23 Things They Don't Tell You About Capitalism

and rearranged in minutes, if not seconds. This enormous gap has created huge problems, because finance capital is ‘impatient’ and seeks short-term gains (see Thing 2). In the short run, this creates economic instability, as liquid capital sloshes around the world at very short notice and in ‘irrational’ ways, as we have recently seen. More importantly, in the long run, it leads to weak productivity growth, because long-term investments are cut down to satisfy impatient capital. The result has been that, despite enormous progress in ‘financial deepening’ (that is, the increase in the ratio between financial assets and GDP), growth has actually slowed down in recent years (see Things 7 and 13).

Thus, exactly because finance is efficient at responding to changing profit opportunities, it can become harmful for the rest of the economy. And this is why James Tobin, the 1981 Nobel laureate in economics, talked of the need to ‘throw some sand in the wheels of our excessively efficient international money markets’. For this purpose, Tobin proposed a financial transaction tax, deliberately intended to slow down financial flows. A taboo in polite circles until recently, the so-called Tobin Tax has recently been advocated by Gordon Brown, the former British prime minister. But the Tobin Tax is not the only way in which we can reduce the speed gap between finance and the real economy. Other means include making hostile takeovers difficult (thereby reducing the gains from speculative investment in stocks), banning short-selling (the practice of selling shares that you do not own today), increasing margin requirements (that is, the proportion of the money that has to be paid upfront when buying shares) or putting restrictions on cross-border capital movements, especially for developing countries.

All this is not to say that the speed gap between finance and the real economy should be reduced to zero. A financial system perfectly synchronized with the real economy would be useless. The whole point of finance is that it can move faster than the real economy. However, if the financial sector moves too fast, it can derail the real economy. In the present circumstances, we need to rewire our financial system so that it allows firms to make those long-term investments in physical capital, human skills and organizations that are ultimately the source of economic development, while supplying them with the necessary liquidity.

Thing 23 Good economic policy does not require good economists

What they tell you

Whatever the theoretical justifications may be for government intervention, the success or otherwise of government policies depends in large part on the competence of those who design and execute them. Especially, albeit not exclusively, in developing countries, government officials are not very well trained in economics, which they need to be if they are to implement good economic policies. Those officials should recognize their limits and should refrain from implementing ‘difficult’ policies, such as selective industrial policy, and stick to less-demanding free-market policies, which minimize the role of the government. Thus seen, free-market policies are doubly good, because not only are they the best policies but they are also the lightest in their demands for bureaucratic capabilities.

What they don’t tell you

Good economists are notrequired to run good economic policies. The economic bureaucrats that have been most successful are usually not economists. During their ‘miracle’ years, economic policies in Japan and (to a lesser extent) Korea were run by lawyers. In Taiwan and China, economic policies have been run by engineers. This demonstrates that economic success does not need people well trained in economics – especially if it is of the free-market kind. Indeed, during the last three decades, the increasing influence of free- market economics has resulted in poorer economic performances all over the world, as I have shown throughout this book – lower economic growth, greater economic instability, increased inequality and finally culminating in the disaster of the 2008 global financial crisis. Insofar as we need economics, we need different kinds of economics from free-market economics.

Economic miracle without economists

The East Asian economies of Japan, Taiwan, South Korea, Singapore, Hong Kong and China are often called ‘miracle’ economies. This is, of course, hyperbole, but as far as hyperboles go, it is not too outlandish.

During their Industrial ‘Revolution’ in the nineteenth century, per capita income in the economies of Western Europe and its offshoots (North America, Australia and New Zealand) grew between 1 per cent and 1.5 per cent per year (the exact number depending on the exact time period and the country you look at). During the so-called ‘Golden Age’ of capitalism between the early 1950s and the mid 1970s, per capita income in Western Europe and its offshoots grew at around 3.5–4 per cent per year.

In contrast, during their miracle years, roughly between the 1950s and the mid 1990s (and between the 1980s and today in the case of China), per capita incomes grew at something like 6–7 per cent per year in the East Asian economies mentioned above. If growth rates of 1–1.5 per cent describe a ‘revolution’ and 3.5–4 per cent a ‘golden age’, 6–7 per cent deserves to be called a ‘miracle’.[1]

Given these economic records, one would naturally surmise that these countries must have had a lot of good economists. In the same way in which Germany excels in engineering because of the quality of its engineers and France leads the world in designer goods because of the talents of its designers, it seems obvious the East Asian countries must have achieved economic miracles because of the capability of their economists. Especially in Japan, Taiwan, South Korea and China – countries in which the government played a very active role during the miracle years – there must have been many first-rate economists working for the government, one would reason.

Not so. Economists were in fact conspicuous by their absence in the governments of the East Asian miracle economies. Japanese economic bureaucrats were mostly lawyers by training. In Taiwan, most key economic officials were engineers and scientists, rather than economists, as is the case in China today. Korea also had a high proportion of lawyers in its economic bureaucracy, especially before the 1980s. Oh Won-Chul, the brains behind the country’s heavy and chemical industrialization programme in the 1970s – which transformed its economy from an efficient exporter of low-grade manufacturing products into a world-class player in electronics, steel and shipbuilding – was an engineer by training.

If we don’t need economists to have good economic performance, as in the East Asian cases, what use is economics? Have the IMF, the World Bank and other international organizations been wasting money when they provided economics training courses for developing-country government officials and scholarships for bright young things from those countries to study in American or British universities renowned for their excellence in economics?

A possible explanation of the East Asian experience is that what is needed in those who are running economic policy is general intelligence, rather than specialist knowledge in economics. It may be that the economics taught in university classrooms is too detached from reality to be of practical use. If this is the case, the government will acquire more able economic policy-makers by recruiting those who have studied what happens to be the most prestigious subject in the country (which could be law, engineering or eveneconomics, depending on the country), rather than a subject that is notionally most relevant for economic policy-making (that is, economics) (see Thing 17). This conjecture is indirectly supported by the fact that although economic policies in many Latin American countries have been run by economists, and very highly trained ones at that (the ‘Chicago Boys’ of General Pinochet being the most prominent example), their economic performance has been much inferior to that of the East Asian countries. India and Pakistan also have many world-class economists, but their economic performance is no match for the East Asian one.

John Kenneth Galbraith, the wittiest economist in history, was certainly exaggerating when he said that ‘economics is extremely useful as a form of employment for economists’, but he may not have been far off the mark. Economics does not seem very relevant for economic management in the real world.

Actually, it is worse than that. There are reasons to think that economics may be positively harmful for the economy.

How come nobody could foresee it?

In November 2008, Queen Elizabeth II visited the London School of Economics, which has one of the most