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Review of Ha-Joon Chang's Bad Samaritans

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July 09, 2012 – Comments (13)

I have a good friend that just returned from Afghanistan.  His tour appears to have made him more conscience of the bigger political and economic influences that change the fate of nations. It's great to have him back in the States, and I'm happy that he's doing very well.  Since similar experiences forced me to take a hard look at the realities of the nation-state many years back, I can certainly understand how these things change your life.  I was thrilled when I found out he was reading my blogs and questioning both mine and others economic ideas.  A while back he asked that I read Ha-Joon Chang's Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism. Although my overall impression of the economic analysis performed by Chang is not favorable, I did learn a few things, and I was impressed by Chang's life experiences and passion for helping others.  Like the great economists before him, he truly believes that economics can show us a way to a better world.  I completely agree.  

A History of Capitalism

Any history of capitalism is going to need more than 222 pages to cover.  But we have to understand what type of economic book Chang is trying to write. He's not reaching out to the scholars.  He's trying to sway public opinion.  In that regard, it would be similar to Thomas DiLorenzo's How Capitalism Saved America, which comes from the complete polar opposite perspective.  You could take the two books side-by-side, hand them to the lay reader, and ask "who makes the better case?"  The benefit is that at the end of the day, you'll have a person who was previously rather uninformed on economic ideas suddenly able to make coherent points on a wide range of topics.  The negative, however, is obvious.  Neither Chang's nor DiLorenzo's  book are going to uncover economic truths.  You will have facts selected that fit the narrative, not rigorous analysis of the problems faced by economists. 

Chang's Story

I didn't know much about Chang before I read Bad Samaritans, and that was helpful. It would have been more helpful if Joseph Stiglitz's endorsement wasn't on the cover, but I guess the publisher doesn't expect the lay reader to know that Stiglitz is a rather famous Keynesian economist.  I did my best to not use that endorsement against Mr. Chang.  Ha-Joon started out as a Marxist understudy, but it's difficult to classify him in any way now.  I think he would prefer to just be known as an economist.  His views on central planning are certainly not those of the typical Socialist, and he does show the knowledge of a wide range of criticisms of state planning, including those of Hayek.

Growing up in post WWII South Korea, his experiences with povery shaped his view of the world.  He saw first hand how economists from rich nations helped shape policies that degraded the progress of poorer ones, including his own.  He seems to have made his mission in life to right those wrongs, so to speak.  Unfortunately, like most economists, he only goes halfway, seeking to reform inherently corrupt and fraudulent institutions, rather than abolish them.  I can see why Keynesians fawn over him.  His belief in the legitimacy of the nation-state, and its ability to make the world better through its institutions, appears unshakable.  That's really too bad.  Libertarians understand that these institutions can never be made judicious and fair, since they derive their revenue ultimately from coercion and violence.  Although Chang's intentions are honorable, his work to reform the system will always fail, and only lead to increased power for the politically connected. Chang now serves as an advisor to the IMF, the very institution that has helped to keep underdeveloped nations down for decades. 

Can't wait to hear how that works out.

According to Chang, the IMF (he has no love for the World Bank and many other supranational institutions either) was set up by "free market" economists to pry open the borders of backward nations.  Liberate them, if you will.  And this is where the pleasantries end and I tell you why Chang is one messed up bird. 

One Man vs. The Neo-Liberals

Chang classifies such a wide range of economists as neo-liberals, a term he uses so often throughout the book I wonder if there was a usage clause in his publishing contract, and free traders that it borders on construction a Strawman Argument.  Everyone not named Chang it seems, is a neo-liberal.  Being relatively unfamiliar with mainstream economic talking points, I looked it up and found out that a neo-liberal generally means "politically conservative" economist.  In other words, Republican shill.  

Normally when Republicans and Democrats get in their little catfights, I tend to treat it the same way I would if the Crips and the Bloods were duking it out.  I find a safe spot far away, grab the popcorn, and root for both sides to annihilate each other.  The problem with Chang's view, however, is that everyone is a neo-liberal, since they were all at some point or another influenced by a free market guy way back when (usually, in his view, Hayek).  I found references to "free market" economists that no serious Internet Arm Chair Economist (like me) would consider as such.  Chang's enemies on this "side" range from Riccardo to Hayek to Milton Friedman to even, Paul Samuelson!  Samuelson, the longtime predictor of Soviet triumph, is apparently a "free market" guy in Chang's eyes.  Ugh.  Left out of Chang's work, naturally, are the economists that the Internet Libertarians view as having general free market purity, i.e. the Austrians, the Physiocrats, and the Scholastics.

Of course, we don't really expect the mainstream to know or care about the real free market economists, since they have long been brushed aside by the academia.  But like it or not, there are a metric ton of us, and we are the future.  So if you really want to sway opinions for the upcoming generation, and you're a mainstream economist trying to make a name for yourself, you had better start learning the nuances of the various non-socialist and non-Keynesian realms of economic discourse.  You can't influence us unless you attempt to understand us.

Likewise, Chang's idea of free trade is equally warped.  To Chang, any policy put forward by a neo-liberal is a free trade policy.  Libertarians understand that nation-states rarely implement anything that resembles free trade.  They call it that, but what they really do is manage trade.  Republicans are famous for talking a free trade game, but pushing a managed trade agenda.  But Democrats are no better.  Clinton promoted the North American Free Trade Agreement, which somehow include thousands of bureaucrats and millions of lines of regulation. I guess it sounds better to the masses than the North American Rigged Trade Agreement, but an economist of Chang's stature should be able to tell the difference.

Again, I understand the audience Chang is trying to reach and the limitations of a 222 page book.  It's just unfortunate that he so easily settles for the (rather lazy) traditional left/right paradigm.  That makes him "mainstream", which is a label I am sure Chang would abhor.  He relishes being outside the establishment, but he's not.  He's an inch outside the narrow range of ideas that spans from Hillary Clinton to Mitt Romney.  Whoop-de-doo.  From where the Internet Judging Panel sits, he's 100% dead center mainstream. 

Measuring Wealth

As he is trapped in a mainstream cage, whether he knows it or not, Chang uses statistics to support his case that only an Ivy League grad could love.  Chang's favorite is comparing per capita income of various nations.  Per capita income is a fancy way to say: "We averaged out the income for every individual in the nation."  Repeatedly, Chang uses per capita income over selected periods to show that Non Free Trade Country A grew faster than Pro Free Trade Country B.  Since we've already shown that what constitutes actual free trade is not exactly a strong part of Chang's analysis, we're left to wonder exactly what the per capita income statistics could even show us.

And the truth is, without context, they don't show much. What makes a person wealth is not, I repeat - this time in bold letters - is not his or her level of income.  Poor people believe that it is.  That's part of the reason they are poor.  Rich people - and smart economists - know that what truly matters is what you can purchase with that income.  Let's do a quick quiz.

Which person is wealthier?

Person A has an annual income of $20,000 and can purchase $17,000 worth of goods to satisfy his family of 4, with $3,000 left over for savings.

Person B - in a neighboring country - has an annual income of $200,000 and can purchase the same exact goods for his family of 4 for $180,000, leaving $20,000 remaining for savings.

If you guess Person B is wealthier, put the dunce cap on and go to the back of the class. (Unless you're unfortunate enough to be sitting in a Princeton economics class, in which case, you just got a star.)

Person A is wealthier. Not only can he buy the same basket of goods, but his remaining $3,000 has a greater purchasing power - can get him more stuff - than Person B's $20,000.  His money has more value because his economy is more productive.   

Per Capita Income is a poor way to make cross-nation comparisons of wealth, yet it is the #1 weapon in Chang's limited arsenal.

Methodologically Flawed

I am not here just to nitpick. Oh no sir-ee!  Let's explode the entire paradigm upon which Chang has built his case.  Economics is the study of human action. It is not the study of statistics.  There is no empirical evidence to be had in this world that will prove any economic theory.  There is a very simple reason for this, yet many brilliant men (and women) have fallen victim to the Fatal Conceit - that they can know the unknowable if only they gather enough data points.

Water freezes at 32 degrees Farhenheit.  We can measure that with precision.  Not a single economist has ever discovered an economic constant that can be measured with the precision of those found in the "hard sciences".  And they never will.  Economics is about human action, and humans have to make choices that water, for example, does not. 

Once again, we see that from the perspective of the Internet Purity Club for Correctly Done Economics, Chang is just another mainstream hack.  Certainly he's a more likeable guy than a Gilbraith or a Laffer, but his work seems incredibly crude when cast in the light of a deductive theorist who starts from the a priori maxim that all economic action is purposeful action, and works to draw laws of economic activity from there.

Without theory, one can assume anything, and Chang does.  Left out of his work on "capitalism" is the role of interest rate manipulation by central banks, the economic implications of various countries' private property laws, business cycle theory, capital theory, and on and on.  We are left with a handful of statistics that are supposed to make neo-liberals shake in their boots. But really, who cares?

Conclusion

If this all sounds too harsh, I want to add that I think Chang's book is a worthwhile read, even for my libertarian friends.  His analysis of the difficulties poor countries face in influencing policy at the IMF and other supra-national institutios is worth the price alone. Grab a copy and enjoy.

David in Liberty
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13 Comments – Post Your Own

#1) On July 10, 2012 at 12:52 AM, NOTvuffett (< 20) wrote:

ummm, david, you know you are one of my favorites, not because you are a good CAPS player, but because you have an intimate knowledge of economics and also highly delevolped critical thinking skills. 

I oftentimes read texts anti-thetical to my thinking to learn about the other side.

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#2) On July 10, 2012 at 1:34 AM, whereaminow (< 20) wrote:

Thanks NOTvuffett! 

I want to add a caveat from my 'quiz' above. Even though I used the same currency symbol ($) I don't mean to imply that both countries use the same currency. Obviously the numbers are meant to be understood in whatever their currency would be. I'm just not creative enough to make up two fake currency names.

David in Liberty 

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#3) On July 10, 2012 at 10:18 AM, Valyooo (99.40) wrote:

Everyone not named Chang it seems, is a neo-liberal

So I guess that leaves about 1 billion Asians in the clear :)

/tasteless

Like the great economists before him, he truly believes that economics can show us a way to a better world.  I completely agree.  

Eh, I respectfully disagree, completely.  Economics is very interesting to me.  However, I wish it were not, because I find it mostly pointless.  I cannot possibly envision a day where the world becomes any more free or liberated or runs according to how a true free market society should run.   Instead, I think the world will probably become more dominated by the state.  And when we are discussing the mechanics of an economy, even if we were in a free market, observing the mechanics does not really change anything.  When you learn engineering, you learn how to build something.  When you learn economics, you learn about how something works, but you can't really do much about it.  For some reason I am fascinated by it, I just dont think understanding it will change much, especially since the masses are idiots and completely unwilling to change their mind. You can give a 4 hour lecture to somebody explaining why roads would be more efficient if left to private practice, and I guarantee you somebody will raise their hand and say. "right, but how could they possibly exist without government?".

  Not a single economist has ever discovered an economic constant that can be measured with the precision of those found in the "hard sciences".  And they never will

This also has bothered me a little.  It makes economics look like guesswork, as opposed to a hard science like physics which takes a lot of actual work.  People can't use opinions to say water really boils at 900 degrees, but they can say you're wrong about economics even if you are not, because you can't measure it.

Anyway, that aside, great blog, very interesting, I had never heard of this guy before.

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#4) On July 10, 2012 at 12:30 PM, whereaminow (< 20) wrote:

Thanks for the comment Val (and I got a kick out of the joke.)

I certainly get where you're coming from. I hate politics and think it's worthless and yet I find myself on all these darn political websites all the time.  We love what we hate? Or we just love to torment ourselves.

David in Liberty

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#5) On July 10, 2012 at 1:05 PM, rfaramir (29.31) wrote:

Valyooo,

"It makes economics look like guesswork"

Not quite on the mark. More like economics has to take a more humble tack. There are no hard constants, but there are perfectly true and useful statements in economics, e.g., "when the price is lowered, more will be demanded." But measuring how much more was demanded in one situation when the price was lowered a certain amount tells us very little about how much more will be demanded of a different product by a different population.

People are all human, so the human action axiom is always true and the whole set of Causal-Realist (Austrian) Economic insights based on it. But all humans are also unique and creative, so you have to let them be unique and not try to either predict precisely what they will do nor try to force them to do anything in particular.

Hard scientists could use a dose of humility, too, though usually when they step outside of their field. Remember when physicists were all the rage as government advisors trying to help solve various problems? It didn't work out too well. But economists have to remain humble even within their field, which no other school seems to realize, and so continue to make fools of themselves.

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#6) On July 10, 2012 at 1:27 PM, whereaminow (< 20) wrote:

rfaramir,

Thanks for the comment. I always love reading them!

David in Liberty

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#7) On July 10, 2012 at 1:31 PM, whereaminow (< 20) wrote:

Speaking of falling into the talking points trap, a quick perusal of social media links to shows that Chang is now fairly active in the "Austerity Never Works" camp.  Libertarians know that the entire austerity debate is a false choice (one set of government controls vs another), and yet another meaningless mainstream debate.

David in Liberty

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#8) On July 10, 2012 at 1:53 PM, mtf00l (50.17) wrote:

@whereaminow and rfaramir

I enjoy reading you both.

@whereaminow 

"like it or not, there are a metric ton of us, and we are the future"

When?

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#9) On July 10, 2012 at 2:11 PM, whereaminow (< 20) wrote:

mtf00l,

Who can say? I had a discussion the other day about the power of the two Americas.  The traditional left/right still holds the majority of power, but the future - the more diverse and intellectually interesting Internet Age - is just now starting to flex its might. It takes time, but one day, they'll be the ones in charge.

To put it another way, Chang's book would have been the "cool econ book" to read 20 years ago.  But today, it's barely relevant.  Young people are less interested in the traditional left/right battle, yet his publisher thinks that the youth are his audience.  They aren't. His real audience is taking Viagara and watching CBS.

David in Liberty

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#10) On July 10, 2012 at 2:25 PM, clarkofmn (< 20) wrote:

Solid review, David.  I found this book eye-opening and figured that you would have the knowledge base to dispute several of his talking points, so I'm glad to hear them.  The terms free marketeers and neo-liberals did get old.  A couple of things I could use more clarification on:

Do you consider comparing Per Capita GDP against the same nation state at different points in time effective? or is Per Capita GDP never valuable?  I realize its obvious faults, but some measure of growth should be available.

While some nations are superior in production (U.S. and Western Europe amongst others), do you believe there is ever a place for protectionist measures by developing nations?

Does a true free market encompass the removal of immigrational control?  How do workers get to the correct locations for employment?

Where does the funding for law, order, and the enforcement of property rights come from in a true free market?

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#11) On July 10, 2012 at 3:19 PM, whereaminow (< 20) wrote:

clarkofmn,

Thanks Clark! And welcome home!

Do you consider comparing Per Capita GDP against the same nation state at different points in time effective? or is Per Capita GDP never valuable?'

Unfortunately, it's just as tricky as per capita income. GDP includes government spending as a wealth adding effect as such that each $1 of government spending equals $1 of "growth."  This assertion is pretty silly on its face, since not all gov spending is created equally.  It's also disputable that it adds any growth, since government spending must come from a removal of available funds from other sectors. That, of course, leads to many other discussions about the best way for an economy to use resources. But the point is that GDP is not very helpful. It can show "growth" when all that's happened is an increase in government spending (generally via the printing of more paper money). GDP can aslo look negative when the economy is showing a preference for savings, which leads some economists to think savings is bad (paradox of thrift.)  Rather than savings being some evil, perhaps the measurement is flawed.

The problem is really with the use of Aggregates.  An economist that really wants to know what is going on in a particular country has a difficult task. He or she needs to eschew aggregates and mine for data that show how people are actually living. Is private output increasing?  How far does the local currency stretch? What industries are performing well, what aren't, and why?

Aggregates are a staple of mainstream economics of both sides of the usual talking points debate, but the Austrian School rejects them.  For more, see here.

While some nations are superior in production (U.S. and Western Europe amongst others), do you believe there is ever a place for protectionist measures by developing nations?

Well, I think they'll just lose in the long run, since the poorer nations will not have the political clout to keep the richer nations from winning trade wars with that strategy. But trade policy isn't a strong suit of mine. I only understand that free trade means the removal of government intervention in trade (including regulations) with respect for property rights and individual liberty.  I agree with Chang that there has been very little free trade success stories since WW I, but Chang thinks we've had free trade in so many areas that I would consider just another form of managed trade.  Trade wars ultimately hurt consumers by raising prices for the goods they need.  They can be helpful to certain interest groups however, and that's why they persist.

So to your answer question, they will help the manufacturers in those countries at the expense of their consumers.

Does a true free market encompass the removal of immigrational control?  How do workers get to the correct locations for employment? 

In its purist form yes, but sadly we can't just dismantle all borders tomorrow. We can start, however, by not using immigrants as scapegoats for bad policy.  

The question of the movement of labor needs more than I can give right now. In general, labor responds to market forces (which are ultimately directed by the tastes and time preferences of consumers) just as any other good.  But the word "labor" is a shorthand term that is often used in ways that make it seems as though it is homogenous.  Obviously, it can't be since everyone brings unique value to the market.  A lot can be said here, so if you want follow up, give me something more specific.

Where does the funding for law, order, and the enforcement of property rights come from in a true free market?

From the voluntary exchanges of economic actors, just as any other economic good or service in a free society.  Among the best reads on this topic is Hans Herman-Hoppe's The Private Production of Defense.  

David in Liberty

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#12) On July 10, 2012 at 8:43 PM, NOTvuffett (< 20) wrote:

hey david,

i really want to comment and question about the topic you brought up, and i will.  but i am really curious how farking govt. came to be counted in the gdp.  if you know the history i would like to hear it.

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#13) On July 10, 2012 at 9:07 PM, whereaminow (< 20) wrote:

NOTvuffett,

Good question. To be honestly, I'm not entirely sure so if anyone else knows the backstory feel free to chime in.  It is from the work of Keynes but I don't believe it's in General Theory, and there was a guy named Simon Kuznets that also helped to develop the formula.  It basically became holy grail at the Bretton Woods conference, and from that point forward.

But its roots are in the econometric revolution of Keynes' day.  I know that socialist ideas dominated the economic profession back then, and many economists felt that central planning was going to be the gateway to a new era. So it's likely that there was a great naivete regarding the effects of government spending.

But why/who exactly put the G in GDP (see what I did there?) I do not know.  I'm going to guess it was Kuznets.

Anyone else know?

David in Liberty

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