Buckle up, this is another sizeable piece… (my series conclusion is below too, so don’t miss that).
In this series looking skeptically at libertarian claims of free market capitalism being the holy grail of all of reality, I have come to the section where I cast a skeptical eye over some of the more common claims of libertarians. The claim appears to be that free market economics is responsible for the success of certain countries. I would like to set out here that, whilst this is true to some extent, it is not so obviously the case. Remember from previous posts, I am not advocating some kind of communist collectivism. This is not a false dichotomy. But I do think the only workable mechanics (certainly in scenarios where we have borders and nations) are those that involve both the state (ideally working morally on behalf of the people) and business organisations. And, indeed, the so-called free market success stories are quite ironically stories which involve protectionism and high tariffs as well as state-directed encouragement and the use of state-owned enterprises (SOEs).
Here is one such quote from the commenter with whom I was having a debate, originally centred around UKIP and their libertarian credentials (there is an appendix below of some of his rhetoric to show why I was motivated to go to lengths to answer some of his claims – you do not need to read it: I hope I am being more civil and respectful in my claims than he was):
…what matters is, free markets have existed and not once has any free market failed, never. Not once in history, they’ve always been a success. We saw that success in the United States in the late 19th Century, same again with the British Industrial Revolution, Hong Kong, Singapore, South Korea, Chile, but of course, we’ll ignore that fact now, won’t we?
This needs unpicking because he seems to have little idea what he is talking about. The US in the 19th century and Britain in the Industrial Revolution (IR) were exceptionally protectionist, as I have pointed out in the previous post. He is just flat-out wrong. There were elements of free market thinking, of course, but massive elements of regulatory framework in place, too. This mixed economic approach is what I was talking about in the previous post, and the commenter stakes his claim that this is pure (or purer) capitalism without recognising the causal efficacy of the states within these successes. In the cases at hand (the IR in the US and UK), this is sometimes called “infant industry protectionism“, a description of which can be found in another of Ha-Joon Chang’s books (I have referred previously at length to 23 Things They Don’t Tell You About Capitalism): Kicking Away the Ladder: Development Strategy in Historical Perspective (London, 2002).
You see, the commenter in question rabidly claimed:
You point out to me where those so called free markets are, because there are few, Hong Kong is one, their free market has never failed in history, their economy has been on the up ever since moving to a free market; then there is Chile who had a very strong free market, no failure there; if that wasn’t enough there is the Industrial Revolution of both the United States and Great Britain, neither of those free markets failed. But of course, I don’t expect you to understand that, because you are uneducated and you don’t understand that the Great Depression was not caused by a free market,
when I had never mentioned the Great Depression once. Like some giant, erected straw man, he ranted this way and that, thinking I was Lenin or someone similar.
One of the core facts to know is that the UK (and US to some extent) did not have its economic success owed wholly to free trade, because it was a pioneer in many manufacturing industries and had no competitors. It was a special case, and had large tariff systems in place until liberalisation in 1846. As Britain entered the second phase of the IR, the cotton textile industry became its spearhead as it competed against India and China. It did so by protecting the industry through government regulation. If we look at how Britain developed its first significant manufacturing industry which launched the industrial revolution, we find that it did so by severely “violating all the modern doctrines of free trade and free market economics”. This included these laws:
1685 – 10% import tariff on Indian goods;
1690 – tariff doubled to 20%;
1701 – First Calico Act, legislation banning imports of dyed, painted or printed fabric;
1707 – British textiles manufacturers obtained further tariffs on Indian textiles;
1721 – Second Calico Act, which further banned imports of Indian textiles.
I could go on about this, but it was well known by free marketeers at the time that the supposed free market success of the UK and US (e.g. through the work of Hamilton) that there was a great double standard involved. Some claim that the innovation of technology was what caused such success, but this is not true. It was protectionism, not innovation which caused competitive advantage:
“It was the wall of protection that made possible the survival and growth of the British cotton textile industry in the face of Indian competition and facilitated large capital investments in the industry. Without it, the English industry would have found it impossible to get a foothold in the home market, let alone abroad.” Alavi (1982: 56)
And Indian silk and cotton goods
“could be sold in the British market at a price between 50% and 60% lower than those fabricated in England. It consequently became necessary to protect the latter by duties of 70% to 80% on their value” (Das 1946: 313, quoting Mukerjee 1967).
As this economic commentator states:
Thus near-contemporary British apostles of free trade were the first to notice the double standard. They were appalled at the hypocrisy of British protectionism and the destruction of India’s prosperous cities built on textile exports.
But they of course failed to notice that the protectionism had been a major cause of Britain’s industrial revolution and that, without it, the UK would have been much poorer. In other words, the success of the cotton textile industry in the early industrial revolution in Britain was an example of infant industry protectionism, or modern import substitution industrialization (ISI).
This was very much the case with the US success in the 1800s. As George Monbiot states in “One thing is clear from the history of trade: protectionism makes you rich”:
By 1816 the US had imposed a 35% tax on most imported manufactures, which rose to 50% in 1832. Between 1864 and 1913 it was the most heavily protected nation on earth, and the fastest-growing. It wasn’t until after the second world war, when it had already become top dog, that it dropped most of its tariffs. The same strategy was followed by Japan, South Korea, Taiwan and almost every other country that is rich today. Within the ACP nations, the great success story of the past 30 years is the country whose protectionism has been fiercest: during the 1980s and 1990s, Mauritius imposed import tariffs of up to 80%. Protectionism, which can be easily exploited by corrupt elites, does not always deliver wealth; but development is much harder without it.
Which is why I get annoyed when the commenter makes such claims as
Absolute economic illiterate, historic illiterate, left-wing degenerate garbage. Absolute economic illiterate, historic illiterate, left-wing degenerate garbage.
because that shows rather a fair bit of hypocrisy.
Let me now look in no way comprehensively at some things about Hong Kong, Singapore, South Korea and Chile to burst the mythological bubble of free market economics as being responsible for their success (though it does contribute, though as much to their eventual crises and busts as their booms):
That’s why Singapore thrived, because they let their economy be. Anyone who claims economies grew because of strong government interference are people who don’t understand the very basics of economics. As proven by both Chile and Sweden, when Socialist policies are enacted, they only slow down the economy.
Let me start off by quoting economywatch.com:
The economy of Singapore is best described as a mixed economy. Although the country strongly advocates free-market policies and practices, government intervention is also evident in macroeconomic management and major factors of production such as land, labour and capital resources. This innovative and highly successful economic system – where both the market and the state have equally strong roles in the government – is dubbed as the Singapore Model.
The Singapore Model was born out of necessity. Singapore has a relatively small domestic market, and thus has to open its economy to external markets in order for the economy to thrive. However, the inherent vulnerability in depending on external markets compelled the government to enact economic policies that would safeguard the country from perturbations in the global market. Apart from these policies, the government has also actively encouraged new industries to develop in Singapore so as to respond to the needs of the global market.
The underlying influence of the government can also be felt in other various facets of the society – from education, to transportation, to housing and to the media. However, many social policies that have been implemented are often seen to be supplementary for the economy. As such, many people have labelled the country as “Singapore Inc.” – where the country appears to be run more like a corporation than a nation.
It has a mixed economic model named after it, for crying out loud! Wow.
As Chang mentions here:
I’m sure it’s similar in many other fields, but especially in economics there is no single economic theory that can explain everything. To make that point, I talk about Singapore in the book. If you read the standard account of Singapore’s economic success in The Economist, The Wall Street Journal, or some textbook, you only learn about Singapore’s free trade and welcoming attitude towards foreign investment. But you will never be told that all the land in Singapore is owned by the government, and 85 percent of housing is supplied by the government’s own housing corporation. 22 percent of GDP is produced by state-owned enterprises (including Singapore Airlines), when the world average in that respect is only about 9 percent.
So I challenge my students to tell me one economic theory, Neo-Classical or Marxist or whatever, that can explain Singapore’s success. There is no such theory because Singaporean reality combines extreme elements of capitalism and socialism. The point that I’m trying to make as an example is that all theories areClassical school or Marxist school focuses more on production than exchanges, in contrast to the Neo-Classical school. They make different assumptions, and they are interested in different issues. They all have their weakness and strengths. In recognition of the fact that the real world is very complex, we need to teach our students and the general public that there are different ways of understanding the economy.
It is terrible that students these days are taught there is only one flavor of ice cream, when there are 9 or 10 different ones. At least, let them taste them all, and if they conclude that neoclassical is the best, then so be it. But you have to at least tell them that there are all other kinds of theories. Otherwise, it’s like North Korea. They’re not told that there are other types of society because the information is blocked.
Which is delightfully accurate as the commenter with whom I was arguing appearing to believe in this false dichotomy of either communist collectivism or libertarian free marketism (and accusing me of adopting the former, whilst later confusingly contradicting himself on his claims).
To continue looking at Singapore (this list is partly taken from here).
- The top six government-linked corporations (GLCs) account for 17% of total capitalisation!
- The public sector is used as a driver for the economy (investing, catalysing).
- Two sovereign wealth funds (Temasek Holdings and GIC Private Limited) which are used to manage the country’s reserves
- US Dept of State: “Singapore’s aggressive pursuit of foreign investment as another pillar of its overall economic strategy has enabled the country to evolve into a base for multinational corporations (MNCs). The Economic Development Board (EDB), Singapore’s investment promotion agency, focuses on securing major investments in high value-added manufacturing and service activities as part of a strategy to replace labor-intensive, low value-added activities that have migrated offshore.”
- One of strongest property rights frameworks in Asia
- Corporate Social Responsibility regulation and strategies
- Singapore imposes a ceiling on the ratio of unskilled/semi-skilled foreign workers to local workers that a company can employ, and charges a monthly levy for each unskilled or semi-skilled foreign worker. The government also provides incentives and assistance to firms to automate and invest in labor-saving technology.
- State ownership is prominent in strategic sectors of the economy, including telecommunications, media, public transportation, defence, port, airport operations as well as banking, shipping, airline, infrastructure and real estate
- Singapore is also ranked third in the World Economic Forum’s Global Competitiveness Report behind Switzerland and Sweden (so it would be worth looking at the success of these economies, eh!)
So it doesn’t look like the commenter has done his research, though he posts a great number of videos on You Tube espousing this nonsense.
This is an interesting case (for me doubly so as I used to live there). The economy is managed by an informal coalition of private economic organisations and the government, and its small city-state infrastructure has meant easy diffusion of economic benefits. This, and being an ex-colony, make it hard to compare with any rigour to other economies. As the Economist states:
Of course, Hong Kong was never entirely free of state interference. Immediately after receiving a semblance of legal title in 1841 under the Convention of Chuenpi, the British began their first municipal building project, a cemetery for the legions of colonisers taken by dysentery and malaria. The colonial government kept control of a critical resource: land. It granted only limited leases, with the sole exception of the local headquarters of the Anglican church. The property market that has since developed, an almost impenetrable blend of government and tycoons, could satisfy no free-market purist.
The property market’s distortions feed through to other sectors, such as retailing. Another exception to the free-market rule is the currency’s peg at around $7.80 to the American dollar. And the state has also had a habit of granting or tolerating monopolies, for example in gambling. Hong Kong’s way has by no means been synonymous with perfect competition.
As Emily Vuong states of East Asian economic success, the key was government interaction with economic ideals:
Paul Krugman wrote a famous paper in the 1990s outlining the myths surrounding the Asian miracle of the 20th century. Rather than it being a ‘miracle’, he presented a less dazzling critique of Asia’s economic success. He proposed that it was a combination of stringent government policy and the further adoption of free trade that was key to sustaining economic growth in East Asia. Most of this growth occurred in eight economies, collectively referred to as the High Performing Asian Economies (HPAEs) – Japan, Hong Kong, the Republic of Korea, Singapore, Taiwan, and the newly industrializing Indonesia, Malaysia, and Thailand . The relationship between public policy and economic growth is now more important than ever, and in light of the continuing economic crisis in Europe, there are a number of lessons to be learnt from the success of the HPAEs.
The Asian Miracle of the second half of the twentieth century can be largely attributed to the authoritarian regimes implemented by domestic governments. To this day, they utilise a heavy hand in central planning even as markets become increasingly decentralised. The HPAEs used a variety of policies to achieve the three functions of growth – accumulation, allocation, and productivity growth. These included the promotion of institutional and policy reform, strengthening of competition, promotion of the accumulation of physical and human capital and adoption of trade liberalisation. Even then, Asia did not experience immediate economic success, with most of the benefit of meticulous government planning through a ‘nexus of policies’  only beginning to accrue over the longer term. As such, Krugman’s view that growth during this period was founded upon good foresight rather than fortune was clearly an insightful one.
The effective use of government policy during this era was pivotal in kick-starting strong and sustainable economic growth. The success of Asia was largely dependent on the types of institutional and structural reforms the government promoted, however it was no single policy that ensured success…
The so-called ‘miracle’ of economic success in East Asia during the second half of the twentieth century can be largely attributed to ‘perspiration’ through the development of fundamental government policy, which to this day continues to foster growth, innovation and constant development. Asia’s success was most certainly not an overnight phenomenon. It certainly is, though, an illustration of the importance of core policy initiatives and ongoing scrutiny, still evident today as the governments of the HPAEs face new economic challenges and take steps to ensure they continue down a path of perpetual economic growth.
To add to that, there is this:
Firstly, like most examples of the wonders of a free market, it is not a democracy, it was a relatively liberal colonial dictatorship run from Britain. But political liberty does not rate highly with many supporters of laissez-faire capitalism (such as right-libertarians, for example). Secondly, the government owns all the land, which is hardly capitalistic, and the state has intervened into the economy many times (for example, in the 1950s, one of the largest public housing schemes in history was launched to house the influx of about 2 million people fleeing Communist China). Thirdly, Hong Kong is a city state and cities have a higher economic growth rate than regions (which are held back by large rural areas). Fourthly, according to an expert in the Asian Tiger economies, “to conclude . . . that Hong Kong is close to a free market economy is misleading.” [Robert Wade,Governing the Market, p. 332]
Wade notes that:
“Not only is the economy managed from outside the formal institutions of government by the informal coalition of peak private economic organisations [notably the major banks and trading companies, which are closely linked to the life-time expatriates who largely run the government. This provides a “point of concentration” to conduct negotiations in line with an implicit development strategy], but government itself also has available some unusual instruments for influencing industrial activity. It owns all the land. . . It controls rents in part of the public housing market and supplies subsidised public housing to roughly half the population, thereby helping to keep down the cost of labour. And its ability to increase or decrease the flow of immigrants from China also gives it a way of affecting labour costs.”[Ibid.]
Wade notes that “its economic growth is a function of its service role in a wider regional economy, as entrepot trader, regional headquarters for multinational companies, and refuge for nervous money.” [Op. Cit., p. 331]. In other words, an essential part of its success is that it gets surplus value produced elsewhere in the world. Handling other people’s money is a sure-fire way of getting rich (see Henwood’s Wall Street to get an idea of the sums involved) and this will have a nice impact on per-capita income figures (as will selling goods produced sweat-shops in dictatorships like China)…
Therefore it is pretty clear that Hong Kong does not really show the benefits of “free market” capitalism. Wade indicates that we can consider Hong Kong as a “special case or as a less successful variant of the authoritarian-capitalist state.” [Op. Cit., p. 333] Its success lies in the fact that it has access to the surplus value produced elsewhere in the world (particularly that from the workers under the dictatorship in China and from the stock market) which gives its economy a nice boost.
Given that everywhere cannot be such a service provider, it does not provide much of an indication of how “free market” capitalism would work in, say, the United States. And as there is in fact extensive (if informal) economic management and that the state owns all the land and subsidies rent and health care, how can it be even considered an example of “capitalism in action”?
So not only is Hong Kong difficult to use as an example of anything generic, since it is so particular as a case, it is very much an example of a mixed style of economy with the government playing a vital role. Finally, I will leave you with part of the abstract for a paper which looks at the mixed economic approach of both Hong Kong and Singapore (“Government Intervention In The Economy: A Comparative Analysis Of Singapore And Hong Kong“):
However, as the two were maturing socially and economically in the last few decades, both governments found the necessity to adopt a hybrid strategy of mixing economic interventions with the free-market approach. An examination of public finance and economic policies since the onset of the Asian economic turmoil shows that the two have become increasingly similar in their economic approaches, with heavy emphasis on stabilizing the economy and stimulating business activities through government initiatives.
This is what the commenter said to me in one comment:
Throughout recorded history, the evidence has clearly proven that the freer the economy has been from regulation, the better off the economy has been. That’s why Chile’s fastest growth period was between the early 1980s to the mid 2000’s. The hilarity is, Chile is now the richest nation in South America, it has very low costs of living, high paid wages, yet is an economy that has strong private enterprise, it’s a free market. That’s how we know you talk nonsense…
In case you haven’t noticed, Chile is not a mixed economy, it’s a free market.
Fascinating that now he can explicitly claim an economy to be free market and thus be able to explicitly define that (see that last two posts to understand how this gets him into lots of definitional trouble). What is interesting is that on one of his videos on Chile he actually had Chileans stating things like:
Hey Scotty, I truly think you’re just talking out of you’re arse here. Chile can’t be an example of anything but legalized slavery. Low income jobs plus extremely long working hours is what keeps this country’s people dumbed/numbed down. A dehumanizing system is what you stand up for.
Market in Chile is not REALLY free. Monopoly is a real issue; new banks are not allowed to settle in the country to compete with the few existing ones. Pharmaceutical companies joined to jack up prices and were convicted for it but there is no guarantee that they are not doing the same thing today. Government is in bed with big companies and lobby on law-making is completely unregulated. We are one of the most unequal countries in the world and we have depression and suicide rates you wouldn’t believe. I would gladly welcome free market but that’s not happening anytime soon. Reality in Chile is much more complex than you describe here.
I gladly invite you to come here and join Chile’s working class. You wouldn’t survive a fucking month, mate, I can assure you that. You’ll be praying to be back in welfare Scotland as soon as possible.
Which I thought was quite interesting, though certainly doesn’t particularly prove anything, other than perhaps showing how one-dimensional the commenter’s rubric is for measuring success. The Miracle of Chile, popularly spouted by many libertarian politicians and free marketeers, originating from Milton Friedman, is yet another problematic claim. This is the period of economic growth experienced by Chile which had its birth in the mid-1970s and continued for a decade or so, making it stand out from its South American neighbours. Whether it be correlation of proper causation between free market policies introduced by free marketeer economists in Chile who became known as the Chicago Boys, and its economic success (though also a crisis), is somewhat contested. As ever in economics, there are plenty of other factors.
As wikipedia points out:
Some economists (such as Nobel laureate Amartya Sen) have argued that the experience of Chile in this period indicates a failure of the economic liberalism posited by thinkers such as Friedman, claiming that there was little net economic growth from 1975 to 1982 (during the so-called “pure Monetarist experiment”). After the catastrophic banking crisis of 1982 the state controlled more of the economy than it had under the previous so-called “socialist” regime, and sustained economic growth only came after the later reforms that privatized the economy, while social indicators remained poor. Pinochet’s dictatorship made the unpopular economic reorientation possible by repressing opposition to it. Rather than a triumph of the free market, the OECD economist Javier Santiso described this reorientation as “combining neo-liberal [sic] sutures and interventionist cures”. By the time of sustained growth, the Chilean government had “cooled itsneo-liberal [sic] ideological fever” and “controlled its exposure to world financial markets and maintained its efficient copper company in public hands”.
The Financial Times similarly concludes that the success of Chile was precisely not the introduction of free market ideals, but the reaction to the banking crisis which came about, ironically, as a result of the free market policies introduced by the Chicago Boys:
This is an attractive argument and provides an interesting framework in which to measure the region’s political progress. It is a particularly valuable way to see Chile, the most successful economy in the region over the past two decades. Santiso attributes Chile’s achievements not to the blind application of free-market orthodoxy but to flexibility in policymaking from the mid-1980s onwards. In other words, the crucial moment was not, as the liberal right argues, the 1973 coup against Salvador Allende, the socialist president, but the catastrophic banking crisis of 1982, the product in part of economic policies pursued by the radical free-marketeers known as the Chicago Boys.
During the 1990s, when countries such as Argentina and Mexico implemented shock therapy and quickly sold off state property, a newly democratic Chile controlled its exposure to world financial markets and maintained its efficient copper company in public hands. The result was a relatively smooth encounter with globalisation, a decade of consistent expansion and a 50 per cent reduction in poverty levels.
Chile, says Santiso, is often presented as the “culmination of Latin America’s neo-liberal trajectory”. In fact, “the great lesson” to be taken from the country’s experience is “achieving distance from ideological fevers of all kinds”.
In fact, according to United Nations Economic Commission for Latin America and the Caribbean data, the percentage of Chilean population living in poverty rose from 17% in 1969 to 45% in 1985.
Other indicators of success (you know, there are other measures other than strictly economic ones!) are also put down to state intervention. Amartya Sen claims that massive improvements in infant mortality were not because of “free-market” policies but as a result of active public and state intervention. He acknowledges (in his book Hunger and Public Action) that Chile had a very long tradition of public action for the improvement of childcare, which were largely maintained after the Pinochet coup:
… there is little disagreement as to what caused the observed improvement in the area of child health and nutrition…It would be hard to attribute the impressively steady decline in infant mortality … (despite several major economic recessions) … to anything else than the maintenance of extensive public support measures
As this commentator states:
The actual results of the free market policies introduced by the dictatorship were far less than the “miracle” claimed by Friedman and a host of other “Libertarians.” The initial effects of introducing free market policies in 1975 was a shock-induced depression which resulted in national output falling buy 15 percent, wages sliding to one-third below their 1970 level and unemployment rising to 20 percent. [Elton Rayack, Not so Free to Choose, p. 57] This meant that, in per capita terms, Chile’s GDP only increased by 1.5% per year between 1974-80. This was considerably less than the 2.3% achieved in the 1960’s. The average growth in GDP was 1.5% per year between 1974 and 1982, which was lower than the average Latin American growth rate of 4.3% and lower than the 4.5% of Chile in the 1960’s. Between 1970 and 1980, per capita GDP grew by only 8%, while for Latin America as a whole, it increased by 40%. Between the years 1980 and 1982 during which all of Latin America was adversely affected by depression conditions, per capita GDP fell by 12.9 percent, compared to a fall of 4.3 percent for Latin America as a whole. [Op. Cit., p. 64]
In 1982, after 7 years of free market capitalism, Chile faced yet another economic crisis which, in terms of unemployment and falling GDP was even greater than that experienced during the terrible shock treatment of 1975. Real wages dropped sharply, falling in 1983 to 14 percent below what they had been in 1970. Bankruptcies skyrocketed, as did foreign debt and unemployment. [Op. Cit., p. 69] By 1983, the Chilean economy was devastated and it was only by the end of 1986 that Gross Domestic Product per capita (barely) equalled that of 1970. [Thomas Skidmore and Peter Smith, “The Pinochet Regime”, pp. 137-138, Modern Latin America]
Faced with this massive collapse of a “free market regime designed by principled believers in a free market” (to use Milton Friedman’s words from an address to the “Smith Centre,” a conservative Think Tank at Cal State entitled “Economic Freedom, Human Freedom, Political Freedom”) the regime organised a massive bailout. The “Chicago Boys” resisted this measure until the situation become so critical that they could not avoid it. The IMF offered loans to Chile to help it out of mess its economic policies had helped create, but under strict conditions. The total bailout cost 3 per cent of Chile’s GNP for three years, a cost which was passed on to the taxpayers. This follows the usual pattern of “free market” capitalism — market discipline for the working class, state aid for the elite. During the “miracle,” the economic gains had been privatised; during the crash the burden for repayment was socialised.
The Pinochet regime did reduce inflation, from around 500% at the time of the CIA-backed coup (given that the US undermined the Chilean economy — “make the economy scream”, Richard Helms, the director of the CIA — high inflation would be expected), to 10% by 1982. From 1983 to 1987, it fluctuated between 20 and 31%. The advent of the “free market” led to reduced barriers to imports “on the ground the quotas and tariffs protected inefficient industries and kept prices artificially high. The result was that many local firms lost out to multinational corporations. The Chilean business community, which strongly supported the coup in 1973, was badly affected.” [Skidmore and Smith, Op. Cit.]
The decline of domestic industry had cost thousands of better-paying jobs. The ready police repression made strikes and other forms of protest both impractical and dangerous. According to a report by the Roman Catholic Church 113 protesters had been killed during social protest against the economic crisis of the early 1980s, with several thousand detained for political activity and protests between May 1983 and mid-1984. Thousands of strikers were also fired and union leaders jailed. [Rayack, Op. Cit., p. 70] The law was also changed to reflect the power property owners have over their wage slaves and the “total overhaul of the labour law system [which] took place between 1979 and 1981. . . aimed at creating a perfect labour market, eliminating collective bargaining, allowing massive dismissal of workers, increasing the daily working hours up to twelve hours and eliminating the labour courts.” [Silvia Borzutzky, Op. Cit., p. 91] Little wonder, then, that this favourable climate for business operations resulted in generous lending by international finance institutions.
By far the hardest group hit was the working class, particularly the urban working class. By 1976, the third year of Junta rule, real wages had fallen to 35% below their 1970 level. It was only by 1981 that they has risen to 97.3% of the 1970 level, only to fall again to 86.7% by 1983. Unemployment, excluding those on state make-work programmes, was 14.8% in 1976, falling to 11.8% by 1980 (this is still double the average 1960’s level) only to rise to 20.3% by 1982. [Rayack, Op. Cit., p. 65]. Unemployment (including those on government make-work programmes) had risen to a third of the labour force by mid-1983. By 1986, per capita consumption was actually 11% lower than the 1970 level. [Skidmore and Smith, Op. Cit.] Between 1980 and 1988, the real value of wages grew only 1.2 percent while the real value of the minimum wage declined by 28.5 percent. During this period, urban unemployment averaged 15.3 percent per year. [Silvia Bortzutzky, Op. Cit., p. 96] Even by 1989 the unemployment rate was still at 10% (the rate in 1970 was 5.7%) and the real wage was still 8% lower than in 1970. Between 1975 and 1989, unemployment averaged 16.7%. In other words, after nearly 15 years of free market capitalism, real wages had still not exceeded their 1970 levels and unemployment was still higher. As would be expected in such circumstances the share of wages in national income fell from 42.7% in 1970 to 33.9% in 1993. Given that high unemployment is often attributed by the right to strong unions and other labour market “imperfections,” these figures are doubly significant as the Chilean regime, as noted above, reformed the labour market to improve its “competitiveness.”
Another consequence of Pinochet’s neo-classical monetarist policies “was a contraction of demand, since workers and their families could afford to purchase fewer goods. The reduction in the market further threatened the business community, which started producing more goods for export and less for local consumption. This posed yet another obstacle to economic growth and led to increased concentration of income and wealth in the hands of a small elite.” [Skidmore and Smith, Op. Cit.]
It is the increased wealth of the elite that we see the true “miracle” of Chile. According to one expert in the Latin American neo-liberal revolutions, the elite “had become massively wealthy under Pinochet” and when the leader of the Christian Democratic Party returned from exile in 1989 he said that economic growth that benefited the top 10 per cent of the population had been achieved (Pinochet’s official institutions agreed). [Duncan Green, The Silent Revolution, p. 216, Noam Chomsky, Deterring Democracy, p. 231] In 1980, the richest 10% of the population took in 36.5% of the national income. By 1989, this had risen to 46.8%. By contrast, the bottom 50% of income earners saw their share fall from 20.4% to 16.8% over the same period. Household consumption followed the same pattern. In 1970, the top 20% of households had 44.5% of consumption. This rose to 51% in 1980 and to 54.6% in 1989. Between 1970 and 1989, the share going to the other 80% fell. The poorest 20% of households saw their share fall from 7.6% in 1970 to 4.4% in 1989. The next 20% saw their share fall from 11.8% to 8.2%, and middle 20% share fell from 15.6% to 12.7%. The next 20% share their share of consumption fall from 20.5% to 20.1%.
Thus the wealth created by the Chilean economy in during the Pinochet years did not “trickle down” to the working class (as claimed would happen by “free market” capitalist dogma) but instead accumulated in the hands of the rich. As in the UK and the USA, with the application of “trickle down economics” there was a vast skewing of income distribution in favour of the already-rich…
Looking at the entire Pinochet era we discover that only by 1989 — 14 years into the free-market policies – did per capita output climb back up to the level of 1970. Between 1970 and 1990, Chile’s total GDP grew by a decidedly average 2% a year. Needless to say, these years also include the Allende period and the aftermath of the coup and so, perhaps, this figure presents a false image of the regime’s record. If we look at the 1981-90 period to (i.e. during the height of Pinochet’s rule, beginning 6 years after the start of the Chilean “Miracle”), the figure is worse with the growth rate in GDP just 1.84% a year. This was slower than Chile during the 1950s (4%) or the 1960s (4.5%). Indeed, if we take population increase into account, Chile saw a per capita GDP growth of just 0.3% a year between 1981 and 1990 (in comparison, the UK GDP per capita grew by 2.4% during the same period and the USA by 1.9%).
Thus the growth “miracles” refer to recoveries from depression-like collapses, collapses that can be attributed in large part to the free- market policies imposed on Chile! Overall, the growth “miracle” under Pinochet turns out to be non-existent. The full time frame illustrates Chile’s lack of significant economic and social process between 1975 and 1989. Indeed, the economy was characterised by instability rather than real growth. The high levels of growth during the boom periods (pointed to by the right as evidence of the “miracle”) barely made up for the losses during the bust periods.
Now I know that is an overly large quote, and I know I am fighting libertarian rhetoric with its antithesis, but fighting fire with fire means that one should end up somewhere in the middle. The ground which I like to occupy. I have already shown that trickle-down economics empirically does not close the income inequality gap. As a skeptic, this is par for the course.
Another supposed example of resounding free market success is South Korea, which has fully transformed over the decades. However, Ha-Joon Chang, South Korean economist now resident in the UK, states in 2012:
According to a recent World Values Survey, Koreans are the second unhappiest people (after Hungary) among the citizens of the 32 OECD countries studied. Worse, its children are the unhappiest in the rich world, according to a survey of 23 OECD countries done by Yonsei University in Seoul. In 2009 the country topped the international league table for suicides, with 28.4 suicides per 100,000 people. Japan was a distant second with 19.7. But Koreans never used to be this unhappy. Until 1995 its suicide rate was, at about 10 per 100,000 people, just below the OECD average. Since then it has almost tripled.
The answer to the Korean puzzle can be found in the consequences of the economic reform implemented after the country’s 1997 financial crisis. In the UK-US mould, the stock market was fully opened to foreign investors, putting the larger, listed companies under pressure from international shareholders, making them increase short-term profits by minimising investments. The ability of smaller, unlisted companies to invest was severely curtailed by a dramatic reduction in credit availability. Deregulation allowed banks to rush into more lucrative consumer loan markets, reducing the share of loans to business.
The resulting dramatic fall in investments has led to a substantial fall in economic growth from 6%-7% (in per capita terms) per year to under 4%. With lower growth, few well-paid jobs are created. When combined with the relaxation of labour laws after 1997, this has given employers a decisive upper hand over their workers. Many employees were sacked and re-hired as “agency” workers, doing the same jobs at lower wages. The proportion of the workforce without a permanent contract rose from an already high 50% to 60%, the highest in the OECD…
The sad tale of my country should serve as a salutary warning to Britain and other European countries that are embarking on major cuts to welfare. They believe that such cuts will reduce budget deficits and make their economies more productive by making people compete more vigorously. However, the Korean story shows that insecurity actually makes people less, not more, productive, and also desperately unhappy. Surely, that is not what they want.
Very much like Britain and the US as I mentioned earlier, South Korea operate a protectionist and high tariff economy, as Chang states elsewhere:
The UK and the USA may be the more dramatic examples, but almost all the rest of the developed world today used tariffs, subsidies and other means to promote their industries in the earlier stages of their development. Cases like Germany, Japan, and Korea are well known in this respect. But even Sweden, which later came to represent the “small open economy” to many economists had also strategically used tariffs, subsidies, cartels, and state support for R&D to develop key industries, especially textile, steel, and engineering.
Robert Wade (in Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization), indeed, sees South Korea as authoritarian-corporatist, with authoritarian political institutions encouraging the growth of huge conglomerates (chaebol). This rather goes against the commenter’s ideas that so-called capitalist countries are actually corporatist apart from the successful ones which he wants to define as capitalist!
Interestingly, in a Pew research poll, South Koreans are the only public where knowing the right people is the most commonly cited key to success (rated at the top of the scale by 39%) – hardly a libertarian ideal. 53% of South Koreans are supportive of higher taxes on the wealthy and corporations to address income inequality, although the population is broadly (70%) supportive of capitalism. Remember, I am for capitalism, just with sensible regulation.
Byung-Doo Choi’s chapter “Developmental Neoliberalism in South Korea”, in Locating Neoliberalism in East Asia (particularly pages 87-89) illustrates the developmental/statist against neoliberal contradiction well, especially with regard to the (arguably free market caused) 1997 crisis. Even the good times in South Korea are seen in the context of the guidance of the “developmental state”:
Rather, we need to illuminate ways in which the developmentally oriented state in South Korea has adjusted to meet new neoliberal challenges via industrial restructuring and spatial reconfiguration in order to recover from the crisis, affecting public policy making and social welfare reform. What we need to explore further is the contradictory character of such adjustment processes after the economic crisis in South Korea. The combination of neoliberalized economic management and authoritarian state intervention does not appear to be free from certain limits, tensions and contradictions. Crisis tendencies in capitalism seem to even “encourage more state ‘intervention’ to ‘liberalize’ the market, a seemingly contradictory behavior” (Yeung 2000: 155).
There is this idea that South Korea is or has been a developmentalist state (neither free market nor socialist, but a “rationally planned capitalist development state” – p.89 of the above book), which is now some sort of neoliberalised hybrid of that.
Conclusion and cognitive dissonance of libertarians
What annoyed me in my discussions with the commenter is the shift that he made in claiming I was some loony-leftie communist socialist, and then being a mixed economy advocate and almost synonymously attacking me over that. This facile and naive approach from a purely dogmatic disciple of the Mises Institute was frustrating, not least because it was thoroughly un-nuanced. I am also not anti-capitalist, and think that capitalism was to some large degree responsible (in a kind of JL Mackie INUS sense) for the successes of these countries mentioned. But you cannot take the government out of those successes. That is incredibly naive, and outright wrong. The governments played wholly important roles, showing that the success of these economies was on account of a good mix of the two. They were all, to varying degrees, mixed economies. Which he claimed had never ever been shown to have sustained success. Well, no economy has ever had sustained success because, as he admitted himself:
It is proven in recorded history that all economies take dips, when the free market does, you let it be.
In other words, the man appears to be a walking, talking contradiction. Which means, by his own admission, the so-called free market economies (as mentioned above) have not shown such sustained success either.
Look, these claims involve so many variables that there is often little clarity and much complexity. I am not advocating communism or extreme socialism in the same way that I am not advocating pure free market economics. Likewise, however, corporatism is rife with problems. Does this mean there is no perfect economic model? Probably, and this is somewhat accepted in the same way that moral philosophers accept that there is no perfect moral philosophy: they are all problematic, and we muddle about trying to get a best fit.
Of course, it remains to be explicitly stated, by the commenter at least, on what criteria we judge economic success of any given model, because it seems that an economic model judged entirely on economic terms is somewhat one dimensional, and is inadequate within a moral paradigm (in other words, what we should do).
Therefore, as is often the case in any given paradigm, the commenter probably needs to do some philosophy before trying to do some politics and economics (see the last two posts in the series on that). Further to this, in my dealings with him, he seems rather victim (as we all are to some degree) to confirmation bias, seeking libertarian sources to defend his ideals. We can all do that, and I have surely exacted biased sources to counter his position.
But, in my humble opinion, there are myriad issues with his approach and his claims, and he would do well not to be so dogmatic and assured of his greatness in the world of economics, politics and, dare I say it, philosophy.
As mentioned in the previous post, the pure free market approach cannot deal with positive or negative externalities (these are costs to production or consumption of a good which is borne out not by producer or consumer, but by a third party). This is such a fundamental flaw which potentially affects the whole world (for example, pollution, loss of biodiversity and climate change) that failure to deal with it is terminal to the system. As this source says, there are only two ways to deal with production or consumption externalities:
If property rights cannot be established, such as with the air, sea, or roads, then the only two options are:
- We learn to live with externalities, or:
- Government intervenes on our behalf through taxes or direct controls and regulations, such as:
[and in the case of consumption externalities:]
- Taxing polluters, such as carbon taxes, or taxes on plastic bags.
- Subsidising households or firms to be non-polluters, such as giving grants for home insulation improvements.
- Selling permits to pollute, which may become traded by the polluters.
- Forcing polluters to pay compensation to those who suffer, such as making noise polluting airports pay for double-glazing.
- Road pricing schemes, such as the Electronic Road Pricing (ERP) system in Singapore, which is a pay-as-you-go, card-based, road-pricing scheme.
Providing more information to consumers and producers, such as requiring that tickets to travel on polluting forms of transport, especially air travel, should contain information on how much CO2pollution will be created from each journey.
There are several remedies for negative consumption externalities, including imposing indirect taxes, and setting minimum prices,imposing fines for over-consumption, controlling supply through a licensing system.
These are supposedly market remedies, and yet only the government can deal with them.
So what happens?
Well, typically, the libertarian is forced to deal with this psychologically. rather than admit that their position is in some way flawed, the submit to cognitive dissonance. Something has to give, and this usually ends up being the negative externalities. Either they attempt to minimise social costs (such as minimising the impact of child labour, gun deaths and violence, drug damage and suchlike) or deny them outright (which can include denying that it matters) as is the case with most environmental problems. There is a reason why so many right-wing or libertarian economy supporters are also climate change deniers: because to accept it would be to accept an uncorrectable flaw in their economic and political system, which cannot arbitrate such moral problems.
I cannot overestimate this enough, which is why it is bold. Because this is what I see the world over in these debates and with the psychology of libertarians. The libertarian Party n the US makes this statement on the environment:
…to support a sensible free-market environmentalism that balances the need for a healthy planet with the importance of liberty, property rights, and limited government.
The environment would benefit immensely from the elimination of sovereign immunity coupled with the privatization of “land and beast.”
Which appears to set property rights and limited government against the environment, and seemingly more important. Thus our health and the planet’s health is supervenient on such ideals, rather than being a bedrock necessity for existence. And privatising all land and nature? There is so much wrong with that I wouldn’t know where to start.
Looking at issues like smoking, some of the rationalisations and remedies libertarians claim would work are hilariously bad and unworkable And this is the underlying problem of individualism and its use or rights. Human rights don’t objectively exist, so we have to construct them. Legally, based on philosophy. And then somehow enforce them. Because arbitration needs to happen when rights come into conflict. One’s right to smoke against another’s right not to be smoked next to. How does that work for trains which cannot have the competitive infrastructure to deal with having the market solving the problem.
Not only that, but drugs, guns, drugs and guns and children. All of these present problems that the market alone cannot solve. As one commenter explains:
I am not a libertarian, but I will give you the main argument from a libertarian perspective: Privatize everything. Give everything an owner and allow all things to be bought and sold. If pollution a problem, privatize the streams into which polluters dump waste. The owner will then have an incentive to go after polluters and will receive payment to have the pollution cleaned up. Of course, it is then always up to the owner to decide whether or not to actually clean up the pollution.
From my perspective, this breaks down when we get to “free goods” like the air. How do we divvy up and manage ownership? Would it be worth the hassle when a polluter would pay a millionth of a cent to each person on the planet to release a relatively small amount of CO2 or SO2?
Some positive externalities are included in a calculation; for example, the knowledge gained through research. A drug company researches and creates a new product. That knowledge can’t be unlearned and if someone else is to get hold of it then the knowledge effectively becomes a public good. However, if this happens then it is unlikely that the drug company will make enough money to pay for the research and means that they probably wouldn’t do the research in the first place. Without some form of patent or rights to intellectual property then there will always be a “sub optimal” amount of investment in research. How do we deal with this? We can either rely on the company keeping the formula secret (and then have no public knowledge of the ingredients), or we can recognize intellectual property ownership: the company will get rent by licensing the formula to others who manufacture and sell it.
Other externalities are not included in the cost/benefit calculation. Consider a street light. If I pay the full cost of a street light then I get the benefit, but those around me also get a “free” benefit of the light. In spite of their getting benefit, I will only install the light if I get enough benefit myself to shoulder the cost.
From my perspective, the example of education is a good way to see some of the limitations of the commodification of everything. From a traditional perspective, there will always be “sub optimal” investment in public goods when everything is privately owned; i.e. not everyone will have an education. But from a libertarian perspective, people pay for exactly what they want. If they want education then they pay for it. Therefore, the only “optimal” level of education is what people pay for on their own. What this fails to recognize is starting inequality. Libertarianism implicitly relies on the idea of Pareto Efficiency. Stated simply, it means that the best solution to a problem is one that makes as many people as possible better off without making anyone worse off. When everything is property, then the sum of market interaction makes this happen automatically. What it doesn’t recognize is that you could make almost everyone much better off while making someone else only marginally worse off. The first few pages of Kenneth Arrow’s Uncertainty and the Welfare Economics of Medical Care (PDF) has a good discussion of this issue. But this idea contradicts the underpinning ideas of libertarianism, self-ownership and the non aggression principle, so the idea is rejected by libertarians. When these are your starting points then no amount of making someone better off justifies making someone even marginally worse off.
Education qualifies as a positive externality, meaning that its benefits aren’t accounted for in its prices. It has a broader societal benefits that aren’t reflected in its price/costs. These benefits include, but are not limited to, greater economic productivity, lower unemployment rates, greater political participation, greater chances for social mobility, etc. These all benefit society as a whole, yet privatized education can’t account for them because it’s a common good that can’t be effectively incorporated into the cost. Whoever can pay receives the benefit of education, whoever can’t won’t. But having an educated public is better for everyone as it’s simply better for society.
EDIT: for clarity, using a total free market system would mean that people won’t get educated if they can’t pay for it, but the benefits to having an educated public are better for everyone though this benefit isn’t readily seen or accounted for in a simple transaction between the consumer and the educator. Therefore, it’s within society’s best interests to adopt an education system that everyone has access to, regardless of ability to pay.
Many attempted theoretical solutions seem to be coincidental rather than systematic (Oh, look what the Khan Academy has done, etc) in a way that appeals to hope and potential for the free market to happen upon benefits to others.
So finally, neither free market capitalism nor entirely planned economies appear to be workable, and so we meet somewhere in the middle, embracing the best of both worlds where possible.
Anyway, that’s about it for now. I won’t start on what insane claims he made about gun control and guns… (I will post an APPENDIX later today listing some of the remarkable, rude and annoying things he said to me, for posterity’s sake).
Alavi, H. (1982). “India: The Transition to Colonial Capitalism,” in H. Alavi et al. (eds), Capitalism and Colonial Production, (London: Croom Helm)
Chang, H-J. (2002) Kicking Away the Ladder: Development Strategy in Historical Perspective (London: Penguin)
Chang, H-J. (2011). 23 Things They Don’t Tell You About Capitalism, (London: Penguin)
Das, T. (1946). Review of The Economic History of India: 1600–1800, American Historical Review 51.2 (January): 312–314
Krugman, P. (1994), ‘The myth of Asia’s miracle’, Foreign Affairs, 73, November-December, pages 62-75.
Mukerjee, R. (1967). The Economic History of India: 1600–1800, (Kitab Mahal: Allahabad)
Park, B-G, Child, R., Saito, A. (2012). Locating Neoliberalism in East Asia: Neoliberalizing Spaces in Developmental States. (Chichester: Blackwell Publishing Ltd)
Sen, A. (1991). Hunger and Public Action, (Oxford: OUP)
Wade, R. (2001). Governing the Market: Economic Theory and the Role of Government in East Asian Industrialization, (Princeton: Princeton University Press)
- On Free Market Economics: History, Morality and Background
- On Free Market Economics: No True Capitalism
- On Free Market Economics: Free Market Success Stories
- Dealing with replies to my free market skepticism posts
- Does free market capitalism close the inequality gap? No.
- Political Libertarianism, Science Denialism, Philosophy and the likes of James Delingpole
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