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23 Things They Don't Tell You About Capitalism: A Second Look

02/08/2013 12:23 BST | Updated 02/10/2013 10:12 BST

Ha-Joon Chang's book, 23 Things They Don't Tell You About Capitalism, a critique of neo-liberal economics and free markets, has been a cult success since it came out three years ago. As the book is still doing well and is often cited by left wingers, I thought it was worth a second look. The author is an economist at the University of Cambridge who keeps himself busy writing opinion columns in The Guardian that attack the Chancellor of the Exchequer, George Osborne.

South Korea is the "miracle economy" that provides Ha-Joon Chang's best counterargument against economic orthodoxy. It's also his homeland. Until the 1970s, Korea was a poor, highly regulated and government-controlled economy. Yet, despite this, it managed to boost growth to almost unprecedented levels. How was this achieved? Dr Chang believes the government successfully steered the economy via state intervention. Governments, he says, can pick winners. Well, of course they can. But they also pick losers. The Koreans got it right when they moved into electronics and shipbuilding. Elsewhere, the world is full of white elephants where the local strongmen got it wrong. I can't help feeling that Korean success owed a lot to luck. They made the right decisions, but this only became clear with hindsight. It is through this kind of selective use of the evidence that Dr Chang must argue his point.

That's not to say that he hasn't got interesting things to say. Dr Chang is right about the importance of strong institutions to support economic growth in developing countries. Liberal economists have been harping on about the rule of law and the need for secure property rights for centuries, so it is nice to see the left catching up. He also doubts the utility of sending half the population into higher education. Again, that's correct and what the Right has been saying for ages. Dr Chang also has interesting things to say about microfinance and overhyping the internet (he's convincingly sceptical about both).

More controversially, Dr Chang is also onto something when he talks about the benefits of protectionism for nascent economies. Protecting your mature manufacturing with high tariff barriers is a recipe for disaster. It means old factories are allowed to get increasingly inefficient as they plunder their domestic markets. However, for developing countries, it makes a lot of sense to protect industry while it is young and vulnerable. Protectionism gives new companies a chance to grow up in a controlled environment, much as we let children make mistakes at home so they don't make them for real in the outside world. The key to successful protectionism is to use it as a nursery to get ready for the cut-throat competition of world trade. That's what the Asian tigers did. Governments have to be ruthless in punishing those protected industries that are not performing. There's always the temptation to protect the weak rather than train the strong. Get it right and developing countries can nurture work-beating companies like Samsung, Lenovo and the various Japanese industrial giants.

Unfortunately, many of the other 23 Things in the book are platitudes or attacks on straw men. No free market economist believes everything that Dr Chang says they do. For example, Thing 1 explains that, because slavery and the narcotics trade are illegal, there is no such thing as a completely free market. Well, you don't say! On regulation, Dr Chang informs us that "what matters is not the quantity, but the quality". For such pearls of wisdom are Cambridge dons appointed.

In common with many others on the left, Professor Chang implies that if only we'd listened to people like him, the financial crisis wouldn't have happened. In fact, although many commentators noticed the US housing bubble, few knew what effect it would have. According to forecasting guru Nate Silver, the only economist who precisely predicted the crisis was Jan Hatzius at Goldman Sachs (which is not a noted as bastion of the left). In any case, recessions are an inevitable result of economic growth (for reasons I explained here). However dreadful they are, we cannot regulate them away. Given the cathartic effect they have on the economy, we shouldn't even want to, although governments must protect the vulnerable from their consequences.

Dr Chang also appears badly misinformed about developing countries (which is odd, since this is his academic specialty). He makes much of the fact that growth rates per capita in much of the Third World were higher in the 1960s and 1970s than during 1980s and 90s. This is true. But he goes on to explain that this was because the IMF imposed sound-money reforms on developing countries in the early 1980s. This is wrong. Professor Chang never mentions the way that the high growth rates in the 60s and 70s were achieved. Banks lent vast amounts of money to developing countries which enjoyed artificially inflated growth rates for a few years. But it couldn't last. Much of the money had been misspent and when the oil shocks hit during the 1970s, many developing economies collapsed. The Third World debt crisis might be a distant memory, but a debt-fuelled boom followed by bust and austerity sounds strangely familiar. Dr Chang mentions none of this. Thankfully, many countries in Africa are now growing at a respectable clip as the IMF's reforms finally do their work. Let's hope this lasts.

You don't need to read 23 Things They Don't Tell You About Capitalism to learn about how developing countries can grow their economies. David Landes's The Wealth and Poverty of Nations remains the standard work on that. But, as an insight into how left wing economists are trying to come to terms with the failure of socialism, 23 Things makes for a fascinating read.