Tuesday, November 25, 2014

Dr. Ha-Joon Chang, Renegade Economist? Oh Please!

One of the talking heads on Ross Ashcroft's Four Horsemen documentary is Dr. Ha-Joon Chang, an economist who's a Reader at the University of Cambridge in England.

In this video under the "Renegade Economist" brand Dr. Chang rehearses lefty talking points on "neoliberalism."

I didn't really know what neoliberalism was when I watched the video; I just knew that it was a term that lefties swung around as a kind of pejorative. It turns out that it was developed by spanish-speaking activists opposed to Gen. Pinochet's regime in Chile. See Wikipedia.

But before you can trash neoliberalism, you have to define "liberalism." For Dr. Chang, liberalism is a 19th century social economic theory that had a rather narrow view that everything should be run on market principles. They didn't quite realize you needed bankruptcy and limited liability laws. (Actually Marx was prescient on this, says Dr. Chang, arguing in the 1860s that limited liability was the future of capitalism). And, of course, these 19th century liberals thought that democracy was a rather bad idea, since the people would vote for an income tax and destroy incentives for wealth creation. This liberalism, of course, was completely discredited in the first half of the 20th century, through two world wars, the rise of communism, the Great Depression, and the rise of social democracy in western Europe.

What about neoliberalism? It's a remake of the old 19th century liberalism, according to Dr. Chang, but it has been modified at the margins. Now it doesn't oppose democracy directly, and endorses limited liability. It wants to maximize the domain of the market -- where one dollar, one vote rule dominates. But it still wants to diminish the domain of the state and democratic policies. It still believes that the most important freedom is freedom of property, and profit-seeking should be the only motive, and that "poor people should be punished." This ideology has been promoted very aggressively by "bad people" (Chang kinda swallows the "bad" on the video) "with a lot of money and power," so the whole world has come to accept this as the truth. Since the financial crisis of 2008 there has been some rethinking, but frankly there is too much power, money and intellectual prestige at stake for this to go away quickly.

Of course, this is a left-wing "narrative" that amounts to an apology for power, as the postmodernists teach us. Only the postmodernists generally spend their energies unmasking evil bourgeois apologies for power, rather than their own noble educated ruling class apologies.

I think the first thing to understand is that conservatives and libertarians think we are trying to understand the world, not change it. That makes us the opposite of Karl Marx who said in his Theses on Feuerbach: the point is not to understand the world, but to change it." What everyone from Marx to Mill was thinking in the mid 19th century was: what on earth has just happened, and what will happen next?

My take on the 19th century liberals is that they were trying to understand what had happened since the start of the industrial revolution. They were thinking: how should be understand this new world, and how can we preserve the beneficial changes? In fact, everybody thought, from Malthus to Ricardo to Marx, that it couldn't last. That's what Marx's "immiseration" thesis is about. He rightly saw that the ruthless efficiency of capitalism would extract the maximum out of the workers as the capitalist firms ruthlessly reduced prices.

But Marx, and all the static thinkers before and since, misses the whole point of capitalism. It is not about accumulation of wealth. It is about sudden, and repeated innovation, what George Gilder calls "surprise." The textile revolution was a complete surprise; nobody saw it coming. And it created fabulous wealth, not to mention cheap clothes for the masses. When that was petering out along came another surprise: steam railways and ocean steamships. Now for the first time ordinary people could travel -- travel the world -- and bulk goods like grain could be profitably transported across the world. It was a complete surprise. Tons of money were made, and famine was eliminated in Europe. Just as the railway revolution was at its height, along came the illuminating oil revolution. A clerk working in a commission merchant's store noticed the barrels of oil in the store, and decided to get into the new mineral oil business. Oil prices came down by 80 percent and John D. Rockefeller became a billionaire and invented modern philanthropy. Then came the electrical revolution, then the auto revolution, then the electronics revolution. Then the information revolution. The point about all these revolutions was that they were complete surprises; nobody saw them coming. The upshot is that per-capita income in real dollars has increases from $1 per day to $100 per day in 200 years. There has been nothing like it in human history. Ever.  The whole thing has been a complete surprise.

Now the question is: how does this system, or this organism, or this emergent phenomenon work? And what should be its relation to government, to society, to religion? In the 1970s, when "neoliberalism" reared its ugly head, the western world was going through a patch of "stagflation." Establishment minds decided that the world was becoming ungovernable, and that we should get used to the idea that the future would not see much growth. In fact we had to adjust ourselves to "The Limits of Growth." Nothing could be done, as the song says.

Well, not to worry. Along came a bunch of renegades, led by Bob Bartley at The Wall Street Journal. They proposed a program of hard money, lowered marginal tax rates, and reduced administrative regulation. This program was inspired by the Austrian economics school led by Ludwig von Mises (an Austrian Jew) and F.A. Hayek, and it was backstopped by "public choice" theory that argued that all regulation of business ended up in "regulatory capture" of the regulators by the regulated. Implemented by Reagan in the US and Thatcher in the UK, the result was a surprise: sky-high energy and commodity prices crashed, and a 20 year boom followed, interrupted only when people got overexcited by the internet boom in the 1990s.

Were the 19th century liberals a bit slow on relaxing bankruptcy laws? Maybe? But once the economy got moving, we could afford leniency on bankrupts, because there was always more where that came from. But go back to Middlemarch and the financial troubles of Dr. Lydgate. Should he have been able to escape his creditors, the local High Street merchants, after his ludicrous profligacy inspired by his empty-headed social-climbing wife? And what about limited liability? Well, the story on that goes back to the South Sea Bubble of 1720. After that crash, people thought that limited liability was a dangerous invitation to fraud. Limited liability got revived in the mid 19th century when it just became obvious that you just couldn't assemble the capital needed when each investor was liable for the debts of the bankrupt enterprise to the limit of his entire fortune. Limited liability protects the small investor, who doesn't have to keep an eye on the CEOs of the companies in his stock portfolio. His liability is merely that he can lose the entire value of his stock equity. My daughter's Wall Street father-in-law thinks that today's investment banks should return to partnerships, where the owners are the bankers and their entire personal wealth is on the line when the market crashes. Maybe there should be an exception on limited liability for bankers.

The argument of neoliberalism is an argument between elites. Should big corporations be regulated by the market and simple rules to penalize fraud, and incentives making it costly to pollute the environment? Or should they be regulated in detail by the assignees of the educated ruling class? It should be clearly understood that establishment economists like Dr. Ha-Joon Chang are not disinterested bystanders in this question. They are the chaps that get to do the regulating, and apply what Deirdre McCloskey calls the "sweet use of the monopoly of violence in government" to the corporate chieftains. But then what? Obviously the corporate CEOs do not just sit there when the Changs and the Grubers come calling. They learn how to manipulate the regulators, and execute a program of "regulatory capture." The result is what we racist-sexist-homophobes call "crony capitalism."

I suppose if we are honest, we right-wing nut-cases should admit that "crony capitalism" is a pejorative.

A couple of points: I don't think that 19th century liberals were really against democracy. Here's Wikipedia on John Bright, who along with Richard Cobden symbolizes 19th century "Manchester" liberalism. He "headed the reform agitation in 1867 which brought the industrial working class within the pale of the constitution" and gave them the vote. Conservative Prime Minister Disraeli famously one-upped the Liberals and passed universal male suffrage in a program called "Tory Democracy." So where is Dr. Chang coming from on this?

Then there are Reagan and Thatcher. The big thing about them is that they successfully appealed to the upper working class, and the left has never forgiven them. It was Reagan that enticed the "Reagan Democrats" out of the Democratic Party; in 2014 the white working class voted Republican by 30 points. And it was Thatcher that appealed to the "C2s" in Britain by passing a program for them to buy their "council houses." Just last week a Labour front-bencher resigned after sneering at "White Van Man" in a tweet.

Dr. Chang is right that there are a lot of people pushing the idea of a market-place relatively free from government power. But there are also a lot of people like him pushing the idea that corporations should be minutely regulated and supervised by government. And they are passing laws to do this, big, comphrehensive and mandatory programs like Sarbanes-Oxley in 2002 and Dodd-Frank in 2010, including the Consumer Finance Protection Bureau on which Sen. Elizabeth Warren (D-MA) did the Grubering. These are huge regulatory actions that have submerged corporations in a tsunami of paperwork. And no doubt they will all end in tears as the big corporations learn how to game them and use them to beat up their small-business competitors.

Let's at least be clear about one thing. Dr. Chang is not a "renegade economist." Nobody that "served as a consultant to the World Bank, the Asian Development Bank and the European Investment Bank as well as to Oxfam and various United Nations agencies" is a renegade. He just isn't!

There's a catchphrase that describes Dr. Chang. He's what politicians call a "safe pair of hands."

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