23 Things They Don't Tell You About Capitalism

reasons, but they should not delude themselves into believing that it would have a significant productivity effect.

In the case of developing countries, an even more radical change of perspective is needed. While they should expand education in order to prepare their youngsters for a more meaningful life, when it comes to the question of productivity increase, these countries need to look beyond the education of individuals and pay more attention to building the right institutions and organizations for productivity growth.

What really distinguishes the rich countries from the poorer ones is much less how well educated their individual citizens are than how well their citizens are organized into collective entities with high productivity – be that giant firms such as Boeing or Volkswagen or the smaller world-class firms of Switzerland and Italy (see Thing 15). Development of such firms needs to be supported by a range of institutions that encourage investment and risk-taking – a trade regime that protects and nurtures firms in ‘infant industries’ (see Things 7 and 12), a financial system that provides ‘patient capital’ necessary for long-term productivity-enhancing investments (see Thing 2), institutions that provide second chances for both the capitalists (a good bankruptcy law) and for the workers (a good welfare state) (see Thing 21), public subsidies and regulation regarding R&D and training (see Things 18 and 19), and so on.

Education is valuable, but its main value is not in raising productivity. It lies in its ability to help us develop our potentials and live a more fulfilling and independent life. If we expanded education in the belief that it will make our economies richer, we will be sorely disappointed, for the link between education and national productivity is rather tenuous and complicated. Our overenthusiasm with education should be tamed, and, especially in developing countries, far greater attention needs to be paid to the issue of establishing and upgrading productive enterprises and institutions that support them.

Thing 18 What is good for General Motors is not necessarily good for the United States

What they tell you

At the heart of the capitalist system is the corporate sector. This is where things are produced, jobs created and new technologies invented. Without a vibrant corporate sector, there is no economic dynamism. What is good for business, therefore, is good for the national economy. Especially given the increasing international competition in a globalizing world, countries that make opening and running businesses difficult or make firms do unwanted things will lose investment and jobs, eventually falling behind. Government needs to give the maximum degree of freedom to business.

What they don’t tell you

Despite the importance of the corporate sector, allowing firms the maximum degree of freedom may not even be good for the firms themselves, let alone the national economy. In fact, not all regulations are bad for business. Sometimes, it is in the long-run interest of the business sector to restrict the freedom of individual firms so that they do not destroy the common pool of resources that all of them need, such as natural resources or the labour force. Regulations can also help businesses by making them do things that may be costly to them individually in the short run but raise their collective productivity in the long run – such as the provision of worker training. In the end, what matters is not the quantity but the quality of business regulation.

How Detroit won the war

They say that Detroit won the Second World War. Yes, the Soviet Union sacrificed the most people – the estimated death toll in the Great Patriotic War (as it is known in Russia) was upward of 25 million, nearly half of all deaths worldwide. But it – and, of course, the UK – would not have survived the Nazi offensive without the arms sent over from what Franklin Roosevelt called ‘the arsenal of democracy’, that is, the United States. And most of those arms were made in the converted factories of the Detroit car-makers – General Motors (GM), Ford and Chrysler. So, without the industrial might of the US, represented by Detroit, the Nazis would have taken over Europe and at least the western part of the Soviet Union.

Of course, history is never straightforward. What made the early success of Nazi Germany in the war possible was the ability of its army to move quickly – its famous Blitzkrieg, or Lightning War. And what made that high mobility of the German army possible was its high degree of motorization, many technologies for which were supplied by none other than GM (through its Opel subsidiary, acquired in 1929). Moreover, evidence is emerging that, in defiance of the law, throughout the war GM secretly maintained its link with Opel, which built not only military cars but aircraft, landmines and torpedoes. So it seems that GM was arming both sides and profiting from it.

Even among the Detroit car-makers – collectively known as the Big Three – GM by then stood pre-eminent. Under the leadership of Alfred Sloan Jr, who ran it for thirty-five years (1923–58), GM had overtaken Ford as the largest US car-maker by the late 1920s and gone on to become the all-American automobile company, producing, in Sloan’s words, ‘a car for every purse and purpose’, arranged along a ‘ladder of success’, starting with Chevrolet, moving up through Pontiac, Oldsmobile, Buick and finally culminating in Cadillac.

By the end of the Second World War, GM was not just the biggest car-maker in the US, it had become the biggest company in the country (in terms of revenue). It was so important that, when asked in the Congressional hearing for his appointment as US Defense Secretary in 1953 whether he saw any potential conflict between his corporate background and his public duties, Mr Charlie Wilson, who used to be the CEO of General Motors, famously replied that what is good for the United States is good for General Motors and vice versa.

The logic behind this argument seems difficult to dispute. In a capitalist economy, private sector companies play the central role in creating wealth, jobs and tax revenue. If they do well, the whole economy does well by extension. Especially when the enterprise in question is one of the largest and technologically most dynamic enterprises, like GM in the 1950s, its success or otherwise has significant effects on the rest of the economy – the supplier firms, the employees of those firms, the producers of goods that the giant firm’s employees, who can number in the hundreds of thousands, may buy, and so on. Therefore, how these giant firms do is particularly important for the prosperity of the national economy.

Unfortunately, proponents of this logic say, this obvious argument was not widely accepted during much of the twentieth century. One can understand why communist regimes were against the private sector – after all, they believed that private property was the source of all the evils of capitalism. However, between the Great Depression and the 1970s, private business was viewed with suspicion even in most capitalist economies.

Businesses were, so the story goes, seen as anti-social agents whose profit-seeking needed to be restrained for other, supposedly loftier, goals, such as justice, social harmony, protection of the weak and even national glory. As a result, complicated and cumbersome systems of licensing were introduced in the belief that governments need to regulate which firms do what in the interest of wider society. In some countries, governments even pushed firms into unwanted businesses in the name of national development (see Things 7 and 12). Large firms were banned from entering those segments of the market populated by small farms, factories and retail shops, in order to preserve the traditional way of life and protect ‘small men’ against big business. Onerous labour regulations were introduced in the name of protecting worker rights. In many countries, consumer rights were extended to such a degree that it hurt business.

These regulations, pro-business commentators argue, not only harmed the large firms but made everyone else worse off by reducing the overall size of the pie to be shared out. By limiting the ability of firms to experiment with new ways of doing business and enter new areas, these regulations slowed down the growth of overall productivity. In the end, however, the folly of this anti-business logic became too obvious, the argument goes. As a result, since the 1970s, countries from all around the world have come to accept that what is good for business is good for the national economy and have adopted a pro-business policy stance. Even communist countries have given up their attempts to stifle the private sector since the 1990s. Need we ponder upon this issue any more?

How the mighty has fallen

Five decades after Mr Wilson’s remark, in the summer of 2009, GM went bankrupt. Notwithstanding its well-known aversion to state ownership, the US government took over the company and, after an extensive