23 Things they don't tell you about Capitalism

# Thing 1: There is no such thing as a free market

**What they tell you**: Markets have to be free from government intervention so that they can most efficiently allocate resources and can give investors an incentive to invest as well as to innovate.

**What they don't tell you**: Markets are never really free, markets only come into being through governments and they always work in the boundaries of certain regulations. The reason why people still assume that markets can potentially be free is because they don't see many of the regulations because they seem so natural to them that they simply don't recognize them as regulations. As long as people morally agree with regulations and restrictions on the market, they don't recognize them as such and don't oppose them (such as e.g. the restrictions in all Western countries on child labour), only when a regulation is proposed that people morally do not agree with do they see it as a restriction and postulate that it would make the market *unfree*.

# Thing 2: Companies should *not* be run in the interest of their owners

**What they tell you**: A company is owned by its shareholders. Since they have invested in the company they are the ones with true long-term interest in the profit of the company

**What they don't tell you**: Most shareholders are investors with little or no connection to the company itself. They own such a limited number of shares that they can simply pull out at anytime and especially when the company is predicted to go down. So they are not the ones with the most interest in long-term profitability in stable terms but rather in exorbitant short-term profitability which leads them to a strong inclination to take risky decisions in order to maximize profits.

# Thing 3: Most People in Rich Countries are paid more than they should be

**What they tell you**: The free market rewards labour according to its productivity. An introduction of legislations such as minimum wages in low wage countries would just distort the market by unjustly rewarding unproductive and inefficient labour, only the market can efficiently and justly determine wages.

**What they don't tell you**: The main reason why wages in rich countries are so high, is not productivity, it is *immigration control*. If there were no government regulated control of immigration almost all workers from rich countries, used to their high wages would in a very short time be replaced by workers from poor countries, willing to work for much lower wages. Furthermore, poor countries while mathematically and statistically poor due to the large numbers of poor people, they are actually in reality poor because of their rich people. Because while the poor people from poor countries can live up in productivity to their counterparts, the poor people in rich countries, in their jobs as taxi drivers, cleaning personnel etc, it is the rich people in poor countries that are far less productive than the rich people in rich countries. This so much higher productivity of rich people in rich countries, however, is not a dispositional characteristic that they have, it is rather a situational and above all, institutional advantage. They are surrounded by better working institutions, bureaucracy, technology etc and have, therefore, better chances on being productive from the very start.

# Thing 4: The Washing Machine has changed the World more than the Internet has

**What they tell you**: The internet has transformed the world into a world without borders and thus revolutionized our economy. Companies and people that do not adapt to this by becoming more flexible will be eliminated by their competition.

**What they don't tell you**: When perceiving changes there is a tendency to always interpret recent changes as the most important ones while underestimating past changes. In that sense the washing machine alongside other domestic gadgets has more fundamentally transformed the economy than the internet since all these new products relieved women of a vast array of their domestic duties and thus allowed them to enter the labor market and additionally almost eliminated the whole sector of domestic services. When comparing the number it becomes apparent that today in many developing countries a lot more families, even lower middle-class families employ domestic servants than families from a similar social strata in rich countries. However, about a century ago these numbers were quite similar in these same rich countries. One of the reasons is that with economic development labor costs rise, domestic servants thus costing more than the corresponding household technology, for that reason in rich countries domestic servants have even become something like a luxury only for the rich people. As opposed to that for the impact of the internet on productivity the numbers are not so clear if even there at all. Furthermore, older communication technologies such as the telegraph can be shown to have a much greater impact on speed and efficiency of communication than the internet. So while the internet has undoubtedly revolutionized a lot of free-time activities and introduced an array of procrastination possibilities it is doubtful whether it had a comparable impact on productivity.

# Thing 5: Assume the worst about People and you will get the worst

**What they tell you**: The market only functions to the benefit of society as a whole, because everyone acts in a selfish manner seeking personal advantage. It works by unleashing market forces that constrain the selfish impulses and channel them into the good for society by introducing mechanisms such as competition etc. This why government intervention has to be limited and market mechanisms such as deregulation and privatization have to be promoted so that the market can develop its positive potential without being restricted by politicians that would only again pursue their self-interest and use their freedom from the market to achieve it.

**What they don't tell you**: Selfish interest is only one albeit strong motivation for human action and often not even the primary drive. So an economic system that aims to successfully organize people's economic activities has to acknowledge selfishness as a motivation but at the same time exploit other drives as well. A lot of companies are in fact much more successfully run based on trust and solidarity than on suspicion and control. so good management does not consist of 'preventing the worst' but rather 'enhancing the good' in the workforce or the company. It has also been found that giving workers a certain leverage to improvise, work out faster ways and shortcuts by themselves and not having them abide by rules in a dictatorial fashion and controlling their every move actually enhances productivity and increases motivation. This becomes most clear in the *Japanese Production System* where workers are entrusted with great responsibilities, trusted as moral agents and invited to make suggestions concerning improvements in the production process, a strategy that has proven to be highly profitable.

# Thing 6: Greater Macroeconomic Stability has *not* made the world economy more stable

**What they tell you**: Economic stability is vital for long-term growth and economic stability. After a long period of high levels of inflation and even hyperinflation up until the 70s, a period marked by high insecurity and low investments due to the economic instability caused by inflation, inflation is now kept in line by tighter government budget controls and the introduction of central banks with the sole purpose of controlling inflation.

**What they don't tell you**: Even though inflation might be under control nowadays, insecurity has risen not fallen and the real focal points of economic stability: growth and employment have been neglected. This adds to an ever rising number of increasingly more devastating financial crises leading to evermore global instability. These sources of insecurity can all infallibly be traced back to the free-market policies introduced since the 1990s, banking crises result from increased capital mobility and labor insecurity from labor market regulations that were aimed at making the labor market more flexible and efficient.
Furthermore, not every inflation necessarily is or turns into a hyperinflation, on the contrary evidence actually seems to point in the opposite direction. There is hardly any evidence that low-level inflation is bad for economic growth, rather studies have found that it does not even seem to be related to growth at all. Even fairly high inflation rates can be compatible with fast economic growth. Given this correlation there is also evidence that suggests that the measures aimed at lowering inflation can also be harmful to economic growth because instead of encouraging investment through stability they tend to discourage investments. Moreover, the interest rates controlled by the central banks to keep inflation at bay lead to a focus of investment on highly speculative, purely financial investments, which have also led to the financial crisis in 2008.

# Thing 7: Free-market policies rarely make poor countries rich

**What they tell you**: After achieving independence most former colonies tried to boost their economies by systems based on state intervention and protectionism. That way they tried to develop industries far beyond their capabilities and failed horribly while doing so. After then finally opening up to free-trade the situation in these countries has greatly improved. All in all one can say that all rich countries have become rich only through free trade.

**What they don't tell you**: In contrast to widespread beliefs the economic performance of developing countries was better during state-led economic development than during the following market-led period. Furthermore, almost all countries that are rich countries today have become so through state-led policies such as subsidies and protectionism. For example the US around 1880s was one of the most restrictive protectionist economies worldwide but at the same time experienced immense economic growth and prosperity (see Alexander Hamilton, first treasury secretary). However, this also applies to a series of other countries among them Great Britain, Finland, Korea, etc. All these countries, during their economic ascendancy, tended to use a high degree of protectionism, state intervention to promote their infant industries and even state ownership of key industries and only entered into free trade once their economic position was secured. There are three main reasons why these policies are actually good for the economic development of these countries.

1. There industries do not yet have the necessary capabilities to compete on the international market unassisted and need to be nurtured and protected until they have acquired these capabilities.
2. In the early stages market often function faultily with limited ranges, high likelihood for the emergence of monopolies and the like and thus it is important for the government to be able to step in and create and later regulate markets.
3. State-ownership springs up mainly because in these countries there are little to no private-sector companies capable of managing large-scale high-risk operations which makes it necessary for the government to step in and do so itself.

# Thing 8: Capital has no nationality

**What they tell you**: Transnational corporation are the real vanguard of economic development by employing people worldwide, on all levels even on the level of decision-makers. Even though they remain headquartered in the country in which they were founded, they are essentially without a real nationality and will locate their operations globally wherever they can expect the greatest return are greatest. Nationalistic policies which discriminate against these corporations will only hurt the national economy by driving them away and thus preventing the establishment of some of the most efficient companies in the country.

**What they don't tell you**: Even though transnational companies might operate on an international level, they are not genuinely nationless. In fact they actually appear to have a strong *home bias* in most of their decisions and economic activity. Most top decision-makers continue to come from the country effectively owning the corporation, research and innovation are also conducted there and even if these activities are located abroad, they tend to be transferred to other developed countries subjected to a strong *regional bias*. And even with regard to production, overall most companies tend to locate only a small share of their production abroad and even less that is, to developing countries. There are several reasons why such a 'home bias' exists. First off, managers of large companies do feel a sort of personal or moral obligation towards their home country and mostly even have a historically shaped very real obligation towards them since many of the companies could only ever become as powerful as they are through government protection indirect and direct subsidies, etc. However, most importantly the 'home bias' has economic reasons in the sense that the core operations of a company can only be taken abroad with great difficulty because they depend on a whole network of organizational structures, skilled workers and even institutional settings which can hardly if at all be transported to another country.

Furthermore, the argument that any restriction on foreign investment (foreign direct investment that is), is harmful also has to be subjected to closer scrutiny. Firstly, most foreign direct investment is actually *brownfield investment* (acquisition of national firms by foreign companies) rather than *greenfield investment* (setting up of new production facilities by a foreign company), which means that most foreign investment actually just means a taking control of national firms by foreign investors instead of creating new employment opportunities. And even in the cases that greenfield investment takes place the 'home bias' greatly influences the outcome in that it is most likely simple production processes located abroad which might carry short-term economic advantages but not contribute to the establishment of long-term profitable high-end activities which could greatly contribute to the economic progress of the country.

Correspondingly, when cuts have to be made or entire factories be shut down this is seldom done at home but more commonly abroad which then of course results highly damaging to the foreign economy. Notwithstanding these considerations, when the decision has to be taken whether to let a national company be taken over by a national private equity fund or a foreign company it might be better to opt for the foreign company after all since take-overs by such funds regardless of their nationality tend to be very harmful to the respective companies. Private equity funds by companies with a plan of selling them again in the future, restructuring them in order to make profit. This mostly involves serious cost cuts, letting go workers, restricting long-term investments which leads to short-term profitable companies with few long-term perspectives. A foreign company with a true interest in long-term profitability of the company might in these cases be the better option.

# Thing 9: We do not live in a post-industrial age

**What they tell you**: In most developed countries the manufacturing sector has been in a steady decline over the past years,with the service (and especially knowledge-based service) sector rapidly expanding. The high prosperity has led to an increased demand for services and contributed to the overall well-being of the countries, a fact that would make it advisable for developing countries to skip the manufacturing phase and turn into service-based economies straight away.

**What they don't tell you**: The declining share of manufacture in the total output of most developed countries is not due to a shrinkage in the quantity of goods produced but rather in the decrease of its prices in relation to those of services. This is mainly due to the high productivity growth in the manufacturing sector which mainly stems from the fact that it is a lot easier for manufacture to raise productivity without severely diluting the quality of the products, in fact in some services this might even be impossible. One of the reasons why there seems to be such a staggering increase in service productivity is actually that outsourcing of services leads to a statistical fallacy, while the outsourced services are not recorded as services, their output is recorded and so output statistically rises seemingly without an increase in input. Another such statistical effect is the *reclassification effect*, a number of manufacturing companies increase their service activities and consequently apply for a reclassification as service companies, which is then reflected in the statistics even though the same companies still continue to produce manufacturing output. A small share of real de-industrialization in developed countries can actually explained by a decrease in national production due to an increase in cheap manufactured imports mainly from China.
De-industrialization is not per se, a bad thing it might be accompanied by both, economic failure or success. Even if the manufacturing sector of a country is more dynamic relative to its service sector it might still be relatively un-dynamic compared to manufacturing in other countries and thus lead the country to lose competitiveness on the global market. Furthermore, the more a country becomes dominated by its service sector, with its relatively low potential for economic growth the less overall economic growth will the country experiences. Such a dominant service sector is also potentially harmful for the balance of payment since services are much more difficult to export than manufactured goods.

The idea that developing countries could skip past the manufacturing period is a fairy tale at best. The limited scope of productivity growth in services makes it a hardly apt motor for overall growth, focus on services limits the ability to export which in turn limits the ability to import advanced technology from abroad which would be a major drive for growth.

# Thing 10: The US does not have the highest living standard

**What they tell you**: Event though some countries have higher per capita income than the US, it is possible to buy more goods with the same amount of money in the US and anywhere else which gives the US the highest living standard in the world except for maybe Luxembourg. This is especially due to the highly competitive free market in the US, there are no limits imposed by the government so there is a high social mobility with big rewards for winners. Even though the flexible labor market with the easy hire-and-fire policies paves the way to higher inequality even the people at the lower end of the spectrum prefer these policies because with free competition and high social mobility they have great chances to be better off in the future. Therefore, all other countries strive to imitate the economic policy of the US which is the closest as one can currently get to a free-market economy.

**What they don't tell you**: In such analyses there tends to prevail a strong focus on the market exchange rate of different countries. Crucially though, the market exchange rate reflects only internationally traded goods, which naturally leave out one of the most important sector of consumption which is services. So in order to really determine the living standard in a country based on purchasing one has to use the artificially constructed currency of the 'international dollar', based on purchasing power determined on the basis of a consumption basket. This then usually yields lower incomes for people in rich countries and higher incomes for people in poor countries due to the fact that services are more expensive in the rich countries. (There are certain limitations to the international dollar, not least that it is based on the assumption of a similar consumption basket in all countries, nevertheless it gives a better idea of per capita income than market exchange rates).

Moreover, while it is true that on average US citizens have a greater command over goods and services than the citizens of any other country worldwide, this average is not very representative due to the high inequality in the US. This inequality is also reflected in health statistics where the US ranks far behind other developed countries on issues such as life expectancy or infant mortality. Moreover, the purchase of more services is possible especially due to the fact that services are cheaper than in other equally developed countries due to higher immigration and poor working conditions. This becomes apparent when comparing the market exchange rate of the US with its purchasing power based income, the two rates are almost equal which points to cheap services. Furthermore, Americans work longer hours than most Europeans so that the command over goods and services per working hour is actually lower in the US than in several European countries.

# Thing 11: Africa is not destined for underdevelopment

**What they tell you**: Due to several structural handicaps the African continent is simply destined for underdevelopment. Its nations are ethnically divided, violent conflicts spring up regularly and disrupt the development of efficient markets, the high amount of natural resources makes people lazy, which adds to their bad culture, prone to laziness, unable to save and to undertake economic endeavors, their climate and geography renders economic development always impossible only bolstered by their inefficient institutions that behave hostile towards foreign investors. This is why there is no other opportunity for Africa than to rely on foreign aid.

**What they don't tell you**: Africa has by no means always been such a stagnant continent, in fact during the 1970s it actually had a growth rate of about 1.6 %, comparable to the growth rates in most of today's rich countries during the industrial revolution. This already proves that structural factor can not be really determining for its situation today since these factors were constant overtime and did never undergo any radical changes. The real reason for the sudden and fatal drop in growth rates is the forcible introduction of free-market policies in Sub-Saharan African countries initiated by the IMF and the Worldbank with the Structural Adjustment Programs (SAPs) in the 1980s. These policies introduced the countries and their still immature industrial sectors to the international market and international competition which soon led to their collapse. Thus, forced back to exporting primary commodities such as agricultural produce, African countries were subjected to the high price fluctuations and the stagnant production technology typical in that sector. Prices frequently collapsed due to the high number of African countries simultaneously trying to export the same goods. Furthermore, government obligation to balance their budgets led to cuts in spending which gravely affected public services, most crucially for production of course infrastructure and transportation.

This is not to say that there are no external factors that can have an impact on the economic performance of countries, such as most obviously maybe violent conflicts or serious climatic disasters. Nevertheless, for some of these external factors the final outcome is by no means clear, proven by the fact that most of today's rich countries have developed in spite of or sometimes even because of exactly the same structural handicaps. It is mostly not the structural handicaps itself which cause underdevelopment, rather underdevelopment is the cause for not being able to handle the structural handicaps. This finds it expression in successful nation-building, which helps to overcome conflicts based on ethnic diversity, health and sanitation structures to combat climatically influenced diseases, technology to design production methods apt for the specific environment and climate and exploitation of natural resources which then become a blessing instead of a curse.

# Thing 12: Governments can pick Winners

**What they tell you**: Governments do not have the necessary information and expertise to take adequate business decisions through industrial policies. In fact because they are motivated by power rather than profit and do not have to bear economic consequences, they are much more likely to make disastrous policy choices. This is especially the case when a government's policies go against the market and try to promote industries that are beyond the country's capabilities, a fact that was staggeringly proven by the *white elephant* projects in developing countries (these projects were especially prestigious projects such as highly developed infrastructure or industries).

**What they don't tell you**: Governments can and do actually pick winners tremendously well. Sometimes taking a decision from the outside can result in a better decision and in addition to that, governments have a myriad of ways available to them to gather information that will allow them to take better decisions. This can be done through a variety of channels such as state-owned companies which a lot of developed countries heavily rely on, the requirement of regular reports from subsidized companies, informal networking, although there is a danger of corruption in this particular channel, or formal meetings with participation of the public and the media.. Furthermore, a decision that is well suited for one company might not be beneficial to the national economy as a whole and thus the government in collaboration with the private sector might actually be much better suited to take a decision that has social advantages for the whole economy. Actually there are many examples from today's most developed countries where they deliberately supported, subsidized or protected certain industries or specific companies, especially during the late twentieth century and with great success. The most striking example maybe is the Korean Steel industry, but the US also massively supported their high-tech and R&D sector and there are many more examples. This is of course not to say that governments will never take ill suited economic decisions, however, these examples can not be an excuse for a complete denial of government's aptitude in deciding on sound industrial policies.

# Thing 13: Making rich people richer doesn't make the rest of us richer

**What they tell you**: In order to make everyone better off the rich people have to get richer. It is them who invest, exploit new market opportunities and create jobs. So high taxes for the rich are harmful because they prevent them from exerting their positive effect on the economy as a whole.

**What they don't tell you**: This theory, also commonly referred to as *trickle-down effect* has hardly ever been remotely successful in the past, on the contrary, pro-rich policies based on that credo have initiated only little growth and the actual trickle down when left to the market has been scarce. This is largely due to the effect that although wealth might eventually trickle down there is no inbuilt mechanism to ensure that it actually does, it has failed to do so because contrary to what rich people were supposed to do investment has actually been steadily decreasing in all the G7 countries. Trickle down is very unlikely to happen if it is left to the market, the only effective way of redistributing wealth is through a strong welfare state based on government-regulated taxation and transfers. This redistribution of wealth will actually lead to more growth on the long-run because poorer people are much more likely to spend money on consumption which increases aggregate demand.

The trickle-down effect theory is largely based on nineteenth-century economic beliefs which in turn emanated from classical economics. In classical economics society is believed to be made up of different classes, landlords, capitalists and working class. The great difference between these classes was that the capitalists were the only ones investing, while the other classes were consuming. In nineteenth-century economics this became the concept of abstinence (from consumption) again a trait only the capitalists were believed capable of. Thus it was believed that if the workers got a larger share of the national income they would spend rather than invest it and subsequently growth would fall.

After the Second World-War systems of progressive taxation were introduced in almost all rich Western countries simultaneously with higher social welfare spending. However, rather than diminishing growth, these policies promoted growth leading to the so called 'Golden Ages of Capitalism' between 1950 and 1973. Since the 1980s, however, most of these countries have introduced pro-rich legislation, reducing welfare spending, introducing tax cuts for the rich, deregulating vast sectors of the economy, which led to a reduction in wages, corporate profits and incidentally the financial crisis of 2008. As a consequence inequality in all developed countries has sharply risen.

# Thing 14: US managers are overpriced

**What they tell you**: It is clear that some people have to be paid more than others since pay is always in proportion to productivity, so someone who adds immense value to the company also deserves a pay that is in relation to this value. Market forces make it immanent that the pay for some high executives be so high that it might seem outrageous to some people but really it isn't. In order to attract the most talented people from the limited pool of talents the company simply has to offer a high pay lest the competition contracts all talented people and the company suffers from bad economic decisions taken by less talented people in top positions.

**What they don't tell you**: US top managers are overpriced in several regards. They get paid to much relatively to their predecessors, to other high executives in other similarly developed countries as well as to the average worker. They are also paid to much in absolute terms compared to these other high executives (for example iin Japan a CEO gets paid 25% of what a US American CEO is paid, while the average worker gets 91% the wage of a US American worker). It is also by no means plausible that the extremely high pay of executives would really still be proportional to their value contribution to the company (this would entail that US American CEOs were 10 times more productive today than one generation ago). This is not to say that there should be no income differences, but the current level of income disparity is far too high (CEOs in the US are currently paid about 300-400 times more than the average worker).

Furthermore, they are overly protected in the sense that they do not get punished if they perform poorly and their great economic power gives them the possibility to manipulate political decisions that influence their proper pay, thus disabling the very market forces that are said to determine their high pay.

# Thing 15: People in poor countries are more entrepreneurial than people in rich countries

**What they tell you**: Entrepreneurship lies at the heart of economic development, as entrepreneurs are the driving market forces, seeking out new business opportunities and meeting demands. One of the key problems of most developing countries is that they lack people with this entrepreneurial spirit and, therefore lag behind in economic development.

**What they don't tell you**: The problem of most developing countries is not that they lack individual entrepreneurial spirit, in fact most people in developing countries are far more entrepreneurial than their counterparts in developed countries. Firstly, because they have to be since there are not many options apart from self-employment in most developing countries and secondly, because they have to be much more flexible and agile given all the obstacles entrepreneurs in developing countries are faced with. What they lack, however, is the technology and the collective organizations, especially modern firms to put this individual spirit to work. In developed countries entrepreneurship, contrary to common belief, is only possible supported by and in the framework of large collective communities and institutions, the very same that are absent in developing countries.

This has become especially apparent through the increasing problems caused by micro-credits, a financial instrument designed to support the individual entrepreneurs in the so called *informal sector* (as in not registered with the government). After a few years of immense hype about micro-credits criticism is now on the rise, with just a few points mentioned here. For one thing, contrary to its claims, microfinance works only when it is bolstered by government subsidies or international donors because otherwise interest rates rise (and have risen) to up to 100% in some countries. These high interest rates make it impossible for small businesses to make the necessary profit to keep the business running, so micro-credits have been increasingly used for consumption instead of entrepreneurship as was originally intended. Furthermore, on the long-run most of the businesses set up based on micro-credits do not prove to be profitable, mostly because the sectors where high profits are made at the start become crowded after a while and the higher number of businesses drives overall profits down. This happens because due to lack of skill and advanced technologies there is really only a very limited number of businesses people in developing countries can start, so the likelihood that these sectors will overcrowd as soon as microfinance takes hold is very high. Another danger in microfinancing is that it discourages cooperation, many of the economic sectors in developed countries are as successful as they are only because entrepreneurs and companies started to cooperate and form larger collectives, micro-credits on the other hand fuel competition between the individual small entrepreneurs and are an obstacle to such collective enterprises.

# Thing 16: We are not smart enough to leave things to the market

**What they tell you**: Markets should best be left to their own devices because market participants are rational actors. Their own best interest in mind and of course endowed with the most reliable information about their own circumstances they can be trusted to make the most sound economic decisions. Other actors such as the government is bound to have inferior information and should therefore never interfere and regulate as this is certain to lead to bad economic decisions. Even though there might occasionally be market failures, individual behavior that is irrational or contrary to the common good will quickly be sorted out by the market itself and government failure will in any case always be more detrimental than individual failure.

**What they don't tell you**: It is a logical fallacy to believe that we ourselves have the best knowledge about matters we are implicated in, in fact we have a limited, a so called *bounded rationality*. The world is immensely complex and uncertain, what makes decision taking so difficult is not a lack of information, but on the contrary an information overload which we are simply not able to process correctly. In order to take sound decisions it is often necessary to limit our choices so that we can actually ponder all options. This is essentially what government regulation does and why it is often to successful, it limits choices and thus possibilities for things to go wrong.

The limited capacity of individuals for actually taking sound decisions has become increasingly apparent in finance and most shockingly in the financial crises. Obviously even the most expert bankers, employing graduates from the most renowned universities were not able to make the right predictions and take sound economic decisions. The financial crisis also illustrates the benefits of regulation in restricting the choice of actions, the financial system and its instruments had become so complex that less and less people understood how they worked and calculation of risk, always doubtful in its correctness, had become next to impossible. The financial system was only able to get so out of hand because it was not regulated, so in the future it will be necessary to ban all financial instruments of which there impact on the economy is not clear, which will entail quite a large number of financial instruments and derivatives. Such a ban can be likened to the ban on new drugs or technology which are not allowed to enter the market until they are sufficiently tested, the same restrictions have to apply to financial instruments.

# Thing 17: More education in itself is not going to make a country richer

**What they tell you**: Education is the key to economic prosperity, especially in the so called *knowledge-economies*, where it has become the ultimate source of wealth.

**What they don't tell you**: There is very little evidence that education actually has any relation to growth or prosperity, not even in the so called knowledge-economies, that are a problematic concept in themselves since knowledge has always been one of the main sources of wealth.

A lot of education is actually concerned with subjects very inspiring and enriching to individual people but hardly related to the productivity of a future workforce, which makes it extremely valuable but not for the reasons related to economic growth that are so frequently invoked. In addition to that, through the increasing mechanization more and more jobs actually require less knowledgeable workers rather than more and with increasingly more knowledge being stored in machines themselves, even high-skilled workers might have and need little understanding of the job they are doing. And even higher education can not be directly related to productivity: the high enrollment rates nowadays relfect nothing but the *degree inflation* effect that comes about when more and more people enroll in university and get a degree until the pressure to go is so high that everyone goes which eventually renders university degrees inherently meaningless and terminates any connection between economic potential and higher education.

The real key to economic development is, again, not single individuals with outstanding knowledge and education but the ability of a nation to organize individuals into profitable organizations. This is dependent on a number of institutions, systems and regimes that have to be well-functioning and supportive, education, however, has to remain important for individual enrichment and inspiration but not for economic growth and productivity.

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

**What they tell you**: The corporate sector is the heart of a well-functioning economy, it is the sector where jobs are created, production takes place and innovations are made. What is good for businesses therefore has to be good for the national economy and government should give a free reign to the corporate sector in order to do the best for the economy. Government regulations are therefore always detrimental and in the past have shown to slow down growth in productivity by forcing businesses out of and into sectors against their own will and restricting their decision-making.

**What they don't tell you**: What seems to be good for the individual company as shown before does not have to be good for the economy as a whole but in fact it might not even be that good for the individual firm as well. What really matters is not the quantity but the quality of regulations on businesses, in many cases regulations may even better not only for the economy as a whole but for the individual businesses as well. These regulations can restrict companies in order to prevent them from using up collective resources or to ensure the collective long-term productivity in favor of short-term gains for individual businesses. Good examples are the East Asian countries that experienced their periods of highest growth during the time of their strictest regulation.

The famous case of General Motors one of the biggest companies in US history actually is a case in point for the importance of adequate government regulation. When GM was increasingly coming under pressure from other international companies it increasingly abandoned the car production and concentrated on financial speculation, making up approximately 80% of its revenues in 2004. In 2009 the company then went bankrupt and had to be taken over by the US government of course financed by taxpayer's money in order to prevent immense unemployment and huge economic deficits. So while a number of GM's decisions, such as the engagement in financial speculation might very reasonable from the point of view of the upper management and shareholders of the corporation that profited immensely from the speculative behavior they were far from beneficial for the national economy of the US as well as for a large part of the employees and suppliers that suffered huge economic losses from the bankruptcy. So the decisions taken by the company can in hindsight be said to have benefited neither the company as a whole (and not only the upper management and shareholders) nor the national economy.

# Thing 19: Despite the fall of communism, we are still living in planned economies

**What they tell you**: The failure of planned economies became apparent with the fall of the communist regimes and today the economy is left to market mechanisms set into force by individuals seeking out the most profitable opportunities for themselves. The less planning there is, the better.

**What they don't tell you**: In fact all of today's capitalist economies are operating on a planned basis, even though on a much more limited scale than former Communist countries. Nevertheless, governments do plan and direct a considerable part of the national economy. Many European and East Asian countries have intensively practiced both sectorial industrial policy (laying out the future of specific sectors) and indicative planning (setting broad targets in some key economic variables, cooperating with the private sector) during the most successful periods of their economic development. With the international average of state-owned enterprises in a country being around 10% and the activities of these companies overwhelmingly being concentrated in key economic sectors, the government effectively controls and plans large parts of the market through these companies. Furthermore, between 20 and 50% of all research and development projects are government funded, which effectively influences the national technological future. In line with the new wave of neoliberal policies in the 90s a lot of these programmes have been privatized and phased out, however government planning still exists to a minor extent and is not the only way in which planning exists in Capitalist societies.

Most big companies are actually rigid hierarchical organizations that centrally plan their operations even across national borders. In fact, the very idea of a centrally planned economy as Karl Marx envisioned it and as the Communist countries tried to put into practice, was based on the workings of a normal company, predicting that the planning taking place in such companies would eventually prove superior to chaotic market forces and extend to the whole economy. A lot of international trade (between one third and one half) today actually takes place inside of transnational companies, mainly between subsidiaries, so a large part of international trade can be said to be planned and coordinated instead of subjected to market forces. Adding the remainder of government planning, which might be smaller than before the 90s but still considerable, to the planning done inside of international corporation, capitalist economies nowadays are planned to a high degree, rich countries being more planned than poor countries due to higher presence of international corporations and effective government structures.

# Thing 20: Equality of opportunity may not be fair

**What they tell you**: When seeking to establish equality, we have to be mindful of the kind of equality we want to have. *Equality of outcome* is reached by introducing measures of affirmative action and rewarding people regardless of the actual work they do. This will make them lose incentive and it will penalize the hard-working, high-achieving people by not adequately rewarding them for their outstanding commitment. What is therefore really necessary is establishing *equality of opportunity*, all should have the same chances, but only those that use these opportunities and perform high, should be rewarded.

**What they don't tell you**: While it is true that equality of opportunity is the very starting point to build a fair society, it is not enough. Individuals should be rewarded for better performance but only if it can be assured that they compete under the same conditions. Individuals can only make use of the opportunities provided to them if they have the capabilities to do so and in these capabilities they are heavily influenced and often severely restricted by the socio-economic environment they are born into. The influence this environment exerts already on schoolchildren spans a vast array of factors from lack of support of the family for education or higher ambitions, due to lack of time, lack of knowledge or lack of interest in the children to simple hunger which impedes concentration and high academic performance. Therefore, affirmative action is necessary, which entails a certain extent of equality of outcome, in order to even make equality of opportunity meaningful. This affirmative action can take the shape of public policy strengthening the support-net for children in school, however, this is not enough. In order to really ensure that chidren acquire all the capabilities necessary to make adequate use of the opportunities provided to them they need parental support and a stable home which can only be guaranteed by providing at least a minimum equality of outcome in terms of parental income. This minimum provision holds also true for adult life, where unemployment can not be left to market forces but should instead be supported by a strong welfare state, providing financial support, retraining and eventually new employment. Studies have overwhelmingly shown that social mobility is highest in states with a strong welfare state and lowest in those with a weak one.

# Thing 21: Big government makes people more open to change

**What they tell you**: The welfare state was created because the poor wanted to have an easier life with the rich people having to cover the cost for all structural adjustment continuously demanded by market forces. A welfare state based on heavy taxation of the rich does not only make the poor lazy and takes away the incentive for rich people to invest, it also makes the economy as a whole less dynamic. People will delay necessary changes in their professions and working patterns because they do not feel compelled to adjust to new market realities.

**What they don't tell you**: The existence of a welfare state can actually make people more and not less open to changes. In fact the absence of a welfare state can more often lead to a failure in market mechanisms to efficiently allocate workers since the heightened job insecurity strongly influences academic and professional choices and not always in the most beneficial way for the economy as a whole (increased preference for those jobs which are relatively more secure).

Demands for trade protectionism tend to be much lower in Europe than in the US, because people in Europe know that there is a safety net provided by the state in case that they lose their jobs due to international competition and even government funded re-training programs to help them find a new job. The welfare state can be seen to act similar to bankruptcy laws in the sense that it provides workers a second chance (or more) after one job loss and that it greatly reduces risks, like the bankruptcy law reduced liability to creditors and provided a safet-net for failed businesses and thus encouraged entrepreneurship. In fact, prior to common belief a strong welfare state is not an obstacle to economic growth, but on the contrary in many European countries it has correlated with and even contributed to economic growth superior to the US.

# Thing 22: Financial markets need to become less, not more, efficient

**What they tell you**: The rapid development and expansion of financial markets has allowed a number of capitalist countries to allocate resources swiftly and efficiently. This has allowed these countries to respond quickly to changing opportunities and to grow faster.

**What they don't tell you**: A key problem with financial markets today is that they have become too efficient, recent financial innovations have made the sector more able to generate short-term profits for itself. Profit generation increasingly became much more easy in the financial sector than in any other sector and subsequently a large part of economic growth was due to growth in financial firm's activities. This led to growth in the financial market multiple times the growth of the actual economy so that more and more financial claims were created for the same real world assets. Furthermore, with an ever more increasing distance of financial products to the corresponding assets, pricing of the assets became extremely difficult. These innovations have made the whole economic system more unstable as was very clearly demonstrated by the financial crisis in 2008 which overwhelmingly had its roots in exactly these processes the privatization and subsequent liberalization of the financial system in a number of countries worldwide.

In addition to that, the high liquidity in the financial sector that makes quick responses to changes in the market possible have made it very difficult for real-sector competitors to keep up which is also detrimental to the economy as a whole. In order to solve this problem the speed gap between financial and real sector has to be reduced which entails making the financial sector less efficient. Such measures could include a financial transaction tax, increasing margin requirements and limiting cross-border capital movement especially for developing countries.

# Thing 23: Good economic policy does not require good economists

**What they tell you**: The ultimate success of economic policies depends on the skill and competence of those who design and execute them. Especially in developing countries, government officials lack the necessary training to implement the most beneficial economic policies for their countries and should therefore refrain from complex industrial policy and rather implement straightforward free-market policies. This has a twofold advantage in that these policies are not only the best for the economic development but also the leas bureaucratically demanding policies.

**What they don't tell you**: Good economic policy does not require good economists and least of all free-market economists, in fact the most successful economic bureaucrats so far were characterized by a lack of training in economics. What seems to be necessary to establish a sound economic policy is general intelligence and not specific economic knowledge, especially not the economics commonly taught which are far too theoretical and detached from real world economics.

Over the last decades the increasing influence of free-market economics has also has a disastrous influence on the global economy. By providing the ideological justification for financial deregulation and the unrestrained pursuit of short-term profits it has led to poor economic performance all over the world, including lower economic growth, greater economic instability, increased inequality and more frequent financial crises not least the financial crisis of 2008. Furthermore, the promoted the policies that weakened sustainable development for developing countries and reiterated that many of the deplorable outcomes of free-market policies such as extreme inequality and poverty all over the world are a necessary consequence of the rational actors complying with market forces.

But, the aim of the book is not to condemn economics as such, rather the specific form of free-market economics that has come to dominate the world over the past decades. There are a number of other schools of economic thought that would be in fact very suitable as a basis for future economic policies. One of the key insights that many of the other schools of economic thought spanning the political spectrum from the extreme right to the extreme left have in common is the understanding that capitalism develops through long-term investment and technological innovation, not trough short-term expansion in singular sectors. In fact when observing the most successful governments and companies, almost all endorse a view of capitalism and economic development that starkly differs from the straightforward free-market ideology. The future prospect should therefore be a concentration on these other strands of economic thought and to learn the lessons from them that an help the world escape the trap of free-market economics.

# How to rebuild the world economy

Ha Joon proposes 8 steps the world has to take in order to fundamentally change its view on economics and to start thinking about a new economic system.

1. The problem is not capitalism as such but the dominant free-market capitalism. It is necessary to reign in the forces set free in the last decades and conceive a new better-regulated variant.
2. A new economic system has to be built on the recognition that human rationality is severely limited.
3. A system has to be constructed that relies on bringing the best out of people, not the worst.
4. The belief that people are always paid what they deserve has to be replaced by a more realistic assessment of the current situations (especially regarding executive pay).
5. Manufacturing and production of actual products has to be taken much more seriously as opposed to activities in the service sector.
6. There has to be a better balance between the financial and the 'real' sector.
7. At least for a time the economic system has to favor developing countries through affirmative action to establish a true equality of opportunity.