made a headlong dash for Thatcherism-plus. True, it has somewhat strengthened financial regulation, but in the meantime it has also subsidised the banks to the gills, both explicitly (bailouts) and implicitly (quantitative easing). Pursuing the doctrine of the balanced budget, it has cut spending in the middle of a recession, seriously delaying the recovery. It has made cuts to the welfare state that Thatcher herself would have found radical, while privatising "the Queen's head" (the Royal Mail), which even she refused to sell off.

Of course, all of these policies are supposed to have been backed up by scientifically proved economic theories – saying that markets are best left alone, that making the rich richer makes everyone richer, that welfare spending and protection of worker rights only make people lazy and dependent, and so on. Most people have accepted these theories without much questioning because they are based on "expert" advice.

However, all these economic theories are at least debatable and often highly questionable. Contrary to what professional economists will typically tell you, economics is not a science. All economic theories have underlying political and ethical assumptions, which make it impossible to prove them right or wrong in the way we can with theories in physics or chemistry. This is why there are a dozen or so schools in economics, with their respective strengths and weaknesses, with three varieties for free-market economics alone – classical, neoclassical, and the Austrian.

Given this, it is entirely possible for people who are not professional economists to have sound judgments on economic issues, based on some knowledge of key economic theories and appreciation of the political and ethical assumptions underlying various theories. Very often, the judgments by ordinary citizens may be better than those by professional economists, being more rooted in reality and less narrowly focused.

Indeed, willingness to challenge professional economists and other experts is a foundation stone of democracy. If all we have to do is to listen to the experts, what is the point of having democracy?

What this means is that, as citizens in a democracy, all of us have the duty to learn at least some economics and engage in economic debates. This is not as difficult as it may seem. As I try to show in my new book, Economics: The User's Guide, most of economics can be understood by anyone with a secondary education, if it is explained accessibly.

The economy is too important to be left to professional economists (and that includes me). As citizens, we should all learn economics and challenge what the professionals tell us to believe.