28 1hinga 1hoy Don't 1oII

You about CaitaIiam

|A-1OOl C|AlG

AllEl lAlE
oo lmprlot o
lElGUll 3OOK3
AllEl lAlE
lub||shod by tho longu|n Group
longu|n 3ooks ltd, 80 3trand, london WC2l 0ll, Eng|and
longu|n Group (U3A) lnc., 87b |udson 3troot, low York,
low York 10014, U3A
longu|n Group (Canada), 00 Eg||nton Avonuo East, 3u|to
700, 1oronto, Ontar|o, Canada V4l 2Y8 (a d|v|s|on ot
loarson Canada lnc.)
longu|n lro|and, 2b 3t 3tophon's Groon, 0ub||n 2, lro|and (a
d|v|s|on ot longu|n 3ooks ltd)
longu|n Group (Austra||a), 2b0 Camborwo|| load,
Camborwo||, v|ctor|a 8124, Austra||a (a d|v|s|on ot loarson
Austra||a Group lty ltd)
longu|n 3ooks lnd|a lvt ltd, 11 Commun|ty Contro,
lanchshoo| lark, low 0oh|| - 110 017, lnd|a
longu|n Group (lZ), 07 Apo||o 0r|vo, lorth 3horo 0082,
low Zoa|and (a d|v|s|on ot loarson low Zoa|and ltd)
longu|n 3ooks (3outh Atr|ca) (lty) ltd, 24 3turdoo Avonuo,
losobank 2100, 3outh Atr|ca
longu|n 3ooks ltd, log|storod Ott|cos: 80 3trand, london
WC2l 0ll, Eng|and
www.pongu|n.com
||rst pub||shod 2010
Copyr|ght t |a-1oon Chang, 2010
1ho mora| r|ght ot tho author has boon assortod
A|| r|ghts rosorvod.
W|thout ||m|t|ng tho r|ghts undor copyr|ght rosorvod abovo,
no part ot th|s pub||cat|on may bo roproducod, storod |n or
|ntroducod |nto a rotr|ova| systom, or transm|ttod, |n any torm
or by any moans (o|octron|c, mochan|ca|, photocopy|ng,
rocord|ng or othorw|so) w|thout tho pr|or wr|tton porm|ss|on
ot both tho copyr|ght ownor and tho abovo pub||shor ot th|s
book
l33l: 078-0-141-0b780-0
1o |oo-1oong, Yuna, and 1|n-Gyu
7 Waya to Road 23 1hIngs 1hey
on't 1ell ou about CapItalIsm

Way 1. |t you aro not ovon auro what caitaIiam ia,
road:
1h|ngs 1, 2, b, 8, 18, 10, 10, 20, and 22
Way 2. |t you think oIitica ia a waato ot timo, road:
1h|ngs 1, b, 7, 12, 10, 18, 10, 21, and 28
Way 8. |t you havo boon wondoring why your Iito dooa
not aoom to got bottor doaito ovor-riaing incomo and
ovor-advancing tochnoIogioa, road:
1h|ngs 2, 4, 0, 8, 0, 10, 17, 18, and 22
Way 4. |t you think aomo ooIo aro richor than othora
bocauao thoy aro moro caabIo, bottor oducatod and
moro ontorriaing, road:
1h|ngs 8, 10, 18, 14, 1b, 10, 17, 20, and 21
Way 5. |t you want to know why oor countrioa aro
oor and how thoy can bocomo richor, road:
1h|ngs 8, 0, 7, 8, 0, 10, 11, 12, 1b, 17, and 28
Way 0. |t you think tho worId ia an untair Iaco but
thoro ia nothing much you can do about it, road:
1h|ngs 1, 2, 8, 4, b, 11, 18, 14, 1b, 20, and 21
Way 7. Road tho whoIo thing in tho toIIowing ordor .
Contonta

Ackoow|oogomoots
lotroooctloo
1h|ng 1 1horo |s no such th|ng as a troo markot
1h|ng 2 Compan|os shou|d oot bo run |n tho |ntorost
ot tho|r ownors
1h|ng 8 Vost poop|o |n r|ch countr|os aro pa|d moro
than thoy shou|d bo
1h|ng 4 1ho wash|ng mach|no has changod tho wor|d
moro than tho |ntornot has
1h|ng b Assumo tho worst about poop|o and you got
tho worst
1h|ng 0 Groator macrooconom|c stab|||ty has oo
mado tho wor|d oconomy moro stab|o.
1h|ng 7 |roo-markot po||c|os raro|y mako poor
countr|os r|ch
1h|ng 8 Cap|ta| has a nat|ona||ty
1h|ng 0 Wo do not ||vo |n a post-|ndustr|a| ago
1h|ng 10 1ho U3 doos not havo tho h|ghost ||v|ng
standard |n tho wor|d
1h|ng 11 Atr|ca |s not dost|nod tor undordovo|opmont
1h|ng 12 Govornmonts can p|ck w|nnors
1h|ng 18 Vak|ng r|ch poop|o r|chor doosn't mako tho
rost ot us r|chor
1h|ng 14 U3 managors aro ovor-pr|cod
1h|ng 1b loop|o |n poor countr|os aro moro
ontropronour|a| than poop|o |n r|ch countr|os
1h|ng 10 Wo aro not smart onough to |oavo th|ngs to
tho markot
1h|ng 17 Voro oducat|on |n |tso|t |s not go|ng to
mako a country r|chor
1h|ng 18 What |s good tor Gonora| Votors |s not
nocossar||y good tor tho Un|tod 3tatos
1h|ng 10 0osp|to tho ta|| ot commun|sm, wo aro st|||
||v|ng |n p|annod oconom|os
1h|ng 20 Equa||ty ot opportun|ty may not bo ta|r
1h|ng 21 3|g govornmont makos poop|o moro opon
to chango
1h|ng 22 ||nanc|a| markots nood to bocomo |oss, not
moro, ott|c|ont
1h|ng 28 Good oconom|c po||cy doos not roqu|ro
good oconom|sts
Cooc|osloo. low to robol|o tbo wor|o ocooomy
Notos
looox
AcknowIodgomonta

l havo bonot|tod trom many poop|o |n wr|t|ng th|s book.
|av|ng p|ayod such a p|vota| ro|o |n br|ng|ng about my
prov|ous book, Boo 5omorltoos, wh|ch tocusod on tho
dovo|op|ng wor|d, lvan Vu|cahy, my ||torary agont, gavo mo
constant oncouragomont to wr|to anothor book w|th a
broador appoa|. lotor G|nna, my od|tor at 3|oomsbury U3A,
not on|y prov|dod va|uab|o od|tor|a| toodback but a|so p|ayod
a cruc|a| ro|o |n sott|ng tho tono ot tho book by com|ng up
w|th tho t|t|o, 28 7blogs 7boy Loo`t 7o|| Yoo oboot
Coplto|lsm, wh||o l was concoptua||z|ng tho book. W||||am
Good|ad, my od|tor at A||on lano, took tho |oad |n tho
od|tor|a| work and d|d a suporb job |n gott|ng ovoryth|ng just
r|ght.
Vany poop|o road chaptors ot tho book and prov|dod
ho|ptu| commonts. 0uncan Groon road a|| tho chaptors and
gavo mo vory usotu| adv|co, both contont-w|so and
od|tor|a||y. Goott |arcourt and 0oopak layyar road many ot
tho chaptors and prov|dod sagac|ous adv|co. 0|rk 3ozomor,
Chr|s Cramor, 3ha||aja |onno||, latr|ck lmam, 0oborah
1ohnston, Amy K|atzk|n, 3arry lynn, Kon|a larsons, and
3ob lowthorn road var|ous chaptors and gavo mo va|uab|o
commonts.
W|thout tho ho|p ot my capab|o rosoarch ass|stants, l
cou|d not havo got a|| tho dota||od |ntormat|on on wh|ch tho
book |s bu||t. l thank, |n a|phabot|ca| ordor, 3hargav
Adhvaryu, |assan Akram, Anton|o Androon|, Yurondra
3asnott, Vuhammad lrtan, voorayooth Kanchoochat, and
|rancosca lo|nhardt, tor tho|r ass|stanco.
l a|so wou|d ||ko to thank 3oung-|| 1oong and 3uhm loo
tor prov|d|ng mo w|th data that aro not oas||y accoss|b|o.
last but not |oast, l thank my tam||y, w|thout whoso
support and |ovo tho book wou|d not havo boon t|n|shod.
|oo-1oong, my w|to, not on|y gavo mo strong omot|ona|
support wh||o l was wr|t|ng tho book but a|so road a|| tho
chaptors and ho|pod mo tormu|ato my argumonts |n a moro
cohoront and usor-tr|ond|y way. l was oxtromo|y p|oasod to
soo that, whon l t|oatod somo ot my |doas to Yuna, my
daughtor, sho rospondod w|th a surpr|s|ng |nto||octua|
matur|ty tor a 14-yoar-o|d. 1|n-Gyu, my son, gavo mo somo
vory |ntorost|ng |doas as wo|| as a |ot ot mora| support tor tho
book. l dod|cato th|s book to tho throo ot thom.
|ntroduction

1ho g|oba| oconomy ||os |n tattors. Wh||o t|sca| and monotary
st|mu|us ot unprocodontod sca|o has provontod tho t|nanc|a|
mo|tdown ot 2008 trom turn|ng |nto a tota| co||apso ot tho
g|oba| oconomy, tho 2008 g|oba| crash st||| roma|ns tho
socond-|argost oconom|c cr|s|s |n h|story, attor tho Groat
0opross|on. At tho t|mo ot wr|t|ng (Varch 2010), ovon as
somo poop|o doc|aro tho ond ot tho rocoss|on, a susta|nod
rocovory |s by no moans corta|n. ln tho absonco ot t|nanc|a|
rotorms, |ooso monotary and t|sca| po||c|os havo |od to now
t|nanc|a| bubb|os, wh||o tho roa| oconomy |s starvod ot
monoy. lt thoso bubb|os burst, tho g|oba| oconomy cou|d ta||
|nto anothor ('doub|o-d|p') rocoss|on. Evon |t tho rocovory |s
susta|nod, tho attormath ot tho cr|s|s w||| bo to|t tor yoars. lt
may bo sovora| yoars botoro tho corporato and tho
housoho|d soctors robu||d tho|r ba|anco shoots. 1ho hugo
budgot dot|c|ts croatod by tho cr|s|s w||| torco govornmonts
to roduco pub||c |nvostmonts and wo|taro ont|t|omonts
s|gn|t|cant|y, nogat|vo|y attoct|ng oconom|c growth, povorty
and soc|a| stab|||ty - poss|b|y tor docados. 3omo ot thoso
who |ost tho|r jobs and housos dur|ng tho cr|s|s may novor
jo|n tho oconom|c ma|nstroam aga|n. 1hoso aro tr|ghton|ng
prospocts.
1h|s catastropho has u|t|mato|y boon croatod by tho troo-
markot |doo|ogy that has ru|od tho wor|d s|nco tho 1080s.
Wo havo boon to|d that, |t |ott a|ono, markots w||| produco tho
most ott|c|ont and just outcomo. Ett|c|ont, bocauso
|nd|v|dua|s know bost how to ut|||zo tho rosourcos thoy
command, and just, bocauso tho compot|t|vo markot
procoss onsuros that |nd|v|dua|s aro rowardod accord|ng to
tho|r product|v|ty. Wo havo boon to|d that bus|noss shou|d bo
g|von max|mum troodom. ||rms, bo|ng c|osost to tho
markot, know what |s bost tor tho|r bus|nossos. lt wo |ot thom
do what thoy want, woa|th croat|on w||| bo max|m|zod,
bonot|t|ng tho rost ot soc|oty as wo||. Wo woro to|d that
govornmont |ntorvont|on |n tho markots wou|d on|y roduco
tho|r ott|c|oncy. Govornmont |ntorvont|on |s otton dos|gnod to
||m|t tho vory scopo ot woa|th croat|on tor m|sgu|dod
oga||tar|an roasons. Evon whon |t |s not, govornmonts
cannot |mprovo on markot outcomos, as thoy havo no|thor
tho nocossary |ntormat|on nor tho |ncont|vos to mako good
bus|noss doc|s|ons. ln sum, wo woro to|d to put a|| our trust
|n tho markot and got out ot |ts way.
|o||ow|ng th|s adv|co, most countr|os havo |ntroducod
troo-markot po||c|os ovor tho |ast throo docados -
pr|vat|zat|on ot stato-ownod |ndustr|a| and t|nanc|a| t|rms,
dorogu|at|on ot t|nanco and |ndustry, ||bora||zat|on ot
|ntornat|ona| trado and |nvostmont, and roduct|on |n |ncomo
taxos and wo|taro paymonts. 1hoso po||c|os, tho|r advocatos
adm|ttod, may tomporar||y croato somo prob|oms, such as
r|s|ng |noqua||ty, but u|t|mato|y thoy w||| mako ovoryono bottor
ott by croat|ng a moro dynam|c and woa|th|or soc|oty. 1ho
r|s|ng t|do ||tts a|| boats togothor, was tho motaphor.
1ho rosu|t ot thoso po||c|os has boon tho po|ar oppos|to
ot what was prom|sod. |orgot tor a momont tho t|nanc|a|
mo|tdown, wh|ch w||| scar tho wor|d tor docados to como.
lr|or to that, and unboknown to most poop|o, troo-markot
po||c|os had rosu|tod |n s|owor growth, r|s|ng |noqua||ty and
ho|ghtonod |nstab|||ty |n most countr|os. ln many r|ch
countr|os, thoso prob|oms woro maskod by hugo crod|t
oxpans|on, thus tho tact that U3 wagos had roma|nod
stagnant and work|ng hours |ncroasod s|nco tho 1070s was
convon|ont|y toggod ovor by tho hoady brow ot crod|t-tuo||od
consumor boom. 1ho prob|oms woro bad onough |n tho r|ch
countr|os, but thoy woro ovon moro sor|ous tor tho
dovo|op|ng wor|d. l|v|ng standards |n 3ub-3aharan Atr|ca
havo stagnatod tor tho |ast throo docados, wh||o lat|n
Amor|ca has soon |ts por cap|ta growth rato ta|| by two-th|rds
dur|ng tho por|od. 1horo woro somo dovo|op|ng countr|os
that grow tast (a|though w|th rap|d|y r|s|ng |noqua||ty) dur|ng
th|s por|od, such as Ch|na and lnd|a, but thoso aro proc|so|y
tho countr|os that, wh||o part|a||y ||bora||z|ng, havo rotusod to
|ntroduco tu||-b|own troo-markot po||c|os.
1hus, what wo woro to|d by tho troo-markotoors - or, as
thoy aro otton ca||od, noo-||bora| oconom|sts - was at bost
on|y part|a||y truo and at worst p|a|n wrong. As l w||| show
throughout th|s book, tho 'truths' podd|od by troo-markot
|doo|oguos aro basod on |azy assumpt|ons and b||nkorod
v|s|ons, |t not nocossar||y so|t-sorv|ng not|ons. Vy a|m |n th|s
book |s to to|| you somo ossont|a| truths about cap|ta||sm
that tho troo-markotoors won't.
1h|s book |s not an ant|-cap|ta||st man|tosto. 3o|ng
cr|t|ca| ot troo-markot |doo|ogy |s not tho samo as bo|ng
aga|nst cap|ta||sm. 0osp|to |ts prob|oms and ||m|tat|ons, l
bo||ovo that cap|ta||sm |s st||| tho bost oconom|c systom that
human|ty has |nvontod. Vy cr|t|c|sm |s ot a part|cu|ar vors|on
ot cap|ta||sm that has dom|natod tho wor|d |n tho |ast throo
docados, that |s, troo-markot cap|ta||sm. 1h|s |s not tho on|y
way to run cap|ta||sm, and corta|n|y not tho bost, as tho
rocord ot tho |ast throo docados shows. 1ho book shows
that thoro aro ways |n wh|ch cap|ta||sm shou|d, and can, bo
mado bottor.
Evon though tho 2008 cr|s|s has mado us sor|ous|y
quost|on tho way |n wh|ch our oconom|os aro run, most ot us
do not pursuo such quost|ons bocauso wo th|nk that thoy aro
onos tor tho oxports. lndood thoy aro - at ono |ovo|. 1ho
proc|so answors do roqu|ro know|odgo on many tochn|ca|
|ssuos, many ot thom so comp||catod that tho oxports
thomso|vos d|sagroo on thom. lt |s thon natura| that most ot
us s|mp|y do not havo tho t|mo or tho nocossary tra|n|ng to
|oarn a|| tho tochn|ca| dota||s botoro wo can pronounco our
judgomonts on tho ottoct|vonoss ot 1All (1roub|od Assot
lo||ot lrogram), tho nocoss|ty ot G20, tho w|sdom ot bank
nat|ona||zat|on or tho appropr|ato |ovo|s ot oxocut|vo
sa|ar|os. And whon |t comos to th|ngs ||ko povorty |n Atr|ca,
tho work|ngs ot tho Wor|d 1rado Organ|zat|on, or tho cap|ta|
adoquacy ru|os ot tho 3ank tor lntornat|ona| 3ott|omonts,
most ot us aro trank|y |ost.
|owovor, |t |s oot nocossary tor us to undorstand a|| tho
tochn|ca| dota||s |n ordor to undorstand what |s go|ng on |n
tho wor|d and oxorc|so what l ca|| an 'act|vo oconom|c
c|t|zonsh|p' to domand tho r|ght coursos ot act|on trom thoso
|n doc|s|on-mak|ng pos|t|ons. Attor a||, wo mako judgomonts
about a|| sorts ot othor |ssuos dosp|to |ack|ng tochn|ca|
oxport|so. Wo don't nood to bo oxport op|dom|o|og|sts |n
ordor to know that thoro shou|d bo hyg|ono standards |n tood
tactor|os, butchors and rostaurants. Vak|ng judgomonts
about oconom|cs |s no d|ttoront: onco you know tho koy
pr|nc|p|os and bas|c tacts, you can mako somo robust
judgomonts w|thout know|ng tho tochn|ca| dota||s. 1ho on|y
proroqu|s|to |s that you aro w||||ng to romovo thoso roso-
t|ntod g|assos that noo-||bora| |doo|og|os ||ko you to woar
ovory day. 1ho g|assos mako tho wor|d |ook s|mp|o and
protty. 3ut ||tt thom ott and staro at tho c|oar harsh ||ght ot
roa||ty.
Onco you know that thoro |s roa||y no such th|ng as a troo
markot, you won't bo doco|vod by poop|o who donounco a
rogu|at|on on tho grounds that |t makos tho markot 'untroo'
(soo 7blog 1). Whon you |oarn that |argo and act|vo
govornmonts can promoto, rathor than dampon, oconom|c
dynam|sm, you w||| soo that tho w|dosproad d|strust ot
govornmont |s unwarrantod (soo 7blogs 12 ooo 21).
Know|ng that wo do oot ||vo |n a post-|ndustr|a| know|odgo
oconomy w||| mako you quost|on tho w|sdom ot nog|oct|ng,
or ovon |mp||c|t|y wo|com|ng, |ndustr|a| doc||no ot a country,
as somo govornmonts havo dono (soo 7blogs 0 ooo 17).
Onco you roa||zo that tr|ck|o-down oconom|cs doos not
work, you w||| soo tho oxcoss|vo tax cuts tor tho r|ch tor what
thoy aro - a s|mp|o upward rod|str|but|on ot |ncomo, rathor
than a way to mako a|| ot us r|chor, as wo woro to|d (soo
7blogs 18 ooo 20).
What has happonod to tho wor|d oconomy was no
acc|dont or tho outcomo ot an |rros|st|b|o torco ot h|story. lt
|s not bocauso ot somo |ron |aw ot tho markot that wagos
havo boon stagnat|ng and work|ng hours r|s|ng tor most
Amor|cans, wh||o tho top managors and bankors vast|y
|ncroasod tho|r |ncomos (soo 7blogs 10 ooo 14). lt |s not
s|mp|y bocauso ot unstoppab|o progross |n tho tochno|og|os
ot commun|cat|ons and transportat|on that wo aro oxposod
to |ncroas|ng torcos ot |ntornat|ona| compot|t|on and havo to
worry about job socur|ty (soo 7blogs 4 ooo 0). lt was not
|nov|tab|o that tho t|nanc|a| soctor got moro and moro
dotachod trom tho roa| oconomy |n tho |ast throo docados,
u|t|mato|y croat|ng tho oconom|c catastropho wo aro |n
today (soo 7blogs 18 ooo 22). lt |s not ma|n|y bocauso ot
somo una|torab|o structura| tactors - trop|ca| c||mato,
untortunato |ocat|on, or bad cu|turo - that poor countr|os aro
poor (soo 7blogs 7 ooo 11).
|uman doc|s|ons, ospoc|a||y doc|s|ons by thoso who
havo tho powor to sot tho ru|os, mako th|ngs happon |n tho
way thoy happon, as l w||| oxp|a|n. Evon though no s|ng|o
doc|s|on-makor can bo suro that hor act|ons w||| a|ways |oad
to tho dos|rod rosu|ts, tho doc|s|ons that havo boon mado
aro not |n somo sonso |nov|tab|o. Wo do not ||vo |n tho bost
ot a|| poss|b|o wor|ds. lt d|ttoront doc|s|ons had boon takon,
tho wor|d wou|d havo boon a d|ttoront p|aco. G|von th|s, wo
nood to ask whothor tho doc|s|ons that tho r|ch and tho
powortu| tako aro basod on sound roason|ng and robust
ov|donco. On|y whon wo do that can wo domand r|ght
act|ons trom corporat|ons, govornmonts and |ntornat|ona|
organ|zat|ons. W|thout our act|vo oconom|c c|t|zonsh|p, wo
w||| a|ways bo tho v|ct|ms ot poop|o who havo groator ab|||ty
to mako doc|s|ons, who to|| us that th|ngs happon bocauso
thoy havo to and thorotoro that thoro |s noth|ng wo can do to
a|tor thom, howovor unp|oasant and unjust thoy may appoar.
1h|s book |s |ntondod to oqu|p tho roador w|th an
undorstand|ng ot how cap|ta||sm roa||y works and how |t can
bo mado to work bottor. lt |s, howovor, not an 'oconom|cs tor
dumm|os'. lt |s attompt|ng to bo both tar |oss and tar moro.
lt |s |oss than oconom|cs tor dumm|os bocauso l do not
go |nto many ot tho tochn|ca| dota||s that ovon a bas|c
|ntroductory book on oconom|cs wou|d bo compo||od to
oxp|a|n. |owovor, th|s nog|oct ot tochn|ca| dota||s |s not
bocauso l bo||ovo thom to bo boyond my roadors. 0b por
cont ot oconom|cs |s common sonso mado comp||catod,
and ovon tor tho roma|n|ng b por cont, tho ossont|a|
roason|ng, |t not a|| tho tochn|ca| dota||s, can bo oxp|a|nod |n
p|a|n torms. lt |s s|mp|y bocauso l bo||ovo that tho bost way
to |oarn oconom|c pr|nc|p|os |s by us|ng thom to undorstand
prob|oms that |ntorost tho roador tho most. 1horotoro, l
|ntroduco tochn|ca| dota||s on|y whon thoy bocomo ro|ovant,
rathor than |n a systomat|c, toxtbook-||ko mannor.
3ut wh||o comp|oto|y accoss|b|o to non-spoc|a||st
roadors, th|s book |s a |ot moro than oconom|cs tor
dumm|os. lndood, |t goos much doopor than many advancod
oconom|cs books |n tho sonso that |t quost|ons many
roco|vod oconom|c thoor|os and omp|r|ca| tacts that thoso
books tako tor grantod. Wh||o |t may sound daunt|ng tor a
non-spoc|a||st roador to bo askod to quost|on thoor|os that
aro supportod by tho 'oxports' and to suspoct omp|r|ca| tacts
that aro accoptod by most protoss|ona|s |n tho t|o|d, you w|||
t|nd that th|s |s actua||y a |ot oas|or than |t sounds, onco you
stop assum|ng that what most oxports bo||ovo must bo r|ght.
Vost ot tho |ssuos l d|scuss |n tho book do not havo
s|mp|o answors. lndood, |n many casos, my ma|n po|nt |s
that thoro |s no s|mp|o answor, un||ko what troo-markot
oconom|sts want you to bo||ovo. |owovor, un|oss wo
contront thoso |ssuos, wo w||| not porco|vo how tho wor|d
roa||y works. And un|oss wo undorstand that, wo won't bo
ab|o to dotond our own |ntorosts, not to spoak ot do|ng
groator good as act|vo oconom|c c|t|zons.
1hing 1
1horo ia no auch thing aa a
troo markot

What they tell you

Varkots nood to bo troo. Whon tho govornmont |ntortoros to
d|ctato what markot part|c|pants can or cannot do,
rosourcos cannot t|ow to tho|r most ott|c|ont uso. lt poop|o
cannot do tho th|ngs that thoy t|nd most prot|tab|o, thoy |oso
tho |ncont|vo to |nvost and |nnovato. 1hus, |t tho govornmont
puts a cap on houso ronts, |and|ords |oso tho |ncont|vo to
ma|nta|n tho|r proport|os or bu||d now onos. Or, |t tho
govornmont rostr|cts tho k|nds ot t|nanc|a| products that can
bo so|d, two contract|ng part|os that may both havo
bonot|tod trom |nnovat|vo transact|ons that tu|t|| tho|r
|d|osyncrat|c noods cannot roap tho potont|a| ga|ns ot troo
contract. loop|o must bo |ott 'troo to chooso', as tho t|t|o ot
troo-markot v|s|onary V||ton |r|odman's tamous book goos.
What they don't tell you

1ho troo markot doosn't ox|st. Evory markot has somo ru|os
and boundar|os that rostr|ct troodom ot cho|co. A markot
|ooks troo on|y bocauso wo so uncond|t|ona||y accopt |ts
undor|y|ng rostr|ct|ons that wo ta|| to soo thom. |ow 'troo' a
markot |s cannot bo objoct|vo|y dot|nod. lt |s a po||t|ca|
dot|n|t|on. 1ho usua| c|a|m by troo-markot oconom|sts that
thoy aro try|ng to dotond tho markot trom po||t|ca||y
mot|vatod |ntortoronco by tho govornmont |s ta|so.
Govornmont |s a|ways |nvo|vod and thoso troo-markotoors
aro as po||t|ca||y mot|vatod as anyono. Ovorcom|ng tho myth
that thoro |s such a th|ng as an objoct|vo|y dot|nod 'troo
markot' |s tho t|rst stop towards undorstand|ng cap|ta||sm.
Labour ought to be |ree

ln 1810 now |og|s|at|on to rogu|ato ch||d |abour, tho Cotton
|actor|os logu|at|on Act, was tab|od |n tho 3r|t|sh
lar||amont. 1ho proposod rogu|at|on was |ncrod|b|y '||ght
touch' by modorn standards. lt wou|d ban tho omp|oymont ot
young ch||dron - that |s, thoso undor tho ago ot n|no. O|dor
ch||dron (agod botwoon ton and s|xtoon) wou|d st||| bo
a||owod to work, but w|th tho|r work|ng hours rostr|ctod to
two|vo por day (yos, thoy woro roa||y go|ng sott on thoso
k|ds). 1ho now ru|os app||od on|y to cotton tactor|os, wh|ch
woro rocogn|zod to bo oxcopt|ona||y hazardous to workors'
hoa|th.
1ho proposa| causod hugo controvorsy. Oppononts saw |t
as undorm|n|ng tho sanct|ty ot troodom ot contract and thus
dostroy|ng tho vory toundat|on ot tho troo markot. ln dobat|ng
th|s |og|s|at|on, somo mombors ot tho |ouso ot lords
objoctod to |t on tho grounds that '|abour ought to bo troo'.
1ho|r argumont sa|d: tho ch||dron want (and nood) to work,
and tho tactory ownors want to omp|oy thom, what |s tho
prob|om?
1oday, ovon tho most ardont troo-markot propononts |n
3r|ta|n or othor r|ch countr|os wou|d not th|nk ot br|ng|ng
ch||d |abour back as part ot tho markot ||bora||zat|on
packago that thoy so want. |owovor, unt|| tho |ato n|notoonth
or tho oar|y twont|oth contury, whon tho t|rst sor|ous ch||d
|abour rogu|at|ons woro |ntroducod |n Europo and lorth
Amor|ca, many rospoctab|o poop|o judgod ch||d |abour
rogu|at|on to bo aga|nst tho pr|nc|p|os ot tho troo markot.
1hus soon, tho 'troodom' ot a markot |s, ||ko boauty, |n tho
oyos ot tho boho|dor. lt you bo||ovo that tho r|ght ot ch||dron
not to havo to work |s moro |mportant than tho r|ght ot tactory
ownors to bo ab|o to h|ro whoovor thoy t|nd most prot|tab|o,
you w||| not soo a ban on ch||d |abour as an |ntr|ngomont on
tho troodom ot tho |abour markot. lt you bo||ovo tho oppos|to,
you w||| soo an 'untroo' markot, shack|od by a m|sgu|dod
govornmont rogu|at|on.
Wo don't havo to go back two contur|os to soo
rogu|at|ons wo tako tor grantod (and accopt as tho 'amb|ont
no|so' w|th|n tho troo markot) that woro sor|ous|y cha||ongod
as undorm|n|ng tho troo markot, whon t|rst |ntroducod. Whon
onv|ronmonta| rogu|at|ons (o.g., rogu|at|ons on car and
tactory om|ss|ons) appoarod a tow docados ago, thoy woro
opposod by many as sor|ous |ntr|ngomonts on our troodom
to chooso. 1ho|r oppononts askod: |t poop|o want to dr|vo |n
moro po||ut|ng cars or |t tactor|os t|nd moro po||ut|ng
product|on mothods moro prot|tab|o, why shou|d tho
govornmont provont thom trom mak|ng such cho|cos?
1oday, most poop|o accopt thoso rogu|at|ons as 'natura|'.
1hoy bo||ovo that act|ons that harm othors, howovor
un|ntont|ona||y (such as po||ut|on), nood to bo rostr|ctod.
1hoy a|so undorstand that |t |s sons|b|o to mako carotu| uso
ot our onorgy rosourcos, whon many ot thom aro non-
ronowab|o. 1hoy may bo||ovo that roduc|ng human |mpact on
c||mato chango makos sonso too.
lt tho samo markot can bo porco|vod to havo vary|ng
dogroos ot troodom by d|ttoront poop|o, thoro |s roa||y no
objoct|vo way to dot|no how troo that markot |s. ln othor
words, tho troo markot |s an |||us|on. lt somo markots |ook
troo, |t |s on|y bocauso wo so tota||y accopt tho rogu|at|ons
that aro propp|ng thom up that thoy bocomo |nv|s|b|o.
PIano wIres and kung|u masters

l|ko many poop|o, as a ch||d l was tasc|natod by a|| thoso
grav|ty-doty|ng kungtu mastors |n |ong Kong mov|os. l|ko
many k|ds, l suspoct, l was b|ttor|y d|sappo|ntod whon l
|oarnod that thoso mastors woro actua||y hang|ng on p|ano
w|ros.
1ho troo markot |s a b|t ||ko that. Wo accopt tho
|og|t|macy ot corta|n rogu|at|ons so tota||y that wo don't soo
thom. Voro carotu||y oxam|nod, markots aro rovoa|od to bo
proppod up by ru|os - and many ot thom.
1o bog|n w|th, thoro |s a hugo rango ot rostr|ct|ons on
what can bo tradod, and not just bans on 'obv|ous' th|ngs
such as narcot|c drugs or human organs. E|octora| votos,
govornmont jobs and |oga| doc|s|ons aro not tor sa|o, at
|oast opon|y, |n modorn oconom|os, a|though thoy woro |n
most countr|os |n tho past. Un|vors|ty p|acos may not usua||y
bo so|d, a|though |n somo nat|ons monoy can buy thom -
o|thor through (|||oga||y) pay|ng tho so|octors or (|oga||y)
donat|ng monoy to tho un|vors|ty. Vany countr|os ban trad|ng
|n t|roarms or a|coho|. Usua||y mod|c|nos havo to bo oxp||c|t|y
||consod by tho govornmont, upon tho proot ot tho|r satoty,
botoro thoy can bo markotod. A|| thoso rogu|at|ons aro
potont|a||y controvors|a| - just as tho ban on so|||ng human
bo|ngs (tho s|avo trado) was ono and a ha|t contur|os ago.
1horo aro a|so rostr|ct|ons on who can part|c|pato |n
markots. Ch||d |abour rogu|at|on now bans tho ontry ot
ch||dron |nto tho |abour markot. l|concos aro roqu|rod tor
protoss|ons that havo s|gn|t|cant |mpacts on human ||to, such
as mod|ca| doctors or |awyors (wh|ch may somot|mos bo
|ssuod by protoss|ona| assoc|at|ons rathor than by tho
govornmont). Vany countr|os a||ow on|y compan|os w|th
moro than a corta|n amount ot cap|ta| to sot up banks. Evon
tho stock markot, whoso undor-rogu|at|on has boon a causo
ot tho 2008 g|oba| rocoss|on, has rogu|at|ons on who can
trado. You can't just turn up |n tho low York 3tock Exchango
(lY3E) w|th a bag ot sharos and so|| thom. Compan|os
must tu|t|| ||st|ng roqu|romonts, moot|ng str|ngont aud|t|ng
standards ovor a corta|n numbor ot yoars, botoro thoy can
ottor tho|r sharos tor trad|ng. 1rad|ng ot sharos |s on|y
conductod by ||consod brokors and tradors.
Cond|t|ons ot trado aro spoc|t|od too. Ono ot tho th|ngs
that surpr|sod mo whon l t|rst movod to 3r|ta|n |n tho m|d
1080s was that ono cou|d domand a tu|| rotund tor a product
ono d|dn't ||ko, ovon |t |t wasn't tau|ty. At tho t|mo, you just
cou|dn't do that |n Koroa, oxcopt |n tho most oxc|us|vo
dopartmont storos. ln 3r|ta|n, tho consumor's r|ght to chango
hor m|nd was cons|dorod moro |mportant than tho r|ght ot
tho so||or to avo|d tho cost |nvo|vod |n roturn|ng unwantod
(yot tunct|ona|) products to tho manutacturor. 1horo aro many
othor ru|os rogu|at|ng var|ous aspocts ot tho oxchango
procoss: product ||ab|||ty, ta||uro |n do||vory, |oan dotau|t, and
so on. ln many countr|os, thoro aro a|so nocossary
porm|ss|ons tor tho |ocat|on ot sa|os out|ots - such as
rostr|ct|ons on stroot-vond|ng or zon|ng |aws that ban
commorc|a| act|v|t|os |n ros|dont|a| aroas.
1hon thoro aro pr|co rogu|at|ons. l am not ta|k|ng horo just
about thoso h|gh|y v|s|b|o phonomona such as ront contro|s
or m|n|mum wagos that troo-markot oconom|sts |ovo to hato.
Wagos |n r|ch countr|os aro dotorm|nod moro by
|mm|grat|on contro| than anyth|ng o|so, |nc|ud|ng any
m|n|mum wago |og|s|at|on. |ow |s tho |mm|grat|on
max|mum dotorm|nod? lot by tho 'troo' |abour markot,
wh|ch, |t |ott a|ono, w||| ond up rop|ac|ng 80-00 por cont ot
nat|vo workors w|th choapor, and otton moro product|vo,
|mm|grants. lmm|grat|on |s |argo|y sott|od by po||t|cs. 3o, |t
you havo any ros|dua| doubt about tho mass|vo ro|o that tho
govornmont p|ays |n tho oconomy's troo markot, thon pauso
to rot|oct that a|| our wagos aro, at root, po||t|ca||y
dotorm|nod (soo 7blog 8).
|o||ow|ng tho 2008 t|nanc|a| cr|s|s, tho pr|cos ot |oans (|t
you can got ono or |t you a|roady havo a var|ab|o rato |oan)
havo bocomo a |ot |owor |n many countr|os thanks to tho
cont|nuous s|ash|ng ot |ntorost ratos. Was that bocauso
suddon|y poop|o d|dn't want |oans and tho banks noodod to
|owor tho|r pr|cos to sh|tt thom? lo, |t was tho rosu|t ot
po||t|ca| doc|s|ons to boost domand by cutt|ng |ntorost ratos.
Evon |n norma| t|mos, |ntorost ratos aro sot |n most countr|os
by tho contra| bank, wh|ch moans that po||t|ca|
cons|dorat|ons croop |n. ln othor words, |ntorost ratos aro
a|so dotorm|nod by po||t|cs.
lt wagos and |ntorost ratos aro (to a s|gn|t|cant oxtont)
po||t|ca||y dotorm|nod, thon a|| tho othor pr|cos aro po||t|ca||y
dotorm|nod, as thoy attoct a|| othor pr|cos.
ls |ree trade |aIr7

Wo soo a rogu|at|on whon wo don't ondorso tho mora|
va|uos boh|nd |t. 1ho n|notoonth-contury h|gh-tar|tt rostr|ct|on
on troo trado by tho U3 todora| govornmont outragod s|avo-
ownors, who at tho samo t|mo saw noth|ng wrong w|th
trad|ng poop|o |n a troo markot. 1o thoso who bo||ovod that
poop|o can bo ownod, bann|ng trado |n s|avos was
objoct|onab|o |n tho samo way as rostr|ct|ng trado |n
manutacturod goods. Koroan shopkoopors ot tho 1080s
wou|d probab|y havo thought tho roqu|romont tor
'uncond|t|ona| roturn' to bo an unta|r|y burdonsomo
govornmont rogu|at|on rostr|ct|ng markot troodom.
1h|s c|ash ot va|uos a|so ||os boh|nd tho contomporary
dobato on troo trado vs. ta|r trado. Vany Amor|cans bo||ovo
that Ch|na |s ongagod |n |ntornat|ona| trado that may bo troo
but |s not ta|r. ln tho|r v|ow, by pay|ng workors unaccoptab|y
|ow wagos and mak|ng thom work |n |nhumano cond|t|ons,
Ch|na compotos unta|r|y. 1ho Ch|noso, |n turn, can r|posto
that |t |s unaccoptab|o that r|ch countr|os, wh||o advocat|ng
troo trado, try to |mposo art|t|c|a| barr|ors to Ch|na's oxports
by attompt|ng to rostr|ct tho |mport ot 'swoatshop' products.
1hoy t|nd |t unjust to bo provontod trom oxp|o|t|ng tho on|y
rosourco thoy havo |n groatost abundanco - choap |abour.
Ot courso, tho d|tt|cu|ty horo |s that thoro |s no objoct|vo
way to dot|no 'unaccoptab|y |ow wagos' or '|nhumano
work|ng cond|t|ons'. W|th tho hugo |ntornat|ona| gaps that
ox|st |n tho |ovo| ot oconom|c dovo|opmont and ||v|ng
standards, |t |s natura| that what |s a starvat|on wago |n tho
U3 |s a handsomo wago |n Ch|na (tho avorago bo|ng 10 por
cont that ot tho U3) and a tortuno |n lnd|a (tho avorago bo|ng
2 por cont that ot tho U3). lndood, most ta|r-trado-m|ndod
Amor|cans wou|d not havo bought th|ngs mado by tho|r own
grandtathors, who workod oxtromo|y |ong hours undor
|nhumano cond|t|ons. Unt|| tho bog|nn|ng ot tho twont|oth
contury, tho avorago work wook |n tho U3 was around s|xty
hours. At tho t|mo (|n 100b, to bo moro proc|so), |t was a
country |n wh|ch tho 3upromo Court doc|arod
unconst|tut|ona| a low York stato |aw ||m|t|ng tho work|ng
days ot bakors to ton hours, on tho grounds that |t 'dopr|vod
tho bakor ot tho ||borty ot work|ng as |ong as ho w|shod'.
1hus soon, tho dobato about ta|r trado |s ossont|a||y
about mora| va|uos and po||t|ca| doc|s|ons, and not
oconom|cs |n tho usua| sonso. Evon though |t |s about an
oconom|c |ssuo, |t |s not somoth|ng oconom|sts w|th tho|r
tochn|ca| too| k|ts aro part|cu|ar|y wo|| oqu|ppod to ru|o on.
A|| th|s doos oot moan that wo nood to tako a ro|at|v|st
pos|t|on and ta|| to cr|t|c|zo anyono bocauso anyth|ng goos.
Wo can (and l do) havo a v|ow on tho accoptab|||ty ot
prova|||ng |abour standards |n Ch|na (or any othor country,
tor that mattor) and try to do somoth|ng about |t, w|thout
bo||ov|ng that thoso who havo a d|ttoront v|ow aro wrong |n
somo abso|uto sonso. Evon though Ch|na cannot attord
Amor|can wagos or 3wod|sh work|ng cond|t|ons, |t corta|n|y
can |mprovo tho wagos and tho work|ng cond|t|ons ot |ts
workors. lndood, many Ch|noso don't accopt tho prova|||ng
cond|t|ons and domand toughor rogu|at|ons. 3ut oconom|c
thoory (at |oast troo-markot oconom|cs) cannot to|| us what
tho 'r|ght' wagos and work|ng cond|t|ons shou|d bo |n Ch|na.
l don't thInk we are In France any more

ln 1u|y 2008, w|th tho country's t|nanc|a| systom |n mo|tdown,
tho U3 govornmont pourod $200 b||||on |nto |ann|o Vao and
|rodd|o Vac, tho mortgago |ondors, and nat|ona||zod thom.
On w|tnoss|ng th|s, tho lopub||can 3onator 1|m 3unn|ng ot
Kontucky tamous|y donouncod tho act|on as somoth|ng that
cou|d on|y happon |n a 'soc|a||st' country ||ko |ranco.
|ranco was bad onough, but on 10 3optombor 2008,
3onator 3unn|ng's bo|ovod country was turnod |nto tho Ev||
Emp|ro |tso|t by h|s own party |oador. Accord|ng to tho p|an
announcod that day by lros|dont Goorgo W. 3ush and
subsoquont|y namod 1All (1roub|od Assot lo||ot
lrogram), tho U3 govornmont was to uso at |oast $700
b||||on ot taxpayors' monoy to buy up tho 'tox|c assots'
chok|ng up tho t|nanc|a| systom.
lros|dont 3ush, howovor, d|d not soo th|ngs qu|to that
way. |o arguod that, rathor than bo|ng 'soc|a||st', tho p|an
was s|mp|y a cont|nuat|on ot tho Amor|can systom ot troo
ontorpr|so, wh|ch 'rosts on tho conv|ct|on that tho todora|
govornmont shou|d |ntortoro |n tho markot p|aco on|y whon
nocossary'. On|y that, |n h|s v|ow, nat|ona||z|ng a hugo chunk
ot tho t|nanc|a| soctor was just ono ot thoso nocossary
th|ngs.
Vr 3ush's statomont |s, ot courso, an u|t|mato oxamp|o ot
po||t|ca| doub|o-spoak - ono ot tho b|ggost stato
|ntorvont|ons |n human h|story |s drossod up as anothor
workaday markot procoss. |owovor, through thoso words
Vr 3ush oxposod tho t||msy toundat|on on wh|ch tho myth ot
tho troo markot stands. As tho statomont so c|oar|y rovoa|s,
what |s a nocossary stato |ntorvont|on cons|stont w|th troo-
markot cap|ta||sm |s roa||y a mattor ot op|n|on. 1horo |s no
sc|ont|t|ca||y dot|nod boundary tor troo markot.
lt thoro |s noth|ng sacrod about any part|cu|ar markot
boundar|os that happon to ox|st, an attompt to chango thom
|s as |og|t|mato as tho attompt to dotond thom. lndood, tho
h|story ot cap|ta||sm has boon a constant strugg|o ovor tho
boundar|os ot tho markot.
A |ot ot tho th|ngs that aro outs|do tho markot today havo
boon romovod by po||t|ca| doc|s|on, rathor than tho markot
procoss |tso|t - human bo|ngs, govornmont jobs, o|octora|
votos, |oga| doc|s|ons, un|vors|ty p|acos or uncort|t|od
mod|c|nos. 1horo aro st||| attompts to buy at |oast somo ot
thoso th|ngs |||oga||y (br|b|ng govornmont ott|c|a|s, judgos or
votors) or |oga||y (us|ng oxpons|vo |awyors to w|n a |awsu|t,
donat|ons to po||t|ca| part|os, otc.), but, ovon though thoro
havo boon movomonts |n both d|roct|ons, tho trond has boon
towards |oss markot|zat|on.
|or goods that aro st||| tradod, moro rogu|at|ons havo
boon |ntroducod ovor t|mo. Comparod ovon to a tow
docados ago, now wo havo much moro str|ngont rogu|at|ons
on who can produco what (o.g., cort|t|catos tor organ|c or
ta|r-trado producors), how thoy can bo producod (o.g.,
rostr|ct|ons on po||ut|on or carbon om|ss|ons), and how thoy
can bo so|d (o.g., ru|os on product |abo|||ng and on rotunds).
|urthormoro, rot|oct|ng |ts po||t|ca| naturo, tho procoss ot
ro-draw|ng tho boundar|os ot tho markot has somot|mos
boon markod by v|o|ont cont||cts. 1ho Amor|cans tought a
c|v|| war ovor troo trado |n s|avos (a|though troo trado |n
goods - or tho tar|tts |ssuo - was a|so an |mportant |ssuo).
1
1ho 3r|t|sh govornmont tought tho Op|um War aga|nst Ch|na
to roa||zo a troo trado |n op|um. logu|at|ons on troo markot
|n ch||d |abour woro |mp|omontod on|y bocauso ot tho
strugg|os by soc|a| rotormors, as l d|scussod oar||or. Vak|ng
troo markots |n govornmont jobs or votos |||oga| has boon
mot w|th st|tt ros|stanco by po||t|ca| part|os who bought votos
and d|shod out govornmont jobs to roward |oya||sts. 1hoso
pract|cos camo to an ond on|y through a comb|nat|on ot
po||t|ca| act|v|sm, o|octora| rotorms and changos |n tho ru|os
rogard|ng govornmont h|r|ng.
locogn|z|ng that tho boundar|os ot tho markot aro
amb|guous and cannot bo dotorm|nod |n an objoct|vo way
|ots us roa||zo that oconom|cs |s not a sc|onco ||ko phys|cs
or chom|stry, but a po||t|ca| oxorc|so. |roo-markot
oconom|sts may want you to bo||ovo that tho corroct
boundar|os ot tho markot can bo sc|ont|t|ca||y dotorm|nod,
but th|s |s |ncorroct. lt tho boundar|os ot what you aro
study|ng cannot bo sc|ont|t|ca||y dotorm|nod, what you aro
do|ng |s not a sc|onco.
1hus soon, oppos|ng a now rogu|at|on |s say|ng that tho
status quo, howovor unjust trom somo poop|o's po|nt ot
v|ow, shou|d not bo changod. 3ay|ng that an ox|st|ng
rogu|at|on shou|d bo abo||shod |s say|ng that tho doma|n ot
tho markot shou|d bo oxpandod, wh|ch moans that thoso
who havo monoy shou|d bo g|von moro powor |n that aroa,
as tho markot |s run on ono-do||ar-ono-voto pr|nc|p|o.
3o, whon troo-markot oconom|sts say that a corta|n
rogu|at|on shou|d not bo |ntroducod bocauso |t wou|d rostr|ct
tho 'troodom' ot a corta|n markot, thoy aro moro|y
oxpross|ng a po||t|ca| op|n|on that thoy rojoct tho r|ghts that
aro to bo dotondod by tho proposod |aw. 1ho|r |doo|og|ca|
c|oak |s to protond that tho|r po||t|cs |s not roa||y po||t|ca|, but
rathor |s an objoct|vo oconom|c truth, wh||o othor poop|o's
po||t|cs ls po||t|ca|. |owovor, thoy aro as po||t|ca||y mot|vatod
as tho|r oppononts.
3roak|ng away trom tho |||us|on ot markot objoct|v|ty |s
tho t|rst stop towards undorstand|ng cap|ta||sm.
1hing 2
Comanioa ahouId not bo run
in tho intoroat ot thoir ownora

What they tell you

3haroho|dors own compan|os. 1horotoro, compan|os shou|d
bo run |n tho|r |ntorosts. lt |s not s|mp|y a mora| argumont.
1ho sharoho|dors aro not guarantood any t|xod paymonts,
un||ko tho omp|oyoos (who havo t|xod wagos), tho supp||ors
(who aro pa|d spoc|t|c pr|cos), tho |ond|ng banks (who got
pa|d t|xod |ntorost ratos), and othors |nvo|vod |n tho
bus|noss. 3haroho|dors' |ncomos vary accord|ng to tho
company's portormanco, g|v|ng thom tho groatost |ncont|vo
to onsuro tho company portorms wo||. lt tho company goos
bankrupt, tho sharoho|dors |oso ovoryth|ng, whoroas othor
'stakoho|dors' got at |oast somoth|ng. 1hus, sharoho|dors
boar tho r|sk that othors |nvo|vod |n tho company do not,
|ncont|v|z|ng thom to max|m|zo company portormanco.
Whon you run a company tor tho sharoho|dors, |ts prot|t
(what |s |ott attor mak|ng a|| t|xod paymonts) |s max|m|zod,
wh|ch a|so max|m|zos |ts soc|a| contr|but|on.
What they don't tell you

3haroho|dors may bo tho ownors ot corporat|ons but, as tho
most mob||o ot tho 'stakoho|dors', thoy otton caro tho |oast
about tho |ong-torm tuturo ot tho company (un|oss thoy aro
so b|g that thoy cannot roa||y so|| tho|r sharos w|thout
sor|ous|y d|srupt|ng tho bus|noss). Consoquont|y,
sharoho|dors, ospoc|a||y but not oxc|us|vo|y tho sma||or onos,
protor corporato stratog|os that max|m|zo short-torm prot|ts,
usua||y at tho cost ot |ong-torm |nvostmonts, and max|m|zo
tho d|v|donds trom thoso prot|ts, wh|ch ovon turthor woakons
tho |ong-torm prospocts ot tho company by roduc|ng tho
amount ot rota|nod prot|t that can bo usod tor ro-|nvostmont.
lunn|ng tho company tor tho sharoho|dors otton roducos |ts
|ong-torm growth potont|a|.
Karl Marx de|ends capItalIsm

You havo probab|y not|cod that many company namos |n tho
Eng||sh-spoak|ng wor|d como w|th tho |ottor l - llC, llC,
ltd, otc. 1ho |ottor l |n thoso acronyms stands tor '||m|tod',
short tor '||m|tod ||ab|||ty' - pub||c |lmltoo company (llC),
|lmltoo ||ab|||ty company (llC) or s|mp|y |lmltoo company
(ltd). l|m|tod ||ab|||ty moans that |nvostors |n tho company
w||| |oso on|y what thoy havo |nvostod (tho|r 'sharos'), shou|d
|t go bank-rupt.
|owovor, you may not havo roa||zod that tho l word, that
|s, ||m|tod ||ab|||ty, |s what has mado modorn cap|ta||sm
poss|b|o. 1oday, th|s torm ot organ|z|ng a bus|noss
ontorpr|so |s takon tor grantod, but |t wasn't a|ways ||ko that.
3otoro tho |nvont|on ot tho ||m|tod ||ab|||ty company |n
s|xtoonth-contury Europo - or tho jo|nt-stock company, as |t
was known |n |ts oar|y days - bus|nossmon had to r|sk
ovoryth|ng whon thoy startod a vonturo. Whon l say
ovoryth|ng, l roa||y moan ovoryth|ng - not just porsona|
proporty (un||m|tod ||ab|||ty moant that a ta||od bus|nossman
had to so|| a|| h|s porsona| proport|os to ropay a|| tho dobts)
but a|so porsona| troodom (thoy cou|d go to a dobtors'
pr|son, shou|d thoy ta|| to honour tho|r dobts). G|von th|s, |t |s
a|most a m|rac|o that anyono was w||||ng to start a bus|noss
at a||.
Untortunato|y, ovon attor tho |nvont|on ot ||m|tod ||ab|||ty, |t
was |n pract|co vory d|tt|cu|t to uso |t unt|| tho m|d n|notoonth
contury - you noodod a roya| chartor |n ordor to sot up a
||m|tod ||ab|||ty company (or a govornmont chartor |n a
ropub||c). lt was bo||ovod that thoso who woro manag|ng a
||m|tod ||ab|||ty company w|thout own|ng |t 100 por cont
wou|d tako oxcoss|vo r|sks, bocauso part ot tho monoy thoy
woro r|sk|ng was not tho|r own. At tho samo t|mo, tho non-
manag|ng |nvostors |n a ||m|tod ||ab|||ty company wou|d a|so
bocomo |oss v|g||ant |n mon|tor|ng tho managors, as tho|r
r|sks woro cappod (at tho|r rospoct|vo |nvostmonts). Adam
3m|th, tho tathor ot oconom|cs and tho patron sa|nt ot troo-
markot cap|ta||sm, opposod ||m|tod ||ab|||ty on thoso
grounds. |o tamous|y sa|d that tho 'd|roctors ot [jo|nt stock|
compan|os . bo|ng tho managors rathor ot othor poop|o's
monoy than ot tho|r own, |t cannot wo|| bo oxpoctod that thoy
wou|d watch ovor |t w|th tho samo anx|ous v|g||anco w|th
wh|ch tho partnors |n a pr|vato copartnory [|.o., partnorsh|p,
wh|ch domands un||m|tod ||ab|||ty| troquont|y watch ovor tho|r
own'.
1
1horotoro, countr|os typ|ca||y grantod ||m|tod ||ab|||ty on|y
to oxcopt|ona||y |argo and r|sky vonturos that woro doomod
to bo ot nat|ona| |ntorost, such as tho 0utch East lnd|a
Company sot up |n 1002 (and |ts arch-r|va|, tho 3r|t|sh East
lnd|a Company) and tho notor|ous 3outh 3oa Company ot
3r|ta|n, tho spocu|at|vo bubb|o surround|ng wh|ch |n 1721
gavo ||m|tod ||ab|||ty compan|os a bad namo tor gonorat|ons.
3y tho m|d n|notoonth contury, howovor, w|th tho
omorgonco ot |argo-sca|o |ndustr|os such as ra||ways, stoo|
and chom|ca|s, tho nood tor ||m|tod ||ab|||ty was to|t
|ncroas|ng|y acuto|y. vory tow poop|o had a b|g onough
tortuno to start a stoo| m||| or a ra||way s|ng|ohandod|y, so,
bog|nn|ng w|th 3wodon |n 1844 and to||owod by 3r|ta|n |n
18b0, tho countr|os ot Wostorn Europo and lorth Amor|ca
mado ||m|tod ||ab|||ty gonora||y ava||ab|o - most|y |n tho
1800s and 70s.
|owovor, tho susp|c|on about ||m|tod ||ab|||ty ||ngorod on.
Evon as |ato as tho |ato n|notoonth contury, a tow docados
attor tho |ntroduct|on ot gonora||zod ||m|tod ||ab|||ty, sma||
bus|nossmon |n 3r|ta|n 'who, bo|ng act|vo|y |n chargo ot a
bus|noss as wo|| as |ts ownor, sought to ||m|t rospons|b|||ty
tor |ts dobts by tho dov|co ot |ncorporat|on [||m|tod ||ab|||ty|'
woro trownod upon, accord|ng to an |nt|uont|a| h|story ot
Wostorn Europoan ontropronoursh|p.
2
lntorost|ng|y, ono ot tho t|rst poop|o who roa||zod tho
s|gn|t|canco ot ||m|tod ||ab|||ty tor tho dovo|opmont ot
cap|ta||sm was Kar| Varx, tho supposod arch-onomy ot
cap|ta||sm. Un||ko many ot h|s contomporary troo-markot
advocatos (and Adam 3m|th botoro thom), who opposod
||m|tod ||ab|||ty, Varx undorstood how |t wou|d onab|o tho
mob|||zat|on ot |argo sums ot cap|ta| that woro noodod tor
tho now|y omorg|ng hoavy and chom|ca| |ndustr|os by
roduc|ng tho r|sk tor |nd|v|dua| |nvostors. Wr|t|ng |n 180b,
whon tho stock markot was st||| vory much a s|do-show |n tho
cap|ta||st drama, Varx had tho toros|ght to ca|| tho jo|nt-stock
company 'cap|ta||st product|on |n |ts h|ghost dovo|opmont'.
l|ko h|s troo-markot oppononts, Varx was awaro ot, and
cr|t|c|zod, tho tondoncy tor ||m|tod ||ab|||ty to oncourago
oxcoss|vo r|sk-tak|ng by managors. |owovor, Varx
cons|dorod |t to bo a s|do-ottoct ot tho hugo mator|a|
progross that th|s |nst|tut|ona| |nnovat|on was about to br|ng.
Ot courso, |n dotond|ng tho 'now' cap|ta||sm aga|nst |ts troo-
markot cr|t|cs, Varx had an u|tor|or mot|vo. |o thought tho
jo|nt-stock company was a 'po|nt ot trans|t|on' to soc|a||sm |n
that |t soparatod ownorsh|p trom managomont, thoroby
mak|ng |t poss|b|o to o||m|nato cap|ta||sts (who now do not
manago tho t|rm) w|thout joopard|z|ng tho mator|a| progross
that cap|ta||sm had ach|ovod.
1he death o| the capItalIst class

Varx's prod|ct|on that a now cap|ta||sm basod on jo|nt-stock
compan|os wou|d pavo tho way tor soc|a||sm has not como
truo. |owovor, h|s prod|ct|on that tho now |nst|tut|on ot
gonora||zod ||m|tod ||ab|||ty wou|d put tho product|vo torcos
ot cap|ta||sm on to a now p|ano provod oxtromo|y prosc|ont.
0ur|ng tho |ato n|notoonth and oar|y twont|oth contur|os
||m|tod ||ab|||ty hugo|y acco|oratod cap|ta| accumu|at|on and
tochno|og|ca| progross. Cap|ta||sm was transtormod trom a
systom mado up ot Adam 3m|th's p|n tactor|os, butchors
and bakors, w|th at most dozons ot omp|oyoos and
managod by a so|o ownor, |nto a systom ot hugo
corporat|ons h|r|ng hundrods or ovon thousands ot
omp|oyoos, |nc|ud|ng tho top managors thomso|vos, w|th
comp|ox organ|zat|ona| structuros.
ln|t|a||y, tho |ong-toarod managor|a| |ncont|vo prob|om ot
||m|tod ||ab|||ty compan|os - that tho managors, p|ay|ng w|th
othor poop|o's monoy, wou|d tako oxcoss|vo r|sk - d|d not
soom to mattor vory much. ln tho oar|y days ot ||m|tod
||ab|||ty, many |argo t|rms woro managod by a char|smat|c
ontropronour - such as |onry |ord, 1homas Ed|son or
Androw Carnog|o - who ownod a s|gn|t|cant chunk ot tho
company. Evon though thoso part-ownor-managors cou|d
abuso tho|r pos|t|on and tako oxcoss|vo r|sk (wh|ch thoy
otton d|d), thoro was a ||m|t to that. Own|ng a |argo chunk ot
tho company, thoy woro go|ng to hurt thomso|vos |t thoy
mado an ovor|y r|sky doc|s|on. Voroovor, many ot thoso
part-ownor-managors woro mon ot oxcopt|ona| ab|||ty and
v|s|on, so ovon tho|r poor|y |ncont|v|zod doc|s|ons woro otton
supor|or to thoso mado by most ot thoso wo||-|ncont|v|zod
tu||-ownor-managors.
|owovor, as t|mo woro on, a now c|ass ot protoss|ona|
managors omorgod to rop|aco thoso char|smat|c
ontropronours. As compan|os grow |n s|zo, |t bocamo moro
and moro d|tt|cu|t tor anyono to own a s|gn|t|cant sharo ot
thom, a|though |n somo Europoan countr|os, such as
3wodon, tho tound|ng tam|||os (or toundat|ons ownod by
thom) hung on as tho dom|nant sharoho|dors, thanks to tho
|oga| a||owanco to |ssuo now sharos w|th sma||or (typ|ca||y
10 por cont, somot|mos ovon 0.1 por cont) vot|ng r|ghts.
W|th thoso changos, protoss|ona| managors bocamo tho
dom|nant p|ayors and tho sharoho|dors bocamo |ncroas|ng|y
pass|vo |n dotorm|n|ng tho way |n wh|ch compan|os woro
run.
|rom tho 1080s, tho ta|k was |ncroas|ng|y ot tho b|rth ot
managor|a| cap|ta||sm, whoro cap|ta||sts |n tho trad|t|ona|
sonso - tho 'capta|ns ot |ndustry', as tho v|ctor|ans usod to
ca|| thom - had boon rop|acod by caroor buroaucrats
(pr|vato soctor buroaucrats, but buroaucrats nonotho|oss).
1horo was an |ncroas|ng worry that thoso h|rod managors
woro runn|ng tho ontorpr|sos |n tho|r own |ntorosts, rathor
than |n tho |ntorosts ot tho|r |oga| ownors, that |s, tho
sharoho|dors. Whon thoy shou|d bo max|m|z|ng prot|ts, |t
was arguod, thoso managors woro max|m|z|ng sa|os (to
max|m|zo tho s|zo ot tho company and thus tho|r own
prost|go) and tho|r own porks, or, worso, ongagod d|roct|y |n
prost|go projocts that add hugo|y to tho|r ogos but ||tt|o to
company prot|ts and thus |ts va|uo (moasurod ossont|a||y by
|ts stock markot cap|ta||zat|on).
3omo accoptod tho r|so ot tho protoss|ona| managors as
an |nov|tab|o, |t not tota||y wo|como, phonomonon. 1osoph
3chumpotor, tho Austr|an-born Amor|can oconom|st who |s
tamous tor h|s thoory ot ontropronoursh|p (soo 7blog 15),
arguod |n tho 1040s that, w|th tho grow|ng sca|o ot
compan|os and tho |ntroduct|on ot sc|ont|t|c pr|nc|p|os |n
corporato rosoarch and dovo|opmont, tho horo|c
ontropronours ot oar|y cap|ta||sm wou|d bo rop|acod by
buroaucrat|c protoss|ona| managors. 3chumpotor bo||ovod
th|s wou|d roduco tho dynam|sm ot cap|ta||sm, but thought |t
|nov|tab|o. Wr|t|ng |n tho 10b0s, 1ohn Konnoth Ga|bra|th, tho
Canad|an-born Amor|can oconom|st, a|so arguod that tho
r|so ot |argo corporat|ons managod by protoss|ona|
managors was unavo|dab|o and thorotoro that tho on|y way
to prov|do 'countorva|||ng torcos' to thoso ontorpr|sos was
through |ncroasod govornmont rogu|at|on and onhancod
un|on powor.
|owovor, tor docados attor that, moro puro-b|oodod
advocatos ot pr|vato proporty havo bo||ovod that managor|a|
|ncont|vos nood to bo dos|gnod |n such a way that tho
managors max|m|zo prot|ts. Vany t|no bra|ns had workod on
th|s '|ncont|vo dos|gn' prob|om, but tho 'ho|y gra||' provod
o|us|vo. Vanagors cou|d a|ways t|nd a way to obsorvo tho
|ottor ot tho contract but not tho sp|r|t, ospoc|a||y whon |t |s
not oasy tor sharoho|dors to vor|ty whothor poor prot|t
portormanco by a managor was tho rosu|t ot h|s ta||uro to
pay onough attont|on to prot|t t|guros or duo to torcos
boyond h|s contro|.
1he holy graIl or an unholy allIance7

And thon, |n tho 1080s, tho ho|y gra|| was tound. lt was ca||od
tho pr|nc|p|o ot sharoho|dor va|uo max|m|zat|on. lt was
arguod that protoss|ona| managors shou|d bo rowardod
accord|ng to tho amount thoy can g|vo to sharoho|dors. ln
ordor to ach|ovo th|s, |t was arguod, t|rst prot|ts nood to bo
max|m|zod by ruth|oss|y cutt|ng costs - wago b|||s,
|nvostmonts, |nvontor|os, m|dd|o-|ovo| managors, and so on.
3ocond, tho h|ghost poss|b|o sharo ot thoso prot|ts noods to
bo d|str|butod to tho sharoho|dors - through d|v|donds and
sharo buybacks. ln ordor to oncourago managors to bohavo
|n th|s way, tho proport|on ot tho|r componsat|on packagos
that stock opt|ons account tor noods to bo |ncroasod, so that
thoy |dont|ty moro w|th tho |ntorosts ot tho sharoho|dors. 1ho
|doa was advocatod not just by sharoho|dors, but a|so by
many protoss|ona| managors, most tamous|y by 1ack Wo|ch,
tho |ong-t|mo cha|rman ot Gonora| E|octr|c (GE), who |s
otton crod|tod w|th co|n|ng tho torm 'sharoho|dor va|uo' |n a
spooch |n 1081.
3oon attor Wo|ch's spooch, sharoho|dor va|uo
max|m|zat|on bocamo tho zo|tgo|st ot tho Amor|can
corporato wor|d. ln tho bog|nn|ng, |t soomod to work roa||y
wo|| tor both tho managors and tho sharoho|dors. 1ho sharo
ot prot|ts |n nat|ona| |ncomo, wh|ch had shown a downward
trond s|nco tho 1000s, sharp|y roso |n tho m|d 1080s and
has shown an upward trond s|nco thon.
8
And tho
sharoho|dors got a h|ghor sharo ot that prot|t as d|v|donds,
wh||o soo|ng tho va|uo ot tho|r sharos r|so. 0|str|butod prot|ts
as a sharo ot tota| U3 corporato prot|t stood at 8b-4b por
cont botwoon tho 10b0s and tho 1070s, but |t has boon on
an upward trond s|nco tho |ato 70s and now stands at
around 00 por cont.
4
1ho managors saw tho|r componsat|on
r|s|ng through tho root (soo 7blog 14), but sharoho|dors
stoppod quost|on|ng tho|r pay packagos, as thoy woro
happy w|th ovor-r|s|ng sharo pr|cos and d|v|donds. 1ho
pract|co soon sproad to othor countr|os - moro oas||y to
countr|os ||ko 3r|ta|n, wh|ch had a corporato powor structuro
and managor|a| cu|turo s|m||ar to thoso ot tho U3, and |oss
oas||y to othor countr|os, as wo sha|| soo bo|ow.
low, th|s unho|y a|||anco botwoon tho protoss|ona|
managors and tho sharoho|dors was a|| t|nancod by
squooz|ng tho othor stakoho|dors |n tho company (wh|ch |s
why |t has sproad much moro s|ow|y to othor r|ch countr|os
whoro tho othor stakoho|dors havo groator ro|at|vo strongth).
1obs woro ruth|oss|y cut, many workors woro t|rod and ro-
h|rod as non-un|on|zod |abour w|th |owor wagos and towor
bonot|ts, and wago |ncroasos woro supprossod (otton by
ro|ocat|ng to or outsourc|ng trom |ow-wago countr|os, such
as Ch|na and lnd|a - or tho throat to do so). 1ho supp||ors,
and tho|r workors, woro a|so squoozod by cont|nuod cuts |n
procuromont pr|cos, wh||o tho govornmont was prossurod
|nto |owor|ng corporato tax ratos and/or prov|d|ng moro
subs|d|os, w|th tho ho|p ot tho throat ot ro|ocat|ng to
countr|os w|th |owor corporato tax ratos and/or h|ghor
bus|noss subs|d|os. As a rosu|t, |ncomo |noqua||ty soarod
(soo 7blog 18) and |n a soom|ng|y ond|oss corporato boom
(ond|ng, ot courso, |n 2008), tho vast major|ty ot tho
Amor|can and tho 3r|t|sh popu|at|ons cou|d sharo |n tho
(apparont) prospor|ty on|y through borrow|ng at
unprocodontod ratos.
1ho |mmod|ato |ncomo rod|str|but|on |nto prot|ts was bad
onough, but tho ovor-|ncroas|ng sharo ot prot|t |n nat|ona|
|ncomo s|nco tho 1080s has not boon trans|atod |nto h|ghor
|nvostmonts o|thor (soo 7blog 18). lnvostmont as a sharo ot
U3 nat|ona| output has actua||y ta||on, rathor than r|son, trom
20.b por cont |n tho 1080s to 18.7 por cont s|nco thon
(1000-2000). lt may havo boon accoptab|o |t th|s |owor
|nvostmont rato had boon componsatod tor by a moro
ott|c|ont uso ot cap|ta|, gonorat|ng h|ghor growth. |owovor,
tho growth rato ot por cap|ta |ncomo |n tho U3 to|| trom
around 2.0 por cont por yoar |n tho 1000s and 70s to 1.0 por
cont dur|ng 1000-2000, tho hoyday ot sharoho|dor
cap|ta||sm. ln 3r|ta|n, whoro s|m||ar changos |n corporato
bohav|our woro happon|ng, por cap|ta |ncomo growth ratos
to|| trom 2.4 por cont |n tho 1000s-70s, whon tho country
was a||ogod|y suttor|ng trom tho '3r|t|sh 0|soaso', to 1.7 por
cont dur|ng 1000-2000. 3o runn|ng compan|os |n tho
|ntorost ot tho sharoho|dors doos not ovon bonot|t tho
oconomy |n tho avorago sonso (that |s, |gnor|ng tho upward
|ncomo rod|str|but|on).
1h|s |s not a||. 1ho worst th|ng about sharoho|dor va|uo
max|m|zat|on |s that |t doos not ovon do tho company |tso|t
much good. 1ho oas|ost way tor a company to max|m|zo
prot|t |s to roduco oxpond|turo, as |ncroas|ng rovonuos |s
moro d|tt|cu|t - by cutt|ng tho wago b||| through job cuts and
by roduc|ng cap|ta| oxpond|turo by m|n|m|z|ng |nvostmont.
Gonorat|ng h|ghor prot|t, howovor, |s on|y tho bog|nn|ng ot
sharoho|dor va|uo max|m|zat|on. 1ho max|mum proport|on ot
tho prot|t thus gonoratod noods to bo g|von to tho
sharoho|dors |n tho torm ot h|ghor d|v|donds. Or tho
company usos part ot tho prot|ts to buy back |ts own sharos,
thoroby koop|ng tho sharo pr|cos up and thus |nd|roct|y
rod|str|but|ng ovon moro prot|ts to tho sharoho|dors (who
can roa||zo h|ghor cap|ta| ga|ns shou|d thoy doc|do to so||
somo ot tho|r sharos). 3haro buybacks usod to bo |oss than
b por cont ot U3 corporato prot|ts tor docados unt|| tho oar|y
1080s, but havo kopt r|s|ng s|nco thon and roachod an op|c
proport|on ot 00 por cont |n 2007 and an absurd 280 por
cont |n 2008.
b
W||||am lazon|ck, tho Amor|can bus|noss
oconom|st, ost|matos that, had GV not spont tho $20.4
b||||on that |t d|d |n sharo buybacks botwoon 1080 and 2002
and put |t |n tho bank (w|th a 2.b por cont attor-tax annua|
roturn), |t wou|d havo had no prob|om t|nd|ng tho $8b b||||on
that |t noodod to stavo ott bankruptcy |n 2000.
0
And |n a|| th|s
b|ngo ot prot|ts, tho protoss|ona| managors bonot|t
onormous|y too, as thoy own a |ot ot sharos thomso|vos
through stock opt|ons.
A|| th|s damagos tho |ong-run prospoct ot tho company.
Cutt|ng jobs may |ncroaso product|v|ty |n tho short run, but
may havo nogat|vo |ong-torm consoquoncos. |av|ng towor
workors moans |ncroasod work |ntons|ty, wh|ch makos
workors t|rod and moro prono to m|stakos, |owor|ng product
qua||ty and thus a company's roputat|on. Voro |mportant|y,
tho ho|ghtonod |nsocur|ty, com|ng trom tho constant throat ot
job cuts, d|scouragos workors trom |nvost|ng |n acqu|r|ng
company-spoc|t|c sk|||s, orod|ng tho company's product|vo
potont|a|. ||ghor d|v|donds and groator own-sharo buybacks
roduco rota|nod prot|ts, wh|ch aro tho ma|n sourcos ot
corporato |nvostmont |n tho U3 and othor r|ch cap|ta||st
countr|os, and thus roduco |nvostmont. 1ho |mpacts ot
roducod |nvostmont may not bo to|t |n tho short run, but |n tho
|ong run mako a company's tochno|ogy backward and
throaton |ts vory surv|va|.
3ut wou|dn't tho sharoho|dors caro? As ownors ot tho
company, don't thoy havo tho most to |oso, |t tho|r company
doc||nos |n tho |ong run? lsn't tho who|o po|nt ot somoono
bo|ng an ownor ot an assot - bo |t a houso, a p|ot ot |and or
a company - that sho caros about |ts |ong-run product|v|ty? lt
tho ownors aro |ott|ng a|| th|s happon, dotondors ot tho status
quo wou|d arguo, |t must bo bocauso that |s what thoy want,
howovor |nsano |t may |ook to outs|dors.
Untortunato|y, dosp|to bo|ng tho |oga| ownors ot tho
company, sharoho|dors aro tho onos who aro |oast
comm|ttod among tho var|ous stakoho|dors to tho |ong-torm
v|ab|||ty ot tho company. 1h|s |s bocauso thoy aro tho onos
who can ox|t tho company most oas||y - thoy just nood to so||
tho|r sharos, |t nocossary at a s||ght |oss, as |ong as thoy aro
smart onough not to st|ck to a |ost causo tor too |ong. ln
contrast, |t |s moro d|tt|cu|t tor othor stakoho|dors, such as
workors and supp||ors, to ox|t tho company and t|nd anothor
ongagomont, bocauso thoy aro ||ko|y to havo accumu|atod
sk|||s and cap|ta| oqu|pmont (|n tho caso ot tho supp||ors)
that aro spoc|t|c to tho compan|os thoy do bus|noss w|th.
1horotoro, thoy havo a groator stako |n tho |ong-run v|ab|||ty
ot tho company than most sharoho|dors. 1h|s |s why
max|m|z|ng sharoho|dor va|uo |s bad tor tho company, as
wo|| as tho rost ot tho oconomy.
1he dumbest Idea In the world

l|m|tod ||ab|||ty has a||owod hugo progross |n human
product|vo powor by onab||ng tho amass|ng ot hugo
amounts ot cap|ta|, oxact|y bocauso |t has ottorod
sharoho|dors an oasy ox|t, thoroby roduc|ng tho r|sk |nvo|vod
|n any |nvostmont. |owovor, at tho samo t|mo, th|s vory oaso
ot ox|t |s oxact|y what makos tho sharoho|dors unro||ab|o
guard|ans ot a company's |ong-torm tuturo.
1h|s |s why most r|ch countr|os outs|do tho Ang|o-
Amor|can wor|d havo tr|od to roduco tho |nt|uonco ot troo-
t|oat|ng sharoho|dors and ma|nta|n (or ovon croato) a group
ot |ong-torm stakoho|dors (|nc|ud|ng somo sharoho|dors)
through var|ous torma| and |ntorma| moans. ln many
countr|os, tho govornmont has ho|d s|zoab|o sharo
ownorsh|p |n koy ontorpr|sos - o|thor d|roct|y (o.g., lonau|t
|n |ranco, vo|kswagon |n Gormany) or |nd|roct|y through
ownorsh|p by stato-ownod banks (o.g., |ranco, Koroa) -
and actod as a stab|o sharoho|dor. As mont|onod abovo,
countr|os ||ko 3wodon a||owod d|ttoront|a| vot|ng r|ghts tor
d|ttoront c|assos ot sharos, wh|ch onab|od tho tound|ng
tam|||os to rota|n s|gn|t|cant contro| ovor tho corporat|on
wh||o ra|s|ng add|t|ona| cap|ta|. ln somo countr|os, thoro aro
torma| roprosontat|ons by workors, who havo a groator |ong-
torm or|ontat|on than t|oat|ng sharoho|dors, |n company
managomont (o.g., tho prosonco ot un|on roprosontat|vos on
company suporv|sory boards |n Gormany). ln 1apan,
compan|os havo m|n|m|zod tho |nt|uonco ot t|oat|ng
sharoho|dors through cross-sharoho|d|ng among tr|ond|y
compan|os. As a rosu|t, protoss|ona| managors and t|oat|ng
sharoho|dors havo tound |t much moro d|tt|cu|t to torm tho
'unho|y a|||anco' |n thoso countr|os, ovon though thoy too
protor tho sharoho|dor-va|uo-max|m|zat|on modo|, g|von |ts
obv|ous bonot|ts to thom.
3o|ng hoav||y |nt|uoncod, |t not tota||y contro||od, by
|ongor-torm stakoho|dors, compan|os |n thoso countr|os do
not as oas||y sack workors, squoozo supp||ors, nog|oct
|nvostmont and uso prot|ts tor d|v|donds and sharo
buybacks as Amor|can and 3r|t|sh compan|os do. A|| th|s
moans that |n tho |ong run thoy may bo moro v|ab|o than tho
Amor|can or tho 3r|t|sh compan|os. 1ust th|nk about tho way
|n wh|ch Gonora| Votors has squandorod |ts abso|uto
dom|nanco ot tho wor|d car |ndustry and t|na||y gono
bankrupt wh||o bo|ng on tho torotront ot sharoho|dor va|uo
max|m|zat|on by constant|y downs|z|ng and rotra|n|ng trom
|nvostmont (soo 7blog 18). 1ho woaknoss ot GV
managomont's short-torm-or|ontod stratogy has boon
apparont at |oast trom tho |ato 1080s, but tho stratogy
cont|nuod unt|| |ts bankruptcy |n 2000, bocauso |t mado both
tho managors and tho sharoho|dors happy ovon wh||o
dob|||tat|ng tho company.
lunn|ng compan|os |n tho |ntorosts ot t|oat|ng
sharoho|dors |s not on|y |noqu|tab|o but a|so |nott|c|ont, not
just tor tho nat|ona| oconomy but a|so tor tho company |tso|t.
As 1ack Wo|ch rocont|y contossod, sharoho|dor va|uo |s
probab|y tho 'dumbost |doa |n tho wor|d'.
1hing 8
Noat ooIo in rich countrioa
aro aid moro than thoy ahouId
bo

What they tell you

ln a markot oconomy, poop|o aro rowardod accord|ng to
tho|r product|v|ty. 3|ood|ng-hoart ||bora|s may t|nd |t d|tt|cu|t
to accopt that a 3wodo gots pa|d t|tty t|mos what an lnd|an
gots pa|d tor tho samo job, but that |s a rot|oct|on ot tho|r
ro|at|vo product|v|t|os. Attompts to roduco thoso d|ttoroncos
art|t|c|a||y - tor oxamp|o, by |ntroduc|ng m|n|mum wago
|og|s|at|on |n lnd|a - |oad on|y to unjust and |nott|c|ont
roward|ng ot |nd|v|dua| ta|onts and ottorts. On|y a troo |abour
markot can roward poop|o ott|c|ont|y and just|y.
What they don't tell you

1ho wago gaps botwoon r|ch and poor countr|os ox|st not
ma|n|y bocauso ot d|ttoroncos |n |nd|v|dua| product|v|ty but
ma|n|y bocauso ot |mm|grat|on contro|. lt thoro woro troo
m|grat|on, most workors |n r|ch countr|os cou|d bo, and
wou|d bo, rop|acod by workors trom poor countr|os. ln othor
words, wagos aro |argo|y po||t|ca||y dotorm|nod. 1ho othor
s|do ot tho co|n |s that poor countr|os aro poor not bocauso
ot tho|r poor poop|o, many ot whom can out-compoto tho|r
countorparts |n r|ch countr|os, but bocauso ot tho|r r|ch
poop|o, most ot whom cannot do tho samo. 1h|s doos not,
howovor, moan that tho r|ch |n tho r|ch countr|os can pat tho|r
own backs tor tho|r |nd|v|dua| br||||anco. 1ho|r h|gh
product|v|t|os aro poss|b|o on|y bocauso ot tho h|stor|ca||y
|nhor|tod co||oct|vo |nst|tut|ons on wh|ch thoy stand. Wo
shou|d rojoct tho myth that wo a|| got pa|d accord|ng to our
|nd|v|dua| worth, |t wo aro to bu||d a tru|y just soc|oty.
rIve straIght on . or dodge the cow
(and the rIckshaw as well}

A bus dr|vor |n low 0o|h| gots pa|d around 18 rupoos an
hour. ||s oqu|va|ont |n 3tockho|m gots pa|d around 180
kronas, wh|ch was, as ot summor 2000, around 870 rupoos.
ln othor words, tho 3wod|sh dr|vor gots pa|d noar|y t|tty t|mos
that ot h|s lnd|an oqu|va|ont.
|roo-markot oconom|cs to||s us that, |t somoth|ng |s moro
oxpons|vo than anothor comparab|o product, |t must bo
bocauso |t |s bottor. ln othor words, |n troo markots, products
(|nc|ud|ng |abour sorv|cos) got pa|d what thoy dosorvo. 3o, |t
a 3wod|sh dr|vor - |ot's ca|| h|m 3von - |s pa|d t|tty t|mos
moro than an lnd|an dr|vor - |ot's ca|| h|m lam - |t must bo
bocauso 3von |s t|tty t|mos moro product|vo as a bus dr|vor
than lam |s.
ln tho short run, somo (a|though not a||) troo-markot
oconom|sts may adm|t, poop|o may pay an oxcoss|vo|y h|gh
pr|co tor a product bocauso ot a tad or a crazo. |or
oxamp|o, poop|o pa|d |ud|crous pr|cos tor thoso 'tox|c
assots' |n tho rocont t|nanc|a| boom (that has turnod |nto tho
b|ggost rocoss|on s|nco tho Groat 0opross|on) bocauso
thoy woro caught |n a spocu|at|vo tronzy. |owovor, thoy
wou|d arguo, th|s k|nd ot th|ng cannot |ast tor |ong, as poop|o
t|guro out tho truo va|uo ot th|ngs soonor or |ator (soo 7blog
10). l|kow|so, ovon |t an undorqua||t|od workor somohow
managos to got a wo||-pa|d job through doco|t (o.g.,
tabr|cat|ng a cort|t|cato) or b|utt|ng |n an |ntorv|ow, ho w|||
soon bo t|rod and rop|acod, bocauso |t w||| qu|ck|y bocomo
apparont that ho doos not havo tho product|v|ty to just|ty h|s
wago. 3o, tho roason|ng goos, |t 3von |s gott|ng pa|d t|tty
t|mos what lam |s pa|d, ho must bo produc|ng t|tty t|mos
moro output than lam.
3ut |s th|s what |s roa||y go|ng on? 1o bog|n w|th, |s |t
poss|b|o that somoono dr|vos t|tty t|mos bottor than anothor?
Evon |t wo somohow manago to t|nd a way to moasuro
quant|tat|vo|y tho qua||ty ot dr|v|ng, |s th|s k|nd ot product|v|ty
gap |n dr|v|ng poss|b|o? lorhaps |t |s, |t wo comparo
protoss|ona| rac|ng dr|vors ||ko V|chao| 3chumachor or
low|s |am||ton w|th somo part|cu|ar|y uncoord|natod
o|ghtoon-yoar-o|d who has just passod h|s dr|v|ng tost.
|owovor, l s|mp|y cannot onv|sago how a rogu|ar bus dr|vor
can dr|vo t|tty t|mos bottor than anothor.
Voroovor, |t anyth|ng, lam wou|d ||ko|y bo a much moro
sk|||od dr|vor than 3von. 3von may ot courso bo a good
dr|vor by 3wod|sh standards, but has ho ovor had to dodgo
a cow |n h|s ||to, wh|ch lam has to do rogu|ar|y? Vost ot tho
t|mo, what |s roqu|rod ot 3von |s tho ab|||ty to dr|vo stra|ght
(OK, g|vo or tako a tow ovas|vo manoouvros to doa| w|th
drunkon dr|vors on 3aturday n|ghts), wh||o lam has to
nogot|ato h|s way a|most ovory m|nuto ot h|s dr|v|ng through
bu||ock carts, r|ckshaws and b|cyc|os stackod throo motros
h|gh w|th cratos. 3o, accord|ng to troo-markot |og|c, lam
shou|d bo pa|d moro than 3von, not tho othor way round.
ln rosponso, a troo-markot oconom|st m|ght arguo that
3von gots pa|d moro bocauso ho has moro 'human cap|ta|',
that |s, sk|||s and know|odgo accumu|atod through oducat|on
and tra|n|ng. lndood, |t |s a|most corta|n that 3von has
graduatod trom h|gh schoo|, w|th two|vo yoars ot schoo||ng
undor h|s bo|t, whoroas lam probab|y can baro|y road and
wr|to, hav|ng comp|otod on|y t|vo yoars ot oducat|on back |n
h|s v|||ago |n lajahstan.
|owovor, ||tt|o ot 3von's add|t|ona| human cap|ta|
acqu|rod |n h|s oxtra sovon yoars ot schoo||ng wou|d bo
ro|ovant tor bus dr|v|ng (soo 7blog 17). |o doos not nood
any know|odgo ot human chromosomos or 3wodon's 1800
war w|th luss|a |n ordor to dr|vo h|s bus wo||. 3o 3von's
oxtra human cap|ta| cannot oxp|a|n why ho |s pa|d t|tty t|mos
moro than lam |s.
1ho ma|n roason that 3von |s pa|d t|tty t|mos moro than
lam |s, to put |t b|unt|y, protoct|on|sm - 3wod|sh workors
aro protoctod trom compot|t|on trom tho workors ot lnd|a
and othor poor countr|os through |mm|grat|on contro|. Whon
you th|nk about |t, thoro |s no roason why a|| 3wod|sh bus
dr|vors, or tor that mattor tho bu|k ot tho worktorco |n
3wodon (and that ot any othor r|ch country), cou|d not bo
rop|acod by somo lnd|ans, Ch|noso or Ghana|ans. Vost ot
thoso toro|gnors wou|d bo happy w|th a tract|on ot tho wago
ratos that 3wod|sh workors got pa|d, wh||o a|| ot thom wou|d
bo ab|o to portorm tho job at |oast oqua||y wo||, or ovon
bottor. And wo aro not s|mp|y ta|k|ng about |ow-sk||| workors
such as c|oanors or stroot-swoopors. 1horo aro hugo
numbors ot ong|noors, bankors and computor programmors
wa|t|ng out thoro |n 3hangha|, la|rob| or Ou|to, who can
oas||y rop|aco tho|r countorparts |n 3tockho|m, l|nkp|ng
and Va|m. |owovor, thoso workors cannot ontor tho
3wod|sh |abour markot bocauso thoy cannot troo|y m|grato
to 3wodon duo to |mm|grat|on contro|. As a rosu|t, 3wod|sh
workors can command t|tty t|mos tho wagos ot lnd|an
workors, dosp|to tho tact that many ot thom do not havo
product|v|ty ratos that aro h|ghor than thoso ot lnd|an
workors.
Elephant In the room

Our story ot bus dr|vors rovoa|s tho ox|stonco ot tho
provorb|a| o|ophant |n tho room. lt shows that tho ||v|ng
standards ot tho hugo major|ty ot poop|o |n r|ch countr|os
cr|t|ca||y dopond on tho ox|stonco ot tho most dracon|an
contro| ovor tho|r |abour markots - |mm|grat|on contro|.
0osp|to th|s, |mm|grat|on contro| |s |nv|s|b|o to many and
do||borato|y |gnorod by othors, whon thoy ta|k about tho
v|rtuos ot tho troo markot.
l havo a|roady arguod (soo 7blog 1) that thoro roa||y |s no
such th|ng as a troo markot, but tho oxamp|o ot |mm|grat|on
contro| rovoa|s tho shoor oxtont ot markot rogu|at|on that wo
havo |n supposod|y troo-markot oconom|os but ta|| to soo.
Wh||o thoy comp|a|n about m|n|mum wago |og|s|at|on,
rogu|at|ons on work|ng hours, and var|ous 'art|t|c|a|' ontry
barr|ors |nto tho |abour markot |mposod by trado un|ons, tow
oconom|sts ovon mont|on |mm|grat|on contro| as ono ot
thoso nasty rogu|at|ons hampor|ng tho work|ngs ot tho troo
|abour markot. |ard|y any ot thom advocatos tho abo||t|on ot
|mm|grat|on contro|. 3ut, |t thoy aro to bo cons|stont, thoy
shou|d a|so advocato troo |mm|grat|on. 1ho tact that tow ot
thom do onco aga|n provos my po|nt |n 7blog 1 that tho
boundary ot tho markot |s po||t|ca||y dotorm|nod and that
troo-markot oconom|sts aro as 'po||t|ca|' as thoso who want
to rogu|ato markots.
Ot courso, |n cr|t|c|z|ng tho |ncons|stoncy ot troo-markot
oconom|sts about |mm|grat|on contro|, l am oot argu|ng that
|mm|grat|on contro| shou|d bo abo||shod - l don't nood to do
that bocauso (as you may havo not|cod by now) l am not a
troo-markot oconom|st.
Countr|os havo tho r|ght to doc|do how many |mm|grants
thoy accopt and |n wh|ch parts ot tho |abour markot. A||
soc|ot|os havo ||m|tod capab|||t|os to absorb |mm|grants,
who otton havo vory d|ttoront cu|tura| backgrounds, and |t
wou|d bo wrong to domand that a country goos ovor that
||m|t. 1oo rap|d an |nt|ow ot |mm|grants w||| not on|y |oad to a
suddon |ncroaso |n compot|t|on tor jobs but a|so strotch tho
phys|ca| and soc|a| |ntrastructuros, such as hous|ng and
hoa|thcaro, and croato tons|ons w|th tho ros|dont popu|at|on.
As |mportant, |t not as oas||y quant|t|ab|o, |s tho |ssuo ot
nat|ona| |dont|ty. lt |s a myth - a nocossary myth, but a myth
nonotho|oss - that nat|ons havo |mmutab|o nat|ona|
|dont|t|os that cannot bo, and shou|d not bo, changod.
|owovor, |t thoro aro too many |mm|grants com|ng |n at tho
samo t|mo, tho roco|v|ng soc|oty w||| havo prob|oms croat|ng
a now nat|ona| |dont|ty, w|thout wh|ch |t may t|nd |t d|tt|cu|t to
ma|nta|n soc|a| cohos|on. 1h|s moans that tho spood and
tho sca|o ot |mm|grat|on nood to bo contro||od.
1h|s |s not to say that tho curront |mm|grat|on po||c|os ot
tho r|ch countr|os cannot bo |mprovod. Wh||o any soc|oty's
ab|||ty to absorb |mm|grants |s ||m|tod, |t |s not as |t tho tota|
popu|at|on |s t|xod. 3oc|ot|os can doc|do to bo moro, or
|oss, opon to |mm|grants by adopt|ng d|ttoront soc|a|
att|tudos and po||c|os towards |mm|grat|on. A|so |n torms ot
tho compos|t|on ot tho |mm|grants, most r|ch countr|os aro
accopt|ng too many 'wrong' poop|o trom tho po|nt ot v|ow ot
tho dovo|op|ng countr|os. 3omo countr|os pract|ca||y so||
tho|r passports through schomos |n wh|ch thoso who br|ng |n
moro than a corta|n amount ot '|nvostmont' aro adm|ttod
moro or |oss |mmod|ato|y. 1h|s schomo on|y adds to tho
cap|ta| shortago that most dovo|op|ng countr|os aro suttor|ng
trom. 1ho r|ch countr|os a|so contr|buto to tho bra|n dra|n
trom dovo|op|ng countr|os by moro w||||ng|y accopt|ng
poop|o w|th h|ghor sk|||s. 1hoso aro poop|o who cou|d havo
contr|butod moro to tho dovo|opmont ot tho|r own countr|os
than unsk|||od |mm|grants, had thoy roma|nod |n tho|r homo
countr|os.
Are poor countrIes poor because o| theIr
poor people7

Our story about tho bus dr|vors not on|y oxposos tho myth
that ovoryono |s gott|ng pa|d ta|r|y, accord|ng to hor own
worth |n a troo markot, but a|so prov|dos us w|th an
|mportant |ns|ght |nto tho causo ot povorty |n dovo|op|ng
countr|os.
Vany poop|o th|nk that poor countr|os aro poor bocauso
ot tho|r poor poop|o. lndood, tho r|ch poop|o |n poor
countr|os typ|ca||y b|amo tho|r countr|os' povorty on tho
|gnoranco, |az|noss and pass|v|ty ot tho|r poor. lt on|y tho|r
to||ow countrymon workod ||ko tho 1apanoso, kopt t|mo ||ko
tho Gormans and woro |nvont|vo ||ko tho Amor|cans - many
ot thoso poop|o wou|d to|| you, |t you wou|d ||ston - tho|r
country wou|d bo a r|ch ono.
Ar|thmot|ca||y spoak|ng, |t |s truo that poor poop|o aro tho
onos that pu|| down tho avorago nat|ona| |ncomo |n poor
countr|os. l|tt|o do tho r|ch poop|o |n poor countr|os roa||zo,
howovor, that tho|r countr|os aro poor not bocauso ot tho|r
poor but bocauso ot thomso|vos. 1o go back to our bus
dr|vor oxamp|o, tho pr|mary roason why 3von |s pa|d t|tty
t|mos moro than lam |s that ho sharos h|s |abour markot
w|th othor poop|o who aro way moro than t|tty t|mos moro
product|vo than tho|r lnd|an countorparts.
Evon |t tho avorago wago |n 3wodon |s about t|tty t|mos
h|ghor than tho avorago wago |n lnd|a, most 3wodos aro
corta|n|y oot t|tty t|mos moro product|vo than tho|r lnd|an
countorparts. Vany ot thom, |nc|ud|ng 3von, aro probab|y
|oss sk|||od. 3ut thoro aro somo 3wodos - thoso top
managors, sc|ont|sts and ong|noors |n wor|d-|oad|ng
compan|os such as Er|csson, 3aab and 3K| - who aro
hundrods ot t|mos moro product|vo than tho|r lnd|an
oqu|va|onts, so 3wodon's avorago nat|ona| product|v|ty onds
up bo|ng |n tho rog|on ot t|tty t|mos that ot lnd|a.
ln othor words, poor poop|o trom poor countr|os aro
usua||y ab|o to ho|d tho|r own aga|nst tho|r countorparts |n
r|ch countr|os. lt |s tho r|ch trom tho poor countr|os who
cannot do that. lt |s tho|r |ow ro|at|vo product|v|ty that makos
tho|r countr|os poor, so tho|r usua| d|atr|bo that tho|r
countr|os aro poor bocauso ot a|| thoso poor poop|o |s tota||y
m|sp|acod. lnstoad ot b|am|ng tho|r own poor poop|o tor
dragg|ng tho country down, tho r|ch ot tho poor countr|os
shou|d ask thomso|vos why thoy cannot pu|| tho rost ot tho|r
countr|os up as much as tho r|ch ot tho r|ch countr|os do.
||na||y, a word ot warn|ng to tho r|ch ot tho r|ch countr|os,
|ost thoy bocomo smug, hoar|ng that tho|r own poor aro pa|d
wo|| on|y bocauso ot |mm|grat|on contro| and tho|r own h|gh
product|v|ty.
Evon |n soctors whoro r|ch country |nd|v|dua|s aro
gonu|no|y moro product|vo than tho|r countorparts |n poor
countr|os, tho|r product|v|ty |s |n groat part duo to tho systom,
rathor than tho |nd|v|dua|s thomso|vos. lt |s not s|mp|y, or
ovon ma|n|y, bocauso thoy aro c|ovoror and bottor oducatod
that somo poop|o |n r|ch countr|os aro hundrods ot t|mos
moro product|vo than tho|r countorparts |n poor countr|os.
1hoy ach|ovo th|s bocauso thoy ||vo |n oconom|os that havo
bottor tochno|og|os, bottor organ|zod t|rms, bottor
|nst|tut|ons and bottor phys|ca| |ntrastructuro - a|| th|ngs that
aro |n |argo part products ot co||oct|vo act|ons takon ovor
gonorat|ons (soo 7blogs 15 ooo 17). Warron 3uttot, tho
tamous t|nanc|or, put th|s po|nt boaut|tu||y, whon ho sa|d |n a
to|ov|s|on |ntorv|ow |n 100b: 'l porsona||y th|nk that soc|oty |s
rospons|b|o tor a vory s|gn|t|cant porcontago ot what l'vo
oarnod. lt you st|ck mo down |n tho m|dd|o ot 3ang|adosh or
loru or somop|aco, you'|| t|nd out how much th|s ta|ont |s
go|ng to produco |n tho wrong k|nd ot so||. l w||| bo strugg||ng
th|rty yoars |ator. l work |n a markot systom that happons to
roward what l do vory wo|| - d|sproport|onato|y wo||.'
3o wo aro actua||y back to whoro wo startod. What an
|nd|v|dua| |s pa|d |s oot tu||y a rot|oct|on ot hor worth. Vost
poop|o, |n poor and r|ch countr|os, got pa|d what thoy do
on|y bocauso thoro |s |mm|grat|on contro|. Evon thoso
c|t|zons ot r|ch countr|os who cannot bo oas||y rop|acod by
|mm|grants, and thus may bo sa|d to bo roa||y bo|ng pa|d
tho|r worth (a|though thoy may not - soo 7blog 14), aro as
product|vo as thoy aro on|y bocauso ot tho soc|o-oconom|c
systom thoy aro oporat|ng |n. lt |s not s|mp|y bocauso ot tho|r
|nd|v|dua| br||||anco and hard work that thoy aro as
product|vo as thoy aro.
1ho w|do|y accoptod assort|on that, on|y |t you |ot markots
bo, w||| ovoryono bo pa|d corroct|y and thus ta|r|y, accord|ng
to h|s worth, |s a myth. On|y whon wo part w|th th|s myth and
grasp tho po||t|ca| naturo ot tho markot and tho co||oct|vo
naturo ot |nd|v|dua| product|v|ty w||| wo bo ab|o to bu||d a
moro just soc|oty |n wh|ch h|stor|ca| |ogac|os and co||oct|vo
act|ons, and not just |nd|v|dua| ta|onts and ottorts, aro
propor|y takon |nto account |n doc|d|ng how to roward
poop|o.
1hing 4
1ho waahing machino haa
changod tho worId moro than
tho intornot haa

What they tell you

1ho rocont rovo|ut|on |n commun|cat|ons tochno|og|os,
roprosontod by tho |ntornot, has tundamonta||y changod tho
way |n wh|ch tho wor|d works. lt has |od to tho 'doath ot
d|stanco'. ln tho 'bordor|oss wor|d' thus croatod, o|d
convont|ons about nat|ona| oconom|c |ntorosts and tho ro|o
ot nat|ona| govornmonts aro |nva||d. 1h|s tochno|og|ca|
rovo|ut|on dot|nos tho ago wo ||vo |n. Un|oss countr|os (or
compan|os or, tor that mattor, |nd|v|dua|s) chango at
corrospond|ng spoods, thoy w||| bo w|pod out. Wo - as
|nd|v|dua|s, t|rms or nat|ons - w||| havo to bocomo ovor moro
t|ox|b|o, wh|ch roqu|ros groator ||bora||zat|on ot markots.
What they don't tell you

ln porco|v|ng changos, wo tond to rogard tho most rocont
onos as tho most rovo|ut|onary. 1h|s |s otton at odds w|th tho
tacts. locont progross |n to|ocommun|cat|ons tochno|og|os
|s not as rovo|ut|onary as what happonod |n tho |ato
n|notoonth contury - w|rod to|ography - |n ro|at|vo torms.
Voroovor, |n torms ot tho consoquont oconom|c and soc|a|
changos, tho |ntornot rovo|ut|on has (at |oast as yot) not boon
as |mportant as tho wash|ng mach|no and othor housoho|d
app||ancos, wh|ch, by vast|y roduc|ng tho amount ot work
noodod tor housoho|d choros, a||owod womon to ontor tho
|abour markot and v|rtua||y abo||shod protoss|ons ||ko
domost|c sorv|co. Wo shou|d not 'put tho to|oscopo
backward' whon wo |ook |nto tho past and undorost|mato tho
o|d and ovorost|mato tho now. 1h|s |oads us to mako a||
sorts ot wrong doc|s|ons about nat|ona| oconom|c po||cy,
corporato po||c|os and our own caroors.
Everyone has a maId In LatIn AmerIca

Accord|ng to an Amor|can tr|ond, tho 3pan|sh toxtbook that
sho usod |n hor schoo| |n tho 1070s had a sontonco say|ng
(|n 3pan|sh, ot courso) that 'ovoryono |n lat|n Amor|ca has a
ma|d'.
Whon you th|nk about |t, th|s |s a |og|ca| |mposs|b|||ty. 0o
ma|ds a|so havo ma|ds |n lat|n Amor|ca? lorhaps thoro |s
somo k|nd ot ma|d oxchango schomo that l havo not hoard
ot, whoro ma|ds tako turns |n bo|ng oach othor's ma|ds, so
that a|| ot thom can havo a ma|d, but l don't th|nk so.
Ot courso, ono can soo why an Amor|can author cou|d
como up w|th such a statomont. A tar h|ghor proport|on ot
poop|o |n poor countr|os havo ma|ds than |n r|ch countr|os. A
schoo|toachor or a young managor |n a sma|| t|rm |n a r|ch
country wou|d not droam ot hav|ng a ||vo-|n ma|d, but tho|r
countorparts |n a poor country aro ||ko|y to havo ono - or
ovon two. 1ho t|guros aro d|tt|cu|t to como by, but, accord|ng
to llO (lntornat|ona| labour Organ|sat|on) data, 7-8 por cont
ot tho |abour torco |n 3raz|| and 0 por cont ot that |n Egypt
aro ost|matod to bo omp|oyod as domost|c sorvants. 1ho
corrospond|ng t|guros aro 0.7 por cont |n Gormany, 0.0 por
cont |n tho U3, 0.8 por cont |n Eng|and and Wa|os, 0.0b por
cont |n lorway and as |ow as 0.00b por cont |n 3wodon (tho
t|guros aro a|| tor tho 1000s, oxcopt tor thoso ot Gormany
and lorway, wh|ch aro tor tho 2000s).
1
3o, |n proport|ona|
torms, 3raz|| has 12-18 t|mos moro domost|c sorvants than
tho U3 doos and Egypt has 1,800 t|mos moro than 3wodon.
lo wondor that many Amor|cans th|nk 'ovoryono' has a
ma|d |n lat|n Amor|ca and a 3wodo |n Egypt too|s that tho
country |s pract|ca||y ovorrun w|th domost|c sorvants.
1ho |ntorost|ng th|ng |s that tho sharo ot tho |abour torco
work|ng as domost|c sorvants |n today's r|ch countr|os usod
to bo s|m||ar to what you t|nd |n tho dovo|op|ng countr|os
today. ln tho U3, around 8 por cont ot thoso who woro
'ga|ntu||y omp|oyod' |n 1870 woro domost|c sorvants. 1ho
rat|o was a|so around 8 por cont |n Gormany unt|| tho 1800s,
a|though |t startod ta|||ng qu|to tast attor that. ln Eng|and and
Wa|os, whoro tho 'sorvant' cu|turo surv|vod |ongor than |n
othor countr|os duo to tho strongth ot tho |and|ord c|ass, tho
rat|o was ovon h|ghor - 10-14 por cont ot tho worktorco was
omp|oyod as domost|c sorvants botwoon 18b0 and 1020
(w|th somo ups and downs). lndood, |t you road Agatha
Chr|st|o novo|s up to tho 1080s, you wou|d not|co that |t |s
not just tho pross baron who gots murdorod |n h|s |ockod
||brary who has sorvants but a|so tho hard-up o|d m|dd|o-
c|ass sp|nstor, ovon though sho may havo just ono ma|d
(who gots m|xod up w|th a good-tor-noth|ng garago
mochan|c, who turns out to bo tho |||og|t|mato son ot tho
pross baron, and a|so gots murdorod on p. 111 tor bo|ng
too||sh onough to mont|on somoth|ng that sho was not
supposod to havo soon).
1ho ma|n roason why thoro aro so much towor (ot courso,
|n proport|ona| torms) domost|c sorvants |n tho r|ch countr|os
- a|though obv|ous|y not tho on|y roason, g|von tho cu|tura|
d|ttoroncos among countr|os at s|m||ar |ovo|s ot |ncomo,
today and |n tho past - |s tho h|ghor ro|at|vo pr|co ot |abour.
W|th oconom|c dovo|opmont, poop|o (or rathor tho |abour
sorv|cos thoy ottor) bocomo moro oxpons|vo |n ro|at|vo
torms than 'th|ngs' (soo o|so 7blog 0). As a rosu|t, |n r|ch
countr|os, domost|c sorv|co has bocomo a |uxury good that
on|y tho r|ch can attord, whoroas |t |s st||| choap onough to
bo consumod ovon by |owor-m|dd|o-c|ass poop|o |n
dovo|op|ng countr|os.
Enter the washIng machIne

low, whatovor tho movomonts |n tho ro|at|vo pr|cos ot
'poop|o' and 'th|ngs', tho ta|| |n tho sharo ot poop|o work|ng
as domost|c sorvants wou|d not havo boon as dramat|c as |t
has boon |n tho r|ch countr|os ovor tho |ast contury, had thoro
not boon tho supp|y ot a host ot housoho|d tochno|og|os,
wh|ch l havo roprosontod by tho wash|ng mach|no. |owovor
oxpons|vo (|n ro|at|vo torms) |t may bo to h|ro poop|o who
can wash c|othos, c|oan tho houso, hoat tho houso, cook and
do tho d|shos, thoy wou|d st||| havo to bo h|rod, |t thoso
th|ngs cou|d not bo dono by mach|nos. Or you wou|d havo to
spond hours do|ng thoso th|ngs yourso|vos.
Wash|ng mach|nos havo savod mounta|ns ot t|mo. 1ho
data aro not oasy to como by, but a m|d 1040s study by tho
U3 lura| E|octr|t|cat|on Author|ty roports that, w|th tho
|ntroduct|on ot tho o|octr|c wash|ng mach|no and o|octr|c
|ron, tho t|mo roqu|rod tor wash|ng a 88 |b |oad ot |aundry
was roducod by a tactor ot noar|y 0 (trom 4 hours to 41
m|nutos) and tho t|mo takon to |ron |t by a tactor ot moro than
2.b (trom 4.b hours to 1.7b hours).
2
l|pod wator has moant
that womon do not havo to spond hours totch|ng wator (tor
wh|ch, accord|ng to tho Un|tod lat|ons 0ovo|opmont
lrogram, up to two hours por day aro spont |n somo
dovo|op|ng countr|os). vacuum c|oanors havo onab|od us to
c|oan our housos moro thorough|y |n a tract|on ot tho t|mo
that was noodod |n tho o|d days, whon wo had to do |t w|th
broom and rags. Gas/o|octr|c k|tchon stovos and contra|
hoat|ng havo vast|y roducod tho t|mo noodod tor co||oct|ng
t|rowood, mak|ng t|ros, koop|ng tho t|ros a||vo, and c|oan|ng
attor thom tor hoat|ng and cook|ng purposos. 1oday many
poop|o |n r|ch countr|os ovon havo tho d|shwashor, whoso
(tuturo) |nvontor a corta|n Vr l. V. lub|now, an omp|oyoo ot
tho U3 0opartmont ot Agr|cu|turo, sa|d wou|d bo 'a truo
bonotactor ot mank|nd' |n h|s art|c|o |n tho 1ooroo| o
Po|ltlco| Ecooomy |n 1000.
1ho omorgonco ot housoho|d app||ancos, as wo|| as
o|octr|c|ty, p|pod wator and p|pod gas, has tota||y
transtormod tho way womon, and consoquont|y mon, ||vo.
1hoy havo mado |t poss|b|o tor tar moro womon to jo|n tho
|abour markot. |or oxamp|o, |n tho U3, tho proport|on ot
marr|od wh|to womon |n pr|mo work|ng agos (8b-44 yoars)
who work outs|do tho homo roso trom a tow por cont |n tho
|ato 1800s to noar|y 80 por cont today.
8
lt has a|so changod
tho toma|o occupat|ona| structuro dramat|ca||y by a||ow|ng
soc|oty to got by w|th tar towor poop|o work|ng as domost|c
sorvants, as wo havo soon abovo - tor oxamp|o, |n tho
1870s, noar|y b0 por cont ot womon omp|oyod |n tho U3
woro omp|oyod as 'sorvants and wa|trossos' (most ot whom
wo can tako to havo boon sorvants rathor than wa|trossos,
g|von that oat|ng out was not yot b|g bus|noss).
4
lncroasod
|abour markot part|c|pat|on has dot|n|to|y ra|sod tho status ot
womon at homo and |n soc|oty, thus a|so roduc|ng
protoronco tor ma|o ch||dron and |ncroas|ng |nvostmont |n
toma|o oducat|on, wh|ch thon turthor |ncroasos toma|o
|abour markot part|c|pat|on. Evon thoso oducatod womon
who |n tho ond chooso to stay at homo w|th tho|r ch||dron
havo h|ghor status at homo, as thoy can mako crod|b|o
throats that thoy can support thomso|vos shou|d thoy doc|do
to |oavo tho|r partnors. W|th outs|do omp|oymont
opportun|t|os, tho opportun|ty costs ot ch||dron havo r|son,
mak|ng tam|||os havo towor ch||dron. A|| ot thoso havo
changod tho trad|t|ona| tam||y dynam|cs. 1akon togothor,
thoy const|tuto roa||y powortu| changos.
Ot courso, l am not say|ng that thoso changos havo
happonod on|y - or ovon prodom|nant|y - bocauso ot
changos |n housoho|d tochno|og|os. 1ho 'p|||' and othor
contracopt|vos havo had a powortu| |mpact on toma|o
oducat|on and |abour markot part|c|pat|on by a||ow|ng
womon to contro| tho t|m|ng and tho troquoncy ot tho|r
ch||db|rths. And thoro aro non-tochno|og|ca| causos. Evon
w|th tho samo housoho|d tochno|og|os, countr|os can havo
qu|to d|ttoront toma|o |abour markot part|c|pat|on rat|os and
d|ttoront occupat|on structuros, dopond|ng on th|ngs ||ko
soc|a| convont|ons rogard|ng tho accoptab|||ty ot m|dd|o-
c|ass womon work|ng (poor womon havo a|ways workod),
tax |ncont|vos tor pa|d work and ch||d roar|ng, and tho
attordab|||ty ot ch||dcaro. |av|ng sa|d a|| th|s, howovor, |t |s
st||| truo that, w|thout tho wash|ng mach|no (and othor |abour-
sav|ng housoho|d tochno|og|os), tho sca|o ot chango |n tho
ro|o ot womon |n soc|oty and |n tam||y dynam|cs wou|d not
havo boon noar|y as dramat|c.
1he washIng machIne beats the Internet

Comparod to tho changos brought about by tho wash|ng
mach|no (and company), tho |mpact ot tho |ntornot, wh|ch
many th|nk has tota||y changod tho wor|d, has not boon as
tundamonta| - at |oast so tar. 1ho |ntornot has, ot courso,
transtormod tho way poop|o spond tho|r out-ot-work hours -
surt|ng tho not, chatt|ng w|th tr|onds on |acobook, ta|k|ng to
thom on 3kypo, p|ay|ng o|octron|c gamos w|th somoono
who's s|tt|ng b,000 m||os away, and what not. lt has a|so
vast|y |mprovod tho ott|c|oncy w|th wh|ch wo can t|nd
|ntormat|on about our |nsuranco po||c|os, ho||days,
rostaurants, and |ncroas|ng|y ovon tho pr|co ot brocco|| and
shampoo.
|owovor, whon |t comos to product|on procossos, |t |s
not c|oar whothor tho |mpacts havo boon so rovo|ut|onary. 1o
bo suro, tor somo, tho |ntornot has protound|y changod tho
way |n wh|ch thoy work. l know that by oxpor|onco. 1hanks to
tho |ntornot, l havo boon ab|o to wr|to a who|o book w|th my
tr|ond and somot|mo co-author, lrotossor l|ono Grabo|, who
toachos |n 0onvor, Co|orado, w|th on|y ono taco-to-taco
moot|ng and ono or two phono ca||s.
b
|owovor, tor many
othor poop|o, tho |ntornot has not had much |mpact on
product|v|ty. 3tud|os havo strugg|od to t|nd tho pos|t|vo
|mpact ot tho |ntornot on ovora|| product|v|ty - as lobort
3o|ow, tho lobo| |auroato oconom|st, put |t, 'tho ov|donco |s
ovorywhoro but |n numbors'.
You may th|nk that my compar|son |s unta|r. 1ho
housoho|d app||ancos that l mont|on havo had at |oast a tow
docados, somot|mos a contury, to work tho|r mag|c,
whoroas tho |ntornot |s baro|y two docados o|d. 1h|s |s part|y
truo. As tho d|st|ngu|shod h|stor|an ot sc|onco, 0av|d
Edgorton, sa|d |n h|s tasc|nat|ng book 7bo 5bock o tbo O|o
- 7ocboo|ogy ooo O|obo| llstory 5loco 1000, tho
max|mum uso ot a tochno|ogy, and thus tho max|mum
|mpact, |s otton ach|ovod docados attor tho |nvont|on ot tho
tochno|ogy. 3ut ovon |n torms ot |ts |mmod|ato |mpact, l
doubt whothor tho |ntornot |s tho rovo|ut|onary tochno|ogy
that many ot us th|nk |t |s.
1he Internet Is beaten by the telegraph

1ust botoro tho start ot tho trans-At|ant|c w|rod to|ograph
sorv|co |n 1800, |t took about throo wooks to sond a
mossago to tho othor s|do ot tho 'pond' - tho t|mo |t took to
cross tho At|ant|c by sa|| sh|ps. Evon go|ng 'oxpross' on a
stoamsh|p (wh|ch d|d not bocomo prova|ont unt|| tho 1800s),
you had to a||ow two wooks (tho rocord cross|ngs ot tho t|mo
woro o|ght to n|no days).
W|th tho to|ograph, tho transm|ss|on t|mo tor, say, a 800-
word mossago was roducod to 7 or 8 m|nutos. lt cou|d ovon
bo qu|ckor st|||. 1ho Now York 7lmos roportod on 4
0ocombor 1801 that Abraham l|nco|n's 3tato ot tho Un|on
addross ot 7,b78 words was transm|ttod trom Wash|ngton,
0C to tho rost ot tho country |n 02 m|nutos, g|v|ng an
avorago ot 82 words por m|nuto, wh|ch wou|d havo a||owod
you to sond tho 800-word mossago |n |oss than 4 m|nutos.
3ut that was a rocord, and tho avorago was moro ||ko 40
words por m|nuto, g|v|ng us 7.b m|nutos tor a 800-word
mossago. A roduct|on trom 2 wooks to 7.b m|nutos |s by a
tactor ot ovor 2,b00 t|mos.
1ho |ntornot roducod tho transm|ss|on t|mo ot a 800-word
mossago trom 10 soconds on tho tax mach|no to, say, 2
soconds, but th|s |s on|y a roduct|on by a tactor ot b. 1ho
spood roduct|on by tho |ntornot |s groator whon |t comos to
|ongor mossagos - |t can sond |n 10 soconds (cons|dor|ng
that |t has to bo |oadod), say, a 80,000-word documont,
wh|ch wou|d havo takon moro than 10 m|nutos (or 1,000
soconds) on tho tax mach|no, g|v|ng us an acco|orat|on |n
transm|ss|on spood ot 100 t|mos. 3ut comparo that to tho
2,b00-t|mo roduct|on ach|ovod by tho to|ograph.
1ho |ntornot obv|ous|y has othor rovo|ut|onary toaturos. lt
a||ows us to sond p|cturos at h|gh spood (somoth|ng that
ovon to|ograph or tax cou|d not do and thus ro||od on
phys|ca| transportat|on). lt can bo accossod |n many p|acos,
not just |n post ott|cos. Vost |mportant|y, us|ng |t, wo can
soarch tor part|cu|ar |ntormat|on wo want trom a vast numbor
ot sourcos. |owovor, |n torms ot shoor acco|orat|on |n
spood, |t |s nowhoro noar as rovo|ut|onary as tho humb|o
w|rod (not ovon w|ro|oss) to|ography.
Wo vast|y ovorost|mato tho |mpacts ot tho |ntornot on|y
bocauso |t |s attoct|ng us now. lt |s not just us. |uman bo|ngs
tond to bo tasc|natod by tho nowost and tho most v|s|b|o
tochno|og|os. A|roady |n 1044, Goorgo Orwo|| cr|t|c|zod
poop|o who got ovoroxc|tod by tho 'abo||t|on ot d|stanco'
and tho 'd|sappoaranco ot tront|ors' thanks to tho aorop|ano
and tho rad|o.
PuttIng changes Into perspectIve

Who caros |t poop|o th|nk wrong|y that tho |ntornot has had
moro |mportant |mpacts than to|ography or tho wash|ng
mach|no? Why doos |t mattor that poop|o aro moro
|mprossod by tho most rocont changos?
lt wou|d not mattor |t th|s d|stort|on ot porspoct|vos was
just a mattor ot poop|o's op|n|ons. |owovor, thoso d|stortod
porspoct|vos havo roa| |mpacts, as thoy rosu|t |n m|sgu|dod
uso ot scarco rosourcos.
1ho tasc|nat|on w|th tho lC1 (lntormat|on and
Commun|cat|on 1ochno|ogy) rovo|ut|on, roprosontod by tho
|ntornot, has mado somo r|ch countr|os - ospoc|a||y tho U3
and 3r|ta|n - wrong|y conc|udo that mak|ng th|ngs |s so
'yostorday' that thoy shou|d try to ||vo on |doas. And as l
oxp|a|n |n 7blog 0, th|s bo||ot |n 'post-|ndustr|a| soc|oty' has
|od thoso countr|os to undu|y nog|oct tho|r manutactur|ng
soctor, w|th advorso consoquoncos tor tho|r oconom|os.
Evon moro worry|ng|y, tho tasc|nat|on w|th tho |ntornot by
poop|o |n r|ch countr|os has movod tho |ntornat|ona|
commun|ty to worry about tho 'd|g|ta| d|v|do' botwoon tho
r|ch countr|os and tho poor countr|os. 1h|s has |od
compan|os, char|tab|o toundat|ons and |nd|v|dua|s to donato
monoy to dovo|op|ng countr|os to buy computor oqu|pmont
and |ntornot tac|||t|os. 1ho quost|on, howovor, |s whothor th|s
|s what tho dovo|op|ng countr|os nood tho most. lorhaps
g|v|ng monoy tor thoso |oss tash|onab|o th|ngs such as
d|gg|ng wo||s, oxtond|ng o|octr|c|ty gr|ds and mak|ng moro
attordab|o wash|ng mach|nos wou|d havo |mprovod
poop|o's ||vos moro than g|v|ng ovory ch||d a |aptop
computor or sott|ng up |ntornot contros |n rura| v|||agos. l am
not say|ng that thoso th|ngs aro oocossorl|y moro |mportant,
but many donors havo rushod |nto tancy programmos
w|thout carotu||y assoss|ng tho ro|at|vo |ong-torm costs and
bonot|ts ot a|tornat|vo usos ot tho|r monoy.
ln yot anothor oxamp|o, a tasc|nat|on w|th tho now has |od
poop|o to bo||ovo that tho rocont changos |n tho
tochno|og|os ot commun|cat|ons and transportat|on aro so
rovo|ut|onary that now wo ||vo |n a 'bordor|oss wor|d', as tho
t|t|o ot tho tamous book by Kon|ch| Ohmao, tho 1apanoso
bus|noss guru, goos.
0
As a rosu|t, |n tho |ast twonty yoars or
so, many poop|o havo como to bo||ovo that whatovor chango
|s happon|ng today |s tho rosu|t ot monumonta| tochno|og|ca|
progross, go|ng aga|nst wh|ch w||| bo ||ko try|ng to turn tho
c|ock back. 3o||ov|ng |n such a wor|d, many govornmonts
havo d|smant|od somo ot tho vory nocossary rogu|at|ons on
cross-bordor t|ows ot cap|ta|, |abour and goods, w|th poor
rosu|ts (tor oxamp|o, soo 7blogs 7 ooo 8). |owovor, as l
havo shown, tho rocont changos |n thoso tochno|og|os aro
not noar|y as rovo|ut|onary as tho corrospond|ng changos ot
a contury ago. ln tact, tho wor|d was a |ot moro g|oba||zod a
contury ago than |t was botwoon tho 1000s and tho 1080s
dosp|to hav|ng much |ntor|or tochno|og|os ot commun|cat|on
and transportat|on, bocauso |n tho |attor por|od
govornmonts, ospoc|a||y tho powortu| govornmonts, bo||ovod
|n toughor rogu|at|ons ot thoso cross-bordor t|ows. What has
dotorm|nod tho dogroo ot g|oba||zat|on (|n othor words,
nat|ona| oponnoss) |s po||t|cs, rathor than tochno|ogy.
|owovor, |t wo |ot our porspoct|vo bo d|stortod by our
tasc|nat|on w|th tho most rocont tochno|og|ca| rovo|ut|on, wo
cannot soo th|s po|nt and ond up |mp|omont|ng tho wrong
po||c|os.
Undorstand|ng tochno|og|ca| tronds |s vory |mportant tor
corroct|y dos|gn|ng oconom|c po||c|os, both at tho nat|ona|
and tho |ntornat|ona| |ovo|s (and tor mak|ng tho r|ght caroor
cho|cos at tho |nd|v|dua| |ovo|). |owovor, our tasc|nat|on w|th
tho |atost, and our undor-va|uat|on ot what has a|roady
bocomo common, can, and has, |od us |n a|| sorts ot wrong
d|roct|ons. l havo mado th|s po|nt do||borato|y provocat|vo|y
by p|tt|ng tho humb|o wash|ng mach|no aga|nst tho |ntornot,
but my oxamp|os shou|d havo shown you that tho ways |n
wh|ch tochno|og|ca| torcos havo shapod oconom|c and
soc|a| dovo|opmonts undor cap|ta||sm aro much moro
comp|ox than |s usua||y bo||ovod.
1hing 5
Aaaumo tho worat about
ooIo and you got tho worat

What they tell you

Adam 3m|th tamous|y sa|d: 'lt |s not trom tho bonovo|onco ot
tho butchor, tho browor, or tho bakor that wo oxpoct our
d|nnor, but trom tho|r rogard to tho|r own |ntorost.' 1ho
markot boaut|tu||y harnossos tho onorgy ot so|t|sh |nd|v|dua|s
th|nk|ng on|y ot thomso|vos (and, at most, tho|r tam|||os) to
produco soc|a| harmony. Commun|sm ta||od bocauso |t
don|od th|s human |nst|nct and ran tho oconomy assum|ng
ovoryono to bo so|t|oss, or at |oast |argo|y a|tru|st|c. Wo havo
to assumo tho worst about poop|o (that |s, thoy on|y th|nk
about thomso|vos), |t wo aro to construct a durab|o
oconom|c systom.
What they don't tell you

3o|t-|ntorost |s a most powortu| tra|t |n most human bo|ngs.
|owovor, |t's not our on|y dr|vo. lt |s vory otton not ovon our
pr|mary mot|vat|on. lndood, |t tho wor|d woro tu|| ot tho so|t-
sook|ng |nd|v|dua|s tound |n oconom|cs toxtbooks, |t wou|d
gr|nd to a ha|t bocauso wo wou|d bo spond|ng most ot our
t|mo choat|ng, try|ng to catch tho choators, and pun|sh|ng tho
caught. 1ho wor|d works as |t doos on|y bocauso poop|o aro
not tho tota||y so|t-sook|ng agonts that troo-markot
oconom|cs bo||ovos thom to bo. Wo nood to dos|gn an
oconom|c systom that, wh||o acknow|odg|ng that poop|o aro
otton so|t|sh, oxp|o|ts othor human mot|vos to tho tu|| and
gots tho bost out ot poop|o. 1ho ||ko||hood |s that, |t wo
assumo tho worst about poop|o, wo w||| got tho worst out ot
thom.
How (not} to run a company

ln tho m|d 1000s, l was attond|ng a contoronco |n 1apan on
tho 'East As|an growth m|rac|o', organ|zod by tho Wor|d
3ank. On ono s|do ot tho dobato woro poop|o ||ko myso|t,
argu|ng that govornmont |ntorvont|on had p|ayod a pos|t|vo
ro|o |n tho East As|an growth story by go|ng aga|nst markot
s|gna|s and protoct|ng and subs|d|z|ng |ndustr|os such as
automob||os and o|octron|cs. On tho othor s|do, thoro woro
oconom|sts support|ng tho Wor|d 3ank, who arguod that
govornmont |ntorvont|on had at bost boon an |rro|ovant
s|doshow or at worst dono moro harm than good |n East
As|a. Voro |mportant|y, thoy addod, ovon |t |t woro truo that
tho East As|an m|rac|o owod somoth|ng to govornmont
|ntorvont|on, that doos not moan that po||c|os usod by tho
East As|an countr|os can bo rocommondod to othor
countr|os. Govornmont ott|c|a|s who mako po||c|os aro (||ko
a|| ot us) so|t-sook|ng agonts, |t was po|ntod out, moro
|ntorostod |n oxpand|ng tho|r own powor and prost|go rathor
than promot|ng nat|ona| |ntorosts. 1hoy arguod that
govornmont |ntorvont|on workod |n East As|a on|y bocauso
thoy had oxcopt|ona||y so|t|oss and capab|o buroaucrats tor
h|stor|ca| roasons (wh|ch wo nood not go |nto horo). Evon
somo ot tho oconom|sts who woro support|ng an act|vo ro|o
tor govornmont concodod th|s po|nt.
l|ston|ng to th|s dobato, a d|st|ngu|shod-|ook|ng
1apanoso gont|oman |n tho aud|onco ra|sod h|s hand.
lntroduc|ng h|mso|t as ono ot tho top managors ot Kobo
3too|, tho thon tourth-|argost stoo| producor |n 1apan, tho
gont|oman ch|dod tho oconom|sts tor m|sundorstand|ng tho
naturo ot modorn buroaucracy, bo |t |n tho govornmont or |n
tho pr|vato soctor.
1ho Kobo 3too| managor sa|d (l am, ot courso,
paraphras|ng h|m): 'l am sorry to say th|s, but you
oconom|sts don't undorstand how tho roa| wor|d works. l
havo a lh0 |n mota||urgy and havo boon work|ng |n Kobo
3too| tor noar|y throo docados, so l know a th|ng or two
about stoo|-mak|ng. |owovor, my company |s now so |argo
and comp|ox that ovon l do not undorstand moro than ha|t tho
th|ngs that aro go|ng on w|th|n |t. As tor tho othor managors
- w|th backgrounds |n account|ng and markot|ng - thoy
roa||y havon't much ot a c|uo. 0osp|to th|s, our board ot
d|roctors rout|no|y approvos tho major|ty ot projocts
subm|ttod by our omp|oyoos, bocauso wo bo||ovo that our
omp|oyoos work tor tho good ot tho company. lt wo
assumod that ovoryono |s out to promoto h|s own |ntorosts
and quost|onod tho mot|vat|ons ot our omp|oyoos a|| tho
t|mo, tho company wou|d gr|nd to a ha|t, as wo wou|d spond
a|| our t|mo go|ng through proposa|s that wo roa||y don't
undorstand. You s|mp|y cannot run a |argo buroaucrat|c
organ|zat|on, bo |t Kobo 3too| or your govornmont, |t you
assumo that ovoryono |s out tor h|mso|t.'
1h|s |s moro|y an anocdoto, but |t |s a powortu| tost|mony
to tho ||m|tat|ons ot standard oconom|c thoory, wh|ch
assumos that so|t-|ntorost |s tho on|y human mot|vat|on that
counts. lot mo o|aborato.
8el|Ish butchers and bakers

|roo-markot oconom|cs starts trom tho assumpt|on that a||
oconom|c agonts aro so|t|sh, as summod up |n Adam
3m|th's assossmont ot tho butchor, tho browor and tho
bakor. 1ho boauty ot tho markot systom, thoy contond, |s that
|t channo|s what sooms to bo tho worst aspoct ot human
naturo - so|t-sook|ng, or grood, |t you ||ko - |nto somoth|ng
product|vo and soc|a||y bonot|c|a|.
G|von tho|r so|t|sh naturo, shopkoopors w||| try to ovor-
chargo you, workors w||| try tho|r bost to goot ott trom work,
and protoss|ona| managors w||| try to max|m|zo tho|r own
sa|ar|os and prost|go rathor than prot|ts, wh|ch go to tho
sharoho|dors rathor than thomso|vos. |owovor, tho powor ot
tho markot w||| put str|ct ||m|ts to, |t not comp|oto|y o||m|nato,
thoso bohav|ours: shopkoopors won't choat you |t thoy havo
a compot|tor around tho cornor, workors wou|d not daro to
s|ack ott |t thoy know thoy can bo oas||y rop|acod, h|rod
managors w||| not bo ab|o to t|ooco tho sharoho|dors |t thoy
oporato |n a v|brant stock markot, wh|ch w||| onsuro that
managors who gonorato |owor prot|ts, and thus |owor sharo
pr|cos, r|sk |os|ng tho|r jobs through takoovor.
1o troo-markot oconom|sts, pub||c ott|c|a|s - po||t|c|ans
and govornmont buroaucrats - poso a un|quo cha||ongo |n
th|s rogard. 1ho|r pursu|t ot so|t-|ntorost cannot bo rostra|nod
to any moan|ngtu| dogroo bocauso thoy aro not subjoct to
markot d|sc|p||no. lo||t|c|ans do taco somo compot|t|on
trom oach othor, but o|oct|ons happon so |ntroquont|y that
tho|r d|sc|p||nary ottocts aro ||m|tod. Consoquont|y, thoro |s
p|onty ot scopo tor thom to pursuo po||c|os that ho|ghton
tho|r powor and woa|th, at tho cost ot nat|ona| wo|taro. Whon
|t comos to tho caroor buroaucrats, tho scopo tor so|t-
sook|ng |s ovon groator. Evon |t tho|r po||t|ca| mastors, tho
po||t|c|ans, try to mako thom |mp|omont po||c|os that cator to
o|octora| domands, thoy can a|ways obtuscato and
man|pu|ato tho po||t|c|ans, as was so br||||ant|y dop|ctod |n
tho 33C comody sor|os Yos, Vlolstor and |ts soquo|, Yos,
Prlmo Vlolstor. Voroovor, un||ko tho po||t|c|ans, thoso
caroor buroaucrats havo h|gh job socur|ty, |t not ||tot|mo
tonuro, so thoy can wa|t out tho|r po||t|ca| mastors by s|mp|y
do|ay|ng th|ngs. 1h|s |s tho crux ot tho concorns that tho
Wor|d 3ank oconom|sts woro oxpross|ng |n tho moot|ng |n
1apan that l mont|onod at tho bog|nn|ng ot th|s 7blog.
1horotoro, troo-markot oconom|sts rocommond, tho
port|on ot tho oconomy contro||od by po||t|c|ans and
buroaucrats shou|d bo m|n|m|zod. 0orogu|at|on and
pr|vat|zat|on, |n th|s v|ow, aro not on|y oconom|ca||y ott|c|ont
but a|so po||t|ca||y sons|b|o |n that thoy m|n|m|zo tho vory
poss|b|||ty that pub||c ott|c|a|s can uso tho stato as a voh|c|o
to promoto tho|r own so|t-|ntorosts, at tho cost ot tho gonora|
pub||c. 3omo - tho so-ca||od 'low lub||c Vanagomont'
schoo| - go ovon turthor and rocommond that tho
managomont ot tho govornmont |tso|t shou|d bo oxposod to
groator markot torcos: a moro aggross|vo uso ot
portormanco-ro|atod pay and short-torm contracts tor
buroaucrats, moro troquont contract|ng-out ot govornmont
sorv|cos, a moro act|vo oxchango ot porsonno| botwoon tho
pub||c and tho pr|vato soctors.
We may not be angels, but .

1ho assumpt|on ot so|t-sook|ng |nd|v|dua||sm, wh|ch |s at tho
toundat|on ot troo-markot oconom|cs, has a |ot ot rosonanco
w|th our porsona| oxpor|oncos. Wo havo a|| boon choatod by
unscrupu|ous tradors, bo |t tho tru|t so||or who put somo
rotton p|ums at tho bottom ot tho papor bag or tho yoghurt
company that vast|y oxaggoratod tho hoa|th bonot|ts ot |t
products. Wo know too many corrupt po||t|c|ans and |azy
buroaucrats to bo||ovo that a|| pub||c sorvants aro so|o|y
sorv|ng tho pub||c. Vost ot us, myso|t |nc|udod, havo gootod
ott trom work ourso|vos and somo ot us havo boon trustratod
by jun|or co||oaguos and ass|stants who t|nd a|| k|nds ot
oxcusos not to put |n sor|ous work. Voroovor, what wo road
|n tho nows mod|a thoso days to||s us that protoss|ona|
managors, ovon tho supposod champ|ons ot sharoho|dor
|ntorost such as 1ack Wo|ch ot GE and l|ck Wagonor ot
GV, havo not roa||y boon sorv|ng tho bost |ntorosts ot tho
sharoho|dors (soo 7blog 2).
1h|s |s a|| truo. |owovor, wo a|so havo a |ot ot ov|donco -
not just anocdotos but systomat|c ov|donco - show|ng that
so|t-|ntorost |s not tho on|y human mot|vat|on that mattors
ovon |n our oconom|c ||to. 3o|t-|ntorost, to bo suro, |s ono ot
tho most |mportant, but wo havo many othor mot|vos -
honosty, so|t-rospoct, a|tru|sm, |ovo, sympathy, ta|th, sonso
ot duty, so||dar|ty, |oya|ty, pub||c-sp|r|todnoss, patr|ot|sm, and
so on - that aro somot|mos ovon moro |mportant than so|t-
sook|ng as tho dr|vor ot our bohav|ours.
1
Our oar||or oxamp|o ot Kobo 3too| shows how succosstu|
compan|os aro run on trust and |oya|ty, rathor than susp|c|on
and so|t-sook|ng. lt you th|nk th|s |s a pocu||ar oxamp|o trom
a country ot 'workor ants' that supprossos |nd|v|dua||ty
aga|nst human naturo, p|ck up any book on bus|noss
|oadorsh|p or any autob|ography by a succosstu|
bus|nossman pub||shod |n tho Wost and soo what thoy say.
0o thoy say that you havo to suspoct poop|o and watch thom
a|| tho t|mo tor s|ack|ng and choat|ng? lo, thoy probab|y ta|k
most|y about how to 'connoct' w|th tho omp|oyoos, chango
tho way thoy soo th|ngs, |nsp|ro thom, and promoto
toamwork among thom. Good managors know that poop|o
aro not tunno|-v|s|onod so|t-sook|ng robots. 1hoy know that
poop|o havo 'good' s|dos and 'bad' s|dos and that tho
socrot ot good managomont |s |n magn|ty|ng tho tormor and
ton|ng down tho |attor.
Anothor good oxamp|o to |||ustrato tho comp|ox|ty ot
human mot|vat|on |s tho pract|co ot 'work to ru|o', whoro
workors s|ow down output by str|ct|y to||ow|ng tho ru|os that
govorn tho|r tasks. You may wondor how workors can hurt
tho|r omp|oyor by work|ng accord|ng to tho ru|o. |owovor,
th|s som|-str|ko mothod - known a|so as 'lta||an str|ko' (and
as 'scloporo blooco', or 'wh|to str|ko', by lta||ans
thomso|vos) - |s known to roduco output by 80 -b0 por cont.
1h|s |s bocauso not ovoryth|ng can bo spoc|t|od |n
omp|oymont contracts (ru|os) and thorotoro a|| product|on
procossos ro|y hoav||y on tho workors' goodw||| to do oxtra
th|ngs that aro not roqu|rod by tho|r contracts or oxorc|so
|n|t|at|vos and tako shortcuts |n ordor to oxpod|to th|ngs,
whon tho ru|os aro too cumborsomo. 1ho mot|vat|ons boh|nd
such non-so|t|sh bohav|ours by workors aro var|od -
tondnoss ot tho|r jobs, pr|do |n tho|r workmansh|p, so|t-
rospoct, so||dar|ty w|th tho|r co||oaguos, trust |n tho|r top
managors or |oya|ty to tho company. 3ut tho bottom ||no |s
that compan|os, and thus our oconomy, wou|d gr|nd to a ha|t
|t poop|o actod |n a tota||y so|t|sh way, as thoy aro assumod
to do |n troo-markot oconom|cs.
lot roa||z|ng tho comp|ox naturo ot workor mot|vat|on, tho
cap|ta||sts ot tho oar|y mass-product|on ora thought that, by
tota||y dopr|v|ng workors ot d|scrot|on ovor tho spood and
tho |ntons|ty ot tho|r work and thus tho|r ab|||ty to sh|rk, tho
convoyor bo|t wou|d max|m|zo tho|r product|v|ty. |owovor, as
thoso cap|ta||sts soon tound out, tho workors roactod by
bocom|ng pass|vo, un-th|nk|ng and ovon uncooporat|vo,
whon thoy woro dopr|vod ot tho|r autonomy and d|gn|ty. 3o,
start|ng w|th tho |uman lo|at|ons 3choo| that omorgod |n
tho 1080s, wh|ch h|gh||ghtod tho nood tor good
commun|cat|ons w|th, and among, workors, many
managor|a| approachos havo omorgod that omphas|zo tho
comp|ox|ty ot human mot|vat|on and suggost ways to br|ng
tho bost out ot workors. 1ho p|nnac|o ot such an approach |s
tho so-ca||od '1apanoso product|on systom' (somot|mos
known as tho '1oyota product|on systom'), wh|ch oxp|o|ts tho
goodw||| and croat|v|ty ot tho workors by g|v|ng thom
rospons|b|||t|os and trust|ng thom as mora| agonts. ln tho
1apanoso systom, workors aro g|von a cons|dorab|o dogroo
ot contro| ovor tho product|on ||no. 1hoy aro a|so oncouragod
to mako suggost|ons tor |mprov|ng tho product|on procoss.
1h|s approach has onab|od 1apanoso t|rms to ach|ovo such
product|on ott|c|oncy and qua||ty that now many non-
1apanoso compan|os aro |m|tat|ng thom. 3y oot assum|ng
tho worst about tho|r workors, tho 1apanoso compan|os
havo got tho bost out ot thom.
Moral behavIour as an optIcal IllusIon7

3o, |t you |ook around and th|nk about |t, tho wor|d sooms to
bo tu|| ot mora| bohav|ours that go aga|nst tho assumpt|ons
ot troo-markot oconom|sts. Whon thoy aro controntod w|th
thoso bohav|ours, troo-markot oconom|sts otton d|sm|ss
thom as 'opt|ca| |||us|ons'. lt poop|o |ook as |t thoy aro
bohav|ng mora||y, thoy arguo, |t |s on|y bocauso tho
obsorvors do not soo tho bloooo rowards and sanct|ons that
thoy aro rospond|ng to.
Accord|ng to th|s ||no ot roason|ng, poop|o a|ways roma|n
so|t-sookors. lt thoy bohavo mora||y, |t |s not bocauso thoy
bo||ovo |n tho mora| codo |tso|t but bocauso bohav|ng |n that
way max|m|zos rowards and m|n|m|zos pun|shmonts tor
thom porsona||y. |or oxamp|o, |t tradors rotra|n trom
choat|ng ovon whon thoro |s no |oga| compu|s|on or whon
thoro aro no compot|tors roady to tako away tho|r
bus|nossos, |t doos not moan that thoy bo||ovo |n honosty. lt
|s bocauso thoy know that hav|ng a roputat|on as an honost
trador br|ngs |n moro customors. Or many tour|sts who
bohavo bad|y wou|d not do tho samo at homo, not bocauso
thoy suddon|y bocomo docont poop|o whon thoy go back
homo but bocauso thoy do not havo tho anonym|ty ot a
tour|st and thorotoro aro atra|d ot bo|ng cr|t|c|zod or shunnod
by poop|o thoy know and caro about.
1horo |s somo truth |n th|s. 1horo oro subt|o rowards and
sanct|ons that aro not |mmod|ato|y v|s|b|o and poop|o do
rospond to thom. |owovor, th|s ||no ot roason|ng doos not
work |n tho ond.
1ho tact |s that, ovon whon thoro aro no h|ddon roward-
and-sanct|on mochan|sms at work, many ot us bohavo
honost|y. |or oxamp|o, why do wo - or at |oast thoso ot us
who aro good runnors - not run away w|thout pay|ng attor a
tax| r|do?
2
1ho tax| dr|vor cannot roa||y chaso us tar, as ho
cannot abandon h|s car tor too |ong. lt you aro ||v|ng |n a b|g
c|ty, thoro |s v|rtua||y no chanco that you w||| moot tho samo
dr|vor aga|n, so you nood not ovon bo atra|d ot tho tax| dr|vor
rota||at|ng |n somo way |n tho tuturo. G|von a|| th|s, |t |s qu|to
romarkab|o that so tow poop|o run away w|thout pay|ng attor
a tax| r|do. 1o tako anothor oxamp|o, on a toro|gn ho||day
somo ot you may havo como across a garago mochan|c or
a stroot vondor who d|d not choat you, ovon whon thoro
roa||y was no way tor you to roward hor by sproad|ng hor
roputat|on tor honost doa||ngs - part|cu|ar|y d|tt|cu|t whon you
cannot ovon spo|| tho 1urk|sh garago's namo or whon your
Cambod|an nood|o |ady, whoso namo you cannot romombor
anyway, may not ovon trado |n tho samo p|aco ovory day.
Voro |mportant|y, |n a wor|d popu|atod by so|t|sh
|nd|v|dua|s, tho |nv|s|b|o roward/sanct|on mochan|sm coooot
ox|st. 1ho prob|om |s that roward|ng and pun|sh|ng othors tor
tho|r bohav|ours costs t|mo and onorgy on|y to tho
|nd|v|dua|s tak|ng tho act|on, wh||o tho|r bonot|ts trom
|mprovod bohav|oura| standards accruo to ovoryono. Go|ng
back to our oxamp|os abovo, |t you, as a tax| dr|vor, want to
chaso and boat up a runaway customor, you may havo to
r|sk gott|ng t|nod tor |||oga| park|ng or ovon hav|ng your tax|
brokon |nto. 3ut what |s tho chanco ot you bonot|t|ng trom an
|mprovod standard ot bohav|our by that passongor, who you
may not moot ovor aga|n? lt wou|d cost you t|mo and onorgy
to sproad tho good word about that 1urk|sh garago, but why
shou|d you do that |t you w||| probab|y novor v|s|t that part ot
tho wor|d ovor aga|n? 3o, as a so|t-sook|ng |nd|v|dua|, you
wa|t tor somoono too||sh onough to spond h|s t|mo and
onorgy |n adm|n|stor|ng pr|vato just|co to wayward tax|
passongors or honost out-ot-tho-way garagos, rathor than
pay|ng tho costs yourso|t. |owovor, |t ovoryono woro a so|t-
|ntorostod |nd|v|dua| ||ko you, ovoryono wou|d do as you do.
As a rosu|t, no ono wou|d roward and pun|sh othors tor tho|r
good or bad bohav|our. ln othor words, thoso |nv|s|b|o
roward/sanct|on mochan|sms that troo-markot oconom|sts
say croato tho opt|ca| |||us|on ot mora||ty can ox|st on|y
bocauso wo aro oot tho so|t|sh, amora| agonts that thoso
oconom|sts say wo aro.
Vora||ty |s not an opt|ca| |||us|on. Whon poop|o act |n a
non-so|t|sh way - bo |t not choat|ng tho|r customors, work|ng
hard dosp|to no ono watch|ng thom, or ros|st|ng br|bos as
an undorpa|d pub||c ott|c|a| - many, |t not a||, ot thom do so
bocauso thoy gonu|no|y bo||ovo that that |s tho r|ght th|ng to
do. lnv|s|b|o rowards and sanct|ons mochan|sms do mattor,
but thoy cannot oxp|a|n a|| - or, |n my v|ow, ovon tho major|ty
ot - non-so|t|sh bohav|ours, |t on|y tor tho s|mp|o roason that
thoy wou|d not ox|st |t wo woro ont|ro|y so|t|sh. Contrary to
Vrs 1hatchor's assort|on that 'thoro |s no such th|ng as
soc|oty. 1horo aro |nd|v|dua| mon and womon, and thoro aro
tam|||os', human bo|ngs havo novor ox|stod as atom|st|c
so|t|sh agonts unbound by any soc|oty. Wo aro born |nto
soc|ot|os w|th corta|n mora| codos and aro soc|a||zod |nto
'|ntorna||z|ng' thoso mora| codos.
Ot courso, a|| th|s |s not to dony that so|t-sook|ng |s ono ot
tho most |mportant human mot|vat|ons. |owovor, |t ovoryono
woro roa||y on|y out to advanco h|s own |ntorost, tho wor|d
wou|d havo a|roady ground to a ha|t, as thoro wou|d bo so
much choat|ng |n trad|ng and s|ack|ng |n product|on. Voro
|mportant|y, |t wo dos|gn our oconom|c systom basod on
such an assumpt|on, tho rosu|t |s ||ko|y to bo |owor, rathor
than h|ghor, ott|c|oncy. lt wo d|d that, poop|o wou|d too| that
thoy aro not trustod as mora| agonts and rotuso to act |n
mora| ways, mak|ng |t nocossary tor us to spond a hugo
amount ot rosourcos mon|tor|ng, judg|ng and pun|sh|ng
poop|o. lt wo assumo tho worst about poop|o, wo w||| got tho
worst out ot thom.
1hing 0
Croator macrooconomic
atabiIity haa not mado tho
worId oconomy moro atabIo

What they tell you

Unt|| tho 1070s, |nt|at|on was tho oconomy's pub||c onomy
numbor ono. Vany countr|os suttorod trom d|sastrous
hypor|nt|at|on oxpor|oncos. Evon whon |t d|d not roach a
hypor|nt|at|onary magn|tudo, tho oconom|c |nstab|||ty that
comos trom h|gh and t|uctuat|ng |nt|at|on d|scouragod
|nvostmont and thus growth. |ortunato|y, tho dragon ot
|nt|at|on has boon s|a|n s|nco tho 1000s, thanks to much
toughor att|tudos towards govornmont budgot dot|c|ts and
tho |ncroas|ng |ntroduct|on ot po||t|ca||y |ndopondont contra|
banks that aro troo to tocus s|ng|o-m|ndod|y on |nt|at|on
contro|. G|von that oconom|c stab|||ty |s nocossary tor |ong-
torm |nvostmont and thus growth, tho tam|ng ot tho boast
ca||od |nt|at|on has |a|d tho bas|s tor groator |ong-torm
prospor|ty.
What they don't tell you

lnt|at|on may havo boon tamod, but tho wor|d oconomy has
bocomo cons|dorab|y shak|or. 1ho onthus|ast|c
proc|amat|ons ot our succoss |n contro|||ng pr|co vo|at|||ty
dur|ng tho |ast throo docados havo |gnorod tho oxtraord|nary
|nstab|||ty shown by oconom|os around tho wor|d dur|ng that
t|mo. 1horo havo boon a hugo numbor ot t|nanc|a| cr|sos,
|nc|ud|ng tho 2008 g|oba| t|nanc|a| cr|s|s, dostroy|ng tho ||vos
ot many through porsona| |ndobtodnoss, bankruptcy and
unomp|oymont. An oxcoss|vo tocus on |nt|at|on has
d|stractod our attont|on away trom |ssuos ot tu|| omp|oymont
and oconom|c growth. Emp|oymont has boon mado moro
unstab|o |n tho namo ot '|abour markot t|ox|b|||ty',
dostab|||z|ng many poop|o's ||vos. 0osp|to tho assort|on that
pr|co stab|||ty |s tho procond|t|on ot growth, tho po||c|os that
woro |ntondod to br|ng |owor |nt|at|on havo producod on|y
anaom|c growth s|nco tho 1000s, whon |nt|at|on |s supposod
to havo t|na||y boon tamod.
1hat's where the money Is ~ or Is It7

ln 1anuary 1028, |ronch and 3o|g|an troops occup|od tho
luhr rog|on ot Gormany, known tor |ts coa| and stoo|. 1h|s
was bocauso, dur|ng 1022, tho Gormans sor|ous|y to||
boh|nd tho roparat|on paymonts domandod ot thom by tho
vorsa|||os 1roaty, wh|ch had conc|udod tho ||rst Wor|d War.
|ad thoy wantod monoy, howovor, tho |ronch and tho
3o|g|ans shou|d havo occup|od tho banks - attor a||, 'that's
whoro tho monoy |s', as tho tamous Amor|can bank robbor
W||||o 3utton a||ogod|y sa|d, whon askod why ho robbod
banks - rathor than a bunch ot coa| m|nos and stoo| m|||s.
Why d|dn't thoy do that? lt was bocauso thoy woro worr|od
about Gorman |nt|at|on.
3|nco tho summor ot 1022, |nt|at|on |n Gormany had boon
gott|ng out ot contro|. 1ho cost ot ||v|ng |ndox roso by s|xtoon
t|mos |n s|x months |n tho socond ha|t ot 1022. Ot courso,
tho hypor|nt|at|on was at |oast |n part causod by tho onorous
roparat|on domands by tho |ronch and tho 3o|g|ans, but
onco |t startod, |t was ont|ro|y rat|ona| tor tho |ronch and tho
3o|g|ans to occupy tho luhr |n ordor to mako suro that thoy
woro pa|d tho|r war roparat|ons |n goods, such as coa| and
stoo|, rathor than |n worth|oss papor, whoso va|uo wou|d
d|m|n|sh rap|d|y.
1hoy woro r|ght to do so. Gorman |nt|at|on got comp|oto|y
out ot contro| attor tho occupat|on ot tho luhr, w|th pr|cos
r|s|ng by anothor 10 b||||on t|mos (yos, b||||on, not thousand
or ovon m||||on) unt|| lovombor 1028, whon lontonmark, tho
now curroncy, was |ntroducod.
1ho Gorman hypor|nt|at|on has |ott b|g and |ong-|ast|ng
marks on tho ovo|ut|on ot Gorman, and wor|d, h|story. 3omo
c|a|m, w|th just|t|cat|on, that tho oxpor|onco ot hypor|nt|at|on
|a|d tho grounds tor tho r|so ot tho laz|s by d|scrod|t|ng tho
||bora| |nst|tut|ons ot tho Wo|mar lopub||c. 1hoso who tako
th|s v|ow aro thon |mp||c|t|y say|ng that tho 1020s Gorman
hypor|nt|at|on was ono ot tho ma|n causos ot tho 3ocond
Wor|d War. 1ho Gorman trauma trom tho hypor|nt|at|on was
such that tho 3undosbank, tho Wost Gorman contra| bank
attor tho 3ocond Wor|d War, was tamous tor |ts oxcoss|vo
avors|on to |ooso monotary po||cy. Evon attor tho b|rth ot tho
Europoan s|ng|o curroncy, tho ouro, and tho consoquont oo
octo abo||t|on ot nat|ona| contra| banks |n tho Eurozono
countr|os, Gormany's |nt|uonco has mado tho Europoan
Contra| 3ank (EC3) st|ck to t|ght monotary po||cy ovon |n tho
taco ot pors|stont|y h|gh unomp|oymont, unt|| tho 2008 wor|d
t|nanc|a| cr|s|s torcod |t to jo|n othor contra| banks around tho
wor|d |n an unprocodontod ro|axat|on ot monotary po||cy.
1hus, whon ta|k|ng about tho consoquoncos ot tho Gorman
hypor|nt|at|on, wo aro ta|k|ng about a shockwavo |ast|ng
noar|y a contury attor tho ovont and attoct|ng not just
Gorman, but othor Europoan, and wor|d, h|stor|os.
How bad Is In|latIon7


Gormany |s not tho on|y country that has oxpor|oncod
hypor|nt|at|on. ln tho t|nanc|a| pross Argont|na has bocomo a
byword tor hypor|nt|at|on |n modorn t|mos, but tho h|ghost
rato ot |nt|at|on |t oxpor|oncod was oo|y around 20,000 por
cont. Worso than tho Gorman ono was tho |ungar|an
|nt|at|on r|ght attor tho 3ocond Wor|d War and that |n
Z|mbabwo |n 2008 |n tho |ast days ot lros|dont lobort
Vugabo's d|ctatorsh|p (now ho sharos powor w|th tho tormor
oppos|t|on).
|ypor|nt|at|on undorm|nos tho vory bas|s ot cap|ta||sm, by
turn|ng markot pr|cos |nto moan|ng|oss no|sos. At tho ho|ght
ot tho |ungar|an |nt|at|on |n 1040, pr|cos doub|od ovory
t|ttoon hours, wh||o pr|cos doub|od ovory tour days |n tho
worst days ot tho Gorman hypor|nt|at|on ot 1028. lr|co
s|gna|s shou|d not bo abso|uto gu|dos, as l arguo throughout
th|s book, but |t |s |mposs|b|o to havo a docont oconomy
whon pr|cos r|so at such ratos. Voroovor, hypor|nt|at|on |s
otton tho rosu|t or tho causo ot po||t|ca| d|sastors, such as
Ado|t ||t|or or lobort Vugabo. lt |s tota||y undorstandab|o
why poop|o dosporato|y want to avo|d hypor|nt|at|on.
|owovor, not a|| |nt|at|on |s hypor|nt|at|on. Ot courso, thoro
aro poop|o who toar that any |nt|at|on, |t |ott a|ono, wou|d
osca|ato |nto a hypor|nt|at|on. |or oxamp|o, |n tho oar|y
2000s, Vr Vasaru |ayam|, tho govornor ot tho contra| bank
ot 1apan, tamous|y rotusod to oaso monoy supp|y on tho
ground that ho was worr|od about tho poss|b|||ty ot a
hypor|nt|at|on - dosp|to tho tact that h|s country was at tho
t|mo actua||y |n tho m|dd|o ot a dot|at|on (ta|||ng pr|cos). 3ut
thoro |s actua||y no ov|donco that th|s |s |nov|tab|o - or ovon
||ko|y. lo ono wou|d arguo that hypor|nt|at|on |s dos|rab|o, or
ovon accoptab|o, but |t |s h|gh|y quost|onab|o whothor a||
|nt|at|on |s a bad th|ng, whatovor tho rato |s.
3|nco tho 1080s, troo-markot oconom|sts havo managod
to conv|nco tho rost ot tho wor|d that oconom|c stab|||ty,
wh|ch thoy dot|no as vory |ow (|doa||y zoro) |nt|at|on, shou|d
bo atta|nod at a|| costs, s|nco |nt|at|on |s bad tor tho
oconomy. 1ho targot |nt|at|on rato thoy rocommondod has
boon somoth|ng ||ko 1-8 por cont, as suggostod by 3tan|oy
||schor, a tormor oconom|cs protossor at Vl1 and tho ch|ot
oconom|st ot tho lV| botwoon 1004 and 2001.
1
|owovor, thoro |s actua||y no ov|donco that, at |ow |ovo|s,
|nt|at|on |s bad tor tho oconomy. |or oxamp|o, ovon stud|os
dono by somo troo-markot oconom|sts assoc|atod w|th
|nst|tut|ons such as tho Un|vors|ty ot Ch|cago or tho lV|
suggost that, bo|ow 8-10 por cont, |nt|at|on has no
ro|at|onsh|p w|th a country's oconom|c growth rato.
2
3omo
othor stud|os wou|d ovon put tho throsho|d h|ghor - 20 por
cont or ovon 40 por cont.
8
1ho oxpor|oncos ot |nd|v|dua| countr|os a|so suggost that
ta|r|y h|gh |nt|at|on |s compat|b|o w|th rap|d oconom|c
growth. 0ur|ng tho 1000s and 70s, 3raz|| had an avorago
|nt|at|on rato ot 42 por cont but was ono ot tho tastost-
grow|ng oconom|os |n tho wor|d, w|th |ts por cap|ta |ncomo
grow|ng at 4.b por cont a yoar. 0ur|ng tho samo por|od, por
cap|ta |ncomo |n 3outh Koroa was grow|ng at 7 por cont por
yoar, dosp|to hav|ng an annua| avorago rato ot |nt|at|on ot
noar|y 20 por cont, wh|ch was actua||y h|ghor than that tound
|n many lat|n Amor|can countr|os at tho t|mo.
4
Voroovor, thoro |s ov|donco that oxcoss|vo ant|-
|nt|at|onary po||c|os can actua||y bo harmtu| tor tho oconomy.
3|nco 1000, whon 3raz|| - hav|ng gono through a traumat|c
phaso ot rap|d |nt|at|on, a|though not qu|to ot
hypor|nt|at|onary magn|tudo - startod to contro| |nt|at|on by
ra|s|ng roa| |ntorost ratos (nom|na| |ntorost ratos m|nus tho
rato ot |nt|at|on) to somo ot tho h|ghost |ovo|s |n tho wor|d
(10-12 por cont por yoar), |ts |nt|at|on to|| to 7.1 por cont por
yoar but |ts oconom|c growth a|so suttorod, w|th a por cap|ta
|ncomo growth rato ot on|y 1.8 por cont por yoar. 3outh
Atr|ca has a|so had a s|m||ar oxpor|onco s|nco 1004, whon |t
startod g|v|ng |nt|at|on contro| top pr|or|ty and jackod up
|ntorost ratos to tho 3raz|||an |ovo|s mont|onod abovo.
Why |s th|s? lt |s bocauso tho po||c|os that aro a|mod to
roduco |nt|at|on actua||y roduco |nvostmont and thus
oconom|c growth, |t takon too tar. |roo-markot oconom|sts
otton try to just|ty tho|r h|gh|y hawk|sh att|tudo towards
|nt|at|on by argu|ng that oconom|c stab|||ty oncouragos
sav|ngs and |nvostmont, wh|ch |n turn oncourago oconom|c
growth. 3o, |n try|ng to arguo that macrooconom|c stab|||ty,
dot|nod |n torms ot |ow |nt|at|on, was a koy tactor |n tho rap|d
growth ot tho East As|an oconom|os (a propos|t|on that
doos not actua||y app|y to 3outh Koroa, as soon abovo), tho
Wor|d 3ank arguos |n |ts 1008 roport: 'Vacrooconom|c
stab|||ty oncouragos |ong-torm p|ann|ng and pr|vato
|nvostmont and, through |ts |mpact on roa| |ntorost ratos and
tho roa| va|uo ot t|nanc|a| assots, ho|pod to |ncroaso
t|nanc|a| sav|ngs.' |owovor, tho truth ot tho mattor |s that
po||c|os that aro noodod to br|ng down |nt|at|on to a vory |ow
- |ow s|ng|o-d|g|t - |ovo| d|scourago |nvostmont.
loa| |ntorost ratos ot 8, 10 or 12 por cont moan that
potont|a| |nvostors wou|d not t|nd non-t|nanc|a| |nvostmonts
attract|vo, as tow such |nvostmonts br|ng prot|t ratos h|ghor
than 7 por cont.
b
ln th|s caso, tho on|y prot|tab|o |nvostmont
|s |n h|gh-r|sk, h|gh-roturn t|nanc|a| assots. Evon though
t|nanc|a| |nvostmonts can dr|vo growth tor a wh||o, such
growth cannot bo susta|nod, as thoso |nvostmonts havo to
bo u|t|mato|y backod up by v|ab|o |ong-torm |nvostmonts |n
roa| soctor act|v|t|os, as so v|v|d|y shown by tho 2008
t|nanc|a| cr|s|s (soo 7blog 22).
3o, troo-markot oconom|sts havo do||borato|y takon
advantago ot poop|o's just|t|od toars ot hypor|nt|at|on |n
ordor to push tor oxcoss|vo ant|-|nt|at|onary po||c|os, wh|ch
do moro harm than good. 1h|s |s bad onough, but |t |s worso
than that. Ant|-|nt|at|onary po||c|os havo not on|y harmod
|nvostmont and growth but thoy havo ta||od to ach|ovo tho|r
supposod a|m - that |s, onhanc|ng oconom|c stab|||ty.
False stabIlIty

3|nco tho 1080s, but ospoc|a||y s|nco tho 1000s, |nt|at|on
contro| has boon at tho top ot po||cy agondas |n many
countr|os. Countr|os woro urgod to chock govornmont
spond|ng, so that budgot dot|c|ts wou|d not tuo| |nt|at|on.
1hoy woro a|so oncouragod to g|vo po||t|ca| |ndopondonco
to tho contra| bank, so that |t cou|d ra|so |ntorost ratos to
h|gh |ovo|s, |t nocossary aga|nst popu|ar protosts, wh|ch
po||t|c|ans wou|d not bo ab|o to ros|st.
1ho strugg|o took t|mo, but tho boast ca||od |nt|at|on has
boon tamod |n tho major|ty ot countr|os |n rocont yoars.
Accord|ng to tho lV| data, botwoon 1000 and 2008,
avorago |nt|at|on rato to|| |n 07 out ot 102 countr|os,
comparod to tho ratos |n tho 1070s and 80s. 1ho t|ght
aga|nst |nt|at|on was part|cu|ar|y succosstu| |n tho r|ch
countr|os: |nt|at|on to|| |n a|| ot thom. Avorago |nt|at|on tor tho
OEC0 countr|os (most ot wh|ch aro r|ch, a|though not a|| r|ch
countr|os bo|ong to tho OEC0) to|| trom 7.0 por cont to 2.0
por cont botwoon tho two por|ods (70s-80s vs. 00s-00s).
1ho wor|d, ospoc|a||y |t you ||vo |n a r|ch country, has
bocomo moro stab|o - or has |t?
1ho tact |s that tho wor|d has bocomo moro stab|o on|y |t
wo rogard |ow |nt|at|on as tho so|o |nd|cator ot oconom|c
stab|||ty, but |t has oot bocomo moro stab|o |n tho way most
ot us oxpor|onco |t.
Ono sonso |n wh|ch tho wor|d has bocomo moro unstab|o
dur|ng tho |ast throo docados ot troo-markot dom|nanco and
strong ant|-|nt|at|onary po||c|os |s tho |ncroasod troquoncy
and oxtont ot t|nanc|a| cr|sos. Accord|ng to a study by
Konnoth logott, a tormor ch|ot oconom|st ot tho lV| and
now a protossor at |arvard Un|vors|ty, and Carmon
lo|nhart, a protossor at tho Un|vors|ty ot Vary|and, v|rtua||y
no country was |n bank|ng cr|s|s botwoon tho ond ot tho
3ocond Wor|d War and tho m|d 1070s, whon tho wor|d was
much moro unstab|o than today, whon moasurod by |nt|at|on.
3otwoon tho m|d 1070s and tho |ato 1080s, whon |nt|at|on
acco|oratod |n many countr|os, tho proport|on ot countr|os
w|th bank|ng cr|sos roso to b-10 por cont, wo|ghtod by tho|r
sharo ot wor|d |ncomo, soom|ng|y cont|rm|ng tho |nt|at|on-
contr|c v|ow ot tho wor|d. |owovor, tho proport|on ot
countr|os w|th bank|ng cr|sos shot up to around 20 por cont
|n tho m|d 1000s, whon wo aro supposod to havo t|na||y
tamod tho boast ca||od |nt|at|on and atta|nod tho o|us|vo goa|
ot oconom|c stab|||ty. 1ho rat|o thon br|ot|y to|| to zoro tor a
tow yoars |n tho m|d 2000s, but wont up aga|n to 8b por cont
to||ow|ng tho 2008 g|oba| t|nanc|a| cr|s|s (and |s ||ko|y to r|so
ovon turthor at tho t|mo ot wr|t|ng, that |s, oar|y 2010).
0
Anothor sonso |n wh|ch tho wor|d has bocomo moro
unstab|o dur|ng tho |ast throo docados |s that job |nsocur|ty
has |ncroasod tor many poop|o dur|ng th|s por|od. 1ob
socur|ty has a|ways boon |ow |n dovo|op|ng countr|os, but
tho sharo ot |nsocuro jobs |n tho so-ca||od '|ntorma| soctor' -
tho co||oct|on ot unrog|storod t|rms wh|ch do not pay taxos or
obsorvo |aws, |nc|ud|ng thoso prov|d|ng job socur|ty - has
|ncroasod |n many dovo|op|ng countr|os dur|ng tho por|od,
duo to promaturo trado ||bora||zat|on that dostroyod a |ot ot
socuro 'torma|' jobs |n tho|r |ndustr|os. ln tho r|ch countr|os,
job |nsocur|ty |ncroasod dur|ng tho 1080s too, duo to r|s|ng
(comparod to tho 10b0s-70s) unomp|oymont, wh|ch was |n
|argo part a rosu|t ot rostr|ct|vo macrooconom|c po||c|os that
put |nt|at|on contro| abovo ovoryth|ng o|so. 3|nco tho 1000s,
unomp|oymont has ta||on, but job |nsocur|ty has st||| r|son,
comparod to tho pro-1080s por|od.
1horo aro many roasons tor th|s. ||rst, tho sharo ot short-
torm jobs has r|son |n tho major|ty ot r|ch countr|os, a|though
not hugo|y as somo poop|o th|nk. 3ocond, wh||o thoso who
koop tho|r job may stay |n tho samo job a|most (a|though not
qu|to) as |ong as tho|r pro-1080s countorparts usod to, a
h|ghor proport|on ot omp|oymont torm|nat|ons havo bocomo
|nvo|untary, at |oast |n somo countr|os (ospoc|a||y tho U3).
1h|rd, ospoc|a||y |n tho UK and tho U3, jobs that had boon
prodom|nant|y socuro ovon unt|| tho 1080s - managor|a|,
c|or|ca| and protoss|ona| jobs - havo bocomo |nsocuro
s|nco tho 1000s. |ourth, ovon |t tho job |tso|t has roma|nod
socuro, |ts naturo and |ntons|ty havo bocomo subjoct to
moro troquont and b|ggor changos - vory otton tor tho
worso. |or oxamp|o, accord|ng to a 1000 study tor tho
1osoph lowntroo |oundat|on, tho 3r|t|sh soc|a| rotorm
char|ty namod attor tho tamous Ouakor ph||anthrop|st
bus|nossman, noar|y two-th|rds ot 3r|t|sh workors sa|d thoy
had oxpor|oncod an |ncroaso |n tho spood or tho |ntons|ty ot
work ovor tho procod|ng t|vo-yoar por|od. last but not |oast,
|n many (a|though not a||) r|ch countr|os, tho wo|taro stato has
boon cut back s|nco tho 1080s, so poop|o too| moro
|nsocuro, ovon |t tho objoct|vo probab|||ty ot job |oss |s tho
samo.
1ho po|nt |s that pr|co stab|||ty |s on|y ono ot tho |nd|cators
ot oconom|c stab|||ty. ln tact, tor most poop|o, |t |s not ovon
tho most |mportant |nd|cator. 1ho most dostab|||z|ng ovonts
|n most poop|o's ||vos aro th|ngs ||ko |os|ng a job (or hav|ng
|t rad|ca||y rodot|nod) or hav|ng tho|r housos ropossossod |n
a t|nanc|a| cr|s|s, and not r|s|ng pr|cos, un|oss thoy aro ot a
hypor|nt|at|onary magn|tudo (hand on hoart, can you roa||y
to|| tho d|ttoronco botwoon a 4 por cont |nt|at|on and a 2 por
cont ono?). 1h|s |s why tam|ng |nt|at|on has not qu|to brought
to most poop|o tho sonso ot stab|||ty that tho ant|-|nt|at|onary
warr|ors had sa|d |t wou|d.
low, tho coox|stonco ot pr|co stab|||ty (that |s, |ow
|nt|at|on) and tho |ncroaso |n non-pr|co torms ot oconom|c
|nstab|||ty, such as moro troquont bank|ng cr|sos and groator
job |nsocur|ty, |s not a co|nc|donco. A|| ot thom aro tho
rosu|ts ot tho samo troo-markot po||cy packago.
ln tho study c|tod abovo, logott and lo|nhart po|nt out
that tho sharo ot countr|os |n bank|ng cr|sos |s vory c|oso|y
ro|atod to tho dogroo ot |ntornat|ona| cap|ta| mob|||ty. 1h|s
|ncroasod |ntornat|ona| mob|||ty |s a koy goa| tor troo-markot
oconom|sts, who bo||ovo that a groator troodom ot cap|ta| to
movo across bordors wou|d |mprovo tho ott|c|oncy ot tho
uso ot cap|ta| (soo 7blog 22). Consoquont|y, thoy havo
pushod tor cap|ta| markot opon|ng across tho wor|d,
a|though rocont|y thoy havo boon sotton|ng tho|r pos|t|on |n
th|s rogard |n ro|at|on to dovo|op|ng countr|os.
l|kow|so, |ncroasod job |nsocur|ty |s a d|roct
consoquonco ot troo-markot po||c|os. 1ho |nsocur|ty
man|tostod |n h|gh unomp|oymont |n tho r|ch countr|os |n tho
1080s was tho rosu|t ot str|ngont ant|-|nt|at|onary
macrooconom|c po||c|os. 3otwoon tho 1000s and tho
outbroak ot tho 2008 cr|s|s, ovon though unomp|oymont to||,
tho chanco ot |nvo|untary job torm|nat|on |ncroasod, tho
sharo ot short-torm jobs roso, jobs woro moro troquont|y
rodot|nod and work |ntons|t|od tor many jobs - a|| as a rosu|t
ot changos |n |abour markot rogu|at|ons that woro |ntondod
to |ncroaso |abour markot t|ox|b|||ty and thus oconom|c
ott|c|oncy.
1ho troo-markot po||cy packago, otton known as tho noo-
||bora| po||cy packago, omphas|zos |owor |nt|at|on, groator
cap|ta| mob|||ty and groator job |nsocur|ty (ouphom|st|ca||y
ca||od groator |abour markot t|ox|b|||ty), ossont|a||y bocauso
|t |s ma|n|y goarod towards tho |ntorosts ot tho ho|dors ot
t|nanc|a| assots. lnt|at|on contro| |s omphas|zod bocauso
many t|nanc|a| assots havo nom|na||y t|xod ratos ot roturn, so
|nt|at|on roducos tho|r roa| roturns. Groator cap|ta| mob|||ty |s
promotod bocauso tho ma|n sourco ot tho ab|||ty tor tho
ho|dors ot t|nanc|a| assots to roap h|ghor roturns than tho
ho|dors ot othor (phys|ca| and human) assots |s tho|r ab|||ty
to movo around tho|r assots moro qu|ck|y (soo 7blog 22).
Groator |abour markot t|ox|b|||ty |s domandod bocauso, trom
tho po|nt ot v|ow ot t|nanc|a| |nvostors, mak|ng h|r|ng and
t|r|ng ot tho workors oas|or a||ows compan|os to bo
rostructurod moro qu|ck|y, wh|ch moans that thoy can bo
so|d and bought moro road||y w|th bottor short-torm ba|anco
shoots, br|ng|ng h|ghor t|nanc|a| roturns (soo 7blog 2).
Evon |t thoy havo |ncroasod t|nanc|a| |nstab|||ty and job
|nsocur|ty, po||c|os a|mod at |ncroas|ng pr|co stab|||ty may
bo part|a||y just|t|od, had thoy |ncroasod |nvostmont and thus
growth, as tho |nt|at|on hawks had prod|ctod. |owovor, tho
wor|d oconomy has grown much moro s|ow|y dur|ng tho
post-1080s |ow-|nt|at|on ora, comparod to tho h|gh-|nt|at|on
por|od ot tho 1000s and 70s, not |oast bocauso |nvostmont
has ta||on |n most countr|os (soo 7blog 18). Evon |n tho r|ch
countr|os s|nco tho 1000s, whoro |nt|at|on has boon
comp|oto|y tamod, por cap|ta |ncomo growth to|| trom 8.2
por cont |n tho 1000s and 70s to 1.4 por cont dur|ng 1000-
2000.
A|| |n a||, |nt|at|on, at |ow to modorato |ovo|s, |s not as
dangorous as troo-markot oconom|sts mako |t out to bo.
Attompts to br|ng |nt|at|on down to vory |ow |ovo|s havo
roducod |nvostmont and growth, contrary to tho c|a|m that tho
groator oconom|c stab|||ty that |owor |nt|at|on br|ngs w|||
oncourago |nvostmont and thus growth. Voro |mportant|y,
|owor |nt|at|on has not ovon brought gonu|no oconom|c
stab|||ty to most ot us. l|bora||zat|ons ot cap|ta| and |abour
markots that torm |ntogra| parts ot tho troo-markot po||cy
packago, ot wh|ch |nt|at|on contro| |s a koy o|omont, havo
|ncroasod t|nanc|a| |nstab|||ty and job |nsocur|ty, mak|ng tho
wor|d moro unstab|o tor most ot us. 1o add |nsu|t to |njury,
tho a||ogod growth-onhanc|ng |mpact ot |nt|at|on contro| has
not mator|a||zod.
Our obsoss|on w|th |nt|at|on shou|d ond. lnt|at|on has
bocomo tho bogoyman that has boon usod to just|ty po||c|os
that havo ma|n|y bonot|tod tho ho|dors ot t|nanc|a| assots, at
tho cost ot |ong-torm stab|||ty, oconom|c growth and human
happ|noss.
1hing 7
Froo-markot oIicioa raroIy
mako oor countrioa rich

What they tell you

Attor tho|r |ndopondonco trom co|on|a| ru|o, dovo|op|ng
countr|os tr|od to dovo|op tho|r oconom|os through stato
|ntorvont|on, somot|mos ovon oxp||c|t|y adopt|ng soc|a||sm.
1hoy tr|od to dovo|op |ndustr|os such as stoo| and
automob||os, wh|ch woro boyond tho|r capab|||t|os, art|t|c|a||y
by us|ng moasuros such as trado protoct|on|sm, a ban on
toro|gn d|roct |nvostmont, |ndustr|a| subs|d|os, and ovon
stato ownorsh|p ot banks and |ndustr|a| ontorpr|sos. At an
omot|ona| |ovo| th|s was undorstandab|o, g|von that tho|r
tormor co|on|a| mastors woro a|| cap|ta||st countr|os pursu|ng
troo-markot po||c|os. |owovor, th|s stratogy producod at
bost stagnat|on and at worst d|sastor. Growth was anaom|c
(|t not nogat|vo) and tho protoctod |ndustr|os ta||od to 'grow
up'. 1hanktu||y, most ot thoso countr|os havo como to tho|r
sonsos s|nco tho 1080s and como to adopt troo-markot
po||c|os. Whon you th|nk about |t, th|s was tho r|ght th|ng to
do trom tho bog|nn|ng. A|| ot today's r|ch countr|os, w|th tho
oxcopt|on ot 1apan (and poss|b|y Koroa, a|though thoro |s
dobato on that), havo bocomo r|ch through troo-markot
po||c|os, ospoc|a||y through troo trado w|th tho rost ot tho
wor|d. And dovo|op|ng countr|os that havo moro tu||y
ombracod such po||c|os havo dono bottor |n tho rocont
por|od.
What they don't tell you

Contrary to what |s common|y bo||ovod, tho portormanco ot
dovo|op|ng countr|os |n tho por|od ot stato-|od dovo|opmont
was supor|or to what thoy havo ach|ovod dur|ng tho
subsoquont por|od ot markot-or|ontod rotorm. 1horo woro
somo spoctacu|ar ta||uros ot stato |ntorvont|on, but most ot
thoso countr|os grow much tastor, w|th moro oqu|tab|o
|ncomo d|str|but|on and tar towor t|nanc|a| cr|sos, dur|ng tho
'bad o|d days' than thoy havo dono |n tho por|od ot markot-
or|ontod rotorms. Voroovor, |t |s a|so oot truo that a|most a||
r|ch countr|os havo bocomo r|ch through troo-markot
po||c|os. 1ho truth |s moro or |oss tho oppos|to. W|th on|y a
tow oxcopt|ons, a|| ot today's r|ch countr|os, |nc|ud|ng 3r|ta|n
and tho U3 - tho supposod homos ot troo trado and troo
markot - havo bocomo r|ch through tho comb|nat|ons ot
protoct|on|sm, subs|d|os and othor po||c|os that today thoy
adv|so tho dovo|op|ng countr|os not to adopt. |roo-markot
po||c|os havo mado tow countr|os r|ch so tar and w||| mako
tow r|ch |n tho tuturo.
1wo basket cases

|oro aro tho prot||os ot two dovo|op|ng countr|os. You aro an
oconom|c ana|yst try|ng to assoss tho|r dovo|opmont
prospocts. What wou|d you say?
Coootry A: Unt|| a docado ago, tho country was h|gh|y
protoct|on|st, w|th an avorago |ndustr|a| tar|tt rato wo|| abovo
80 por cont. 0osp|to tho rocont tar|tt roduct|on, |mportant
v|s|b|o and |nv|s|b|o trado rostr|ct|ons roma|n. 1ho country
has hoavy rostr|ct|ons on cross-bordor t|ows ot cap|ta|, a
stato-ownod and h|gh|y rogu|atod bank|ng soctor, and
numorous rostr|ct|ons on toro|gn ownorsh|p ot t|nanc|a|
assots. |oro|gn t|rms produc|ng |n tho country comp|a|n that
thoy aro d|scr|m|natod aga|nst through d|ttoront|a| taxos and
rogu|at|ons by |oca| govornmonts. 1ho country has no
o|oct|ons and |s r|dd|od w|th corrupt|on. lt has opaquo and
comp||catod proporty r|ghts. ln part|cu|ar, |ts protoct|on ot
|nto||octua| proporty r|ghts |s woak, mak|ng |t tho p|rato
cap|ta| ot tho wor|d. 1ho country has a |argo numbor ot stato-
ownod ontorpr|sos, many ot wh|ch mako |argo |ossos but
aro proppod up by subs|d|os and govornmont-grantod
monopo|y r|ghts.
Coootry B: 1ho country's trado po||cy has ||tora||y boon tho
most protoct|on|st |n tho wor|d tor tho |ast tow docados, w|th
an avorago |ndustr|a| tar|tt rato at 40-bb por cont. 1ho
major|ty ot tho popu|at|on cannot voto, and voto-buy|ng and
o|octora| traud aro w|dosproad. Corrupt|on |s rampant, w|th
po||t|ca| part|os so|||ng govornmont jobs to tho|r t|nanc|a|
backors. 1ho country has novor rocru|tod a s|ng|o c|v||
sorvant through an opon, compot|t|vo procoss. lts pub||c
t|nancos aro procar|ous, w|th rocords ot govornmont |oan
dotau|ts that worry toro|gn |nvostors. 0osp|to th|s, |t
d|scr|m|natos hoav||y aga|nst toro|gn |nvostors. Espoc|a||y |n
tho bank|ng soctor, toro|gnors aro proh|b|tod trom bocom|ng
d|roctors wh||o toro|gn sharoho|dors cannot ovon oxorc|so
tho|r vot|ng r|ghts un|oss thoy aro ros|dont |n tho country. lt
doos not havo a compot|t|on |aw, porm|tt|ng carto|s and
othor torms ot monopo|y to grow unchockod. lts protoct|on ot
|nto||octua| proporty r|ghts |s patchy, part|cu|ar|y marrod by
|ts rotusa| to protoct toro|gnors' copyr|ghts.
3oth thoso countr|os aro up to tho|r nocks |n th|ngs that
aro supposod to hampor oconom|c dovo|opmont - hoavy
protoct|on|sm, d|scr|m|nat|on aga|nst toro|gn |nvostors,
woak protoct|on ot proporty r|ghts, monopo||os, |ack ot
domocracy, corrupt|on, |ack ot mor|tocracy, and so on. You
wou|d th|nk that thoy aro both hoadod tor dovo|opmonta|
d|sastors. 3ut th|nk aga|n.
Coootry A |s Ch|na today - somo roadors may havo
guossod that. |owovor, tow roadors wou|d havo guossod
that Coootry B |s tho U3A - that |s, around 1880, whon |t
was somowhat pooror than today's Ch|na.
0osp|to a|| tho supposod|y ant|-dovo|opmonta| po||c|os
and |nst|tut|ons, Ch|na has boon ono ot tho wor|d's most
dynam|c and succosstu| oconom|os ovor tho |ast throo
docados, wh||o tho U3A |n tho 1880s was ono ot tho tastost-
grow|ng - and rap|d|y bocom|ng ono ot tho r|chost -
countr|os |n tho wor|d. 3o tho oconom|c suporstars ot tho
|ato n|notoonth contury (U3A) and ot today (Ch|na) havo both
to||owod po||cy roc|pos that go a|most tota||y aga|nst today's
noo-||bora| troo-markot orthodoxy.
|ow |s th|s poss|b|o? |asn't tho troo-markot doctr|no
boon d|st|||od out ot two contur|os ot succosstu| dovo|opmont
oxpor|oncos by today's two dozon r|ch countr|os? ln ordor to
answor thoso quost|ons, wo nood to go back |n h|story.
ead presIdents don't talk

3omo Amor|cans ca|| tho|r do||ar b|||s 'doad pros|donts', or
'doad proz'. lot qu|to accurato|y. 1hoy aro a|| doad a|| r|ght,
but not a|| tho po||t|c|ans whoso portra|ts adorn tho do||ar
b|||s aro tormor pros|donts ot tho U3.
3onjam|n |rank||n - who toaturos on tho bost-known
papor monoy |n human h|story, tho $100 b||| - novor was
pros|dont. |owovor, ho cou|d wo|| havo boon. |o was tho
o|dost ot tho |ound|ng |athors and arguab|y tho most
rovorod po||t|c|an ot tho now-born country. A|though ho was
too o|d and Goorgo Wash|ngton's po||t|ca| staturo too groat
tor h|m to run tor tho t|rst pros|doncy |n 1780, |rank||n was
tho on|y porson who cou|d poss|b|y havo cha||ongod
Wash|ngton tor tho job.
1ho roa| surpr|so |n tho panthoon ot pros|donts on tho
groonback |s A|oxandor |am||ton, who toaturos on tho $10
b|||. l|ko |rank||n, |am||ton was novor a pros|dont ot tho U3.
3ut un||ko |rank||n, whoso ||to story has bocomo Amor|can
|ogond, ho was, wo||, not |rank||n. |am||ton was a moro
1roasury 3ocrotary, ovon though ho was tho vory t|rst ono.
What |s ho do|ng among tho pros|donts?
|am||ton |s thoro bocauso, unboknown to most
Amor|cans today, ho |s tho arch|toct ot tho modorn
Amor|can oconom|c systom. 1wo yoars attor bocom|ng
1roasury 3ocrotary |n 1780 at tho outragoous|y young ago ot
th|rty-throo, |am||ton subm|ttod to tho Congross tho Roport
oo tbo 5objoct o Vooooctoros, whoro ho sot out tho
oconom|c dovo|opmont stratogy tor h|s young country. ln tho
roport, ho arguod that '|ndustr|os |n tho|r |ntancy', ||ko tho
Amor|can onos, nood to bo protoctod and nurturod by
govornmont botoro thoy can stand on tho|r own toot.
|am||ton's roport was not jost about trado protoct|on|sm -
ho a|so arguod tor pub||c |nvostmont |n |ntrastructuro (such
as cana|s), dovo|opmont ot tho bank|ng systom, promot|on
ot a govornmont bond markot - but protoct|on|sm was at tho
hoart ot h|s stratogy. G|von h|s v|ows, woro |am||ton t|nanco
m|n|stor ot a dovo|op|ng country today, ho wou|d havo boon
hoav||y cr|t|c|zod by tho U3 1roasury 0opartmont tor h|s
horosy. ||s country m|ght ovon havo boon rotusod a |oan
trom tho lV| and tho Wor|d 3ank.
1ho |ntorost|ng th|ng, howovor, |s that |am||ton was not
a|ono |n th|s. A|| tho othor 'doad pros|donts' wou|d havo mot
w|th tho samo d|sapprova| trom tho U3 1roasury, tho lV|,
tho Wor|d 3ank and othor dotondors ot tho troo-markot ta|th
today.
On tho $1 b||| |s tho t|rst pros|dont, Goorgo Wash|ngton.
At h|s |naugurat|on coromony, ho |ns|stod on woar|ng
Amor|can c|othos - spoc|a||y wovon |n Connoct|cut tor tho
occas|on - rathor than h|ghor-qua||ty 3r|t|sh onos. 1oday,
th|s wou|d havo boon a v|o|at|on ot tho proposod W1O ru|o
on transparoncy |n govornmont procuromont. And |ot's not
torgot that Wash|ngton was tho ono who appo|ntod |am||ton
as 1roasury 3ocrotary, and |n tu|| know|odgo ot what h|s v|ow
on oconom|c po||cy was - |am||ton was Wash|ngton's a|do-
do-camp dur|ng tho Amor|can War ot lndopondonco and h|s
c|osost po||t|ca| a||y attor that.
On tho $b b|||, wo havo Abraham l|nco|n, a wo||-known
protoct|on|st, who dur|ng tho C|v|| War ra|sod tar|tts to tho|r
h|ghost |ovo| ovor.
1
On tho $b0 b|||, wo havo U|yssos Grant,
tho C|v|| War horo-turnod pros|dont. ln dot|anco ot tho 3r|t|sh
prossuro on tho U3A to adopt troo trado, ho onco romarkod
that 'w|th|n 200 yoars, whon Amor|ca has gotton out ot
protoct|on a|| that |t can ottor, |t too w||| adopt troo trado'.
3onjam|n |rank||n d|d not sharo |am||ton's |ntant |ndustry
doctr|no, but ho |ns|stod on h|gh tar|tt protoct|on tor anothor
roason. At tho t|mo, tho ox|stonco ot a|most-troo |and |n tho
U3 mado |t nocossary tor Amor|can manutacturors to ottor
wagos around tour t|mos h|ghor than tho Europoan avorago,
as othorw|so tho workors wou|d havo run away to sot up
tarms (th|s was no |d|o throat, g|von that many ot thom woro
tarmors |n tho|r prov|ous ||vos) (soo 7blog 10). 1horotoro,
|rank||n arguod, tho Amor|can manutacturors cou|d not
surv|vo un|oss thoy woro protoctod trom |ow-wago
compot|t|on - or what |s known as 'soc|a| dump|ng' today -
trom Europo. 1h|s |s oxact|y tho |og|c that loss lorot, tho
b||||ona|ro-turnod-po||t|c|an, usod |n ordor to opposo tho
lA|1A (lorth Amor|can |roo 1rado Agroomont) |n tho
1002 pros|dont|a| o|oct|on campa|gn - a |og|c that 18.0 por
cont ot tho Amor|can votors woro happy to ondorso.
3ut suro|y, you may say, 1homas 1ottorson (on tho raro|y
soon $2 b|||) and Androw 1ackson (on tho $20 b|||), tho
patron sa|nts ot Amor|can troo-markot cap|ta||sm, wou|d
havo passod tho 'U3 1roasury 1ost'?
1homas 1ottorson may havo boon aga|nst |am||ton's
protoct|on|sm but, un||ko |am||ton, who supportod tho patont
systom, ho arguod strong|y aga|nst patonts. 1ottorson
bo||ovod that |doas aro '||ko a|r' and thorotoro shou|d not bo
ownod by anyono. G|von tho omphas|s that most ot today's
troo-markot oconom|sts put on tho protoct|on ot patonts and
othor |nto||octua| proporty r|ghts, h|s v|ows wou|d havo gono
down ||ko a |oad ba||oon among thom.
1hon how about Androw 1ackson, that protoctor ot tho
'common man' and t|sca| consorvat|vo (ho pa|d ott a||
todora| govornmont dobts tor tho t|rst t|mo |n U3 h|story)?
Untortunato|y tor h|s tans, ovon ho wou|d not pass tho tost.
Undor 1ackson, avorago |ndustr|a| tar|tts woro |n tho rog|on
ot 8b-40 por cont. |o was a|so notor|ous|y ant|-toro|gn.
Whon |n 1880 ho canco||od tho ||conco tor tho som|-pub||c
(socond) 3ank ot tho U3A (|t was 20 por cont ownod by tho
U3 todora| govornmont), ono ot tho ma|n oxcusos was that |t
was 'too much' ownod by toro|gn (ma|n|y 3r|t|sh) |nvostors.
And how much was too much? On|y 80 por cont. lt somo
dovo|op|ng country pros|dont today canco||od tho ||conco tor
a bank bocauso |t was 80 por cont ownod by tho Amor|cans,
|t wou|d sond tho U3 1roasury |nto a t|t.
3o thoro wo go. Evory day, tons ot m||||ons ot Amor|cans
go through tho day pay|ng tor tho|r tax|s and buy|ng tho|r
sandw|chos w|th a |am||ton or a l|nco|n, gott|ng tho|r
chango w|th Wash|ngtons, not roa||z|ng that thoso rovorod
po||t|c|ans aro nasty protoct|on|sts that most ot tho|r
country's nows mod|a, consorvat|vo and ||bora| a||ko, |ovo to
|ambast. low York bankors and Ch|cago un|vors|ty
protossors tut-tut through art|c|os cr|t|c|z|ng tho ant|-toro|gn
ant|cs ot |ugo Chavoz, tho vonozuo|an pros|dont, |n cop|os
ot tho o|| 5troot 1ooroo| bought w|th an Androw 1ackson,
w|thout roa||z|ng that ho was tar moro ant|-toro|gn than
Chavoz.
1ho doad pros|donts don't ta|k. 3ut |t thoy cou|d, thoy
wou|d to|| Amor|cans and tho rost ot tho wor|d how tho
po||c|os that tho|r succossors promoto today aro tho oxact
oppos|to ot what thoy usod |n ordor to transtorm a socond-
rato agrar|an oconomy dopondont on s|avo |abour |nto tho
wor|d's groatost |ndustr|a| powor.
o as l say, not as l dId

Whon rom|ndod ot tho protoct|on|st past ot tho U3, troo-
markot oconom|sts usua||y rotort that tho country succoodod
dosp|to, rathor than bocauso ot, protoct|on|sm. 1hoy say that
tho country was dost|nod to grow tast anyway, bocauso |t
had boon oxcopt|ona||y wo|| ondowod w|th natura| rosourcos
and roco|vod a |ot ot h|gh|y mot|vatod and hard-work|ng
|mm|grants. lt |s a|so sa|d that tho country's |argo |ntorna|
markot somowhat m|t|gatod tho nogat|vo ottocts ot
protoct|on|sm, by a||ow|ng a dogroo ot compot|t|on among
domost|c t|rms.
3ut tho prob|om w|th th|s rosponso |s that, dramat|c as |t
may bo, tho U3 |s not tho on|y country that has succoodod
w|th po||c|os that go aga|nst tho troo-markot doctr|no. ln tact,
as l sha|| o|aborato bo|ow, most ot today's r|ch countr|os
havo succoodod w|th such po||c|os.
2
And, whon thoy aro
countr|os w|th vory d|ttoront cond|t|ons, |t |s not poss|b|o to
say that thoy a|| sharod somo spoc|a| cond|t|ons that
canco||od out tho nogat|vo |mpacts ot protoct|on|sm and
othor 'wrong' po||c|os. 1ho U3 may havo bonot|tod trom a
|argo domost|c markot, but thon how about t|ny ||n|and or
0onmark? lt you th|nk tho U3 bonot|tod trom abundanco ot
natura| rosourcos, how do you oxp|a|n tho succoss ot
countr|os such as Koroa and 3w|tzor|and that had v|rtua||y no
natura| rosourcos to spoak ot? lt |mm|grat|on was a pos|t|vo
tactor tor tho U3, how about a|| thoso othor countr|os - trom
Gormany to 1a|wan - that |ost somo ot tho|r bost poop|o to
tho U3 and othor low Wor|d countr|os? 1ho 'spoc|a|
cond|t|ons' argumont s|mp|y doos not work.
3r|ta|n, tho country wh|ch many poop|o th|nk |nvontod troo
trado, bu||t |ts prospor|ty on tho bas|s ot po||c|os s|m||ar to
thoso that |am||ton promotod. 1h|s was not a co|nc|donco.
A|though |am||ton was tho t|rst porson to tboorlzo tho '|ntant
|ndustry' argumont, many ot h|s po||c|os woro cop|od trom
lobort Wa|po|o, tho so-ca||od t|rst 3r|t|sh lr|mo V|n|stor,
who ran tho country botwoon 1721 and 1742.
0ur|ng tho m|d o|ghtoonth contury, 3r|ta|n movod |nto tho
woo||on manutactur|ng |ndustry, tho h|gh-toch |ndustry ot tho
t|mo that had boon dom|natod by tho low Countr|os (what
aro 3o|g|um and tho lothor|ands today), w|th tho ho|p ot
tar|tt protoct|on, subs|d|os, and othor supports that Wa|po|o
and h|s succossors prov|dod to tho domost|c woo||on
manutacturors. 1ho |ndustry soon prov|dod 3r|ta|n's ma|n
sourco ot oxport oarn|ngs, wh|ch onab|od tho country to
|mport tho tood and raw mator|a|s that |t noodod to |aunch
tho lndustr|a| lovo|ut|on |n tho |ato o|ghtoonth and tho oar|y
n|notoonth contur|os. 3r|ta|n adoptod troo trado on|y |n tho
1800s, whon |ts |ndustr|a| dom|nanco was abso|uto. ln tho
samo way |n wh|ch tho U3 was tho most protoct|on|st
country |n tho wor|d dur|ng most ot |ts phaso ot ascondancy
(trom tho 1880s to tho 1040s), 3r|ta|n was ono ot tho wor|d's
most protoct|on|st countr|os dur|ng much ot |ts own
oconom|c r|so (trom tho 1720s to tho 18b0s).
v|rtua||y a|| ot today's r|ch countr|os usod protoct|on|sm
and subs|d|os to promoto tho|r |ntant |ndustr|os. Vany ot
thom (ospoc|a||y 1apan, ||n|and and Koroa) a|so sovoro|y
rostr|ctod toro|gn |nvostmont. 3otwoon tho 1080s and tho
1080s, ||n|and usod to c|ass|ty a|| ontorpr|sos w|th moro
than 20 por cont toro|gn ownorsh|p ott|c|a||y as 'dangorous
ontorpr|sos'. 3ovora| ot thom (ospoc|a||y |ranco, Austr|a,
||n|and, 3|ngaporo and 1a|wan) usod stato-ownod
ontorpr|sos to promoto koy |ndustr|os. 3|ngaporo, wh|ch |s
tamous tor |ts troo-trado po||c|os and wo|com|ng att|tudos
towards toro|gn |nvostors, producos ovor 20 por cont ot |ts
output through stato-ownod ontorpr|sos, whon tho
|ntornat|ona| avorago |s around 10 por cont. lor d|d today's
r|ch countr|os protoct toro|gnors' |nto||octua| proporty r|ghts
vory wo||, |t at a|| - |n many ot thom |t was |oga| to patont
somoono o|so's |nvont|on as |ong as that somoono o|so was
a toro|gnor.
1horo woro oxcopt|ons ot courso. 1ho lothor|ands,
3w|tzor|and (unt|| tho ||rst Wor|d War) and |ong Kong usod
||tt|o protoct|on|sm, but ovon thoso countr|os d|d not to||ow
today's orthodox doctr|nos. Argu|ng that patonts aro art|t|c|a|
monopo||os that go aga|nst tho pr|nc|p|o ot troo trado (a
po|nt wh|ch |s strango|y |ost on most ot today's troo-trado
oconom|sts), tho lothor|ands and 3w|tzor|and rotusod to
protoct patonts unt|| tho oar|y twont|oth contury. Evon though
|t d|d not do |t on such pr|nc|p|od grounds, |ong Kong was
unt|| rocont|y ovon moro notor|ous tor |ts v|o|at|on ot
|nto||octua| proporty r|ghts than tho tormor countr|os. l bot you
know somoono - or at |oast havo a tr|ond who knows
somoono - who has bought p|ratod computor sottwaro, a
tako lo|ox watch or an 'unott|c|a|' Ca|v|n 8 |obbos 1-sh|rt
trom |ong Kong.
Vost roadors may t|nd my h|stor|ca| account countor-
|ntu|t|vo. |av|ng boon ropoatod|y to|d that troo-markot
po||c|os aro tho bost tor oconom|c dovo|opmont, thoy wou|d
t|nd |t mystor|ous how most ot today's countr|os cou|d uso a||
thoso supposod|y bad po||c|os - such as protoct|on|sm,
subs|d|os, rogu|at|on and stato ownorsh|p ot |ndustry - and
st||| bocomo r|ch.
1ho answor ||os |n tho tact that thoso bad po||c|os woro |n
tact good po||c|os, g|von tho stago ot oconom|c
dovo|opmont |n wh|ch thoso countr|os woro at tho t|mo, tor a
numbor ot roasons. ||rst |s |am||ton's |ntant |ndustry
argumont, wh|ch l oxp|a|n |n groator dota|| |n tho chaptor 'Vy
s|x-yoar-o|d son shou|d got a job' |n my oar||or book Boo
5omorltoos. |or tho samo roason why wo sond our ch||dron
to schoo| rathor than mak|ng thom compoto w|th adu|ts |n tho
|abour markot, dovo|op|ng countr|os nood to protoct and
nurturo tho|r producors botoro thoy acqu|ro tho capab|||t|os
to compoto |n tho wor|d markot unass|stod. 3ocond, |n tho
oar||or stagos ot dovo|opmont, markots do not tunct|on vory
wo|| tor var|ous roasons - poor transport, poor t|ow ot
|ntormat|on, tho sma|| s|zo ot tho markot that makos
man|pu|at|on by b|g actors oas|or, and so on. 1h|s moans
that tho govornmont noods to rogu|ato tho markot moro
act|vo|y and somot|mos ovon do||borato|y croato somo
markots. 1h|rd, |n thoso stagos, tho govornmont noods to do
many th|ngs |tso|t through stato-ownod ontorpr|sos bocauso
thoro aro s|mp|y not onough capab|o pr|vato soctor t|rms that
can tako up |argo-sca|o, h|gh-r|sk projocts (soo 7blog 12).
0osp|to tho|r own h|story, tho r|ch countr|os mako
dovo|op|ng countr|os opon tho|r bordors and oxposo tho|r
oconom|os to tho tu|| torcos ot g|oba| compot|t|on, us|ng tho
cond|t|ons attachod to tho|r b||atora| toro|gn a|d and to tho
|oans trom |ntornat|ona| t|nanc|a| |nst|tut|ons that thoy contro|
(such as tho lV| and tho Wor|d 3ank) as wo|| as tho
|doo|og|ca| |nt|uonco that thoy oxorc|so through |nto||octua|
dom|nanco. ln promot|ng po||c|os that thoy d|d not uso whon
thoy woro dovo|op|ng countr|os thomso|vos, thoy aro say|ng
to tho dovo|op|ng countr|os, '0o as l say, not as l d|d.'
A pro-growth doctrIne that reduces
growth

Whon tho h|stor|ca| hypocr|sy ot tho r|ch countr|os |s po|ntod
out, somo dotondors ot tho troo markot como back and say:
'Wo||, protoct|on|sm and othor |ntorvont|on|st po||c|os may
havo workod |n n|notoonth-contury Amor|ca or m|d twont|oth-
contury 1apan, but havon't tho dovo|op|ng countr|os
monumonta||y scrowod up whon thoy tr|od such po||c|os |n
tho 1000s and 70s?' What may havo workod |n tho past,
thoy say, |s not nocossar||y go|ng to work today.
1ho truth |s that dovo|op|ng countr|os d|d not do bad|y at
a|| dur|ng tho 'bad o|d days' ot protoct|on|sm and stato
|ntorvont|on |n tho 1000s and 70s. ln tact, tho|r oconom|c
growth portormanco dur|ng tho por|od was tar supor|or to
that ach|ovod s|nco tho 1080s undor groator opon|ng and
dorogu|at|on.
3|nco tho 1080s, |n add|t|on to r|s|ng |noqua||ty (wh|ch
was to bo oxpoctod trom tho pro-r|ch naturo ot tho rotorms -
soo 7blog 18), most dovo|op|ng countr|os havo oxpor|oncod
a s|gn|t|cant doco|orat|on |n oconom|c growth. lor cap|ta
|ncomo growth |n tho dovo|op|ng wor|d to|| trom 8 por cont
por yoar |n tho 1000s and 70s to 1.7 por cont dur|ng tho
1080-2000 por|od, whon thoro was tho groatost numbor ot
troo-markot rotorms. 0ur|ng tho 2000s, thoro was a p|ck-up
|n tho growth ot tho dovo|op|ng wor|d, br|ng|ng tho growth
rato up to 2.0 por cont tor tho 1080-2000 por|od, but th|s
was |argo|y duo to tho rap|d growth ot Ch|na and lnd|a - two
g|ants that, wh||o ||bora||z|ng, d|d oot ombraco noo-||bora|
po||c|os.
Growth portormancos |n rog|ons that havo ta|thtu||y
to||owod tho noo-||bora| roc|po - lat|n Amor|ca and 3ub-
3aharan Atr|ca - havo boon much |ntor|or to what thoy had
|n tho 'bad o|d days'. ln tho 1000s and 70s, lat|n Amor|ca
grow at 8.1 por cont |n por cap|ta torms. 3otwoon 1080 and
2000, |t grow at a rato just abovo ono-th|rd that - 1.1 por
cont. And ovon that rato was part|y duo to tho rap|d growth ot
countr|os |n tho rog|on that had oxp||c|t|y rojoctod noo-||bora|
po||c|os somot|mo oar||or |n tho 2000s - Argont|na,
Ecuador, Uruguay and vonozuo|a. 3ub-3aharan Atr|ca grow
at 1.0 por cont |n por cap|ta torms dur|ng tho 'bad o|d days',
but |ts growth rato was on|y 0.2 por cont botwoon 1080 and
2000 (soo 7blog 11).
1o sum up, tho troo-trado, troo-markot po||c|os aro
po||c|os that havo raro|y, |t ovor, workod. Vost ot tho r|ch
countr|os d|d not uso such po||c|os whon thoy woro
dovo|op|ng countr|os thomso|vos, wh||o thoso po||c|os havo
s|owod down growth and |ncroasod |ncomo |noqua||ty |n tho
dovo|op|ng countr|os |n tho |ast throo docados. |ow
countr|os havo bocomo r|ch through troo-trado, troo-markot
po||c|os and tow ovor w|||.
1hing 8
CaitaI haa a nationaIity

What they tell you

1ho roa| horo ot g|oba||zat|on has boon tho transnat|ona|
corporat|on. 1ransnat|ona| corporat|ons, as tho|r namo
|mp||os, aro corporat|ons that havo gono boyond tho|r
or|g|na| nat|ona| boundar|os. 1hoy may bo st|||
hoadquartorod |n tho country whoro thoy woro toundod, but
much ot tho|r product|on and rosoarch tac|||t|os aro outs|do
tho|r homo country, omp|oy|ng poop|o, |nc|ud|ng many top
doc|s|on-makors, trom across tho wor|d. ln th|s ago ot such
nat|on-|oss cap|ta|, nat|ona||st|c po||c|os towards toro|gn
cap|ta| aro at bost |nottoct|vo and at worst
countorproduct|vo. lt a country's govornmont d|scr|m|natos
aga|nst thom, transnat|ona| corporat|ons w||| not |nvost |n that
country. 1ho |ntont|on may bo to ho|p tho nat|ona| oconomy
by promot|ng nat|ona| t|rms, but such po||c|os actua||y harm |t
by provont|ng tho most ott|c|ont t|rms trom ostab||sh|ng
thomso|vos |n tho country.
What they don't tell you

0osp|to tho |ncroas|ng 'transnat|ona||zat|on' ot cap|ta|, most
transnat|ona| compan|os |n tact roma|n nat|ona| compan|os
w|th |ntornat|ona| oporat|ons, rathor than gonu|no|y nat|on-
|oss compan|os. 1hoy conduct tho bu|k ot tho|r coro
act|v|t|os, such as h|gh-ond rosoarch and stratog|z|ng, at
homo. Vost ot tho|r top doc|s|on-makors aro homo-country
nat|ona|s. Whon thoy havo to shut down tactor|os or cut jobs,
thoy usua||y do |t |ast at homo tor var|ous po||t|ca| and, moro
|mportant|y, oconom|c roasons. 1h|s moans that tho homo
country appropr|atos tho bu|k ot tho bonot|ts trom a
transnat|ona| corporat|on. Ot courso, tho|r nat|ona||ty |s not
tho on|y th|ng that dotorm|nos how corporat|ons bohavo, but
wo |gnoro tho nat|ona||ty ot cap|ta| at our por||.
Carlos Ghosn lIves globalIzatIon

Car|os Ghosn was born |n 10b4 to lobanoso paronts |n tho
3raz|||an c|ty ot lorto vo|ho. At tho ago ot s|x, ho movod
w|th h|s mothor to 3o|rut, lobanon. Attor t|n|sh|ng socondary
schoo| thoro, ho wont to |ranco and oarnod ong|noor|ng
dogroos trom two ot tho country's most prost|g|ous
oducat|ona| |nst|tut|ons, Eco|o lo|ytochn|quo and Eco|o dos
V|nos do lar|s. 0ur|ng h|s o|ghtoon yoars at tho |ronch
tyro-makor V|cho||n, wh|ch ho had jo|nod |n 1078, Ghosn
acqu|rod a roputat|on tor ottoct|vo managomont by turn|ng
tho company's unprot|tab|o 3outh Amor|can oporat|on
around and by succosstu||y manag|ng tho morgor ot |ts U3
subs|d|ary w|th Un|roya| Goodr|ch, wh|ch doub|od tho s|zo ot
tho company's U3 oporat|on.
ln 1000, Ghosn jo|nod tho stato-ownod |ronch car-makor
lonau|t and p|ayod a koy ro|o |n rov|v|ng tho company,
att|rm|ng h|s roputat|on tor ruth|oss cost-cutt|ng and oarn|ng
tho sobr|quot '|o cost k|||or', a|though h|s actua| approach
was moro consonsua| than that namo suggosts. Whon
lonau|t acqu|rod l|ssan, tho |oss-mak|ng 1apanoso car-
makor, |n 1000, Ghosn was sont to 1apan to put l|ssan
back |nto shapo. ln|t|a||y, ho tacod st|tt ros|stanco to h|s un-
1apanoso way ot managomont, such as sack|ng workors,
but ho turnod tho company comp|oto|y around |n a tow yoars.
Attor that, ho has boon so tota||y accoptod by tho 1apanoso
that ho has boon mado |nto a moogo (com|c book)
charactor, tho 1apanoso oqu|va|ont ot boat|t|cat|on by tho
Catho||c Church. ln 200b, ho stunnod tho wor|d onco aga|n
by go|ng back to lonau|t as CEO and pros|dont, wh||o
stay|ng on as a co-cha|rman ot l|ssan - a toat comparod by
somo to a tootba|| coach manag|ng two toams at tho samo
t|mo.
Car|os Ghosn's ||to story sums up tho drama that |s
g|oba||zat|on. loop|o m|grato |n soarch ot a bottor ||to,
somot|mos ||tora||y to tho othor s|do ot tho wor|d, as Ghosn's
tam||y d|d. 3omo ot tho m|grants, ||ko Ghosn's mothor, go
back homo. 1h|s |s a b|g contrast to tho days whon, tor
oxamp|o, lta||an |mm|grants to tho U3 rotusod to toach tho|r
ch||dron lta||an, as thoy woro so dotorm|nod not to go back
to lta|y and wantod tho|r ch||dron tota||y ass|m||atod. Vany
youngstors trom pooror countr|os w|th amb|t|on and bra|ns
now go to a r|chor country to study, as Ghosn d|d. 1hoso
days, many managors work tor a company basod |n a
toro|gn country, wh|ch otton moans ||v|ng and work|ng |n yot
anothor toro|gn country (or two) bocauso your company |s
transnat|ona|. Ghosn, a lobanoso 3raz|||an roturn-m|grant,
workod |n 3raz||, tho U3 and 1apan tor two |ronch
compan|os.
ln th|s g|oba||zod wor|d, tho argumont goos, nat|ona||ty ot
cap|ta| |s moan|ng|oss. Corporat|ons may havo startod and
st||| bo hoadquartorod |n a part|cu|ar country, but thoy havo
brokon out ot tho|r nat|ona| bordors. 1hoy now |ocato tho|r
act|v|t|os whorovor tho roturn |s tho groatost. |or oxamp|o,
lost|o, tho 3w|ss tood g|ant, may bo hoadquartorod |n tho
3w|ss c|ty ot vovoy, but |oss than b por cont ot |ts output |s
producod |n 3w|tzor|and. Evon |t wo cons|dor lost|o's
'homo' to bo Europo, rathor than 3w|tzor|and, |ts homo baso
accounts tor on|y around 80 por cont ot |ts oarn|ngs. lt |s not
just tho ro|at|vo|y |ow-grado act|v|t|os such as product|on that
transnat|ona| corporat|ons aro conduct|ng outs|do tho|r
homo countr|os. 1hoso days, ovon top-ond act|v|t|os such as
l80 aro otton |ocatod outs|do tho homo country -
|ncroas|ng|y |n dovo|op|ng countr|os, such as Ch|na and
lnd|a. Evon tho|r top managors aro drawn, ||ko Ghosn, trom
an |ntornat|ona| poo| ot ta|ont, rathor than trom oxc|us|vo|y
nat|ona| poo|s.
1ho upshot |s that a company has no nat|ona| |oya|ty any
moro. A bus|noss w||| do what |t has to do |n ordor to
|ncroaso |ts prot|t, ovon |t |t moans hurt|ng |ts homo country
by shutt|ng p|ants down, s|ash|ng jobs, or ovon br|ng|ng |n
toro|gn workors. G|von th|s, many poop|o arguo, |t |s unw|so
to put rostr|ct|ons on toro|gn ownorsh|p ot compan|os, as
many govornmonts usod to. As |ong as tho company
gonoratos woa|th and jobs w|th|n |ts bordors, tho country
shou|d not caro whothor tho company |s ownod by |ts
c|t|zons or toro|gnors. Whon a|| major compan|os aro roady
to movo anywhoro |n soarch ot prot|t opportun|t|os, mak|ng
|nvostmont by toro|gn compan|os d|tt|cu|t moans that your
country |s not go|ng to bonot|t trom thoso toro|gn compan|os
that havo |dont|t|od good |nvostmont prospocts |n your
country. lt a|| makos sonso, doosn't |t?
Chrysler ~ AmerIcan, German, AmerIcan
(agaIn} and (becomIng} ltalIan

ln 1008, 0a|m|or-3onz, tho Gorman automob||o company,
and Chrys|or, tho U3 car-makor, woro morgod. lt was roa||y
a takoovor ot Chrys|or by 0a|m|or-3onz. 3ut whon tho
morgor was announcod, |t was dop|ctod as a marr|ago ot
two oqua|s. 1ho now company, 0a|m|or-Chrys|or, ovon had
oqua| numbors ot Gormans and Amor|cans on tho
managomont board. 1hat was, howovor, on|y tor tho t|rst tow
yoars. 3oon, tho Gormans vast|y outnumborod tho
Amor|cans on tho board - usua||y ton to two|vo to just ono or
two Amor|cans, dopond|ng on tho yoar.
Untortunato|y, tho takoovor was not a groat succoss, and
|n 2007 0a|m|or-3onz so|d Chrys|or ott to Corborus, an
Amor|can pr|vato oqu|ty tund. Corborus, bo|ng an Amor|can
company, mado up Chrys|or's board ot d|roctors most|y w|th
Amor|cans (w|th somo roprosontat|on trom 0a|m|or, wh|ch
st||| ho|d a 10.0 por cont stako).
ln tho ovont, Corborus ta||od to turn tho company around
and Chrys|or wont bankrupt |n 2000. lt was rostructurod w|th
U3 todora| govornmont t|nanc|a| a|d and a major oqu|ty
|nvostmont by ||at, tho lta||an car-makor. Whon ||at bocamo
tho |oad|ng sharoho|dor, |t mado 3org|o Varch|onno, tho
CEO ot ||at, a|so tho now CEO ot Chrys|or and appo|ntod
anothor ||at managor to Chrys|or's n|no-mombor board ot
d|roctors. G|von that ||at has on|y a 20 por cont stako at tho
momont but has tho opt|on to |ncroaso |t to 8b por cont and
ovontua||y to b1 por cont, |t |s h|gh|y ||ko|y that tho proport|on
ot lta||ans on tho board w||| |ncroaso ovor t|mo, w|th tho
|ncroaso |n ||at's ownorsh|p sharo.
3o Chrys|or, onco ono ot tho qu|ntossont|a| Amor|can
compan|os, has |n tho |ast docado como to bo run by
Gormans, Amor|cans (aga|n) and (|ncroas|ng|y) lta||ans.
1horo |s no such th|ng as 'nat|on-|oss' cap|ta|. Whon takon
ovor by a toro|gn company, ovon m|ghty (tormor-)Amor|can
t|rms ond up bo|ng run by toro|gnors (but thon that |s what
takoovor moans, whon you th|nk about |t). ln most
compan|os, howovor transnat|ona| tho|r oporat|ons may
soom, tho top doc|s|on-makors st||| roma|n tho c|t|zons ot tho
homo country - that |s, tho country whoro ownorsh|p ros|dos
- dosp|to tho tact that |ong-d|stanco managomont (whon tho
acqu|r|ng company doos not d|spatch top managors to tho
acqu|rod t|rm) can roduco managomont ott|c|oncy, wh||o
d|spatch|ng top managors to a toro|gn country |s oxpons|vo,
ospoc|a||y whon tho phys|ca| and tho cu|tura| d|stancos
botwoon tho two countr|os aro groat. Car|os Ghosn |s vory
much an oxcopt|on that provos tho ru|o.
lt |s not just |n torms ot tho appo|ntmont ot top doc|s|on-
makors that corporat|ons havo a 'homo b|as'. |omo b|as |s
a|so vory strong |n rosoarch and dovo|opmont, wh|ch aro at
tho coro ot a company's compot|t|vo strongths |n most
advancod |ndustr|os. Vost ot a corporat|on's l80 act|v|t|os
stay at homo. lnsotar as thoy aro ro|ocatod abroad, |t |s
usua||y to othor dovo|opod countr|os, and at that w|th a hoavy
'rog|ona|' b|as (tho rog|ons horo moan|ng lorth Amor|ca,
Europo and 1apan, wh|ch |s a rog|on unto |tso|t |n th|s
rospoct). locont|y an |ncroas|ng numbor ot l80 contros
havo boon sot up |n dovo|op|ng countr|os, such as Ch|na
and lnd|a, but tho l80 thoy conduct tonds to bo at tho
|owost |ovo|s ot soph|st|cat|on.
Evon |n torms ot product|on, arguab|y tho oas|ost th|ng
that a company doos and thorotoro tho most ||ko|y cand|dato
tor ro|ocat|on abroad, most transnat|ona| corporat|ons aro
st||| t|rm|y basod |n tho|r homo countr|os. 1horo aro odd
oxamp|os ot t|rms, tor |nstanco lost|o, wh|ch produco most
ot tho|r outputs abroad, but thoy aro vory much tho
oxcopt|on. Among U3-basod transnat|ona| corporat|ons,
|oss than ono-th|rd ot tho output ot manutactur|ng t|rms |s
producod ovorsoas. ln tho caso ot 1apanoso compan|os,
tho rat|o |s wo|| bo|ow 10 por cont. ln Europo, tho rat|o has
r|son tast rocont|y, but most ovorsoas product|on by
Europoan t|rms |s w|th|n tho Europoan Un|on, so |t shou|d bo
undorstood moro as a procoss ot croat|ng nat|ona| t|rms tor
a now nat|on ca||od Europo than as a procoss ot Europoan
t|rms go|ng tru|y transnat|ona|.
ln short, tow corporat|ons aro tru|y transnat|ona|. 1ho vast
major|ty ot thom st||| produco tho bu|k ot tho|r outputs |n tho|r
homo countr|os. Espoc|a||y |n torms ot h|gh-grado act|v|t|os
such as stratog|c doc|s|on-mak|ng and h|ghor-ond l80,
thoy roma|n t|rm|y controd at tho|r homo countr|os. 1ho ta|k
ot a bordor|oss wor|d |s h|gh|y oxaggoratod.
1
Why Is there a home-country bIas7

Why |s thoro a homo-country b|as |n th|s g|oba||zod wor|d?
1ho troo-markot v|ow |s that nat|ona||ty ot cap|ta| doos not -
and shou|d not - mattor, bocauso compan|os havo to
max|m|zo prot|t |n ordor to surv|vo and thorotoro that
patr|ot|sm |s a |uxury thoy can ||| attord. lntorost|ng|y, many
Varx|sts wou|d agroo. 1hoy a|so bo||ovo that cap|ta| w||||ng|y
dostroys nat|ona| bordors tor groator prot|ts and tor tho
oxpandod roproduct|on ot |tso|t. 1ho |anguago |s rad|ca||y
d|ttoront, but tho mossago |s tho samo - monoy |s monoy,
so why shou|d a company do |oss prot|tab|o th|ngs s|mp|y
bocauso thoy aro good tor |ts homo country?
|owovor, thoro aro good roasons why compan|os act
w|th homo-country b|asos. 1o bog|n w|th, ||ko most ot us, top
bus|noss managors too| somo porsona| ob||gat|ons to tho
soc|oty thoy como trom. 1hoy may tramo such ob||gat|ons |n
many d|ttoront ways - patr|ot|sm, commun|ty sp|r|t, oob|osso
ob|lgo, or want|ng to 'roturn somoth|ng to tho soc|oty that
has mado thom what thoy aro today' - and may too| thom to
d|ttoront dogroos. 3ut tho po|nt |s that thoy do too| thom. And
|nsotar as most top doc|s|on-makors |n most compan|os aro
homo-country nat|ona|s, thoro |s bound to bo somo homo-
country b|as |n tho|r doc|s|ons. A|though troo-markot
oconom|sts d|sm|ss any mot|vo othor than puro so|t-sook|ng,
'mora|' mot|vos aro roa| and aro much moro |mportant than
thoy |oad us to bo||ovo (soo 7blog 5).
On top ot thoso porsona| too||ngs ot managors, a
company otton has roa| h|stor|ca| ob||gat|ons to tho country
|n wh|ch |t has 'grown up'. Compan|os, ospoc|a||y (a|though
not oxc|us|vo|y) |n tho oar|y stagos ot tho|r dovo|opmont, aro
otton supportod w|th pub||c monoy, d|roct|y and |nd|roct|y
(soo 7blog 7). Vany ot thom roco|vo d|roct subs|d|os tor
part|cu|ar typos ot act|v|t|os, such as oqu|pmont |nvostmont
or workor tra|n|ng. 1hoy somot|mos ovon got ba||od out w|th
pub||c monoy, as 1oyota was |n 1040, vo|kswagon |n 1074
and GV |n 2000. Or thoy may got |nd|roct subs|d|os |n tho
torm ot tar|tt protoct|on or statutory monopo|y r|ghts.
Ot courso, compan|os otton ta|| to mont|on, and ovon
act|vo|y h|do, such h|story, but thoro |s an unspokon
undorstand|ng among tho ro|ovant part|os that compan|os
do havo somo mora| ob||gat|ons to tho|r homo countr|os
bocauso ot thoso h|stor|ca| dobts. 1h|s |s why nat|ona|
compan|os aro much moro opon to mora| suas|on by tho
govornmont and tho pub||c than toro|gn compan|os aro,
whon thoy aro oxpoctod, a|though cannot bo |oga||y ob||god,
to do somoth|ng tor tho country aga|nst tho|r (at |oast short-
torm) |ntorosts. |or oxamp|o, |t was roportod |n Octobor
2000 that 3outh Koroa's t|nanc|a| suporv|sory agoncy was
t|nd|ng |t |mposs|b|o to porsuado toro|gn-ownod banks to
|ond moro to sma|| and mod|um-s|zod compan|os, ovon
though thoy, ||ko tho nat|ona||y ownod banks, had a|roady
s|gnod an VOU (momorandum ot undorstand|ng) about that
w|th tho agoncy, whon tho g|oba| t|nanc|a| cr|s|s broko out |n
tho autumn ot 2008.
lmportant though tho mora| and h|stor|ca| roasons aro, by
tar tho most |mportant roason tor homo-country b|as |s
oconom|c - tho tact that tho coro capab|||t|os ot a company
cannot bo oas||y takon across tho bordor.
Usua||y, a company bocomos transnat|ona| and sots up
act|v|t|os |n toro|gn countr|os bocauso |t possossos somo
tochno|og|ca| and/or organ|zat|ona| compotoncos that tho
t|rms oporat|ng |n tho host countr|os do not possoss. 1hoso
compotoncos aro usua||y ombod|od |n poop|o (o.g.,
managors, ong|noors, sk|||od workors), organ|zat|ons (o.g.,
|ntorna| company ru|os, organ|zat|ona| rout|nos, '|nst|tut|ona|
momory') and notworks ot ro|atod t|rms (o.g., supp||ors,
t|nanc|ors, |ndustr|a| assoc|at|ons or ovon o|d-boy notworks
that cut across company boundar|os), a|| ot wh|ch cannot bo
oas||y transportod to anothor country.
Vost mach|nos may bo movod abroad oas||y, but |t |s
much moro cost|y to movo sk|||od workors or managors. lt |s
ovon moro d|tt|cu|t to transp|ant organ|zat|ona| rout|nos or
bus|noss notworks on to anothor country. |or oxamp|o, whon
1apanoso automob||o compan|os startod sott|ng up
subs|d|ar|os |n 3outhoast As|a |n tho 1080s, thoy askod
tho|r subcontractors a|so to sot up tho|r own subs|d|ar|os, as
thoy noodod ro||ab|o subcontractors. Voroovor, thoso
|ntang|b|o capab|||t|os ombod|od |n poop|o, organ|zat|ons
and notworks otton nood to havo tho r|ght |nst|tut|ona|
onv|ronmont (tho |oga| systom, |ntorma| ru|os, bus|noss
cu|turo) |n ordor to tunct|on wo||. |owovor powortu| |t may bo,
a company cannot transport |ts |nst|tut|ona| surround|ngs to
anothor country.
|or a|| thoso roasons, tho most soph|st|catod act|v|t|os
that roqu|ro h|gh |ovo|s ot human and organ|zat|ona|
compotoncos and a conduc|vo |nst|tut|ona| onv|ronmont tond
to stay at homo. |omo b|asos do not ox|st s|mp|y bocauso
ot omot|ona| attachmonts or h|stor|ca| roasons. 1ho|r
ox|stonco has good oconom|c basos.
PrInce o| darkness' changes hIs mInd

lord lotor Vando|son, tho oo octo doputy pr|mo m|n|stor ot
tho UK govornmont at tho t|mo ot wr|t|ng (oar|y 2010), has a
b|t ot a roputat|on tor h|s Vach|avo|||an po||t|cs. A grandson
ot tho h|gh|y rospoctod labour po||t|c|an |orbort Vorr|son,
and a 1v producor by protoss|on, Vando|son was tho ch|ot
sp|n doctor boh|nd tho r|so ot tho so-ca||od low labour
undor 1ony 3|a|r. ||s tamous ab|||ty to sonso and oxp|o|t
sh|tts |n po||t|ca| moods and accord|ng|y organ|zo an
ottoct|vo mod|a campa|gn, comb|nod w|th h|s ruth|ossnoss,
oarnod h|m tho n|cknamo 'pr|nco ot darknoss'.
Attor a h|gh-prot||o but turbu|ont cab|not caroor, marrod
by two ros|gnat|ons duo to suspoctod corrupt|on scanda|s,
Vando|son qu|t 3r|t|sh po||t|cs and movod to 3russo|s to
bocomo Europoan Comm|ss|onor tor 1rado |n 2004.
3u||d|ng on tho |mago ot a pro-bus|noss po||t|c|an, ga|nod
dur|ng h|s br|ot spo|| as tho UK's 3ocrotary ot 3tato tor
1rado and lndustry back |n 1008, Vando|son ostab||shod a
t|rm roputat|on as ono ot tho wor|d's |oad|ng advocatos ot
troo trado and |nvostmont.
3o |t sont out a shockwavo, whon Vando|son, who had
mado a surpr|so comoback to 3r|t|sh po||t|cs and bocomo
3us|noss 3ocrotary |n oar|y 2000, sa|d |n an |ntorv|ow w|th
tho o|| 5troot 1ooroo| |n 3optombor 2000 that, thanks to
3r|ta|n's porm|ss|vo att|tudo towards toro|gn ownorsh|p, 'UK
manutactur|ng cou|d bo a |osor', ovon though ho addod tho
prov|so that th|s was 'ovor a |ongthy por|od ot t|mo, corta|n|y
not ovorn|ght'.
Was |t a typ|ca| Vando|son ant|c, w|th h|s |nst|nct to|||ng
h|m that th|s was tho t|mo to p|ay tho nat|ona||st card? Or d|d
ho t|na||y cotton on to somoth|ng that ho and othor 3r|t|sh
po||cy-makors shou|d havo roa||zod a |ong t|mo ago - that
oxcoss|vo toro|gn ownorsh|p ot a nat|ona| oconomy can bo
harmtu|?
low, |t may bo arguod, tho tact that t|rms havo a homo-
country b|as doos oot nocossar||y moan that countr|os
shou|d put rostr|ct|ons on toro|gn |nvostmont. 1ruo, g|von tho
homo b|as, |nvostmont by a toro|gn company may not bo |n
tho most dos|rab|o act|v|t|os, but an |nvostmont |s an
|nvostmont and |t w||| st||| |ncroaso output and croato jobs. lt
you put rostr|ct|ons on what toro|gn |nvostors can do - tor
oxamp|o, by to|||ng thom that thoy cannot |nvost |n corta|n
'stratog|c' |ndustr|os, by torb|dd|ng thom trom ho|d|ng a
major|ty sharo or domand|ng that thoy transtor tochno|og|os
- toro|gn |nvostors w||| s|mp|y go somowhoro o|so and you
w||| |oso tho jobs and tho woa|th that thoy wou|d havo
croatod. Espoc|a||y tor dovo|op|ng countr|os, wh|ch do not
havo many nat|ona| t|rms that can mako s|m||ar |nvostmonts,
rojoct|ng toro|gn |nvostmont bocauso |t |s toro|gn many
poop|o bo||ovo |s trank|y |rrat|ona|. Evon |t thoy got on|y
|owor-grado act|v|t|os such as assomb|y oporat|on, thoy aro
st||| bottor ott w|th tho |nvostmont than w|thout |t.
1h|s roason|ng |s corroct |n |ts own torms, but thoro aro
moro |ssuos that nood to bo cons|dorod botoro wo conc|udo
that thoro shou|d bo no rostr|ct|on on toro|gn |nvostmont
(horo, wo put as|do portto||o |nvostmont, wh|ch |s |nvostmont
|n company sharos tor t|nanc|a| ga|ns w|thout |nvo|vomont |n
d|roct managomont, and tocus on toro|gn d|roct |nvostmont,
wh|ch |s usua||y dot|nod as acqu|s|t|on ot moro than 10 por
cont ot a company's sharos w|th an |ntont to got |nvo|vod |n
managomont).
||rst ot a||, wo nood to romombor that a |ot ot toro|gn
|nvostmont |s what |s known as 'brownt|o|d |nvostmont,' that
|s, acqu|s|t|on ot ox|st|ng t|rms by a toro|gn t|rm, rathor than
'groont|o|d |nvostmont', wh|ch |nvo|vos a toro|gn t|rm sott|ng
up now product|on tac|||t|os. 3|nco tho 1000s, brownt|o|d
|nvostmont has accountod tor ovor ha|t ot tota| wor|d toro|gn
d|roct |nvostmont (|0l), ovon roach|ng 80 por cont |n 2001,
at tho ho|ght ot tho |ntornat|ona| morgors and acqu|s|t|ons
(V8A) boom. 1h|s moans that tho major|ty ot |0l |nvo|vos
tak|ng contro| ot ox|st|ng t|rms, rathor than tho croat|on ot
now output and jobs. Ot courso, tho now ownors may |njoct
bottor managor|a| and tochno|og|ca| capab|||t|os and rov|vo
an a|||ng company - as soon |n tho caso ot l|ssan undor
Car|os Ghosn - but vory otton such an acqu|s|t|on |s mado
w|th a v|ow to ut|||z|ng capab|||t|os that a|roady ox|st |n tho
acqu|rod company rathor than croat|ng now onos. And, moro
|mportant|y, onco your nat|ona| t|rm |s acqu|rod by a toro|gn
t|rm, tho homo b|as ot tho acqu|r|ng company w||| |n tho |ong
run |mposo a co|||ng on how tar |t progrossos |n tho |ntorna|
pock|ng ordor ot tho acqu|r|ng company.
Evon |n tho caso ot groont|o|d |nvostmont, homo-country
b|as |s a tactor to cons|dor. Yos, groont|o|d |nvostmont
croatos now product|vo capab|||t|os, so |t |s by dot|n|t|on
bottor than tho a|tornat|vo, that |s, no |nvostmont. |owovor,
tho quost|on that po||cy-makors nood to cons|dor botoro
accopt|ng |t |s how |t |s go|ng to attoct tho tuturo trajoctory ot
tho|r nat|ona| oconomy. 0|ttoront act|v|t|os havo d|ttoront
potont|a|s tor tochno|og|ca| |nnovat|on and product|v|ty
growth, and thorotoro what you do today |nt|uoncos what you
w||| bo do|ng |n tho tuturo and what you w||| got out ot |t. As a
popu|ar say|ng among Amor|can |ndustr|a| po||cy oxports |n
tho 1080s wont, wo cannot protond that |t doos not mattor
whothor you produco potato ch|ps, wood ch|ps or
m|croch|ps. And tho chanco |s that a toro|gn company |s
moro ||ko|y to produco potato ch|ps or wood ch|ps than
m|croch|ps |n your country.
G|von th|s, ospoc|a||y tor a dovo|op|ng country, whoso
nat|ona| t|rms aro st||| undordovo|opod, |t may bo bottor to
rostr|ct |0l at |oast |n somo |ndustr|os and try to ra|so
nat|ona| t|rms so that thoy bocomo crod|b|o a|tornat|vo
|nvostors to toro|gn compan|os. 1h|s w||| mako tho country
|oso somo |nvostmont |n tho short run, but |t may onab|o |t to
havo moro h|ghor-ond act|v|t|os w|th|n |ts bordors |n tho |ong
run. Or, ovon bottor, tho dovo|op|ng country govornmont can
a||ow toro|gn |nvostmont undor cond|t|ons that w||| ho|p tho
country upgrado tho capab|||t|os ot nat|ona| t|rms tastor - tor
oxamp|o, by roqu|r|ng jo|nt vonturos (wh|ch w||| promoto tho
transtor ot managor|a| tochn|quos), domand|ng moro act|vo
tochno|ogy transtor, or mandat|ng workor tra|n|ng.
low, say|ng that toro|gn cap|ta| |s ||ko|y to bo |oss good
tor your country than your own nat|ona| cap|ta| |s not to say
that wo shou|d a|ways protor nat|ona| cap|ta| to toro|gn
cap|ta|. 1h|s |s bocauso |ts nat|ona||ty |s not tho on|y th|ng
that dotorm|nos tho bohav|our ot cap|ta|. 1ho |ntont|on and
tho capab|||ty ot tho cap|ta| |n quost|on a|so mattor.
3upposo that you aro th|nk|ng ot so|||ng a strugg||ng
nat|ona||y ownod car company. ldoa||y, you want tho now
ownor to havo tho w||||ngnoss and tho ab|||ty to upgrado tho
company |n tho |ong run. 1ho prospoct|vo buyor |s moro
||ko|y to havo tho tochno|og|ca| capab|||t|os to do so whon |t
|s an a|roady ostab||shod automob||o producor, whothor
nat|ona| or toro|gn, rathor than whon |t |s t|nanco cap|ta|,
such as a pr|vato oqu|ty tund.
ln rocont yoars, pr|vato oqu|ty tunds havo p|ayod an
|ncroas|ng|y |mportant ro|o |n corporato acqu|s|t|ons. Evon
though thoy havo no |n-houso oxport|so |n part|cu|ar
|ndustr|os, thoy may, |n thoory, acqu|ro a company tor tho
|ong torm and h|ro |ndustry oxports as managors and ask
thom to upgrado |ts capab|||t|os. |owovor, |n pract|co, thoso
tunds usua||y havo no |ntont|on to upgrado tho acqu|rod
company tor tho |ong torm. 1hoy acqu|ro t|rms w|th a v|ow to
so|||ng thom on |n throo to t|vo yoars attor rostructur|ng thom
|nto prot|tab|||ty. 3uch rostructur|ng, g|von tho t|mo hor|zon,
usua||y |nvo|vos cutt|ng costs (ospoc|a||y sack|ng workors
and rotra|n|ng trom |ong-torm |nvostmonts), rathor than
ra|s|ng capab|||t|os. 3uch rostructur|ng |s ||ko|y to hurt tho
|ong-torm prospocts ot tho company by woakon|ng |ts ab|||ty
to gonorato product|v|ty growth. ln tho worst casos, pr|vato
oqu|ty tunds may acqu|ro compan|os w|th tho oxp||c|t
|ntont|on to ongago |n assot-str|pp|ng, so|||ng tho va|uab|o
assots ot a company w|thout rogard to |ts |ong-torm tuturo.
What tho now-notor|ous lhoon|x vonturo |o|d|ngs d|d to tho
3r|t|sh car-makor lovor, wh|ch thoy had bought trom 3VW,
|s a c|ass|c oxamp|o ot th|s (tho so-ca||od 'lhoon|x |our'
bocamo part|cu|ar|y notor|ous tor pay|ng thomso|vos hugo
sa|ar|os and tho|r tr|onds oxorb|tant consu|tancy toos).
Ot courso, th|s |s not to say that t|rms that aro a|roady
oporat|ng |n tho |ndustry w||| a|ways havo tho |ntont|on to
upgrado tho acqu|rod company tor tho |ong torm o|thor.
Whon GV acqu|rod a sor|os ot sma||or toro|gn car
compan|os - such as 3wodon's 3aab and Koroa's 0aowoo
- dur|ng tho docado botoro |ts bankruptcy |n 2000, tho
|ntont|on was to ||vo ott tho tochno|og|os accumu|atod by
thoso compan|os, rathor than to upgrado thom (soo 7blog
18). Voroovor, rocont|y tho d|st|nct|on botwoon |ndustr|a|
cap|ta| and t|nanco cap|ta| has como to bo b|urrod, w|th
|ndustr|a| compan|os such as GV and GE mak|ng moro
prot|ts |n t|nanco than |n |ndustry (soo 7blog 22), so tho tact
that tho acqu|r|ng t|rm oporatos |n a part|cu|ar |ndustry |s not
a guarantoo ot a |ong-torm comm|tmont to that |ndustry.
3o, |t a toro|gn company oporat|ng |n tho samo |ndustry |s
buy|ng up your nat|ona| company w|th a sor|ous |ong-torm
comm|tmont, so|||ng |t to that company may bo bottor than
so|||ng |t to your own nat|ona| pr|vato oqu|ty tund. |owovor,
othor th|ngs bo|ng oqua|, tho chanco |s that your nat|ona|
company |s go|ng to act |n a way that |s moro tavourab|o to
your nat|ona| oconomy.
1hus, dosp|to tho g|oba||zat|on rhotor|c, tho nat|ona||ty ot
a t|rm |s st||| a koy to doc|d|ng whoro |ts h|gh-grado
act|v|t|os, such as l80 and stratog|z|ng, aro go|ng to bo
|ocatod. lat|ona||ty |s not tho on|y dotorm|nant ot t|rm
bohav|our, so wo nood to tako |nto account othor tactors,
such as whothor tho |nvostor has a track rocord |n tho
|ndustry concornod and how strong |ts |ong-torm
comm|tmont to tho acqu|rod company roa||y |s. Wh||o a b||nd
rojoct|on ot toro|gn cap|ta| |s wrong, |t wou|d bo vory navo to
dos|gn oconom|c po||c|os on tho myth that cap|ta| doos not
havo nat|ona| roots any moro. Attor a||, lord Vando|son's
bo|atod|y tound rosorvat|ons turn out to havo a sor|ous bas|s
|n roa||ty.
1hing 0
Wo do not Iivo in a oat-
induatriaI ago

What they tell you

Our oconomy has boon tundamonta||y transtormod dur|ng
tho |ast tow docados. Espoc|a||y |n tho r|ch countr|os,
manutactur|ng |ndustry, onco tho dr|v|ng torco ot cap|ta||sm,
|s not |mportant any moro. W|th tho natura| tondoncy tor tho
(ro|at|vo) domand tor sorv|cos to r|so w|th prospor|ty and
w|th tho r|so ot h|gh-product|v|ty know|odgo-basod sorv|cos
(such as bank|ng and managomont consu|t|ng),
manutactur|ng |ndustr|os havo gono |nto doc||no |n a|| r|ch
countr|os. 1hoso countr|os havo ontorod tho 'post-|ndustr|a|'
ago, whoro most poop|o work |n sorv|cos and most outputs
aro sorv|cos. 1ho doc||no ot manutactur|ng |s not on|y
somoth|ng natura| that wo noodn't worry about but somoth|ng
that wo shou|d roa||y co|obrato. W|th tho r|so ot know|odgo-
basod sorv|cos, |t may bo bottor ovon tor somo dovo|op|ng
countr|os to sk|p thoso doomod manutactur|ng act|v|t|os
a|togothor and |oaptrog stra|ght to a sorv|co-basod post-
|ndustr|a| oconomy.
What they don't tell you

Wo may bo ||v|ng |n a post-|ndustr|a| soc|oty |n tho sonso
that most ot us work |n shops and ott|cos rathor than |n
tactor|os. 3ut wo havo not ontorod a post-|ndustr|a| stago ot
dovo|opmont |n tho sonso that |ndustry has bocomo
un|mportant. Vost (a|though not a||) ot tho shr|nkago |n tho
sharo ot manutactur|ng |n tota| output |s not duo to tho ta|| |n
tho abso|uto quant|ty ot manutacturod goods producod but
duo to tho ta|| |n tho|r pr|cos ro|at|vo to thoso tor sorv|cos,
wh|ch |s causod by tho|r tastor growth |n product|v|ty (output
por un|t ot |nput). low, ovon though do-|ndustr|a||zat|on |s
ma|n|y duo to th|s d|ttoront|a| product|v|ty growth across
soctors, and thus may not bo somoth|ng nogat|vo |n |tso|t, |t
has nogat|vo consoquoncos tor oconomy-w|do product|v|ty
growth and tor tho ba|anco ot paymonts, wh|ch cannot bo
|gnorod. As tor tho |doa that dovo|op|ng countr|os can
|argo|y sk|p |ndustr|a||zat|on and ontor tho post-|ndustr|a|
phaso d|roct|y, |t |s a tantasy. 1ho|r ||m|tod scopo tor
product|v|ty growth makos sorv|cos a poor ong|no ot growth.
1ho |ow tradab|||ty ot sorv|cos moans that a moro sorv|co-
basod oconomy w||| havo a |owor ab|||ty to oxport. lowor
oxport oarn|ngs moans a woakor ab|||ty to buy advancod
tochno|og|os trom abroad, wh|ch |n turn |oads to a s|owor
growth.
ls there anythIng that Is not made In
ChIna7

Ono day, 1|n-Gyu, my n|no-yoar-o|d son (yos, that's tho ono
who appoarod as 'my s|x-yoar-o|d son' |n my oar||or book
Boo 5omorltoos - roa||y qu|to a vorsat||o actor, ho |s) camo
and askod mo: '0addy, |s thoro anyth|ng that |s not mado |n
Ch|na?' l to|d h|m that, yos, |t may not |ook that way, but othor
countr|os st||| mako th|ngs. l thon strugg|od to como up w|th
an oxamp|o. l was about to mont|on h|s '1apanoso' l|ntondo
03| gamo conso|o, but thon l romomborod soo|ng 'Vado |n
Ch|na' on |t. l managod to to|| h|m that somo mob||o phonos
and t|at-scroon 1vs aro mado |n Koroa, but l cou|d not th|nk
ot many othor th|ngs that a n|no-yoar-o|d wou|d rocogn|zo
(ho |s st||| too young tor th|ngs ||ko 3VW). lo wondor Ch|na
|s now ca||od tho 'workshop ot tho wor|d'.
lt |s hard to bo||ovo, but tho phraso 'workshop ot tho
wor|d' was or|g|na||y co|nod tor 3r|ta|n, wh|ch today,
accord|ng to l|co|as 3arkozy, tho |ronch pros|dont, has 'no
|ndustry'. |av|ng succosstu||y |aunchod tho lndustr|a|
lovo|ut|on botoro othor countr|os, 3r|ta|n bocamo such a
dom|nant |ndustr|a| powor by tho m|d n|notoonth contury that
|t to|t cont|dont onough to comp|oto|y ||bora||zo |ts trado (soo
7blog 7). ln 1800, |t producod 20 por cont ot wor|d
manutactur|ng output. ln 1870, |t accountod tor 40 por cont ot
wor|d trado |n manutacturod goods. 1ho curront Ch|noso
sharo |n wor|d oxports |s on|y around 17 por cont (as ot
2007), ovon though 'ovoryth|ng' sooms to bo mado |n Ch|na,
so you can |mag|no tho oxtont ot 3r|t|sh dom|nanco thon.
|owovor, 3r|ta|n's po|o pos|t|on was short||vod. |av|ng
||bora||zod |ts trado comp|oto|y around 1800, |ts ro|at|vo
pos|t|on startod doc||n|ng trom tho 1880s, w|th countr|os
such as tho U3 and Gormany rap|d|y catch|ng up. lt |ost |ts
|oad|ng pos|t|on |n tho wor|d's |ndustr|a| h|orarchy by tho
t|mo ot tho ||rst Wor|d War, but tho dom|nanco ot
manutactur|ng |n tho 3r|t|sh oconomy |tso|t cont|nuod tor a
|ong t|mo attorwards. Unt|| tho oar|y 1070s, togothor w|th
Gormany, 3r|ta|n had ono ot tho wor|d's h|ghost sharos ot
manutactur|ng omp|oymont |n tota| omp|oymont, at around
8b por cont. At tho t|mo, 3r|ta|n was tho qu|ntossont|a|
manutactur|ng oconomy, oxport|ng manutacturod goods and
|mport|ng tood, tuo| and raw mator|a|s. lts manutactur|ng
trado surp|us (manutactur|ng oxports m|nus manutactur|ng
|mports) stayod cons|stont|y botwoon 4 por cont and 0 por
cont ot G0l dur|ng tho 1000s and 70s.
3|nco tho 1070s, howovor, tho 3r|t|sh manutactur|ng
soctor has shrunk rap|d|y |n |mportanco. Vanutactur|ng
output as a sharo ot 3r|ta|n's G0l usod to bo 87 por cont |n
10b0. 1oday, |t accounts tor on|y around 18 por cont.
Vanutactur|ng's sharo |n tota| omp|oymont to|| trom around
8b por cont |n tho oar|y 1070s to just ovor 10 por cont.
1
lts
pos|t|on |n |ntornat|ona| trado has a|so dramat|ca||y
changod. 1hoso days, 3r|ta|n runs manutactur|ng trado
dot|c|ts |n tho rog|on ot 2-4 por cont ot G0l por yoar. What
has happonod? 3hou|d 3r|ta|n bo worr|od?
1ho prodom|nant op|n|on |s that thoro |s noth|ng to worry
about. 1o bog|n w|th, |t |s not as |t 3r|ta|n |s tho on|y country
|n wh|ch thoso th|ngs havo happonod. 1ho doc||n|ng sharos
ot manutactur|ng |n tota| output and omp|oymont - a
phonomonon known as do-|ndustr|a||zat|on - |s a natura|
occurronco, many commontators arguo, common to a|| r|ch
countr|os (acco|oratod |n tho 3r|t|sh caso by tho t|nd|ng ot
lorth 3oa o||). 1h|s |s w|do|y bo||ovod to bo bocauso, as
thoy bocomo r|chor, poop|o bog|n to domand moro sorv|cos
than manutacturod goods. W|th ta|||ng domand, |t |s natura|
that tho manutactur|ng soctor shr|nks and tho country ontors
tho post-|ndustr|a| stago. Vany poop|o actua||y co|obrato tho
r|so ot sorv|cos. Accord|ng to thom, tho rocont oxpans|on ot
know|odgo-basod sorv|cos w|th rap|d product|v|ty growth -
such as t|nanco, consu|t|ng, dos|gn, comput|ng and
|ntormat|on sorv|cos, l80 - moans that sorv|cos havo
rop|acod manutactur|ng as tho ong|no ot growth, at |oast |n
tho r|ch countr|os. Vanutactur|ng |s now a |ow-grado act|v|ty
that dovo|op|ng countr|os such as Ch|na portorm.
Computers and haIrcuts: why de-
IndustrIalIzatIon happens

|avo wo roa||y ontorod tho post-|ndustr|a| ago? ls
manutactur|ng |rro|ovant now? 1ho answors aro: 'on|y |n
somo ways', and 'no'.
lt |s |nd|sputab|o that much |owor proport|ons ot poop|o |n
lt |s |nd|sputab|o that much |owor proport|ons ot poop|o |n
tho r|ch countr|os work |n tactor|os than usod to bo tho caso.
1horo was a t|mo |n tho |ato n|notoonth and oar|y twont|oth
contur|os whon |n somo countr|os (notab|y 3r|ta|n and
3o|g|um) around 40 por cont ot thoso omp|oyod workod |n
tho manutactur|ng |ndustry. 1oday, tho rat|o |s at most 2b por
cont, and |n somo countr|os (ospoc|a||y tho U3, Canada and
3r|ta|n) baro|y 1b por cont.
W|th so much towor poop|o (|n proport|ona| torms)
work|ng |n tactor|os, tho naturo ot soc|oty has changod. Wo
aro part|y tormod by our work oxpor|oncos (a po|nt wh|ch
most oconom|sts ta|| to rocogn|zo), so whoro and how wo
work |nt|uoncos who wo aro. Comparod to tactory workors,
ott|co workors and shop ass|stants do much |oss phys|ca|
work and, not hav|ng to work w|th convoyor bo|ts and othor
mach|nos, havo moro contro| ovor tho|r |abour procoss.
|actory workors cooporato moro c|oso|y w|th tho|r
co||oaguos dur|ng work and outs|do work, ospoc|a||y through
trado un|on act|v|t|os. ln contrast, poop|o work|ng |n shops
and ott|cos tond to work on moro |nd|v|dua| basos and aro
not vory un|on|zod. 3hop ass|stants and somo ott|co
workors |ntoract d|roct|y w|th customors, whoroas tactory
workors novor soo tho|r customors. l am not onough ot a
soc|o|og|st or a psycho|og|st to say anyth|ng protound |n th|s
rogard, but a|| th|s moans that poop|o |n today's r|ch
countr|os not on|y work d|ttoront|y trom but aro d|ttoront trom
tho|r paronts and grandparonts. ln th|s way, today's r|ch
countr|os havo bocomo post-|ndustr|a| soc|ot|os |n tho soc|a|
sonso.
|owovor, thoy havo oot bocomo post-|ndustr|a| |n tho
oconom|c sonso. Vanutactur|ng st||| p|ays tho |oad|ng ro|o |n
tho|r oconom|os. ln ordor to soo th|s po|nt, wo t|rst nood to
undorstand why do-|ndustr|a||zat|on has happonod |n tho r|ch
countr|os.
A sma||, but not nog||g|b|o, part ot do-|ndustr|a||zat|on |s
duo to opt|ca| |||us|ons, |n tho sonso that |t rot|octs changos
|n stat|st|ca| c|ass|t|cat|on rathor than changos |n roa|
act|v|t|os. Ono such |||us|on |s duo to tho outsourc|ng ot
somo act|v|t|os that aro roa||y sorv|cos |n tho|r phys|ca|
naturo but usod to bo prov|dod |n-houso by manutactur|ng
t|rms and thus c|ass|t|od as manutactur|ng output (o.g.,
cator|ng, c|oan|ng, tochn|ca| supports). Whon thoy aro
outsourcod, rocordod sorv|co outputs |ncroaso w|thout a roa|
|ncroaso |n sorv|co act|v|t|os. Evon though thoro |s no
ro||ab|o ost|mato ot |ts magn|tudo, oxports agroo that
outsourc|ng has boon a s|gn|t|cant sourco ot do-
|ndustr|a||zat|on |n tho U3 and 3r|ta|n, ospoc|a||y dur|ng tho
1080s. ln add|t|on to tho outsourc|ng ottoct, tho oxtont ot
manutactur|ng contract|on |s oxaggoratod by what |s ca||od
tho 'roc|ass|t|cat|on ottoct'.
2
A UK govornmont roport
ost|matos that up to 10 por cont ot tho ta|| |n manutactur|ng
omp|oymont botwoon 1008 and 2000 |n tho UK may bo
accountod tor by somo manutactur|ng t|rms, soo|ng tho|r
sorv|co act|v|t|os bocom|ng prodom|nant, app|y|ng to tho
govornmont stat|st|ca| agoncy to bo roc|ass|t|od as sorv|co
t|rms, ovon whon thoy aro st||| ongagod |n somo
manutactur|ng act|v|t|os.
Ono causo ot gonu|no do-|ndustr|a||zat|on has rocont|y
attractod a |ot ot attont|on. lt |s tho r|so ot manutactur|ng
|mports trom |ow-cost dovo|op|ng countr|os, ospoc|a||y
Ch|na. |owovor dramat|c |t may |ook, |t |s not tho ma|n
oxp|anat|on tor do-|ndustr|a||zat|on |n tho r|ch countr|os.
Ch|na's oxports d|d not mako a roa| |mpact unt|| tho |ato
1000s, but tho do-|ndustr|a||zat|on procoss had a|roady
startod |n tho 1070s |n most r|ch countr|os. Vost ost|matos
show that tho r|so ot Ch|na as tho now workshop ot tho wor|d
can oxp|a|n on|y around 20 por cont ot do-|ndustr|a||zat|on |n
tho r|ch countr|os that has happonod so tar.
Vany poop|o th|nk that tho roma|n|ng 80 por cont or so
can bo |argo|y oxp|a|nod by tho natura| tondoncy ot tho
(ro|at|vo) domand tor manutacturod goods to ta|| w|th r|s|ng
prospor|ty. |owovor, a c|osor |ook rovoa|s that th|s domand
ottoct |s actua||y vory sma||. lt |ooks as |t wo aro spond|ng
ovor h|ghor sharos ot our |ncomo on sorv|cos not bocauso
wo aro consum|ng ovor moro sorv|cos |n abso|uto torms but
ma|n|y bocauso sorv|cos aro bocom|ng ovor moro
oxpons|vo |n ro|at|vo torms.
W|th tho (|nt|at|on-adjustod) amount ot monoy you pa|d to
got a lC ton yoars ago, today you can probab|y buy throo, |t
not tour, computors ot oqua| or ovon groator comput|ng
powor (and corta|n|y sma||or s|zo). As a rosu|t, you probab|y
havo two, rathor than just ono, computors. 3ut, ovon w|th two
computors, tho port|on ot your |ncomo that you spond on
computors has gono down qu|to a |ot (tor tho sako ot
argumont, l am assum|ng that your |ncomo, attor adjust|ng
tor |nt|at|on, |s tho samo). ln contrast, you aro probab|y
gott|ng tho samo numbor ot ha|rcuts as you d|d ton yoars
ago (|t you havon't gono th|n on top, that |s). 1ho pr|co ot
ha|rcuts has probab|y gono up somowhat, so tho proport|on
ot your |ncomo that goos to your ha|rcuts |s groator than |t
was ton yoars ago. 1ho rosu|t |s that |t |ooks as |t you aro
spond|ng a groator (sma||or) port|on ot your |ncomo on
ha|rcuts (computors) than botoro, but tho roa||ty |s that you
aro actua||y consum|ng moro computors than botoro, wh||o
your consumpt|on ot ha|rcuts |s tho samo.
lndood, |t you adjust tor tho changos |n ro|at|vo pr|cos (or,
to uso tochn|ca| jargon, |t you moasuro th|ngs |n coostoot
pr|cos), tho doc||no ot manutactur|ng |n tho r|ch countr|os has
boon tar |oss stoop than |t appoars to bo. |or oxamp|o, |n
tho caso ot 3r|ta|n, tho sharo ot manutactur|ng |n tota| output,
w|thout count|ng tho ro|at|vo pr|co ottocts (to uso tho jargon,
|n corroot pr|cos), to|| by ovor 40 por cont botwoon 10bb and
1000 (trom 87 por cont to 21 por cont). |owovor, whon
tak|ng tho ro|at|vo pr|co ottocts |nto account, tho ta|| was on|y
by just ovor 10 por cont (trom 27 por cont to 24 por cont).
8
ln
othor words, tho roo| domand ottoct - that |s tho domand
ottoct attor tak|ng ro|at|vo pr|co changos |nto account - |s
sma||.
1hon why aro tho ro|at|vo pr|cos ot manutacturod goods
ta|||ng? lt |s bocauso manutactur|ng |ndustr|os tond to havo
tastor product|v|ty growth than sorv|cos. As tho output ot tho
manutactur|ng soctor |ncroasos tastor than tho output ot tho
sorv|co soctor, tho pr|cos ot tho manutacturod goods ro|at|vo
to thoso ot sorv|cos ta||. ln manutactur|ng, whoro
mochan|zat|on and tho uso ot chom|ca| procossos aro much
oas|or, |t |s oas|or to ra|so product|v|ty than |n sorv|cos. ln
contrast, by tho|r vory naturo, many sorv|co act|v|t|os aro
|nhoront|y |mporv|ous to product|v|ty |ncroaso wltboot
ol|otlog tbo qoo|lty o tbo proooct.
ln somo casos, tho vory attompt to |ncroaso product|v|ty
w||| dostroy tho product |tso|t. lt a str|ng quartot trots through
a twonty-sovon-m|nuto p|oco |n n|no m|nutos, wou|d you say
that |ts product|v|ty has trob|od?
|or somo othor sorv|cos, tho apparont h|ghor product|v|ty
|s duo to tho dobasomont ot tho product. A toachor can
ra|so hor apparont product|v|ty by tour t|mos by hav|ng tour
t|mos as many pup||s |n hor c|assroom, but tho qua||ty ot hor
'product' has boon d||utod by tho tact that sho cannot pay as
much |nd|v|dua| attont|on as botoro. A |ot ot tho |ncroasos |n
rota|| sorv|co product|v|ty |n countr|os such as tho U3 and
3r|ta|n has boon bought by |owor|ng tho qua||ty ot tho rota||
sorv|co |tso|t wh||o ostons|b|y ottor|ng choapor shoos, sotas
and app|os: thoro aro towor sa|os ass|stants at shoo storos,
so you wa|t twonty m|nutos |nstoad ot t|vo, you havo to wa|t
tour wooks, rathor than two, tor tho do||vory ot your now sota
and probab|y a|so havo to tako a day ott work bocauso thoy
w||| on|y do||vor 'somot|mo botwoon 8 a.m. and 0 p.m.', you
spond much moro t|mo than botoro dr|v|ng to tho now
supormarkot and wa|k|ng through tho now |ongor a|s|os
whon you got thoro, bocauso thoso app|os aro choapor than
|n tho o|d supormarkot on|y bocauso tho now supormarkot |s
|n tho m|dd|o ot nowhoro and thus can havo moro t|oor
spaco.
1horo aro somo sorv|co act|v|t|os, such as bank|ng,
wh|ch havo groator scopo tor product|v|ty |ncroaso than
othor sorv|cos. |owovor, as rovoa|od by tho 2008 t|nanc|a|
cr|s|s, much ot tho product|v|ty growth |n thoso act|v|t|os was
duo not to a roa| r|so |n tho|r product|v|ty (o.g., roduct|on |n
trad|ng costs duo to bottor computors) but to t|nanc|a|
|nnovat|ons that obscurod (rathor than gonu|no|y roducod)
tho r|sk|noss ot t|nanc|a| assots, thoroby a||ow|ng tho
t|nanc|a| soctor to grow at an unsusta|nab|y rap|d rato (soo
7blog 22).
1o sum up, tho ta|| |n tho sharo ot manutactur|ng |n tota|
output |n tho r|ch countr|os |s oot |argo|y duo to tho ta|| |n
(ro|at|vo) domand tor manutacturod goods, as many poop|o
th|nk. lor |s |t duo ma|n|y to tho r|so ot manutacturod oxports
trom Ch|na and othor dovo|op|ng countr|os, a|though that
has had b|g |mpacts on somo soctors. lt |s |nstoad tho ta|||ng
ro|at|vo pr|cos ot tho manutacturod goods duo to tastor
growth |n product|v|ty |n tho manutactur|ng soctor that |s tho
ma|n dr|vor ot tho do-|ndustr|a||zat|on procoss. 1hus, wh||o
tho c|t|zons ot tho r|ch countr|os may bo ||v|ng |n post-
|ndustr|a| soc|ot|os |n torms ot tho|r omp|oymoot, tho
|mportanco ot manutactur|ng |n torms ot proooctloo |n thoso
oconom|os has not boon d|m|n|shod to tho oxtont that wo
can doc|aro a post-|ndustr|a| ago.
8hould we worry about de-
IndustrIalIzatIon7

3ut |t do-|ndustr|a||zat|on |s duo to tho vory dynam|sm ot a
country's manutactur|ng soctor, |sn't |t a good th|ng?
lot nocossar||y. 1ho tact that do-|ndustr|a||zat|on |s
ma|n|y causod by tho comporotlvo dynam|sm ot tho
manutactur|ng soctor vls--vls tho sorv|co soctor doos not
to|| us anyth|ng about how wo|| |t |s do|ng comparod to |ts
countorparts |n othor countr|os. lt a country's manutactur|ng
soctor has s|owor product|v|ty growth than |ts countorparts |n
othor countr|os, |t w||| bocomo |ntornat|ona||y uncompot|t|vo,
|oad|ng to ba|anco ot paymonts prob|oms |n tho short run
and ta|||ng standards ot ||v|ng |n tho |ong torm. ln othor
words, do-|ndustr|a||zat|on may bo accompan|od by o|thor
oconom|c succoss or ta||uro. Countr|os shou|d not bo |u||od
|nto a ta|so sonso ot socur|ty by tho tact that do-
|ndustr|a||zat|on |s duo to comporotlvo dynam|sm ot tho
manutactur|ng soctor, as ovon a manutactur|ng soctor that |s
vory undynam|c by |ntornat|ona| standards can bo (and
usua||y |s) moro dynam|c than tho sorv|co soctor ot tho samo
country.
Whothor or not a country's manutactur|ng soctor |s
dynam|c by |ntornat|ona| standards, tho shr|nkago ot tho
ro|at|vo wo|ght ot tho manutactur|ng soctor has a nogat|vo
|mpact on product|v|ty growth. As tho oconomy bocomos
dom|natod by tho sorv|co soctor, whoro product|v|ty growth
|s s|owor, product|v|ty growth tor tho who|o oconomy w||| s|ow
down. Un|oss wo bo||ovo (as somo do) that tho countr|os
oxpor|onc|ng do-|ndustr|a||zat|on aro now r|ch onough not to
nood moro product|v|ty growth, product|v|ty s|owdown |s
somoth|ng that countr|os shou|d got worr|od about - or at
|oast roconc||o thomso|vos to.
0o-|ndustr|a||zat|on a|so has a nogat|vo ottoct on a
country's ba|anco ot paymonts bocauso sorv|cos aro
|nhoront|y moro d|tt|cu|t to oxport than manutacturod goods.
A ba|anco ot paymonts dot|c|t moans that tho country cannot
'pay |ts way' |n tho wor|d. Ot courso, a country can p|ug tho
ho|o through toro|gn borrow|ng tor a wh||o, but ovontua||y |t
w||| havo to |owor tho va|uo ot |ts curroncy, thoroby roduc|ng
|ts ab|||ty to |mport and thus |ts ||v|ng standard.
At tho root ot tho |ow 'tradab|||ty' ot sorv|cos ||os tho tact
that, un||ko manutacturod goods that can bo sh|ppod
anywhoro |n tho wor|d, most sorv|cos roqu|ro tho|r prov|dors
and consumors to bo |n tho samo |ocat|on. lo ono has yot
|nvontod ways to prov|do a ha|rcut or houso-c|oan|ng |ong-
d|stanco. Obv|ous|y, th|s prob|om w||| bo so|vod |t tho sorv|co
prov|dor (tho ha|rdrossor or tho c|oanor |n tho abovo
oxamp|os) can movo to tho customor's country, but that |n
most casos moans |mm|grat|on, wh|ch most countr|os
rostr|ct hoav||y (soo 7blog 8). G|von th|s, a r|s|ng sharo ot
sorv|cos |n tho oconomy moans that tho country, othor th|ngs
bo|ng oqua|, w||| havo |owor oxport oarn|ngs. Un|oss tho
oxports ot manutacturod goods r|so d|sproport|onato|y, tho
country won't bo ab|o to pay tor tho samo amount ot |mports
as botoro. lt |ts do-|ndustr|a||zat|on |s ot a nogat|vo k|nd
accompan|od by woakon|ng |ntornat|ona| compot|t|vonoss,
tho ba|anco ot paymonts prob|om cou|d bo ovon moro
sor|ous, as tho manutactur|ng soctor thon won't bo ab|o to
|ncroaso |ts oxports.
lot a|| sorv|cos aro oqua||y non-tradab|o. 1ho know|odgo-
basod sorv|cos that l mont|onod oar||or - bank|ng,
consu|t|ng, ong|noor|ng, and so on - aro h|gh|y tradab|o. |or
oxamp|o, |n 3r|ta|n s|nco tho 1000s, oxports ot know|odgo-
basod sorv|cos havo p|ayod a cruc|a| ro|o |n p|ugg|ng tho
ba|anco ot paymonts gap |ott boh|nd by do-|ndustr|a||zat|on
(and tho ta|| |n lorth 3oa o|| oxports, wh|ch had onab|od tho
country - just - to surv|vo tho nogat|vo ba|anco ot paymonts
consoquoncos ot do-|ndustr|a||zat|on dur|ng tho 1080s).
|owovor, ovon |n 3r|ta|n, wh|ch |s most advancod |n tho
oxports ot thoso know|odgo-basod sorv|cos, tho ba|anco ot
paymonts surp|us gonoratod by thoso sorv|cos |s wo|| bo|ow
4 por cont ot G0l, just onough to covor tho country's
manutactur|ng trado dot|c|ts. W|th tho ||ko|y strongthon|ng ot
g|oba| t|nanc|a| rogu|at|on as a consoquonco ot tho 2008
wor|d t|nanc|a| cr|s|s, |t |s un||ko|y that 3r|ta|n can ma|nta|n
th|s |ovo| ot trado surp|us |n t|nanco and othor know|odgo-
basod sorv|cos |n tho tuturo. ln tho caso ot tho U3,
supposod|y anothor modo| post-|ndustr|a| oconomy, tho
trado surp|us |n know|odgo-basod sorv|cos |s actua||y |oss
than 1 por cont ot G0l - nowhoro noar onough to mako up
tor |ts manutactur|ng trado dot|c|ts, wh|ch aro around 4 por
cont ot G0l.
4
1ho U3 has boon ab|o to ma|nta|n such a
|argo manutactur|ng trado dot|c|t on|y bocauso |t cou|d
borrow hoav||y trom abroad - an ab|||ty that can on|y shr|nk
|n tho com|ng yoars, g|von tho changos |n tho wor|d
oconomy - and not bocauso tho sorv|co soctor stoppod |n to
t||| tho gap, as |n tho 3r|t|sh caso. Voroovor, |t |s
quost|onab|o whothor tho strongths ot tho U3 and 3r|ta|n |n
tho know|odgo-basod sorv|cos can bo ma|nta|nod ovor t|mo.
ln sorv|cos such as ong|noor|ng and dos|gn, whoro |ns|ghts
ga|nod trom tho product|on procoss aro cruc|a|, a
cont|nuous shr|nkago ot tho |ndustr|a| baso w||| |oad to a
doc||no |n tho qua||ty ot tho|r (sorv|co) products and a
consoquont |oss |n oxport oarn|ngs.
lt 3r|ta|n and tho U3 - two countr|os that aro supposod to
bo tho most dovo|opod |n tho know|odgo-basod sorv|cos -
aro un||ko|y to moot tho|r ba|anco ot paymonts noods |n tho
|ong run through tho oxports ot thoso sorv|cos, |t |s h|gh|y
un||ko|y that othor countr|os can.
Post-IndustrIal |antasIes

3o||ov|ng do-|ndustr|a||zat|on to bo tho rosu|t ot tho chango
ot our ong|no ot growth trom manutactur|ng to sorv|cos,
somo havo arguod that dovo|op|ng countr|os can |argo|y
sk|p |ndustr|a||zat|on and movo d|roct|y to tho sorv|co
oconomy. Espoc|a||y w|th tho r|so ot sorv|co ottshor|ng, th|s
v|ow has bocomo vory popu|ar among somo obsorvors ot
lnd|a. |orgot a|| thoso po||ut|ng |ndustr|os, thoy say, why not
go trom agr|cu|turo to sorv|cos d|roct|y? lt Ch|na |s tho
workshop ot tho wor|d, tho argumont goos, lnd|a shou|d try to
bocomo tho 'ott|co ot tho wor|d'.
|owovor, |t |s a tantasy to th|nk that a poor country can
dovo|op ma|n|y on tho bas|s ot tho sorv|co soctor. As
po|ntod out oar||or, tho manutactur|ng soctor has an
|nhoront|y tastor product|v|ty growth than tho sorv|co soctor.
1o bo suro, thoro aro somo sorv|co |ndustr|os that havo
rap|d product|v|ty growth potont|a|, notab|y tho know|odgo-
basod sorv|cos that l mont|onod abovo. |owovor, thoso aro
sorv|co act|v|t|os that ma|n|y sorvo manutactur|ng t|rms, so |t
|s vory d|tt|cu|t to dovo|op thoso |ndustr|os w|thout t|rst
dovo|op|ng a strong manutactur|ng baso. lt you baso your
dovo|opmont |argo|y on sorv|cos trom oar|y on, your |ong-
torm product|v|ty growth rato |s go|ng to bo much s|owor than
whon you baso |t on manutactur|ng.
Voroovor, wo havo a|roady soon that, g|von that sorv|cos
aro much |oss tradab|o, countr|os spoc|a||z|ng |n sorv|cos
aro ||ko|y to taco much moro sor|ous ba|anco ot paymonts
prob|oms than countr|os that spoc|a||zo |n manutactur|ng.
1h|s |s bad onough tor a dovo|opod country, whoro ba|anco
ot paymonts prob|oms w||| |owor standards ot ||v|ng |n tho
|ong run. |owovor, |t |s sor|ous|y dotr|monta| tor a
dovo|op|ng country. 1ho po|nt |s that, |n ordor to dovo|op, a
dovo|op|ng country has to |mport supor|or tochno|og|os trom
abroad (o|thor |n tho torm ot mach|nos or |n tho torm ot
tochno|ogy ||cons|ng). 1horotoro, whon |t has a ba|anco ot
paymonts prob|om, |ts vory ab|||ty to upgrado and thus
dovo|op |ts oconomy by dop|oy|ng supor|or tochno|og|os |s
hamporod.
As l say thoso nogat|vo th|ngs about oconom|c
dovo|opmont stratog|os basod on sorv|cos, somo ot you
may say: what about countr|os ||ko 3w|tzor|and and
3|ngaporo? |avon't thoy dovo|opod on tho bas|s ot
sorv|cos?
|owovor, thoso oconom|os aro not what thoy aro
roportod to bo o|thor. 1hoy aro |n tact manutactur|ng
succoss stor|os. |or oxamp|o, many poop|o th|nk that
3w|tzor|and ||vos ott tho sto|on monoy dopos|tod |n |ts banks
by 1h|rd Wor|d d|ctators or by so|||ng cowbo||s and cuckoo
c|ocks to 1apanoso and Amor|can tour|sts, but |t |s actua||y
ono ot tho most |ndustr|a||zod oconom|os |n tho wor|d. Wo
don't soo many 3w|ss manutacturod products around
bocauso tho country |s sma|| (around 7 m||||on poop|o),
wh|ch makos tho tota| amount ot 3w|ss manutacturod goods
rathor sma||, and bocauso |ts producors spoc|a||zo |n
producor goods, such as mach|nory and |ndustr|a|
chom|ca|s, rathor than consumor goods that aro moro
v|s|b|o. 3ut |n por cap|ta torms, 3w|tzor|and has tho h|ghost
|ndustr|a| output |n tho wor|d (|t cou|d como socond attor
1apan, dopond|ng on tho yoar and tho data you |ook at).
3|ngaporo |s a|so ono ot tho t|vo most |ndustr|a||zod
oconom|os |n tho wor|d (onco aga|n, moasurod |n torms ot
manutactur|ng va|uo-addod por hoad). ||n|and and 3wodon
mako up tho rost ot tho top t|vo. lndood, oxcopt tor a tow
p|acos such as tho 3oycho||os that has a vory sma||
popu|at|on and oxcopt|ona| rosourcos tor tour|sm (8b,000
poop|o w|th around $0,000 por cap|ta |ncomo), no country
has so tar ach|ovod ovon a docont (not to spoak ot h|gh)
||v|ng standard by ro|y|ng on sorv|cos and nono w||| do so |n
tho tuturo.
1o sum up, ovon tho r|ch countr|os havo not bocomo
unoqu|voca||y post-|ndustr|a|. Wh||o most poop|o |n thoso
countr|os do not work |n tactor|os any moro, tho
manutactur|ng soctor's |mportanco |n tho|r product|on
systoms has not ta||on vory much, onco wo tako |nto account
tho ro|at|vo pr|co ottocts. 3ut ovon |t do-|ndustr|a||zat|on |s
not nocossar||y a symptom ot |ndustr|a| doc||no (a|though |t
otton |s), |t has nogat|vo ottocts tor |ong-torm product|v|ty
growth and tho ba|anco ot paymonts, both ot wh|ch nood
rockon|ng. 1ho myth that wo now ||vo |n a post-|ndustr|a| ago
has mado many govornmonts |gnoro tho nogat|vo
consoquoncos ot do-|ndustr|a||zat|on.
As tor tho dovo|op|ng countr|os, |t |s a tantasy to th|nk that
thoy can sk|p |ndustr|a||zat|on and bu||d prospor|ty on tho
bas|s ot sorv|co |ndustr|os. Vost sorv|cos havo s|ow
product|v|ty growth and most ot thoso sorv|cos that havo
h|gh product|v|ty growth aro sorv|cos that cannot bo
dovo|opod w|thout a strong manutactur|ng soctor. low
tradab|||ty ot sorv|cos moans that a dovo|op|ng country
spoc|a||z|ng |n sorv|cos w||| taco a b|ggor ba|anco ot
paymonts prob|om, wh|ch tor a dovo|op|ng country moans a
roduct|on |n |ts ab|||ty to upgrado |ts oconomy. lost-
|ndustr|a| tantas|os aro bad onough tor tho r|ch countr|os, but
thoy aro pos|t|vo|y dangorous tor dovo|op|ng countr|os.
1hing 10
1ho u5 dooa not havo tho
highoat Iiving atandard in tho
worId

What they tell you

0osp|to |ts rocont oconom|c prob|oms, tho U3 st||| onjoys
tho h|ghost standard ot ||v|ng |n tho wor|d. At markot
oxchango ratos, thoro aro sovora| countr|os that havo a
h|ghor por cap|ta |ncomo than tho U3. |owovor, |t wo
cons|dor tho tact that tho samo do||ar (or whatovor common
curroncy wo chooso) can buy moro goods and sorv|cos |n
tho U3 than |n othor r|ch countr|os, tho U3 turns out to havo
tho h|ghost ||v|ng standard |n tho wor|d, barr|ng tho m|n|-c|ty-
stato ot luxomburg. 1h|s |s why othor countr|os sook to
omu|ato tho U3, |||ustrat|ng tho supor|or|ty ot tho troo-markot
systom, wh|ch tho U3 most c|oso|y (|t not portoct|y)
roprosonts.
What they don't tell you

1ho avorago U3 c|t|zon doos havo groator command ovor
goods and sorv|cos than h|s countorpart |n any othor country
|n tho wor|d oxcopt luxomburg. |owovor, g|von tho country's
h|gh |noqua||ty, th|s avorago |s |oss accurato |n roprosont|ng
how poop|o ||vo than tho avoragos tor othor countr|os w|th a
moro oqua| |ncomo d|str|but|on. ||ghor |noqua||ty |s a|so
boh|nd tho pooror hoa|th |nd|cators and worso cr|mo
stat|st|cs ot tho U3. Voroovor, tho samo do||ar buys moro
th|ngs |n tho U3 than |n most othor r|ch countr|os ma|n|y
bocauso |t has choapor sorv|cos than |n othor comparab|o
countr|os, thanks to h|ghor |mm|grat|on and pooror
omp|oymont cond|t|ons. |urthormoro, Amor|cans work
cons|dorab|y |ongor than Europoans. lor hour workod, tho|r
command ovor goods and sorv|cos |s sma||or than that ot
sovora| Europoan countr|os. Wh||o wo can dobato wh|ch |s a
bottor ||tosty|o - moro mator|a| goods w|th |oss |o|suro t|mo
(as |n tho U3) or towor mator|a| goods w|th moro |o|suro
t|mo (as |n Europo) - th|s suggosts that tho U3 doos not
havo an unamb|guous|y h|ghor ||v|ng standard than
comparab|o countr|os.
1he roads are not paved wIth gold

3otwoon 1880 and 1014, noar|y 8 m||||on lta||ans m|gratod
to tho U3. Whon thoy arr|vod, many ot thom woro b|ttor|y
d|sappo|ntod. 1ho|r now homo was not tho parad|so thoy
had thought |t wou|d bo. lt |s sa|d that many ot thom wroto
back homo, say|ng 'not on|y aro tho roads not pavod w|th
go|d, thoy aro not pavod at a||, |n tact, wo aro tho onos who
aro supposod to pavo thom'.
1hoso lta||an |mm|grants woro not a|ono |n th|nk|ng that
tho U3 |s whoro droams como truo. 1ho U3 bocamo tho
r|chost country |n tho wor|d on|y around 1000, but ovon |n tho
oar|y days ot |ts ox|stonco, |t had a strong ho|d on tho
|mag|nat|on ot poor poop|o o|sowhoro. ln tho oar|y
n|notoonth contury, U3 por cap|ta |ncomo was st||| on|y
around tho Europoan avorago and somoth|ng ||ko b0 por
cont |owor than that ot 3r|ta|n and tho lothor|ands. 3ut poor
Europoans st||| wantod to movo thoro bocauso tho country
had an a|most un||m|tod supp|y ot |and (wo||, |t you woro
w||||ng to push out a tow nat|vo Amor|cans) and an acuto
|abour shortago, wh|ch moant wagos throo or tour t|mos
h|ghor than thoso |n Europo (soo 7blog 7). Vost |mportant|y,
tho |ack ot touda| |ogacy moant that tho country had much
h|ghor soc|a| mob|||ty than tho O|d Wor|d countr|os, as
co|obratod |n tho |doa ot tho Amor|can droam.
lt |s not just prospoct|vo |mm|grants who aro attractod to
tho U3. Espoc|a||y |n tho |ast tow docados, bus|nossmon
and po||cy-makors around tho wor|d havo wantod, and otton
tr|od, to omu|ato tho U3 oconom|c modo|. lts troo ontorpr|so
systom, accord|ng to adm|rors ot tho U3 modo|, |ots poop|o
compoto w|thout ||m|ts and rowards tho w|nnors w|thout
rostr|ct|ons |mposod by tho govornmont or by m|sgu|dod
oga||tar|an cu|turo. 1ho systom thorotoro croatos
oxcopt|ona||y strong |ncont|vos tor ontropronoursh|p and
|nnovat|on. lts troo |abour markot, w|th oasy h|r|ng and t|r|ng,
a||ows |ts ontorpr|sos to bo ag||o and thus moro compot|t|vo,
as thoy can rodop|oy tho|r workors moro qu|ck|y than tho|r
compot|tors, |n rosponso to chang|ng markot cond|t|ons.
W|th ontropronours r|ch|y rowardod and workors hav|ng to
adapt qu|ck|y, tho systom doos croato h|gh |noqua||ty.
|owovor, |ts propononts arguo, ovon tho '|osors' |n th|s
gamo w||||ng|y accopt such outcomos bocauso, g|von tho
country's h|gh soc|a| mob|||ty, tho|r own ch||dron cou|d bo tho
noxt 1homas Ed|son, 1. l. Vorgan or 3||| Gatos. W|th such
|ncont|vos to work hard and oxorc|so |ngonu|ty, no wondor
tho country has boon tho r|chost |n tho wor|d tor tho |ast
contury.
AmerIcans just lIve better .

Actua||y, th|s |s not qu|to truo. 1ho U3 |s not tho r|chost
country |n tho wor|d any moro. low sovora| Europoan
countr|os havo h|ghor por cap|ta |ncomos. 1ho Wor|d 3ank
data to|| us that tho por cap|ta |ncomo ot tho U3 |n 2007 was
$40,040. 1horo woro sovon countr|os w|th h|ghor por cap|ta
|ncomo |n U3 do||ar torms - start|ng w|th lorway ($70,4b0)
at tho top, through luxomburg, 3w|tzor|and, 0onmark,
lco|and, lro|and and ond|ng w|th 3wodon ($40,000).
0|scount|ng tho two m|n|-statos ot lco|and (811,000 poop|o)
and luxomburg (480,000 poop|o), th|s makos tho U3 on|y
tho s|xth r|chost country |n tho wor|d.
3ut, somo ot you may say, that cannot bo r|ght. Whon you
go to tho U3, you just soo that poop|o thoro ||vo bottor than
tho lorwog|ans or tho 3w|ss do.
Ono roason why wo got that |mpross|on |s that tho U3 |s
much moro unoqua| than tho Europoan countr|os and
thorotoro |ooks moro prosporous to toro|gn v|s|tors than |t
roa||y |s - toro|gn v|s|tors to any country raro|y got to soo tho
dopr|vod parts, ot wh|ch tho U3 has many moro than
Europo. 3ut ovon |gnor|ng th|s |noqua||ty tactor, thoro |s a
good roason why most poop|o th|nk that tho U3 has a h|ghor
||v|ng standard than Europoan countr|os.
You may havo pa|d 8b 3w|ss trancs, or $8b, tor a b-m||o
(or 8-km) tax| r|do |n Gonova, whon a s|m||ar r|do |n 3oston
wou|d havo cost you around $1b. ln Os|o, you may havo pa|d
bb0 kronor, or $100, tor a d|nnor that cou|d not poss|b|y
havo boon moro than $b0, or 27b kronor, |n 3t lou|s. 1ho
rovorso wou|d havo boon tho caso |t you had changod your
do||ars |nto 1ha| baht or Vox|can posos on your ho||days.
|av|ng your s|xth back massago ot tho wook or ordor|ng tho
th|rd margar|ta botoro d|nnor, you wou|d havo to|t as |t your
$100 had boon strotchod |nto $200, or ovon $800 (or was
that tho a|coho|?). lt markot oxchango ratos accurato|y
rot|octod d|ttoroncos |n ||v|ng standards botwoon countr|os,
thoso k|nds ot th|ngs shou|d not happon.
Why aro thoro such hugo d|ttoroncos botwoon tho th|ngs
that you can buy |n d|ttoront countr|os w|th what shou|d bo
tho samo sums ot monoy? 3uch d|ttoroncos ox|st bas|ca||y
bocauso markot oxchango ratos aro |argo|y dotorm|nod by
tho supp|y and domand tor |ntornat|ona||y tradod goods and
sorv|cos (a|though |n tho short run curroncy spocu|at|on can
|nt|uonco markot oxchango ratos), wh||o what a sum ot
monoy can buy |n a part|cu|ar country |s dotorm|nod by tho
pr|cos ot a|| goods and sorv|cos, and not just thoso that aro
|ntornat|ona||y tradod.
1ho most |mportant among tho non-tradod th|ngs aro
porson-to-porson |abour sorv|cos, such as dr|v|ng tax|s and
sorv|ng moa|s |n rostaurants. 1rado |n such sorv|cos
roqu|ros |ntornat|ona| m|grat|on, but that |s sovoro|y ||m|tod
by |mm|grat|on contro|, so tho pr|cos ot such |abour sorv|cos
ond up bo|ng hugo|y d|ttoront across countr|os (soo 7blogs
8 ooo 0). ln othor words, th|ngs such as tax| r|dos and moa|s
aro oxpons|vo |n countr|os such as 3w|tzor|and and lorway
bocauso thoy havo oxpons|vo workors. 1hoy aro choap |n
countr|os w|th choap workors, such as Vox|co and 1ha||and.
Whon |t comos to |ntornat|ona||y tradod th|ngs such as 1vs
or mob||o phonos, tho|r pr|cos aro bas|ca||y tho samo |n a||
countr|os, r|ch and poor.
ln ordor to tako |nto account tho d|ttoront|a| pr|cos ot non-
tradod goods and sorv|cos across countr|os, oconom|sts
havo como up w|th tho |doa ot an '|ntornat|ona| do||ar'.
3asod on tho not|on ot purchas|ng powor par|ty (lll) - that
|s, moasur|ng tho va|uo ot a curroncy accord|ng to how much
ot a common consumpt|on baskot |t can buy |n d|ttoront
countr|os - th|s t|ct|t|ous curroncy a||ows us to convort
|ncomos ot d|ttoront countr|os |nto a common moasuro ot
||v|ng standards.
1ho rosu|t ot convort|ng tho |ncomos ot d|ttoront countr|os
|nto tho |ntornat|ona| do||ar |s that tho |ncomos ot r|ch
countr|os tond to bocomo |owor than tho|r |ncomos at markot
oxchango ratos, wh||o thoso ot poor countr|os tond to
bocomo h|ghor. 1h|s |s bocauso a |ot ot what wo consumo |s
sorv|cos, wh|ch aro much moro oxpons|vo |n tho r|ch
countr|os. ln somo casos, tho d|ttoronco botwoon markot
oxchango rato |ncomo and lll |ncomo |s not groat.
Accord|ng to tho Wor|d 3ank data, tho markot oxchango
rato |ncomo ot tho U3 was $40,040 |n 2007, wh||o |ts lll
|ncomo was moro or |oss tho samo at $4b,8b0. ln tho caso
ot Gormany, tho d|ttoronco botwoon tho two was groator, at
$88,800 vs. $88,820 (a 1b por cont d|ttoronco, so to spoak,
a|though wo cannot roa||y comparo tho two numbors th|s
d|roct|y). ln tho caso ot 0onmark, tho d|ttoronco was noar|y
b0 por cont ($b4,010 vs. $80,740). ln contrast, Ch|na's 2007
|ncomo moro than doub|os trom $2,800 to $b,870 and
lnd|a's by noar|y throo t|mos trom $0b0 to $2,740, whon
ca|cu|atod |n lll torms.
low, tho ca|cu|at|on ot oach curroncy's oxchango rato
w|th tho (t|ct|t|ous) |ntornat|ona| do||ar |s not a stra|ghttorward
atta|r, not |oast bocauso wo havo to assumo that a||
countr|os consumo tho samo baskot ot goods and sorv|cos,
wh|ch |s patont|y not tho caso. 1h|s makos tho lll |ncomos
oxtromo|y sons|t|vo to tho mothodo|og|os and tho data usod.
|or oxamp|o, whon tho Wor|d 3ank changod |ts mothod ot
ost|mat|ng lll |ncomos |n 2007, Ch|na's lll |ncomo por
cap|ta to|| by 44 por cont (trom $7,740 to $b,870), wh||o
3|ngaporo's roso by b8 por cont (trom $81,710 to $48,b20)
ovorn|ght.
0osp|to thoso ||m|ts, a country's |ncomo |n |ntornat|ona|
do||ars probab|y g|vos us a bottor |doa ot |ts ||v|ng standard
than doos |ts do||ar |ncomo at tho markot oxchango rato.
And |t wo ca|cu|ato |ncomos ot d|ttoront countr|os |n
|ntornat|ona| do||ars, tho U3 (a|most) comos back to tho top
ot tho wor|d. lt doponds on tho ost|mato, but luxomburg |s
tho on|y country that has a h|ghor lll |ncomo por cap|ta
than that ot tho U3 |n a|| ost|matos. 3o, as |ong as wo sot
as|do tho t|ny c|ty-stato ot luxomburg, w|th |oss than ha|t a
m||||on poop|o, tho avorago U3 c|t|zon can buy tho |argost
amount ot goods and sorv|cos |n tho wor|d w|th hor |ncomo.
0oos th|s a||ow us to say that tho U3 has tho h|ghost
||v|ng standard |n tho wor|d? lorhaps. 3ut thoro aro qu|to a
tow th|ngs wo havo to cons|dor botoro wo jump to that
conc|us|on.
. or do they7

1o bog|n w|th, hav|ng a h|ghor ovorogo |ncomo than othor
countr|os doos not nocossar||y moan that a|| U3 c|t|zons ||vo
bottor than tho|r toro|gn countorparts. Whothor th|s |s tho
caso doponds on tho d|str|but|on ot |ncomo. Ot courso, |n no
country doos tho avorago |ncomo g|vo tho r|ght p|cturo ot
how poop|o ||vo, but |n a country w|th h|ghor |noqua||ty |t |s
||ko|y to bo part|cu|ar|y m|s|oad|ng. G|von that tho U3 has by
tar tho most unoqua| d|str|but|on ot |ncomo among tho r|ch
countr|os, wo can sato|y guoss that tho U3 por cap|ta
|ncomo ovorstatos tho actua| ||v|ng standards ot moro ot |ts
c|t|zons than |n othor countr|os. And th|s conjocturo |s
|nd|roct|y supportod by othor |nd|cators ot ||v|ng standards.
|or oxamp|o, dosp|to hav|ng tho h|ghost avorago lll
|ncomo, tho U3 ranks on|y around th|rt|oth |n tho wor|d |n
hoa|th stat|st|cs such as ||to oxpoctancy and |ntant morta||ty
(OK, tho |nott|c|oncy ot tho U3 hoa|thcaro systom contr|butos
to |t, but |ot's not got |nto that). 1ho much h|ghor cr|mo rato
than |n Europo or 1apan - |n por cap|ta torms, tho U3 has
o|ght t|mos moro poop|o |n pr|son than Europo and two|vo
t|mos moro than 1apan - shows that thoro |s a tar b|ggor
undorc|ass |n tho U3.
3ocond, tho vory tact that |ts lll |ncomo |s moro or |oss
tho samo as |ts markot oxchango rato |ncomo |s proot that
tho h|ghor avorago ||v|ng standard |n tho U3 |s bu||t on tho
povorty ot many. What do l moan by th|s? As l havo po|ntod
out oar||or, |t |s norma| tor a r|ch country's lll |ncomo to bo
|owor, somot|mos s|gn|t|cant|y, than |ts markot oxchango
rato |ncomo, bocauso |t has oxpons|vo sorv|co workors.
|owovor, th|s doos not happon to tho U3, bocauso, un||ko
othor r|ch countr|os, |t has choap sorv|co workors. 1o bog|n
w|th, thoro |s a |argo |nt|ow ot |ow-wago |mm|grants trom
poor countr|os, many ot thom |||oga|, wh|ch makos thom
ovon choapor. Voroovor, ovon tho nat|vo workors havo
much woakor ta||back pos|t|ons |n tho U3 than |n Europoan
countr|os ot comparab|o |ncomo |ovo|. 3ocauso thoy havo
much |oss job socur|ty and woakor wo|taro supports, U3
workors, ospoc|a||y tho non-un|on|zod onos |n tho sorv|co
|ndustr|os, work tor |owor wagos and undor |ntor|or
cond|t|ons than do tho|r Europoan countorparts. 1h|s |s why
th|ngs ||ko tax| r|dos and moa|s at rostaurants aro so much
choapor |n tho U3 than |n othor r|ch countr|os. 1h|s |s groat
whon you aro tho customor, but not |t you aro tho tax| dr|vor
or tho wa|tross. ln othor words, tho h|ghor purchas|ng powor
ot avorago U3 |ncomo |s bought at tho pr|co ot |owor
|ncomo and |ntor|or work|ng cond|t|ons tor many U3 c|t|zons.
last but not |oast, |n compar|ng ||v|ng standards across
countr|os, wo shou|d not |gnoro tho d|ttoroncos |n work|ng
hours. Evon |t somoono |s oarn|ng b0 por cont moro monoy
than l oarn, you wou|dn't say that ho has a h|ghor ||v|ng
standard than l do, |t that porson has to work doub|o tho
numbor ot hours that l do. 1ho samo app||os to tho U3. 1ho
Amor|cans, bot|tt|ng tho|r roputat|on tor workaho||sm, work
|ongor hours than tho c|t|zons ot any othor country that has a
por cap|ta |ncomo ot moro than $80,000 at markot
oxchango rato |n 2007 (Grooco bo|ng tho poorost ot tho |ot,
at just undor $80,000 por cap|ta |ncomo). Amor|cans work
10 por cont |ongor than most Europoans and around 80 por
cont |ongor than tho 0utch and tho lorwog|ans. Accord|ng
to a ca|cu|at|on by tho lco|and|c oconom|st 1horva|dur
Gy|tason, |n torms ot |ncomo (|n lll torms) por hour
workod |n 200b, tho U3 rankod on|y o|ghth - attor
luxomburg, lorway, |ranco (yos, |ranco, that nat|on ot
|oungors), lro|and, 3o|g|um, Austr|a, and tho lothor|ands -
and was vory c|oso|y to||owod by Gormany.
1
ln othor words,
por un|t ot ottort, tho Amor|cans aro not gott|ng as h|gh a
||v|ng standard as tho|r countorparts |n compot|tor nat|ons.
1hoy mako up tor th|s |owor product|v|ty through much |ongor
hours.
low, |t |s portoct|y roasonab|o tor somoono to arguo that
sho wants to work |ongor hours |t that |s nocossary to havo a
h|ghor |ncomo - sho wou|d rathor havo anothor 1v than ono
moro wook ot ho||day. And who am l, or anyono o|so, to say
that tho porson got hor pr|or|ty wrong?
|owovor, |t |s st||| |og|t|mato to ask whothor poop|o who
work |ongor hours ovon at vory h|gh |ovo|s ot |ncomo aro
do|ng tho r|ght th|ng. Vost poop|o wou|d agroo that, at a |ow
|ovo| ot |ncomo, an |ncroaso |n |ncomo |s ||ko|y to |mprovo
your qua||ty ot ||to, ovon |t |t moans |ongor work|ng hours. At
th|s |ovo|, ovon |t you havo to work |ongor |n your tactory,
h|ghor |ncomo |s ||ko|y to br|ng a h|ghor ovora|| qua||ty ot ||to,
by |mprov|ng your hoa|th (through bottor tood, hoat|ng,
hyg|ono and hoa|thcaro) and by roduc|ng tho phys|ca|
domands ot housoho|d work (through moro housoho|d
app||ancos, p|pod wator, gas and o|octr|c|ty - soo 7blog 4).
|owovor, abovo a corta|n |ovo| ot |ncomo, tho ro|at|vo va|uo
ot mator|a| consumpt|on vls--vls |o|suro t|mo |s d|m|n|shod,
so oarn|ng a h|ghor |ncomo at tho cost ot work|ng |ongor
hours may roduco tho qua||ty ot your ||to.
Voro |mportant|y, tho tact that tho c|t|zons ot a country
work |ongor than othors |n comparab|o countr|os doos not
nocossar||y moan that thoy |lko work|ng |ongor hours. 1hoy
may bo compo||od to work |ong hours, ovon |t thoy actua||y
want to tako |ongor ho||days. As l po|ntod out abovo, how
|ong a porson works |s attoctod not on|y by h|s own
protoronco rogard|ng work - |o|suro ba|anco but a|so by
th|ngs such as wo|taro prov|s|on, protoct|on ot workor r|ghts
and un|on powor. lnd|v|dua|s havo to tako thoso th|ngs as
g|von, but nat|ons havo a cho|co ovor thom. 1hoy can rowr|to
tho |abour |aws, boot up tho wo|taro stato and ottoct othor
po||cy changos to mako |t |oss nocossary tor |nd|v|dua|s to
work |ong hours.
Vuch ot tho support tor tho Amor|can modo| has boon
basod on tho 'tact' that tho U3 has tho h|ghost ||v|ng
standard |n tho wor|d. Wh||o thoro |s no quost|on that tho U3
has ono ot tho h|ghost ||v|ng standards |n tho wor|d, |ts
a||ogod supor|or|ty |ooks much woakor onco wo havo a
broador concopt|on ot ||v|ng standards than what tho
avorago |ncomo ot a country w||| buy. ||ghor |noqua||ty |n tho
U3 moans that |ts avorago |ncomo |s |oss |nd|cat|vo ot tho
||v|ng standards ot |ts c|t|zons than |n othor countr|os. 1h|s |s
rot|octod |n |nd|cators such as hoa|th and cr|mo, whoro tho
U3 portorms much worso than comparab|o countr|os. 1ho
h|ghor purchas|ng powor ot U3 c|t|zons (comparod to tho
c|t|zons ot othor r|ch countr|os) |s owod |n |argo part to tho
povorty and |nsocur|ty ot many ot tho|r to||ow c|t|zons,
ospoc|a||y |n sorv|co |ndustr|os. 1ho Amor|cans a|so work
cons|dorab|y |ongor than tho|r countorparts |n compot|tor
nat|ons. lor hour workod, U3 |ncomo |s |owor than that ot
sovora| Europoan countr|os, ovon |n purchas|ng powor
torms. lt |s dobatab|o that that can bo doscr|bod as hav|ng a
h|ghor ||v|ng standard.
1horo |s no s|mp|o way to comparo ||v|ng standards
across countr|os. lor cap|ta |ncomo, ospoc|a||y |n
purchas|ng powor torms, |s arguab|y tho most ro||ab|o
|nd|cator. |owovor, by tocus|ng just on how many goods and
sorv|cos our |ncomo can buy, wo m|ss out a |ot ot othor
th|ngs that const|tuto o|omonts ot tho 'good ||to', such as tho
amount ot qua||ty |o|suro t|mo, job socur|ty, troodom trom
cr|mo, accoss to hoa|thcaro, soc|a| wo|taro prov|s|ons, and
so on. Wh||o d|ttoront |nd|v|dua|s and countr|os w||| dot|n|to|y
havo d|ttoront v|ows on how to wo|gh thoso |nd|cators
aga|nst oach othor and aga|nst |ncomo t|guros, non-|ncomo
d|mons|ons shou|d not bo |gnorod, |t wo aro to bu||d
soc|ot|os whoro poop|o gonu|no|y '||vo wo||'.
1hing 11
Atrica ia not doatinod tor
undordovoIomont

What they tell you

Atr|ca |s dost|nod tor undordovo|opmont. lt has a poor
c||mato, wh|ch |oads to sor|ous trop|ca| d|soaso prob|oms. lt
has |ousy goography, w|th many ot |ts countr|os |and|ockod
and surroundod by countr|os whoso sma|| markots ottor
||m|tod oxport opportun|t|os and whoso v|o|ont cont||cts sp|||
|nto no|ghbour|ng countr|os. lt has too many natura|
rosourcos, wh|ch mako |ts poop|o |azy, corrupt and cont||ct-
prono. Atr|can nat|ons aro othn|ca||y d|v|dod, wh|ch rondors
thom d|tt|cu|t to manago and moro ||ko|y to oxpor|onco
v|o|ont cont||cts. 1hoy havo poor-qua||ty |nst|tut|ons that do
not protoct |nvostors wo||. 1ho|r cu|turo |s bad - poop|o do
not work hard, thoy do not savo and thoy cannot cooporato
w|th oach othor. A|| thoso structura| hand|caps oxp|a|n why,
un||ko othor rog|ons ot tho wor|d, tho cont|nont has ta||od to
grow ovon attor |t has |mp|omontod s|gn|t|cant markot
||bora||zat|on s|nco tho 1080s. 1horo |s no othor way torward
tor Atr|ca than bo|ng proppod up by toro|gn a|d.
What they don't tell you

Atr|ca has oot a|ways boon stagnant. ln tho 1000s and 70s,
whon a|| tho supposod structura| |mpod|monts to growth
woro prosont and otton moro b|nd|ng, |t actua||y postod a
docont growth portormanco. Voroovor, a|| tho structura|
hand|caps that aro supposod to ho|d back Atr|ca havo boon
prosont |n most ot today's r|ch countr|os - poor c||mato
(arct|c and trop|ca|), |and|ockodnoss, abundant natura|
rosourcos, othn|c d|v|s|ons, poor |nst|tut|ons and bad cu|turo.
1hoso structura| cond|t|ons soom to act as |mpod|monts to
dovo|opmont |n Atr|ca on|y bocauso |ts countr|os do not yot
havo tho nocossary tochno|og|os, |nst|tut|ons and
organ|zat|ona| sk|||s to doa| w|th tho|r advorso
consoquoncos. 1ho roa| causo ot Atr|can stagnat|on |n tho
|ast throo docados |s troo-markot po||c|os that tho cont|nont
has boon compo||od to |mp|omont dur|ng tho por|od. Un||ko
h|story or goography, po||c|os can bo changod. Atr|ca |s not
dost|nod tor undordovo|opmont.
1he world accordIng to 8arah PalIn . or
was It 1ho Roacuora7

3arah la||n, tho lopub||can v|co-pros|dont|a| cand|dato |n
tho 2008 U3 o|oct|on, |s roportod to havo thought that Atr|ca
was a country, rathor than a cont|nont. A |ot ot poop|o
wondorod whoro sho got that |doa, but l th|nk l know tho
answor. lt was trom tho 1077 0|snoy an|mat|on 7bo
Roscoors.
7bo Roscoors |s about a group ot m|co ca||od tho
loscuo A|d 3oc|oty go|ng around tho wor|d, ho|p|ng an|ma|s
|n troub|o. ln ono scono, thoro |s an |ntornat|ona| congross ot
tho soc|oty, w|th mouso do|ogatos trom a|| sorts ot countr|os
|n tho|r trad|t|ona| costumos and appropr|ato acconts (|t thoy
happon to spoak). 1horo |s tho |ronch mouso |n h|s borot,
tho Gorman mouso |n hor sombro b|uo dross and tho
1urk|sh mouso |n h|s toz. And thon thoro |s tho mouso |n h|s
tur hat and board roprosont|ng latv|a and tho toma|o mouso
roprosont|ng, wo||, Atr|ca.
lorhaps 0|snoy d|dn't ||tora||y th|nk that Atr|ca was a
country, but a||ocat|ng ono do|ogato oach to a country w|th
2.2 m||||on poop|o and to a cont|nont ot moro than 000
m||||on poop|o and noar|y s|xty countr|os (tho oxact numbor
doponds on whothor you rocogn|zo ont|t|os such as
3oma|||and and Wostorn 3ahara as countr|os) to||s you
somoth|ng about |ts v|ow ot Atr|ca. l|ko 0|snoy, many
poop|o soo Atr|ca as an amorphous mass ot countr|os
suttor|ng trom tho samo hot woathor, trop|ca| d|soasos,
gr|nd|ng povorty, c|v|| war and corrupt|on.
Wh||o wo shou|d bo carotu| not to |ump a|| Atr|can
countr|os togothor, thoro |s no dony|ng that most Atr|can
countr|os aro vory poor - ospoc|a||y |t wo cont|no our |ntorost
to 3ub-3aharan Atr|ca (or 'b|ack' Atr|ca), wh|ch |s roa||y what
most poop|o moan whon thoy say Atr|ca. Accord|ng to tho
Wor|d 3ank, tho avorago por cap|ta |ncomo ot 3ub-3aharan
Atr|ca was ost|matod to bo $0b2 |n 2007. 1h|s |s somowhat
h|ghor than tho $880 ot 3outh As|a (Atghan|stan,
3ang|adosh, 3hutan, lnd|a, Va|d|vos, lopa|, lak|stan and
3r| lanka), but |owor than that ot any othor rog|on ot tho
wor|d.
What |s moro, many poop|o ta|k ot Atr|ca's 'growth
tragody'. Un||ko 3outh As|a, whoso growth ratos havo
p|ckod up s|nco tho 1080s, Atr|ca sooms to bo suttor|ng
trom 'a chron|c ta||uro ot oconom|c growth'.
1
3ub-3aharan
Atr|ca's por cap|ta |ncomo today |s moro or |oss tho samo
as what |t was |n 1080. Evon moro worry|ng |s tho tact that
th|s |ack ot growth sooms to bo duo not ma|n|y to poor po||cy
cho|cos (attor a||, ||ko many othor dovo|op|ng countr|os,
countr|os |n tho rog|on havo |mp|omontod troo-markot
rotorms s|nco tho 1080s) but ma|n|y to tho hand|caps
handod down to thom by naturo and h|story and thus
oxtromo|y d|tt|cu|t, |t not |mposs|b|o, to chango.
1ho ||st ot supposod 'structura|' hand|caps that aro
ho|d|ng Atr|ca back |s |mpross|vo.
||rst, thoro aro a|| thoso cond|t|ons dot|nod by naturo -
c||mato, goography and natura| rosourcos. 3o|ng too c|oso
to tho oquator, |t has rampant trop|ca| d|soasos, such as
ma|ar|a, wh|ch roduco workor product|v|ty and ra|so
hoa|thcaro costs. 3o|ng |and|ockod, many Atr|can countr|os
t|nd |t d|tt|cu|t to |ntograto |nto tho g|oba| oconomy. 1hoy aro
|n 'bad no|ghbourhoods' |n tho sonso that thoy aro
surroundod by othor poor countr|os that havo sma|| markots
(wh|ch rostr|ct tho|r trad|ng opportun|t|os) and, troquont|y,
v|o|ont cont||cts (wh|ch otton sp||| ovor |nto no|ghbour|ng
countr|os). Atr|can countr|os aro a|so supposod to bo
'cursod' by tho|r abundant natura| rosourcos. lt |s sa|d that
rosourco abundanco makos Atr|cans |azy - bocauso thoy
'can ||o bonoath a coconut troo and wa|t tor tho coconut to
ta||', as a popu|ar oxpross|on ot th|s |doa goos (a|though
thoso who say that obv|ous|y havo not tr|od |t, you r|sk hav|ng
your hoad smashod). 'Unoarnod' rosourco woa|th |s a|so
supposod to oncourago corrupt|on and v|o|ont cont||cts ovor
tho spo||s. 1ho oconom|c succossos ot rosourco-poor East
As|an countr|os, such as 1apan and Koroa, aro otton c|tod
as casos ot 'rovorso rosourco curso'.
lot just naturo but Atr|ca's h|story |s a|so supposod to bo
ho|d|ng |t back. Atr|can nat|ons aro othn|ca||y too d|vorso,
wh|ch causos poop|o to bo d|strusttu| ot oach othor and thus
makos markot transact|ons cost|y. lt |s arguod that othn|c
d|vors|ty may oncourago v|o|ont cont||cts, ospoc|a||y |t thoro
aro a tow oqua||y strong groups (rathor than many sma||
groups, wh|ch aro moro d|tt|cu|t to organ|zo). 1ho h|story ot
co|on|a||sm |s thought to havo producod |ow-qua||ty
|nst|tut|ons |n most Atr|can countr|os, as tho co|on|zors d|d
not want to sott|o |n countr|os w|th too many trop|ca|
d|soasos (so thoro |s an |ntoract|on botwoon c||mato and
|nst|tut|ons) and thus |nsta||od on|y tho m|n|ma| |nst|tut|ons
noodod tor rosourco oxtract|on, rathor than tor tho
dovo|opmont ot tho |oca| oconomy. 3omo ovon vonturo that
Atr|can cu|turo |s bad tor oconom|c dovo|opmont - Atr|cans
do not work hard, do not p|an tor tho tuturo and cannot
cooporato w|th oach othor.
2
G|von a|| th|s, Atr|ca's tuturo prospocts soom b|oak. |or
somo ot thoso structura| hand|caps, any so|ut|on sooms
unach|ovab|o or unaccoptab|o. lt bo|ng |and|ockod, bo|ng
too c|oso to tho oquator and s|tt|ng |n a bad no|ghbourhood
aro ho|d|ng Uganda back, what shou|d |t do? lhys|ca||y
mov|ng a country |s not an opt|on, so tho on|y toas|b|o
answor |s co|on|a||sm - that |s, Uganda shou|d |nvado, say,
lorway, and movo a|| tho lorwog|ans to Uganda. lt hav|ng
too many othn|c groups |s bad tor dovo|opmont, shou|d
1anzan|a, wh|ch has ono ot tho groatost othn|c d|vors|t|os |n
tho wor|d, |ndu|go |n a spot ot othn|c c|oans|ng? lt hav|ng too
many natura| rosourcos hampors growth, shou|d tho
0omocrat|c lopub||c ot Congo try to so|| tho port|ons ot |ts
|and w|th m|nora| dopos|ts to, say, 1a|wan so that |t can pass
on tho natura| rosourco curso to somoono o|so? What
shou|d Vozamb|quo do |t |ts co|on|a| h|story has |ott |t w|th
bad |nst|tut|ons? 3hou|d |t |nvont a t|mo mach|no and t|x that
h|story? lt Camoroon has a cu|turo that |s bad tor oconom|c
dovo|opmont, shou|d |t start somo mass bra|n-wash|ng
programmo or put poop|o |n somo ro-oducat|on camp, as
tho Khmor lougo d|d |n Cambod|a?
A|| ot thoso po||cy conc|us|ons aro o|thor phys|ca||y
|mposs|b|o (mov|ng a country, |nvont|ng a t|mo mach|no) or
po||t|ca||y and mora||y unaccoptab|o (|nvas|on ot anothor
country, othn|c c|oans|ng, ro-oducat|on camps). 1horotoro,
thoso who bo||ovo |n tho powor ot thoso structura| hand|caps
but t|nd thoso oxtromo so|ut|ons unaccoptab|o arguo that
Atr|can countr|os shou|d bo put on somo k|nd ot pormanont
'd|sab|||ty bonot|t' through toro|gn a|d and oxtra ho|p w|th
|ntornat|ona| trado (o.g., r|ch countr|os |owor|ng tho|r
agr|cu|tura| protoct|on on|y tor Atr|can - and othor s|m||ar|y
poor and structura||y d|sadvantagod - countr|os).
3ut |s thoro any othor way tor Atr|ca's tuturo dovo|opmont
boyond accopt|ng |ts tato or ro|y|ng on outs|do ho|p? 0o
Atr|can countr|os havo no hopo ot stand|ng on tho|r own
toot?
An A|rIcan growth tragedy7

Ono quost|on that wo nood to ask botoro wo try to oxp|a|n
Atr|ca's growth tragody and oxp|oro poss|b|o ways to
ovorcomo |t |s whothor thoro |s |ndood such a tragody. And
tho answor |s 'no'. 1ho |ack ot growth |n tho rog|on has oot
boon chron|c.
0ur|ng tho 1000s and 70s, por cap|ta |ncomo |n 3ub-
3aharan Atr|ca grow at a rospoctab|o rato. At around 1.0
por cont, |t was nowhoro noar tho 'm|rac|o' growth rato ot
East As|a (b-0 por cont) or ovon that ot lat|n Amor|ca
(around 8 por cont) dur|ng tho por|od. |owovor, th|s |s not a
growth rato to bo sn|ttod at. lt comparos tavourab|y w|th tho
ratos ot 1-1.b por cont ach|ovod by today's r|ch countr|os
dur|ng tho|r lndustr|a| 'lovo|ut|on' (rough|y 1820-1018).
1ho tact that Atr|ca grow at a rospoctab|o rato botoro tho
1080s suggosts that tho 'structura|' tactors cannot bo tho
ma|n oxp|anat|on ot tho rog|on's (what |n tact |s rocont)
growth ta||uro. lt thoy woro, Atr|can growth shou|d a|ways
havo boon non-ox|stont. lt |s not as |t tho Atr|can countr|os
suddon|y movod to tho trop|cs or somo so|sm|c act|v|ty
suddon|y mado somo ot thom |and|ockod. lt tho structura|
tactors woro so cruc|a|, Atr|can oconom|c growth shou|d
havo acco|oratod ovor t|mo, as at |oast somo ot thoso
tactors wou|d havo boon woakonod or o||m|natod. |or
oxamp|o, poor-qua||ty |nst|tut|ons |ott boh|nd by tho co|on|sts
cou|d havo boon abandonod or |mprovod. Evon othn|c
d|vors|ty cou|d havo boon roducod through compu|sory
oducat|on, m|||tary sorv|co and mass mod|a, |n tho samo
way |n wh|ch |ranco managod to turn 'poasants |nto
|ronchmon', as tho t|t|o ot a c|ass|c 1070 book by tho
Amor|can h|stor|an Eugon Wobor goos.
8
|owovor, th|s |s
not what has happonod - Atr|can growth suddon|y co||apsod
s|nco tho 1080s.
3o, |t tho structura| tactors havo a|ways boon thoro and |t
tho|r |nt|uoncos wou|d havo, |t anyth|ng, d|m|n|shod ovor
t|mo, thoso tactors cannot oxp|a|n why Atr|ca usod to grow at
a docont rato |n tho 1000s and 70s and thon suddon|y ta||od
to grow. 1ho suddon co||apso |n growth must bo oxp|a|nod
by somoth|ng that happonod around 1080. 1ho pr|mo
suspoct |s tho dramat|c chango |n po||cy d|roct|on around
tho t|mo.
3|nco tho |ato 1070s (start|ng w|th 3onoga| |n 1070),
3ub-3aharan Atr|can countr|os woro torcod to adopt troo-
markot, troo-trado po||c|os through tho cond|t|ons |mposod
by tho so-ca||od 3tructura| Adjustmont lrograms (3Als) ot
tho Wor|d 3ank and tho lV| (and tho r|ch countr|os that
u|t|mato|y contro| thom). Contrary to convont|ona| w|sdom,
thoso po||c|os aro oot good tor oconom|c dovo|opmont (soo
7blog 7). 3y suddon|y oxpos|ng |mmaturo producors to
|ntornat|ona| compot|t|on, thoso po||c|os |od to tho co||apso
ot what ||tt|o |ndustr|a| soctors thoso countr|os had managod
to bu||d up dur|ng tho 1000s and 70s. 1hus, hav|ng boon
torcod back |nto ro|y|ng on oxports ot pr|mary commod|t|os,
such as cocoa, cottoo and coppor, Atr|can countr|os havo
cont|nuod to suttor trom tho w||d pr|co t|uctuat|ons and
stagnant product|on tochno|og|os that charactor|zo most
such commod|t|os. |urthormoro, whon tho 3Als domandod
a rap|d |ncroaso |n oxports, Atr|can countr|os, w|th
tochno|og|ca| capab|||t|os on|y |n a ||m|tod rango ot act|v|t|os,
ondod up try|ng to oxport s|m||ar th|ngs - bo thoy trad|t|ona|
products such as cottoo and cocoa or now products such as
cut t|owors. 1ho rosu|t was otton a co||apso ot pr|cos |n thoso
commod|t|os duo to a |argo |ncroaso |n tho|r supp||os, wh|ch
somot|mos moant that thoso countr|os woro oxport|ng moro
|n quant|ty but oarn|ng |oss |n rovonuo. 1ho prossuro on
govornmonts to ba|anco tho|r budgots |od to cuts |n
oxpond|turos whoso |mpacts aro s|ow to show, such as
|ntrastructuro. Ovor t|mo, howovor, tho dotor|orat|ng qua||ty
ot |ntrastructuro d|sadvantagod Atr|can producors ovon
moro, mak|ng tho|r 'goograph|ca| d|sadvantagos' |oom ovon
|argor.
1ho rosu|t ot tho 3Als - and tho|r var|ous |ator
|ncarnat|ons, |nc|ud|ng today's ll3ls (lovorty loduct|on
3tratogy lapors) - was a stagnant oconomy that has ta||od
to grow (|n por cap|ta torms) tor throo docados. 0ur|ng tho
1080s and 00s, por cap|ta |ncomo |n 3ub-3aharan Atr|ca
o|| at tho rato ot 0.7 por cont por yoar. 1ho rog|on t|na||y
startod to grow |n tho 2000s, but tho contract|on ot tho
procod|ng two docados moant that tho avorago annua|
growth rato ot por cap|ta |ncomo |n 3ub-3aharan Atr|ca
botwoon 1080 and 2000 was 0.2 por cont. 3o, attor noar|y
th|rty yoars ot us|ng 'bottor' (that |s, troo-markot) po||c|os, |ts
por cap|ta |ncomo |s bas|ca||y at tho samo |ovo| as |t was |n
1080.
3o, tho so-ca||od structura| tactors aro roa||y scapogoats
whoo|od out by troo-markot oconom|sts. 3oo|ng tho|r
tavourod po||c|os ta|||ng to produco good outcomos, thoy
had to t|nd othor oxp|anat|ons tor Atr|ca's stagnat|on (or
rotrogross|on, |t you don't count tho |ast tow yoars ot growth
sp|ko duo to commod|ty boom, wh|ch has como to an ond).
lt was unth|nkab|o tor thom that such 'corroct' po||c|os cou|d
ta||. lt |s no co|nc|donco that structura| tactors camo to bo
c|tod as tho ma|n oxp|anat|ons ot poor Atr|can oconom|c
portormanco oo|y otor growth ovaporatod |n tho oar|y
1080s.
Can A|rIca change Its geography and
hIstory7

lo|nt|ng out that tho abovo-mont|onod structura| var|ab|os
woro |nvokod |n an attompt to savo troo-markot oconom|cs
trom ombarrassmont doos not moan that thoy aro |rro|ovant.
trom ombarrassmont doos not moan that thoy aro |rro|ovant.
Vany ot tho thoor|os ottorod as to how a part|cu|ar structura|
var|ab|o attocts oconom|c outcomo do mako sonso. loor
c||mato can hampor dovo|opmont. 3o|ng surroundod by
poor and cont||ct-r|ddon countr|os ||m|ts oxport opportun|t|os
and makos cross-bordor sp|||-ovor ot cont||cts moro ||ko|y.
Ethn|c d|vors|ty or rosourco bonanzas can gonorato
porvorso po||t|ca| dynam|cs. |owovor, thoso outcomos aro
not |nov|tab|o.
1o bog|n w|th, thoro aro many d|ttoront ways |n wh|ch
thoso structura| tactors can p|ay out. |or oxamp|o, abundant
natura| rosourcos can croato porvorso outcomos, but can
a|so promoto dovo|opmont. lt that woron't tho caso, wo
wou|dn't cons|dor tho poor portormancos ot rosourco-r|ch
countr|os to bo porvorso |n tho t|rst p|aco. latura| rosourcos
a||ow poor countr|os to oarn tho toro|gn oxchangos w|th
wh|ch thoy can buy advancod tochno|og|os. 3ay|ng that
thoso rosourcos aro a curso |s ||ko say|ng that a|| ch||dron
born |nto a r|ch tam||y w||| ta|| |n ||to bocauso thoy w||| got
spo||t by tho|r |nhor|tod woa|th. 3omo do so oxact|y tor th|s
roason, but thoro aro many othors who tako advantago ot
tho|r |nhor|tanco and bocomo ovon moro succosstu| than
tho|r paronts. 1ho tact that a tactor |s structura| (that |s, |t |s
g|von by naturo or h|story) doos not moan that tho outcomo
ot |ts |nt|uonco |s prodotorm|nod.
lndood, tho tact that a|| thoso structura| hand|caps aro not
|nsurmountab|o |s provon by tho tact that most ot today's r|ch
countr|os havo dovo|opod dosp|to suttor|ng trom s|m||ar
hand|caps.
4
lot us t|rst tako tho caso ot tho c||mato. 1rop|ca| c||mato
|s supposod to cr|pp|o oconom|c growth by croat|ng hoa|th
burdons duo to trop|ca| d|soasos, ospoc|a||y ma|ar|a. 1h|s |s
a torr|b|o prob|om, but surmountab|o. Vany ot today's r|ch
countr|os usod to havo ma|ar|a and othor trop|ca| d|soasos,
at |oast dur|ng tho summor - not just 3|ngaporo, wh|ch |s
bang |n tho m|dd|o ot tho trop|cs, but a|so 3outhorn lta|y, tho
3outhorn U3, 3outh Koroa and 1apan. 1hoso d|soasos do
not mattor vory much any moro on|y bocauso thoso countr|os
havo bottor san|tat|on (wh|ch has vast|y roducod tho|r
|nc|donco) and bottor mod|ca| tac|||t|os, thanks to oconom|c
dovo|opmont. A moro sor|ous cr|t|c|sm ot tho c||mato
argumont |s that tr|g|d and arct|c c||matos, wh|ch attoct a
numbor ot r|ch countr|os, such as ||n|and, 3wodon, lorway,
Canada and parts ot tho U3, |mposo burdons as
oconom|ca||y cost|y as trop|ca| onos - mach|nos so|zo up,
tuo| costs skyrockot, and transportat|on |s b|ockod by snow
and |co. 1horo |s no o prlorl roason to bo||ovo that co|d
woathor |s bottor than hot woathor tor oconom|c
dovo|opmont. 1ho co|d c||mato doos not ho|d thoso
countr|os back bocauso thoy havo tho monoy and tho
tochno|og|os to doa| w|th thom (tho samo can bo sa|d ot
3|ngaporo's trop|ca| c||mato). 3o b|am|ng Atr|ca's
undordovo|opmont on c||mato |s contus|ng tho causo ot
undordovo|opmont w|th |ts symptoms - poor c||mato doos
not causo undordovo|opmont, a country's |nab|||ty to
ovorcomo |ts poor c||mato |s moro|y a symptom ot
undordovo|opmont.
ln torms ot goography, tho |and|ockod status ot many
Atr|can countr|os has boon much omphas|zod. 3ut thon what
about 3w|tzor|and and Austr|a? 1hoso aro two ot tho r|chost
oconom|os |n tho wor|d, and thoy aro |and|ockod. 1ho roador
may rospond by say|ng that thoso countr|os cou|d dovo|op
bocauso thoy had good r|vor transport, but many |and|ockod
Atr|can countr|os aro potont|a||y |n tho samo pos|t|on: o.g.,
3urk|na |aso (tho vo|ta), Va|| and l|gor (tho l|gor),
Z|mbabwo (tho l|mpopo) and Zamb|a (tho Zamboz|). 3o |t
|s tho |ack ot |nvostmont |n tho r|vor transport systom, rathor
than tho goography |tso|t, that |s tho prob|om. Voroovor, duo
to trooz|ng soas |n w|ntor, 3cand|nav|an countr|os usod to
bo ottoct|vo|y |and|ockod tor ha|t ot tho yoar, unt|| thoy
dovo|opod tho |co-broak|ng sh|p |n tho |ato n|notoonth
contury. A bad no|ghbourhood ottoct may ox|st, but |t nood
not bo b|nd|ng - |ook at tho rocont rap|d growth ot lnd|a,
wh|ch |s |ocatod |n tho poorost rog|on |n tho wor|d (pooror
than 3ub-3aharan Atr|ca, as mont|onod abovo), wh|ch a|so
has |ts sharo ot cont||cts (tho |ong h|story ot m|||tary cont||cts
botwoon lnd|a and lak|stan, tho Vao|st laxa||to guorr|||as |n
lnd|a, tho 1am||-3|nha|oso c|v|| war |n 3r| lanka).
Vany poop|o ta|k ot tho rosourco curso, but tho
dovo|opmont ot countr|os such as tho U3, Canada and
Austra||a, wh|ch aro much bottor ondowod w|th natura|
rosourcos than a|| Atr|can countr|os, w|th tho poss|b|o
oxcopt|ons ot 3outh Atr|ca and tho 0lC (0omocrat|c
lopub||c ot Congo), show that abundant rosourcos can bo a
b|oss|ng. ln tact, most Atr|can countr|os aro not that wo||
ondowod w|th natura| rosourcos - towor than a dozon
Atr|can countr|os havo so tar d|scovorod any s|gn|t|cant
m|nora| dopos|ts.
b
Vost Atr|can countr|os may bo
abundant|y ondowod w|th natura| rosourcos |n ro|at|vo torms,
but that |s on|y bocauso thoy havo so tow man-mado
rosourcos, such as mach|nos, |ntrastructuro, and sk|||od
|abour. Voroovor, |n tho |ato n|notoonth and oar|y twont|oth
contur|os, tho tastost-grow|ng rog|ons ot tho wor|d woro
rosourco-r|ch aroas such as lorth Amor|ca, lat|n Amor|ca
and 3cand|nav|a, suggost|ng that tho rosourco curso has not
a|ways ox|stod.
Ethn|c d|v|s|ons can hampor growth |n var|ous ways, but
tho|r |nt|uonco shou|d not bo oxaggoratod. Ethn|c d|vors|ty |s
tho norm o|sowhoro too. Evon |gnor|ng othn|c d|vors|t|os |n
|mm|grat|on-basod soc|ot|os such as tho U3, Canada and
Austra||a, many ot today's r|ch countr|os |n Europo havo
suttorod trom ||ngu|st|c, ro||g|ous and |doo|og|ca| d|v|dos -
ospoc|a||y ot tho 'mod|um-dogroo' (a tow, rathor than
numorous, groups) that |s supposod to bo most conduc|vo to
v|o|ont cont||cts. 3o|g|um has two (and a b|t, |t you count tho
t|ny Gorman-spoak|ng m|nor|ty) othn|c groups. 3w|tzor|and
has tour |anguagos and two ro||g|ons, and has oxpor|oncod
a numbor ot ma|n|y ro||g|on-basod c|v|| wars. 3pa|n has
sor|ous m|nor|ty prob|oms w|th tho Cata|ans and tho
3asquos, wh|ch havo ovon |nvo|vod torror|sm. 0uo to |ts
b00-yoar ru|o ovor ||n|and (1240 to 1800, whon |t was
codod to luss|a), 3wodon has a s|gn|t|cant ||nn|sh m|nor|ty
(around b por cont ot tho popu|at|on) and ||n|and a 3wod|sh
ono ot s|m||ar sca|o. And so on.
Evon East As|an countr|os that aro supposod to havo
part|cu|ar|y bonot|tod trom tho|r othn|c homogono|ty havo
sor|ous prob|oms w|th |ntorna| d|v|s|ons. You may th|nk
1a|wan |s othn|ca||y homogonoous as |ts c|t|zons aro a||
'Ch|noso', but tho popu|at|on cons|sts ot two (or tour, |t you
d|v|do thom up moro t|no|y) ||ngu|st|c groups (tho
'ma|n|andors' vs. tho 1a|wanoso) that aro host||o to oach
othor. 1apan has sor|ous m|nor|ty prob|oms w|th tho
Koroans, tho Ok|nawans, tho A|nus and tho 3urakum|ns.
3outh Koroa may bo ono ot tho most othno-||ngu|st|ca||y
homogonoous countr|os |n tho wor|d, but that has not
provontod my to||ow countrymon trom hat|ng oach othor. |or
oxamp|o, thoro aro two rog|ons |n 3outh Koroa that
part|cu|ar|y hato oach othor (3outhoast and 3outhwost), so
much so that somo poop|o trom thoso rog|ons wou|d not
a||ow tho|r ch||dron to got marr|od to somoono trom 'tho
othor p|aco'. vory |ntorost|ng|y, lwanda |s noar|y as
homogonoous |n othno-||ngu|st|c torms as Koroa, but that
d|d not provont tho othn|c c|oans|ng ot tho tormor|y dom|nant
m|nor|ty 1uts|s by tho major|ty |utus - an oxamp|o that
provos that 'othn|c|ty' |s a po||t|ca|, rathor than a natura|,
construct|on. ln othor words, r|ch countr|os do not suttor trom
othn|c hotorogono|ty not bocauso thoy do not havo |t but
bocauso thoy havo succoodod |n nat|on-bu||d|ng (wh|ch, wo
shou|d noto, was otton an unp|oasant and ovon v|o|ont
procoss).
loop|o say that bad |nst|tut|ons aro ho|d|ng back Atr|ca
(and thoy aro), but whon tho r|ch countr|os woro at s|m||ar
|ovo|s ot mator|a| dovo|opmont to thoso wo t|nd |n Atr|ca
curront|y, tho|r |nst|tut|ons woro |n a tar worso stato.
0
0osp|to
that, thoy grow cont|nuous|y and havo roachod h|gh |ovo|s ot
dovo|opmont. 1hoy bu||t tho good |nst|tut|ons |argo|y attor, or
at |oast |n tandom w|th, tho|r oconom|c dovo|opmont. 1h|s
shows that |nst|tut|ona| qua||ty |s as much an outcomo as tho
causa| tactor ot oconom|c dovo|opmont. G|von th|s, bad
|nst|tut|ons cannot bo tho oxp|anat|on ot growth ta||uro |n
Atr|ca.
loop|o ta|k about 'bad' cu|turos |n Atr|ca, but most ot
today's r|ch countr|os had onco boon arguod to havo
comparab|y bad cu|turos, as l documontod |n tho chaptor
'lazy 1apanoso and th|ov|ng Gormans' |n my oar||or book
Boo 5omorltoos. Unt|| tho oar|y twont|oth contury,
Austra||ans and Amor|cans wou|d go to 1apan and say tho
1apanoso woro |azy. Unt|| tho m|d n|notoonth contury, tho
3r|t|sh wou|d go to Gormany and say that tho Gormans woro
too stup|d, too |nd|v|dua||st|c and too omot|ona| to dovo|op
tho|r oconom|os (Gormany was not un|t|od thon) - tho oxact
oppos|to ot tho storootyp|ca| |mago that thoy havo ot tho
Gormans today and oxact|y tho sort ot th|ngs that poop|o
now say about Atr|cans. 1ho 1apanoso and Gorman cu|turos
woro transtormod w|th oconom|c dovo|opmont, as tho
domands ot a h|gh|y organ|zod |ndustr|a| soc|oty mado
poop|o bohavo |n moro d|sc|p||nod, ca|cu|at|ng and
cooporat|vo ways. ln that sonso, cu|turo |s moro ot an
outcomo, rathor than a causo, ot oconom|c dovo|opmont. lt
|s wrong to b|amo Atr|ca's (or any rog|on's or any country's)
undordovo|opmont on |ts cu|turo.
1hus soon, what appoar to bo una|torab|o structura|
|mpod|monts to oconom|c dovo|opmont |n Atr|ca (and
|ndood o|sowhoro) aro usua||y th|ngs that can bo, and havo
boon, ovorcomo w|th bottor tochno|og|os, supor|or
organ|zat|ona| sk|||s and |mprovod po||t|ca| |nst|tut|ons. 1ho
tact that most ot today's r|ch countr|os thomso|vos usod to
suttor (and st||| suttor to an oxtont) trom thoso cond|t|ons |s
an |nd|roct proot ot th|s po|nt. Voroovor, dosp|to hav|ng
thoso |mpod|monts (otton |n moro sovoro torms), Atr|can
countr|os thomso|vos d|d not havo a prob|om grow|ng |n tho
1000s and 70s. 1ho ma|n roason tor Atr|ca's rocont growth
ta||uro ||os |n po||cy - namo|y, tho troo-trado, troo-markot
po||cy that has boon |mposod on tho cont|nont through tho
3Al. laturo and h|story do not condomn a country to a
part|cu|ar tuturo. lt |t |s po||cy that |s caus|ng tho prob|om, tho
tuturo can bo changod ovon moro oas||y. 1ho tact that wo
havo ta||od to soo th|s, and not |ts a||ogod|y chron|c growth
ta||uro, |s tho roa| tragody ot Atr|ca.
1hing 12
Covornmonta can ick winnora

What they tell you

Govornmonts do not havo tho nocossary |ntormat|on and
oxport|so to mako |ntormod bus|noss doc|s|ons and 'p|ck
w|nnors' through |ndustr|a| po||cy. lt anyth|ng, govornmont
doc|s|on-makors aro ||ko|y to p|ck somo spoctacu|ar |osors,
g|von that thoy aro mot|vatod by powor rathor than prot|t and
that thoy do not havo to boar tho t|nanc|a| consoquoncos ot
tho|r doc|s|ons. Espoc|a||y |t govornmont tr|os to go aga|nst
markot |og|c and promoto |ndustr|os that go boyond a
country's g|von rosourcos and compotoncos, tho rosu|ts aro
d|sastrous, as provon by tho 'wh|to o|ophant' projocts that
||ttor dovo|op|ng countr|os.
What they don't tell you

Govornmonts can p|ck w|nnors, somot|mos spoctacu|ar|y
wo||. Whon wo |ook around w|th an opon m|nd, thoro aro
many oxamp|os ot succosstu| w|nnor-p|ck|ng by
govornmonts trom a|| ovor tho wor|d. 1ho argumont that
govornmont doc|s|ons attoct|ng bus|noss t|rms aro bound to
bo |ntor|or to tho doc|s|ons mado by tho t|rms thomso|vos |s
unwarrantod. |av|ng moro dota||od |ntormat|on doos not
guarantoo bottor doc|s|ons - |t may actua||y bo moro d|tt|cu|t
to mako tho r|ght doc|s|on, |t ono |s '|n tho th|ck ot |t'. A|so,
thoro aro ways tor tho govornmont to acqu|ro bottor
|ntormat|on and |mprovo tho qua||ty ot |ts doc|s|ons.
Voroovor, doc|s|ons that aro good tor |nd|v|dua| t|rms may
not bo good tor tho nat|ona| oconomy as a who|o. 1horotoro,
tho govornmont p|ck|ng w|nnors aga|nst markot s|gna|s can
|mprovo nat|ona| oconom|c portormanco, ospoc|a||y |t |t |s
dono |n c|oso (but not too c|oso) co||aborat|on w|th tho
pr|vato soctor.
1he worst busIness proposItIon In
human hIstory

Eugono 3|ack, tho |ongost-sorv|ng pros|dont |n tho h|story ot
tho Wor|d 3ank (1040-08), |s roportod to havo cr|t|c|zod
dovo|op|ng countr|os tor bo|ng t|xatod on throo totoms - tho
h|ghway, tho |ntogratod stoo| m||| and tho monumont to tho
hoad ot tho stato.
Vr 3|ack's romark on tho monumont may havo boon
unta|r (many po||t|ca| |oadors |n dovo|op|ng countr|os at tho
t|mo woro not so|t-aggrand|z|ng), but ho was r|ght to bo
worr|od about tho thon w|dosproad tondoncy to go tor
prost|go projocts, such as h|ghways and stoo| m|||s,
rogard|oss ot tho|r oconom|c v|ab|||ty. At tho t|mo, too many
dovo|op|ng countr|os bu||t h|ghways that roma|nod ompty
and stoo| m|||s that surv|vod on|y bocauso ot mass|vo
govornmont subs|d|os and tar|tt protoct|on. Expross|ons ||ko
'wh|to o|ophant' or 'cast|o |n tho dosort' woro |nvontod dur|ng
th|s por|od to doscr|bo such projocts.
3ut ot a|| tho thon potont|a| cast|os |n tho dosort, 3outh
Koroa's p|an to bu||d an |ntogratod stoo| m|||, hatchod |n
100b, was ono ot tho most out|and|sh.
At tho t|mo, Koroa was ono ot tho poorost countr|os |n tho
wor|d, ro|y|ng on natura| rosourco-basod oxports (o.g., t|sh,
tungston oro) or |abour-|ntons|vo manutacturod oxports (o.g.,
w|gs mado w|th human ha|r, choap garmonts). Accord|ng to
tho roco|vod thoory ot |ntornat|ona| trado, known as tho
'thoory ot comparat|vo advantago', a country ||ko Koroa, w|th
a |ot ot |abour and vory ||tt|o cap|ta|, shou|d oot bo mak|ng
cap|ta|-|ntons|vo products, ||ko stoo|.
1
Worso, Koroa d|d not ovon produco tho nocossary raw
mator|a|s. 3wodon dovo|opod an |ron and stoo| |ndustry
qu|to natura||y bocauso |t has a |ot ot |ron oro dopos|ts.
Koroa producod v|rtua||y no |ron oro or cok|ng coa|, tho two
koy |ngrod|onts ot modorn stoo|-mak|ng. 1oday, thoso cou|d
havo boon |mportod trom Ch|na, but th|s was tho t|mo ot tho
Co|d War whon thoro was no trado botwoon Ch|na and
3outh Koroa. 3o tho raw mator|a|s had to bo |mportod trom
countr|os such as Austra||a, Canada and tho U3 - a|| ot
thom t|vo or s|x thousand m||os away - thoroby s|gn|t|cant|y
add|ng to tho cost ot product|on.
lo wondor tho Koroan govornmont was t|nd|ng |t d|tt|cu|t
to conv|nco potont|a| toro|gn donors and |ondors ot |ts p|an,
ovon though |t proposod to subs|d|zo tho stoo| m||| |ott, r|ght
and contro - troo |ntrastructuro (ports, roads, ra||roads), tax
broaks, acco|oratod doproc|at|on ot |ts cap|ta| oqu|pmont
(so that tax ||ab|||t|os wou|d bo m|n|m|zod |n tho oar|y yoars),
roducod ut|||ty ratos, and what not.
Wh||o tho nogot|at|ons w|th potont|a| donors - such as tho
Wor|d 3ank and tho govornmonts ot tho U3, UK, Wost
Gormany, |ranco and lta|y - woro go|ng on, tho Koroan
govornmont d|d th|ngs to mako tho projoct |ook ovon |oss
appoa||ng. Whon tho company to run tho stoo| m||| - tho
lohang lron and 3too| Company (lO3CO) - was sot up |n
1008, |t was as a stato-ownod ontorpr|so (3OE), dosp|to
w|dosproad concorns about tho |nott|c|onc|os ot 3OEs |n
dovo|op|ng countr|os. And to cap |t a||, tho company was to
bo |od by Vr lark 1ao-1oon, a tormor army gonora| w|th
m|n|ma| bus|noss oxpor|onco as tho hoad ot a stato-ownod
tungston-m|n|ng company tor a tow yoars. Evon tor a m|||tary
d|ctatorsh|p, th|s was go|ng too tar. 1ho country was about to
start tho b|ggost bus|noss vonturo |n |ts h|story, and tho man
put |n chargo was not ovon a protoss|ona| bus|nossman!
1hus, tho potont|a| donors tacod arguab|y tho worst
bus|noss proposa| |n human h|story - a stato-ownod
company, run by a po||t|ca||y appo|ntod so|d|or, mak|ng a
product that a|| roco|vod oconom|c thoor|os sa|d was not
su|tab|o to tho country. latura||y, tho Wor|d 3ank adv|sod tho
othor potont|a| donors not to support tho projoct, and ovory
ono ot thom ott|c|a||y pu||od out ot tho nogot|at|ons |n Apr||
1000.
Undotorrod, tho Koroan govornmont managod to
porsuado tho 1apanoso govornmont to channo| a |argo
chunk ot tho roparat|on paymonts |t was pay|ng tor |ts
co|on|a| ru|o (1010-4b) |nto tho stoo|-m||| projoct and to
prov|do tho mach|nos and tho tochn|ca| adv|co nocossary tor
tho m|||.
1ho company startod product|on |n 1078 and ostab||shod
|ts prosonco romarkab|y qu|ck|y. 3y tho m|d 1080s, |t was
cons|dorod ono ot tho most cost-ott|c|ont producors ot |ow-
grado stoo| |n tho wor|d. 3y tho 1000s, |t was ono ot tho
wor|d's |oad|ng stoo| compan|os. lt was pr|vat|zod |n 2001,
not tor poor portormanco but tor po||t|ca| roasons, and today
|s tho tourth-|argost stoo| producor |n tho wor|d (by quant|ty ot
output).
3o wo havo a groat puzz|o on our hands. |ow d|d ono ot
tho worst bus|noss proposa|s |n h|story produco ono ot tho
most succosstu| bus|nossos |n h|story? Actua||y, tho puzz|o
|s ovon groator, bocauso lO3CO |s not tho on|y succosstu|
Koroan company that was sot up through govornmont
|n|t|at|vo.
1hroughout tho 1000s and 70s, tho Koroan govornmont
pushod many pr|vato soctor t|rms |nto |ndustr|os that thoy
wou|d not havo ontorod ot tho|r own accord. 1h|s was otton
dono through carrots, such as subs|d|os or tar|tt protoct|on
trom |mports (a|though tho carrots woro a|so st|cks |n tho
sonso that thoy wou|d bo don|od to undor-portormors).
|owovor, ovon whon a|| thoso carrots woro not onough to
conv|nco tho bus|nossmon concornod, st|cks - b|g st|cks -
woro pu||od out, such as throats to cut ott |oans trom tho thon
who||y stato-ownod banks or ovon a 'qu|ot chat' w|th tho
socrot po||co.
lntorost|ng|y, many ot tho bus|nossos thus promotod by
tho govornmont turnod out to bo groat succossos. ln tho
1000s, tho lG Group, tho o|octron|cs g|ant, was bannod by
tho govornmont trom ontor|ng |ts dos|rod toxt||o |ndustry and
was torcod to ontor tho o|octr|c cab|o |ndustry. lron|ca||y, tho
cab|o company bocamo tho toundat|on ot |ts o|octron|cs
bus|noss, tor wh|ch lG |s curront|y wor|d-tamous (you wou|d
know, |t you havo ovor wantod tho |atost Choco|ato mob||o
phono). ln tho 1070s, tho Koroan govornmont put onormous
prossuro on Vr Chung 1u-Yung, tho |ogondary toundor ot tho
|yunda| Group, tamous tor h|s r|sk appot|to, to start a
sh|pbu||d|ng company. Evon Chung |s sa|d to havo |n|t|a||y
bau|kod at tho |doa but ro|ontod whon Gonora| lark Chung-
|oo, tho country's thon d|ctator and tho arch|toct ot Koroa's
oconom|c m|rac|o, porsona||y throatonod h|s bus|noss group
w|th bankruptcy. 1oday, tho |yunda| sh|pbu||d|ng company
|s ono ot tho b|ggost sh|pbu||dors |n tho wor|d.
PIckIng losers7

low, accord|ng to tho dom|nant troo-markot oconom|c
thoory, th|ngs ||ko tho succossos ot lO3CO, lG and
|yunda| doscr|bod abovo s|mp|y shou|dn't happon. 1ho
thoory to||s us that cap|ta||sm works bost whon poop|o aro
a||owod to tako caro ot tho|r own bus|nossos w|thout any
govornmont |ntortoronco. Govornmont doc|s|ons aro bound
to bo |ntor|or to tho doc|s|ons mado by thoso who aro
d|roct|y concornod w|th tho mattor |n quost|on, |t |s arguod.
1h|s |s bocauso tho govornmont doos not possoss as much
|ntormat|on about tho bus|noss at hand as tho t|rm d|roct|y
concornod w|th |t. 3o, tor oxamp|o, |t a company protors to
ontor lndustry A ovor lndustry 3, |t must bo bocauso |t knows
that A wou|d bo moro prot|tab|o than 3, g|von |ts
compotoncos and markot cond|t|ons. lt wou|d bo tota||y
prosumptuous ot somo govornmont ott|c|a|, howovor c|ovor
sho may bo by somo abso|uto standard, to to|| tho
company's managors that thoy shou|d |nvost |n lndustry 3,
whon sho s|mp|y doos not havo thoso managors' bus|noss
acumon and oxpor|oncos. ln othor words, thoy arguo, tho
govornmont cannot p|ck w|nnors.
1ho s|tuat|on |s actua||y moro oxtromo than that, troo-
markot oconom|sts say. lot on|y aro govornmont doc|s|on-
makors unab|o to p|ck w|nnors, thoy aro ||ko|y to p|ck |osors.
Vost |mportant|y, govornmont doc|s|on-makors - po||t|c|ans
and buroaucrats - aro dr|von by tho dos|ro to max|m|zo
powor, rathor than prot|ts. 1horotoro, thoy aro bound to go
tor wh|to o|ophant projocts that havo h|gh v|s|b|||ty and
po||t|ca| symbo||sm, rogard|oss ot tho|r oconom|c toas|b|||ty.
Voroovor, s|nco govornmont ott|c|a|s p|ay w|th 'othor
poop|o's monoy', thoy do not roa||y havo to worry about tho
oconom|c v|ab|||ty ot tho projoct that thoy aro promot|ng (on
tho subjoct ot 'othor poop|o's monoy', soo 7blog 2).
3otwoon tho wrong goa|s (prost|go ovor prot|t) and tho
wrong |ncont|vos (not porsona||y boar|ng tho consoquoncos
ot tho|r doc|s|ons), thoso ott|c|a|s aro a|most corta|n to p|ck
|osors, woro thoy to |ntorvono |n bus|noss atta|rs. 3us|noss
shou|d oot bo tho bus|noss ot govornmont, |t |s sa|d.
1ho bost-known oxamp|o ot govornmont p|ck|ng a |osor
bocauso ot tho wrong goa|s and |ncont|vos |s tho Concordo
projoct, jo|nt|y t|nancod by tho 3r|t|sh and tho |ronch
govornmonts |n tho 1000s. Concordo corta|n|y roma|ns ono
ot tho most |mpross|vo toats ot ong|noor|ng |n human
h|story. l st||| romombor soo|ng ono ot tho most momorab|o
advort|s|ng s|ogans l'vo ovor oncountorod, on a 3r|t|sh
A|rways b|||board |n low York - |t urgod poop|o to 'arr|vo
botoro you |oavo' by t|y|ng Concordo (|t took around throo
hours to cross tho At|ant|c on a Concordo, wh||o tho t|mo
d|ttoronco botwoon low York and london |s t|vo hours).
|owovor, cons|dor|ng a|| tho monoy spont on |ts
dovo|opmont and tho subs|d|os that tho two govornmonts
had to g|vo to 3r|t|sh A|rways and A|r |ranco ovon to buy tho
a|rcratts, Concordo was a rosound|ng bus|noss ta||uro.
An ovon moro outragoous oxamp|o ot a govornmont
p|ck|ng a |osor bocauso |t |s d|vorcod trom markot |og|c |s
tho caso ot tho lndonos|an a|rcratt |ndustry. 1ho |ndustry was
startod |n tho 1070s, whon tho country was ono ot tho
poorost |n tho wor|d. 1h|s doc|s|on was mado on|y bocauso
0r 3acharudd|n |ab|b|o, numbor two to lros|dont
Vohammod 3uharto tor ovor twonty yoars (and tho country's
pros|dont tor just ovor a yoar, attor h|s ta||), happonod to bo
an aorospaco ong|noor who had tra|nod and workod |n
Gormany.
3ut |t a|| roco|vod oconom|c thoor|os and tho ov|donco
trom othor countr|os suggost that govornmonts aro ||ko|y to
p|ck |osors rathor than w|nnors, how cou|d tho Koroan
govornmont succood |n p|ck|ng so many w|nnors?
Ono poss|b|o oxp|anat|on |s that Koroa |s an oxcopt|on.
|or whatovor roasons, Koroan govornmont ott|c|a|s woro so
oxcopt|ona||y capab|o, tho argumont m|ght run, that thoy
cou|d p|ck w|nnors |n a way that no ono o|so cou|d. 3ut that
must moan that wo Koroans aro tho smartost poop|o |n
h|story. As a good Koroan, l wou|d not m|nd an oxp|anat|on
that portrays us |n such g|or|ous ||ght, but l doubt whothor
non-Koroans wou|d bo conv|ncod by |t (and thoy aro r|ght -
soo 7blog 28).
lndood, as l d|scuss |n somo dota|| o|sowhoro |n tho book
(most notab|y, soo 7blogs 7 ooo 10), Koroa |s not tho on|y
country |n wh|ch tho govornmont has had succoss |n p|ck|ng
w|nnors.
2
Othor East As|an m|rac|o oconom|os d|d tho
samo. 1ho Koroan stratogy ot p|ck|ng w|nnors, wh||o
|nvo|v|ng moro aggross|vo moans, was cop|od trom tho ono
pract|sod by tho 1apanoso govornmont. And tho 1a|wanoso
and 3|ngaporoan govornmonts woro no worso at tho job
than tho|r Koroan countorpart, a|though tho po||cy too|s thoy
usod woro somowhat d|ttoront.
Voro |mportant|y, |t |sn't just East As|an govornmonts that
havo succosstu||y p|ckod w|nnors. ln tho socond ha|t ot tho
twont|oth contury, tho govornmonts ot countr|os such as
|ranco, ||n|and, lorway and Austr|a shapod and d|roctod
|ndustr|a| dovo|opmont w|th groat succoss through
protoct|on, subs|d|os and |nvostmonts by 3OEs. Evon wh||o
|t protonds that |t doos not, tho U3 govornmont has p|ckod
most ot tho country's |ndustr|a| w|nnors s|nco tho 3ocond
Wor|d War through mass|vo support tor rosoarch and
dovo|opmont (l80). 1ho computor, som|-conductors,
a|rcratt, |ntornot and b|otochno|ogy |ndustr|os havo a|| boon
dovo|opod thanks to subs|d|zod l80 trom tho U3
govornmont. Evon |n tho n|notoonth and oar|y twont|oth
contur|os, whon govornmont |ndustr|a| po||c|os woro much
|oss organ|zod and ottoct|vo than |n tho |ato twont|oth
contury, v|rtua||y a|| ot today's r|ch countr|os usod tar|tts,
subs|d|os, ||cons|ng, rogu|at|on and othor po||cy moasuros to
promoto part|cu|ar |ndustr|os ovor othors, w|th cons|dorab|o
dogroos ot succoss (soo 7blog 7).
lt govornmonts can and do p|ck w|nnors w|th such
rogu|ar|ty, somot|mos w|th spoctacu|ar rosu|ts, you may
wondor whothor thoro |s somoth|ng wrong w|th tho dom|nant
oconom|c thoory that says that |t cannot bo dono. Yos, l
wou|d say that thoro aro many th|ngs wrong w|th tho thoory.
||rst ot a||, tho thoory |mp||c|t|y assumos that thoso who
aro c|osost to tho s|tuat|on w||| havo tho bost |ntormat|on and
thus mako tho bost doc|s|on. 1h|s may sound p|aus|b|o but,
|t prox|m|ty to tho s|tuat|on guarantood a bottor doc|s|on, no
bus|noss wou|d ovor mako a wrong doc|s|on. 3omot|mos
bo|ng too c|oso to tho s|tuat|on can actua||y mako |t moro,
rathor than |oss, d|tt|cu|t to soo tho s|tuat|on objoct|vo|y. 1h|s
|s why thoro aro so many bus|noss doc|s|ons that tho
doc|s|on-makors thomso|vos bo||ovo to bo works ot gon|us
that othors v|ow w|th scopt|c|sm, |t not downr|ght contompt.
|or oxamp|o, |n 2000, AOl, tho |ntornot company, acqu|rod
1|mo Warnor mod|a group. 0osp|to tho doop scopt|c|sm ot
many outs|dors, 3tovo Caso, AOl's thon cha|rman, ca||od |t
a 'h|stor|c morgor' that wou|d transtorm 'tho |andscapo ot
mod|a and tho |ntornot'. 3ubsoquont|y tho morgor turnod out
to bo a spoctacu|ar ta||uro, prompt|ng 1orry lov|n, tho 1|mo
Warnor ch|ot at tho t|mo ot tho morgor, to adm|t |n 1anuary
2010 that |t was 'tho worst doa| ot tho contury'.
Ot courso, by say|ng that wo cannot nocossar||y assumo
a govornmont's doc|s|on concorn|ng a t|rm w||| bo worso
than a doc|s|on by tho t|rm |tso|t, l am not dony|ng tho
|mportanco ot hav|ng good |ntormat|on. |owovor, |nsotar as
such |ntormat|on |s noodod tor |ts |ndustr|a| po||cy, tho
govornmont can mako suro that |t has such |ntormat|on. And
|ndood, tho govornmonts that havo boon moro succosstu| at
p|ck|ng w|nnors tond to havo moro ottoct|vo channo|s ot
|ntormat|on oxchango w|th tho bus|noss soctor.
Ono obv|ous way tor a govornmont to onsuro that |t has
good bus|noss |ntormat|on |s to sot up an 3OE and run tho
bus|noss |tso|t. Countr|os such as 3|ngaporo, |ranco,
Austr|a, lorway and ||n|and ro||od hoav||y on th|s so|ut|on.
3ocond, a govornmont can |oga||y roqu|ro that t|rms |n
|ndustr|os that roco|vo stato support rogu|ar|y roport on
somo koy aspocts ot tho|r bus|nossos. 1ho Koroan
govornmont d|d th|s vory thorough|y |n tho 1070s, whon |t
was prov|d|ng a |ot ot t|nanc|a| support tor sovora| now
|ndustr|os, such as sh|pbu||d|ng, stoo| and o|octron|cs. Yot
anothor mothod |s to ro|y on |ntorma| notworks botwoon
govornmont ott|c|a|s and bus|noss o||tos so that tho ott|c|a|s
dovo|op a good undorstand|ng ot bus|noss s|tuat|ons,
a|though an oxc|us|vo ro||anco on th|s channo| can |oad to
oxcoss|vo 'c|ubb|noss' or downr|ght corrupt|on. 1ho |ronch
po||cy notwork, bu||t around tho graduatos ot ElA (Eco|o
lat|ona|o d'Adm|n|strat|on), |s tho most tamous oxamp|o ot
th|s, show|ng both |ts pos|t|vo and nogat|vo s|dos.
3omowhoro |n botwoon tho two oxtromos ot |oga|
roqu|romont and porsona| notworks, tho 1apanoso havo
dovo|opod tho 'do||borat|on counc||s', whoro govornmont
ott|c|a|s and bus|noss |oadors rogu|ar|y oxchango
|ntormat|on through torma| channo|s, |n tho prosonco ot th|rd-
party obsorvors trom acadom|a and tho mod|a.
Voroovor, dom|nant oconom|c thoory ta||s to rocogn|zo
that thoro cou|d bo a c|ash botwoon bus|noss |ntorosts and
nat|ona| |ntorosts. Evon though bus|nossmon may gonora||y
(but not nocossar||y, as l arguod abovo) know tho|r own
atta|rs bottor than govornmont ott|c|a|s and thorotoro bo ab|o
to mako doc|s|ons that bost sorvo tho|r compan|os'
|ntorosts, thoro |s no guarantoo that tho|r doc|s|ons aro
go|ng to bo good tor tho nat|ona| oconomy. 3o, tor oxamp|o,
whon |t wantod to ontor tho toxt||o |ndustry |n tho 1000s, tho
managors ot lG woro do|ng tho r|ght th|ng tor tho|r
company, but |n push|ng thom to ontor tho o|octr|c cab|o
|ndustry, wh|ch onab|od lG to bocomo an o|octron|cs
company, tho Koroan govornmont was sorv|ng Koroa's
nat|ona| |ntorost - and lG's |ntorost |n tho |ong run - bottor.
ln othor words, tho govornmont p|ck|ng w|nnors may hurt
somo bus|noss |ntorosts but |t may produco a bottor
outcomo trom a soc|a| po|nt ot v|ow (soo 7blog 18).
WInners are beIng pIcked all the tIme

3o tar, l havo ||stod many succosstu| oxamp|os ot
govornmont p|ck|ng w|nnors and oxp|a|nod why tho troo-
markot thoory that don|os tho vory poss|b|||ty ot govornmont
p|ck|ng w|nnors |s tu|| ot ho|os.
3y do|ng th|s, l am not try|ng to b||nd you to casos ot
govornmont ta||uro. l havo a|roady mont|onod tho sor|os ot
cast|os |n tho dosort bu||t |n many dovo|op|ng countr|os |n tho
1000s and 70s, |nc|ud|ng lndonos|a's a|rcratt |ndustry.
|owovor, |t |s moro than that. Govornmont attompts to p|ck
w|nnors havo ta||od ovon |n countr|os that aro tamous tor
bo|ng good at |t, such as 1apan, |ranco or Koroa. l'vo
a|roady mont|onod tho |ronch govornmont's |||-tatod toray
|nto Concordo. ln tho 1000s, tho 1apanoso govornmont tr|od
|n va|n to arrango a takoovor ot |onda, wh|ch |t cons|dorod
to bo too sma|| and woak, by l|ssan, but |t |ator turnod out
that |onda was a much moro succosstu| t|rm than l|ssan.
1ho Koroan govornmont tr|od to promoto tho a|um|n|um-
smo|t|ng |ndustry |n tho |ato 1070s, on|y to soo tho |ndustry
whackod by a mass|vo |ncroaso |n onorgy pr|cos, wh|ch
account tor a part|cu|ar|y h|gh proport|on ot a|um|n|um
product|on costs. And thoy aro just tho most prom|nont
oxamp|os.
|owovor, |n tho samo way that tho succoss stor|os do not
a||ow us to support govornmonts p|ck|ng w|nnors undor a||
c|rcumstancos, tho ta||uros, howovor many thoro aro, do not
|nva||dato a|| govornmont attompts to p|ck w|nnors.
Whon you th|nk about |t, |t |s natura| that govornmonts ta||
|n p|ck|ng w|nnors. lt |s |n tho vory naturo ot r|sk-tak|ng
ontropronour|a| doc|s|ons |n th|s uncorta|n wor|d that thoy
otton ta||. Attor a||, pr|vato soctor t|rms try to p|ck w|nnors a||
tho t|mo, by bott|ng on uncorta|n tochno|og|os and ontor|ng
act|v|t|os that othors th|nk aro hopo|oss, and otton ta||.
lndood, |n oxact|y tho samo way that ovon thoso
govornmonts that havo tho bost track rocords at p|ck|ng
w|nnors do not p|ck w|nnors a|| tho t|mo, ovon tho most
succosstu| t|rms do not mako tho r|ght doc|s|ons a|| tho t|mo
- just th|nk about V|crosott's d|sastrous W|ndows v|sta
oporat|ng systom (w|th wh|ch l am vory unhapp||y wr|t|ng th|s
book) and lok|a's ombarrass|ng ta||uro w|th tho l-Gago
phono/gamo conso|o.
1ho quost|on |s not thon whothor govornmonts can p|ck
w|nnors, as thoy obv|ous|y can, but how to |mprovo tho|r
'batt|ng avorago'. And contrary to popu|ar porcopt|on,
govornmonta| batt|ng avoragos can bo qu|to dramat|ca||y
|mprovod, |t thoro |s sutt|c|ont po||t|ca| w|||. 1ho countr|os that
aro troquont|y assoc|atod w|th succoss |n p|ck|ng w|nnors
provo tho po|nt. 1ho 1a|wanoso m|rac|o was ong|noorod by
tho lat|ona||st larty govornmont, wh|ch had boon a byword
tor corrupt|on and |ncompotonco unt|| |t was torcod to movo
to 1a|wan attor |os|ng tho Ch|noso ma|n|and to tho
Commun|sts |n 1040. 1ho Koroan govornmont |n tho 10b0s
was tamous|y |nopt at oconom|c managomont, so much so
that tho country was doscr|bod as a bottom|oss p|t by
U3Al0, tho U3 govornmont a|d agoncy. ln tho |ato
n|notoonth and oar|y twont|oth contur|os, tho |ronch
govornmont was tamous tor |ts unw||||ngnoss and |nab|||ty to
p|ck w|nnors, but |t bocamo tho champ|on ot p|ck|ng w|nnors
|n Europo attor tho 3ocond Wor|d War.
1ho roa||ty |s that w|nnors aro bo|ng p|ckod a|| tho t|mo
both by tho govornmont and by tho pr|vato soctor, but tho
most succosstu| onos tond to bo dono |n jo|nt ottorts
botwoon tho two. ln a|| typos ot w|nnor-p|ck|ng - pr|vato,
pub||c, jo|nt - thoro aro succossos and ta||uros, somot|mos
spoctacu|ar onos. lt wo roma|n b||ndod by tho troo-markot
|doo|ogy that to||s us on|y w|nnor-p|ck|ng by tho pr|vato
soctor can succood, wo w||| ond up |gnor|ng a hugo rango ot
poss|b|||t|os tor oconom|c dovo|opmont through pub||c
|oadorsh|p or pub||c-pr|vato jo|nt ottorts.
1hing 18
Naking rich ooIo richor
dooan't mako tho roat ot ua
richor

What they tell you

Wo havo to croato woa|th botoro wo can sharo |t out. l|ko |t
or not, |t |s tho r|ch poop|o who aro go|ng to |nvost and
croato jobs. 1ho r|ch aro v|ta| to both spott|ng markot
opportun|t|os and oxp|o|t|ng thom. ln many countr|os, tho
po||t|cs ot onvy and popu||st po||c|os ot tho past havo put
rostr|ct|ons on woa|th croat|on by |mpos|ng h|gh taxos on tho
r|ch. 1h|s has to stop. lt may sound harsh, but |n tho |ong run
poor poop|o can bocomo r|chor on|y by mak|ng tho r|ch ovon
r|chor. Whon you g|vo tho r|ch a b|ggor s||co ot tho p|o, tho
s||cos ot tho othors may bocomo sma||or |n tho short run, but
tho poor w||| onjoy b|ggor s||cos |n abso|uto torms |n tho |ong
run, bocauso tho p|o w||| got b|ggor.
What they don't tell you

1ho abovo |doa, known as 'tr|ck|o-down oconom|cs',
stumb|os on |ts t|rst hurd|o. 0osp|to tho usua| d|chotomy ot
'growth-onhanc|ng pro-r|ch po||cy' and 'growth-roduc|ng pro-
poor po||cy', pro-r|ch po||c|os havo ta||od to acco|orato
growth |n tho |ast throo docados. 3o tho t|rst stop |n th|s
argumont - that |s, tho v|ow that g|v|ng a b|ggor s||co ot p|o
to tho r|ch w||| mako tho p|o b|ggor - doos not ho|d. 1ho
socond part ot tho argumont - tho v|ow that groator woa|th
croatod at tho top w||| ovontua||y tr|ck|o down to tho poor -
doos not work o|thor. 1r|ck|o down doos happon, but usua||y
|ts |mpact |s moagro |t wo |oavo |t to tho markot.
1he ghost o| 8talIn ~ or Is It
Preobrazhensky7

W|th tho dovastat|on ot tho ||rst Wor|d War, tho 3ov|ot
oconomy was |n d|ro stra|ts |n 1010. loa||z|ng that tho now
rog|mo had no chanco ot surv|v|ng w|thout rov|v|ng tood
product|on, lon|n |aunchod tho low Econom|c lo||cy
(lEl), a||ow|ng markot transact|ons |n agr|cu|turo and |ott|ng
tho poasants koop tho prot|ts trom thoso transact|ons.
1ho 3o|shov|k party was sp||t. On tho |ott ot tho party,
argu|ng that tho lEl was no moro than a rogross|on to
cap|ta||sm, was loon 1rotsky. |o was supportod by tho
br||||ant so|t-taught oconom|st Yovgon| lroobrazhonsky.
lroobrazhonsky arguod that |t tho 3ov|ot oconomy was to
dovo|op |t noodod to |ncroaso |nvostmont |n |ndustr|os.
|owovor, lroobrazhonsky arguod, |t was vory d|tt|cu|t to
|ncroaso such |nvostmont bocauso v|rtua||y a|| tho surp|us tho
oconomy gonoratod (that |s, ovor and abovo what was
abso|uto|y nocossary tor tho phys|ca| surv|va| ot |ts
popu|at|on) was contro||od by tho tarmors, as tho oconomy
was most|y agr|cu|tura|. 1horotoro, ho roasonod, pr|vato
proporty and tho markot shou|d bo abo||shod |n tho
countrys|do, so that a|| |nvost|b|o surp|us cou|d bo squoozod
out ot |t by tho govornmont suppross|ng agr|cu|tura| pr|cos.
3uch surp|us was thon to bo sh|ttod to tho |ndustr|a| soctor,
whoro tho p|ann|ng author|ty cou|d mako suro that a|| ot |t
was |nvostod. ln tho short run, th|s wou|d suppross ||v|ng
standards, ospoc|a||y tor tho poasantry, but |n tho |ong run |t
wou|d mako ovoryono bottor ott, bocauso |t wou|d max|m|zo
|nvostmont and thorotoro tho growth potont|a| ot tho
oconomy.
1hoso on tho r|ght ot tho party, such as 1osot 3ta||n and
l|ko|a| 3ukhar|n, lroobrazhonsky's orstwh||o tr|ond and
|nto||octua| r|va|, ca||od tor roa||sm. 1hoy arguod that, ovon |t
|t was not vory 'commun|st' to a||ow pr|vato proporty |n |and
and ||vostock |n tho countrys|do, thoy cou|d not attord to
a||onato tho poasantry, g|von |ts prodom|nanco. Accord|ng
to 3ukhar|n, thoro was no othor cho|co than 'r|d|ng |nto
soc|a||sm on a poasant nag'. 1hroughout most ot tho 1020s,
tho r|ght had tho uppor hand. lroobrazhonsky was
|ncroas|ng|y marg|na||zod and torcod |nto ox||o |n 1027.
|owovor, |n 1028, |t a|| changod. Upon bocom|ng tho
so|o d|ctator, 3ta||n t||chod h|s r|va|s' |doas and
|mp|omontod tho stratogy advocatod by lroobrazhonsky. |o
cont|scatod |and trom tho ku|aks, tho r|ch tarmors, and
brought tho ont|ro countrys|do undor stato contro| through
co||oct|v|zat|on ot agr|cu|turo. 1ho |ands cont|scatod trom tho
ku|aks woro turnod |nto stato tarms (sovkboz), wh||o sma||
tarmors woro torcod to jo|n cooporat|vos or co||oct|vo tarms
(ko|kboz), w|th a nom|na| sharo ownorsh|p.
3ta||n d|d not to||ow lroobrazhonsky's rocommondat|on
oxact|y. Actua||y, ho wont rathor sott on tho countrys|do and
d|d not squoozo tho poasants to tho max|mum. lnstoad, ho
|mposod |owor-than-subs|stonco wagos on |ndustr|a|
workors, wh|ch |n turn torcod urban womon to jo|n tho
|ndustr|a| worktorco |n ordor to onab|o tho|r tam|||os to
surv|vo.
3ta||n's stratogy had hugo costs. V||||ons ot poop|o
ros|st|ng, or bo|ng accusod ot ros|s|st|ng, agr|cu|tura|
co||oct|v|zat|on ondod up |n |abour camps. 1horo was a
co||apso |n agr|cu|tura| output, to||ow|ng tho dramat|c ta|| |n
tho numbor ot tract|on an|ma|s, part|y duo to tho s|aughtor|ng
by tho|r ownors |n ant|c|pat|on ot cont|scat|on and part|y duo
to tho shortago ot gra|ns to tood thom thanks to torcod gra|n
sh|pmonts to tho c|t|os. 1h|s agr|cu|tura| broakdown rosu|tod
|n tho sovoro tam|no ot 1082-8 |n wh|ch m||||ons ot poop|o
por|shod.
1ho |rony |s that, w|thout 3ta||n adopt|ng
lroobrazhonsky's stratogy, tho 3ov|ot Un|on wou|d not havo
boon ab|o to bu||d tho |ndustr|a| baso at such a spood that |t
was ab|o to ropo| tho laz| |nvas|on on tho Eastorn |ront |n
tho 3ocond Wor|d War. W|thout tho laz| dotoat on tho
Eastorn |ront, Wostorn Europo wou|d not havo boon ab|o to
boat tho laz|s. 1hus, |ron|ca||y, Wostorn Europoans owo
tho|r troodom today to an u|tra-|ott-w|ng 3ov|ot oconom|st
ca||od lroobrazhonsky.
Why am l nattor|ng on about somo torgotton luss|an
Varx|st oconom|st trom noar|y a contury ago? lt |s bocauso
thoro |s a str|k|ng para||o| botwoon 3ta||n's (or rathor
lroobrazhonsky's) stratogy and today's pro-r|ch po||c|os
advocatod by troo-markot oconom|sts.
CapItalIsts vs. workers

|rom tho o|ghtoonth contury, tho touda| ordor, whoroby
poop|o woro born |nto corta|n 'stat|ons' and roma|nod thoro
tor tho rost ot tho|r ||vos, camo undor attack trom ||bora|s
throughout Europo. 1hoy arguod that poop|o shou|d bo
rowardod accord|ng to tho|r ach|ovomonts rathor than tho|r
b|rths (soo 7blog 20).
Ot courso, thoso woro ||bora|s ot n|notoonth-contury
v|ntago, so thoy had v|ows that today's ||bora|s (|oast ot a||
Amor|can ||bora|s, who wou|d bo ca||od '|ott ot contro', rathor
than ||bora|, |n Europo) wou|d t|nd objoct|onab|o. Abovo a||,
thoy woro aga|nst domocracy. 1hoy bo||ovod that g|v|ng
votos to poor mon - womon woro not ovon cons|dorod, as
thoy woro bo||ovod to |ack tu|| monta| tacu|ty - wou|d dostroy
cap|ta||sm. Why was that?
1ho n|notoonth-contury ||bora|s bo||ovod that abst|nonco
was tho koy to woa|th accumu|at|on and thus oconom|c
dovo|opmont. |av|ng acqu|rod tho tru|ts ot tho|r |abour,
poop|o nood to absta|n trom |nstant grat|t|cat|on and |nvost
|t, |t thoy woro to accumu|ato woa|th. ln th|s wor|d v|ow, tho
poor woro poor bocauso thoy d|d not havo tho charactor to
oxorc|so such abst|nonco. 1horotoro, |t you gavo tho poor
vot|ng r|ghts, thoy wou|d want to max|m|zo tho|r curront
consumpt|on, rathor than |nvostmont, by |mpos|ng taxos on
tho r|ch and spond|ng thom. 1h|s m|ght mako tho poor bottor
ott |n tho short run, but |t wou|d mako thom worso ott |n tho
|ong run by roduc|ng |nvostmont and thus growth.
ln tho|r ant|-poor po||t|cs, tho ||bora|s woro |nto||octua||y
supportod by tho C|ass|ca| oconom|sts, w|th 0av|d l|cardo,
tho n|notoonth-contury 3r|t|sh oconom|st, as tho most br||||ant
ot thom a||. Un||ko today's ||bora| oconom|sts, tho C|ass|ca|
oconom|sts d|d not soo tho cap|ta||st oconomy as bo|ng
mado up ot |nd|v|dua|s. 1hoy bo||ovod that poop|o bo|ongod
to d|ttoront c|assos - cap|ta||sts, workors and |and|ords -
and bohavod d|ttoront|y accord|ng to tho|r c|assos. 1ho most
|mportant |ntor-c|ass bohav|oura| d|ttoronco was cons|dorod
to bo tho tact that cap|ta||sts |nvostod (v|rtua||y) a|| ot tho|r
|ncomos wh||o tho othor c|assos - tho work|ng c|ass and tho
|and|ord c|ass - consumod thom. On tho |and|ord c|ass,
op|n|on was sp||t. 3omo, ||ko l|cardo, saw |t as a
consum|ng c|ass that hamporod cap|ta| accumu|at|on, wh||o
othors, such as 1homas Va|thus, thought that |ts
consumpt|on ho|pod tho cap|ta||st c|ass by ottor|ng oxtra
domands tor tho|r products. |owovor, on tho workors, thoro
was a consonsus. 1hoy spont a|| ot tho|r |ncomo, so |t tho
workors got a h|ghor sharo ot tho nat|ona| |ncomo,
|nvostmont and thus oconom|c growth wou|d ta||.
1h|s |s whoro ardont troo-markotoors ||ko l|cardo moot
u|tra-|ott w|ng commun|sts ||ko lroobrazhonsky. 0osp|to
tho|r apparont d|ttoroncos, both ot thom bo||ovod that tho
|nvost|b|o surp|us shou|d bo concontratod |n tho hands ot tho
|nvostor, tho cap|ta||st c|ass |n tho caso ot tho tormor and tho
p|ann|ng author|ty |n tho caso ot tho |attor, |n ordor to
max|m|zo oconom|c growth |n tho |ong run. 1h|s |s u|t|mato|y
what poop|o today havo |n m|nd whon thoy say that 'you t|rst
havo to croato woa|th botoro you can rod|str|buto |t'.
1he |all and rIse o| pro-rIch polIcIes

3otwoon tho |ato n|notoonth and oar|y twont|oth contur|os,
tho worst toars ot ||bora|s woro roa||zod, and most countr|os
|n Europo and tho so-ca||od 'Wostorn ottshoots' (tho U3,
Canada, Austra||a and low Zoa|and) oxtondod suttrago to
tho poor (natura||y on|y to tho ma|os). |owovor, tho droadod
ovor-taxat|on ot tho r|ch and tho rosu|t|ng dostruct|on ot
cap|ta||sm d|d not happon. ln tho docados that to||owod tho
|ntroduct|on ot un|vorsa| ma|o suttrago, taxat|on on tho r|ch
and soc|a| spond|ng d|d not |ncroaso by much. 3o, tho poor
woro not that |mpat|ont attor a||.
Voroovor, whon tho droadod ovor-taxat|on ot tho r|ch
startod |n oarnost, |t d|d not dostroy cap|ta||sm. ln tact, |t
mado |t ovon strongor. |o||ow|ng tho 3ocond Wor|d War,
thoro was a rap|d growth |n progross|vo taxat|on and soc|a|
wo|taro spond|ng |n most ot tho r|ch cap|ta||st countr|os.
0osp|to th|s (or rathor part|y bocauso ot th|s - soo 7blog
21), tho por|od botwoon 10b0 and 1078 saw tho h|ghost-
ovor growth ratos |n thoso countr|os - known as tho 'Go|don
Ago ot Cap|ta||sm'. 3otoro tho Go|don Ago, por cap|ta
|ncomo |n tho r|ch cap|ta||st oconom|os usod to grow at 1-
1.b por cont por yoar. 0ur|ng tho Go|don Ago, |t grow at 2-8
por cont |n tho U3 and 3r|ta|n, 4-b por cont |n Wostorn
Europo, and 8 por cont |n 1apan. 3|nco thon, thoso countr|os
havo novor managod to grow tastor than that.
Whon growth s|owod down |n tho r|ch cap|ta||st
oconom|os trom tho m|d 1070s, howovor, tho troo-
markotoors dustod ott tho|r n|notoonth-contury rhotor|c and
managod to conv|nco othors that tho roduct|on |n tho sharo
ot tho |ncomo go|ng to tho |nvost|ng c|ass was tho roason tor
tho s|owdown.
3|nco tho 1080s, |n many (a|though not a||) ot thoso
countr|os, govornmonts that ospouso upward |ncomo
rod|str|but|on havo ru|od most ot tho t|mo. Evon somo so-
ca||od |ott-w|ng part|os, such as 3r|ta|n's low labour undor
1ony 3|a|r and tho Amor|can 0omocrat|c larty undor 3|||
C||nton, opon|y advocatod such a stratogy - tho h|gh po|nt
bo|ng 3||| C||nton |ntroduc|ng h|s wo|taro rotorm |n 1000,
doc|ar|ng that ho wantod to 'ond wo|taro as wo know |t'.
ln tho ovont, tr|mm|ng tho wo|taro stato down provod moro
d|tt|cu|t than |n|t|a||y thought (soo 7blog 21). |owovor, |ts
growth has boon modoratod, dosp|to tho structura| prossuro
tor groator wo|taro spond|ng duo to tho ago|ng ot tho
popu|at|on, wh|ch |ncroasos tho nood tor pons|ons, d|sab|||ty
a||owancos, hoa|thcaro and othor spond|ng d|roctod to tho
o|dor|y.
Voro |mportant|y, |n most countr|os thoro woro a|so many
po||c|os that ondod up rod|str|but|ng |ncomo trom tho poor to
tho r|ch. 1horo havo boon tax cuts tor tho r|ch - top |ncomo-
tax ratos woro brought down. ||nanc|a| dorogu|at|on has
croatod hugo opportun|t|os tor spocu|at|vo ga|ns as wo|| as
astronom|ca| paychoquos tor top managors and t|nanc|ors
(soo 7blogs 2 ooo 22). 0orogu|at|on |n othor aroas has a|so
a||owod compan|os to mako b|ggor prot|ts, not |oast
bocauso thoy woro moro ab|o to oxp|o|t tho|r monopo|y
powors, moro troo|y po||uto tho onv|ronmont and moro
road||y sack workors. lncroasod trado ||bora||zat|on and
|ncroasod toro|gn |nvostmont - or at |oast tho throat ot thom
- havo a|so put downward prossuro on wagos.
As a rosu|t, |ncomo |noqua||ty has |ncroasod |n most r|ch
countr|os. |or oxamp|o, accord|ng to tho llO (lntornat|ona|
labour Organ|zat|on) roport 7bo or|o o ork 2008, ot tho
twonty advancod oconom|os tor wh|ch data was ava||ab|o,
botwoon 1000 and 2000 |ncomo |noqua||ty roso |n s|xtoon
countr|os, w|th on|y 3w|tzor|and among tho roma|n|ng tour
oxpor|onc|ng a s|gn|t|cant ta||.
1
0ur|ng th|s por|od, |ncomo
|noqua||ty |n tho U3, a|roady by tar tho h|ghost |n tho r|ch
wor|d, roso to a |ovo| comparab|o to that ot somo lat|n
Amor|can countr|os such as Uruguay and vonozuo|a. 1ho
ro|at|vo |ncroaso |n |ncomo |noqua||ty was a|so h|gh |n
countr|os such as ||n|and, 3wodon and 3o|g|um, but thoso
woro countr|os that prov|ous|y had vory |ow |ovo|s ot
|noqua||ty - porhaps too |ow |n tho caso ot ||n|and, wh|ch
had an ovon moro oqua| |ncomo d|str|but|on than many ot
tho tormor soc|a||st countr|os.
Accord|ng to tho Econom|c lo||cy lnst|tuto (Ell), tho
contro-|ott th|nk-tank |n Wash|ngton, 0C, botwoon 1070 and
2000 (tho |atost yoar ot ava||ab|o data), tho top 1 por cont ot
oarnors |n tho U3 moro than doub|od tho|r sharo ot nat|ona|
|ncomo, trom 10 por cont to 22.0 por cont. 1ho top 0.1 por
cont d|d ovon bottor, |ncroas|ng tho|r sharo by moro than
throo t|mos, trom 8.b por cont |n 1070 to 11.0 por cont |n
2000.
2
1h|s was ma|n|y bocauso ot tho astronom|ca|
|ncroaso |n oxocut|vo pay |n tho country, whoso |ack ot
just|t|cat|on |s |ncroas|ng|y bocom|ng obv|ous |n tho
attormath ot tho 2008 t|nanc|a| cr|s|s (soo 7blog 14).
Ot tho s|xty-t|vo dovo|op|ng and tormor soc|a||st countr|os
covorod |n tho abovo-mont|onod llO study, |ncomo
|noqua||ty roso |n torty-ono countr|os dur|ng tho samo por|od.
Wh||o tho proport|on ot countr|os oxpor|onc|ng r|s|ng
|noqua||ty among thom was sma||or than tor tho r|ch
countr|os, many ot thoso countr|os a|roady had vory h|gh
|noqua||ty, so tho |mpacts ot r|s|ng |noqua||ty woro ovon
worso than |n tho r|ch countr|os.
Water that does not trIckle down

A|| th|s upward rod|str|but|on ot |ncomo m|ght havo boon
just|t|od, had |t |od to acco|oratod growth. 3ut tho tact |s that
oconom|c growth has actua||y s|owod down s|nco tho start ot
tho noo-||bora| pro-r|ch rotorm |n tho 1080s. Accord|ng to
Wor|d 3ank data, tho wor|d oconomy usod to grow |n por
cap|ta torms at ovor 8 por cont dur|ng tho 1000s and 70s,
wh||o s|nco tho 1080s |t has boon grow|ng at tho rato ot 1.4
por cont por yoar (1080-2000).
ln short, s|nco tho 1080s, wo havo g|von tho r|ch a b|ggor
s||co ot our p|o |n tho bo||ot that thoy wou|d croato moro
woa|th, mak|ng tho p|o b|ggor than othorw|so poss|b|o |n tho
|ong run. 1ho r|ch got tho b|ggor s||co ot tho p|o a|| r|ght, but
thoy havo actua||y rooocoo tho paco at wh|ch tho p|o |s
grow|ng.
1ho prob|om |s that concontrat|ng |ncomo |n tho hands ot
tho supposod |nvostor, bo |t tho cap|ta||st c|ass or 3ta||n's
contra| p|ann|ng author|ty, doos not |oad to h|ghor growth |t
tho |nvostor ta||s to |nvost moro. Whon 3ta||n concontratod
|ncomo |n Gosp|an, tho p|ann|ng author|ty, thoro was at |oast
a guarantoo that tho concontratod |ncomo wou|d bo turnod
|nto |nvostmont (ovon though tho product|v|ty ot tho
|nvostmont may havo boon advorso|y attoctod by tactors
such as tho d|tt|cu|ty ot p|ann|ng and work |ncont|vo
prob|oms - soo 7blog 10). Cap|ta||st oconom|os do not
havo such a mochan|sm. lndood, dosp|to r|s|ng |noqua||ty
s|nco tho 1080s, |nvostmont as a rat|o ot nat|ona| output has
ta||on |n a|| G7 oconom|os (tho U3, 1apan, Gormany, tho UK,
lta|y, |ranco and Canada) and |n most dovo|op|ng countr|os
(soo 7blogs 2 ooo 0).
Evon whon upward |ncomo rod|str|but|on croatos moro
woa|th than othorw|so poss|b|o (wh|ch has oot happonod, l
ropoat), thoro |s no guarantoo that tho poor w||| bonot|t trom
thoso oxtra |ncomos. lncroas|ng prospor|ty at tho top m|ght
ovontua||y tr|ck|o down and bonot|t tho poor, but th|s |s not a
torogono conc|us|on.
Ot courso, tr|ck|o down |s not a comp|oto|y stup|d |doa.
Wo cannot judgo tho |mpact ot |ncomo rod|str|but|on on|y by
|ts |mmod|ato ottocts, howovor good or bad thoy may |ook.
Whon r|ch poop|o havo moro monoy, thoy may uso |t to
|ncroaso |nvostmont and growth, |n wh|ch caso tho |ong-run
ottoct ot upward |ncomo rod|str|but|on may bo tho growth |n
tho abso|uto s|zo, a|though not nocossar||y tho ro|at|vo sharo,
ot |ncomo that ovoryono gots.
|owovor, tho troub|o |s that tr|ck|o down usua||y doos not
happon vory much |t |ott to tho markot. |or oxamp|o, onco
aga|n accord|ng to tho Ell, tho top 10 por cont ot tho U3
popu|at|on appropr|atod 01 por cont ot |ncomo growth
botwoon 1080 and 2000, wh||o tho top 1 por cont took b0
por cont. ln contrast, |n countr|os w|th a strong wo|taro stato
|t |s a |ot oas|or to sproad tho bonot|ts ot oxtra growth that
to||ows upward |ncomo rod|str|but|on (|t |t happons) through
taxos and transtors. lndood, botoro taxos and transtors,
|ncomo d|str|but|on |s actua||y moro unoqua| |n 3o|g|um and
Gormany than |n tho U3, wh||o |n 3wodon and tho
lothor|ands |t |s moro or |oss tho samo as |n tho U3.
8
ln
othor words, wo nood tho o|octr|c pump ot tho wo|taro stato
to mako tho wator at tho top tr|ck|o down |n any s|gn|t|cant
quant|ty.
last but not |oast, thoro aro many roasons to bo||ovo that
downward |ncomo rod|str|but|on can ho|p growth, |t dono |n
tho r|ght way at tho r|ght t|mo. |or oxamp|o, |n an oconom|c
downturn ||ko today's, tho bost way to boost tho oconomy |s
to rod|str|buto woa|th downward, as pooror poop|o tond to
spond a h|ghor proport|on ot tho|r |ncomos. 1ho oconomy-
boost|ng ottoct ot tho oxtra b||||on do||ar g|von to tho |owor-
|ncomo housoho|ds through |ncroasod wo|taro spond|ng w|||
bo b|ggor than tho samo amount g|von to tho r|ch through tax
cuts. Voroovor, |t wagos aro not stuck at or bo|ow
subs|stonco |ovo|s, add|t|ona| |ncomo may oncourago
workors' |nvostmont |n oducat|on and hoa|th, wh|ch may
ra|so tho|r product|v|ty and thus oconom|c growth. ln
add|t|on, groator |ncomo oqua||ty may promoto soc|a| poaco
by roduc|ng |ndustr|a| str|kos and cr|mo, wh|ch may |n turn
oncourago |nvostmont, as |t roducos tho dangor ot
d|srupt|on to tho product|on procoss and thus to tho procoss
ot gonorat|ng woa|th. Vany scho|ars bo||ovo that such a
mochan|sm was at work dur|ng tho Go|don Ago ot
Cap|ta||sm, whon |ow |ncomo |noqua||ty coox|stod w|th rap|d
growth.
1hus soon, thoro |s no roason to prosumo that upward
|ncomo rod|str|but|on w||| acco|orato |nvostmont and growth.
1h|s has not happonod |n gonora|. Evon whon thoro |s moro
growth, tho tr|ck|o down that occurs through tho markot
mochan|sm |s vory ||m|tod, as soon |n tho abovo compar|son
ot tho U3 w|th othor r|ch countr|os w|th a good wo|taro stato.
3|mp|y mak|ng tho r|ch r|chor doos not mako tho rost ot
us r|chor. lt g|v|ng moro to tho r|ch |s go|ng to bonot|t tho rost
ot tho soc|oty, tho r|ch havo to bo mooo to do||vor h|ghor
|nvostmont and thus h|ghor growth through po||cy moasuros
(o.g., tax cuts tor tho r|ch |nd|v|dua|s and corporat|ons,
cond|t|ona| on |nvostmont), and thon sharo tho tru|ts ot such
growth through a mochan|sm such as tho wo|taro stato.
1hing 14
u5 managora aro ovor-ricod

What they tell you

3omo poop|o aro pa|d a |ot moro than othors. Espoc|a||y |n
tho U3, compan|os pay tho|r top managors what somo
poop|o cons|dor to bo obscono amounts. |owovor, th|s |s
what markot torcos domand. G|von that tho poo| ot ta|ont |s
||m|tod, you s|mp|y havo to pay |argo sums ot monoy |t you
aro to attract tho bost ta|onts. |rom tho po|nt ot v|ow ot a
g|ant corporat|on w|th b||||ons ot do||ars ot turnovor, |t |s
dot|n|to|y worth pay|ng oxtra m||||ons, or ovon tons ot m||||ons,
ot do||ars to got tho bost ta|ont, as hor ab|||ty to mako bottor
doc|s|ons than hor countorparts |n compot|tor compan|os
can br|ng |n oxtra hundrods ot m||||ons ot do||ars |n rovonuo.
|owovor unjust thoso |ovo|s ot componsat|on may appoar,
wo shou|d not ongago |n acts ot onvy and sp|to and try to
art|t|c|a||y suppross thom. 3uch attompts wou|d bo s|mp|y
countorproduct|vo.
What they don't tell you

U3 managors aro ovor-pr|cod |n moro than ono sonso. ||rst,
thoy aro ovor-pr|cod comparod to tho|r prodocossors. ln
ro|at|vo torms (that |s, as a proport|on ot avorago workor
componsat|on), Amor|can CEOs today aro pa|d around ton
t|mos moro than tho|r prodocossors ot tho 1000s, dosp|to
tho tact that tho |attor ran compan|os that woro much moro
succosstu|, |n ro|at|vo torms, than today's Amor|can
compan|os. U3 managors aro a|so ovor-pr|cod comparod
to tho|r countorparts |n othor r|ch countr|os. ln abso|uto
torms, thoy aro pa|d, dopond|ng on tho moasuro wo uso and
tho country wo comparo w|th, up to twonty t|mos moro than
tho|r compot|tors runn|ng s|m||ar|y |argo and succosstu|
compan|os. Amor|can managors aro not on|y ovor-pr|cod
but a|so ovor|y protoctod |n tho sonso that thoy do not got
pun|shod tor poor portormanco. And a|| th|s |s not, un||ko
what many poop|o arguo, puro|y d|ctatod by markot torcos.
1ho managor|a| c|ass |n tho U3 has ga|nod such oconom|c,
po||t|ca| and |doo|og|ca| powor that |t has boon ab|o to
man|pu|ato tho torcos that dotorm|no |ts pay.
ExecutIve pay and the polItIcs o| class
envy

1ho avorago CEO componsat|on (sa|ar|os, bonusos,
pons|ons and stock opt|ons) |n tho U3 |s 800-400 t|mos tho
avorago workor componsat|on (wagos and bonot|ts). 3omo
poop|o aro torr|b|y upsot about th|s. |or oxamp|o, Vr 3arack
Obama, tho U3 pros|dont, |s troquont|y quotod cr|t|c|z|ng
what ho soos as oxcoss|vo oxocut|vo pay.
|roo-markot oconom|sts soo no prob|om |n th|s pay
d|spar|ty. lt tho CEOs aro pa|d 800 t|mos moro than tho
avorago workor, thoy say, |t must bo bocauso thoy add 800
t|mos moro va|uo to tho company. lt somoono doos not havo
tho product|v|ty to just|ty hor h|gh pay, markot torcos w|||
soon onsuro that sho |s sackod (soo 7blog 8). 1hoso who
ra|so |ssuos w|th oxocut|vo pay, ||ko Vr Obama, aro
popu||sts who ongago |n tho po||t|cs ot c|ass onvy. Un|oss
thoso who aro |oss product|vo accopt, thoy arguo, that
poop|o nood to bo pa|d accord|ng to tho|r product|v|ty,
cap|ta||sm cannot tunct|on propor|y.
Ono cou|d a|most bo||ovo |n tho abovo argumonts, |t ono
mado a sma|| concoss|on - |gnor|ng tho tacts.
l am not d|sput|ng that somo poop|o aro moro product|vo
than othors and that thoy nood to bo pa|d moro - somot|mos
a |ot moro (a|though thoy shou|d not bo too smug about |t -
soo 7blog 8). 1ho roa| quost|on |s whothor tho curront
dogroo ot d|ttoronco |s just|t|od.
low, accurato|y tott|ng up oxocut|vo pay |s vory d|tt|cu|t.
1o bog|n w|th, tho d|sc|osuro ot oxocut|vo pay |s not vory
good |n many countr|os. Whon wo |ook at componsat|on as
a who|o, rathor than just sa|ar|os, wo nood to |nc|udo stock
opt|ons. 3tock opt|ons g|vo tho roc|p|ont tho r|ght to buy a
corta|n numbor ot tho company's stocks |n tho tuturo, so thoy
do not havo an oxact va|uo |n tho prosont and tho|r va|uo
noods to bo ost|matod. 0opond|ng on tho mothodo|ogy
usod tor tho ost|mat|on, tho va|uat|on can vary a |ot.
As mont|onod oar||or, boar|ng thoso cavoats |n m|nd, tho
rat|o ot CEO componsat|on to avorago workor
componsat|on |n tho U3 usod to bo |n tho rog|on ot 80 to 40
to 1 |n tho 1000s and 70s. 1h|s rat|o has grown at a rap|d
rato s|nco tho oar|y 1080s, roach|ng around 100 to 1 |n tho
oar|y 1000s and r|s|ng to 800-400 to 1 by tho 2000s.
Contrast th|s to tho changos |n what tho Amor|can
workors got. Accord|ng to tho Econom|c lo||cy lnst|tuto
(Ell), tho Wash|ngton-basod contro-|ott th|nk-tank, tho
avorago hour|y wago tor tho U3 workors |n 2007 do||ars (that
|s, adjustod tor |nt|at|on) roso trom $18.00 |n 1078 to $21.84
|n 2000. 1hat |s a 18 por cont |ncroaso |n th|rty-throo yoars,
wh|ch |s around 0.4 por cont growth por yoar.
1
1ho p|cturo |s
ovon b|oakor whon wo |ook at ovora|| componsat|on (wagos
p|us bonot|ts) and not just wagos. Evon |t wo |ook at on|y tho
rocovory por|ods (g|von that workor componsat|on ta||s
dur|ng rocoss|ons), mod|an workor componsat|on roso at
tho rato ot 0.2 por cont por yoar dur|ng 1088-0, at tho rato ot
0.1 por cont por yoar botwoon 1002 and 2000 and d|d not
grow at a|| dur|ng 2002-7.
2
ln othor words, workor pay |n tho U3 has boon v|rtua||y
stagnant s|nco tho m|d 1070s. Ot courso, th|s |s not to say
that Amor|cans havo not soon any r|so |n ||v|ng standards
s|nco tho 1070s. |am||y |ncomo, as opposod to |nd|v|dua|
workor componsat|on, has r|son, but that |s on|y bocauso
moro and moro tam|||os havo both partnors work|ng.
low, |t wo bo||ovod |n tho troo-markot |og|c that poop|o
aro pa|d accord|ng to tho|r contr|but|on, tho |ncroaso |n tho
ro|at|vo componsat|on ot tho CEOs trom 80-40 t|mos that ot
avorago workor componsat|on (wh|ch has not changod vory
much) to 800-400 t|mos must moan that tho Amor|can
CEOs havo bocomo ton t|mos moro product|vo (|n ro|at|vo
torms) than thoy woro |n tho 1000s and 70s. ls th|s truo?
1ho avorago qua||ty ot U3 managors may havo boon
r|s|ng duo to bottor oducat|on and tra|n|ng, but |s |t roa||y
p|aus|b|o that thoy aro ton t|mos bottor than tho|r oqu|va|onts
woro ono gonorat|on ago? Evon |ook|ng back at on|y tho |ast
twonty yoars, dur|ng wh|ch t|mo l havo boon toach|ng |n
Cambr|dgo, l s|ncoro|y doubt whothor tho Amor|can studonts
wo got (who aro potont|a| CEO mator|a|) aro throo to tour
t|mos bottor today than whon l startod toach|ng |n tho oar|y
1000s. 3ut that shou|d bo tho caso, |t Amor|can CEO pay
had r|son |n ro|at|vo torms puro|y bocauso ot tho r|s|ng
qua||ty ot tho CEOs: dur|ng th|s por|od, tho avorago CEO
componsat|on |n tho U3 roso trom 100 t|mos tho avorago
workor componsat|on to 800-400 t|mos.
A common oxp|anat|on ot th|s rocont stoop r|so |n ro|at|vo
pay |s that compan|os havo bocomo b|ggor and thorotoro
tho d|ttoronco that tho CEO can mako has bocomo b|ggor.
Accord|ng to a popu|ar oxamp|o usod by lrotossor lobort
|. |rank ot Corno|| Un|vors|ty |n h|s w|do|y c|tod Now York
7lmos co|umn, |t a company has $10 b||||on oarn|ngs, a tow
bottor doc|s|ons mado by a bottor CEO can oas||y |ncroaso
tho company's oarn|ngs by $80 m||||on.
8
3o, tho |mp||c|t
mossago goos, what |s an oxtra $b m||||on tor tho CEO,
whon sho has g|von an oxtra $80 m||||on to tho company?
1horo |s somo |og|c to th|s argumont, but |t tho grow|ng
s|zo ot tho company |s tho ma|n oxp|anat|on tor CEO pay
|nt|at|on, why d|d |t suddon|y tako ott |n tho 1080s, whon U3
company s|zo has boon grow|ng a|| tho t|mo?
A|so, tho samo argumont shou|d app|y to tho workors as
wo||, at |oast to somo oxtont. Vodorn corporat|ons work on
tho bas|s ot comp|ox d|v|s|ons ot |abour and cooporat|on, so
tho v|ow that what tho CEO doos |s tho on|y th|ng that
mattors tor company portormanco |s h|gh|y m|s|oad|ng (soo
7blogs 8 ooo 15). As compan|os grow b|ggor, tho potont|a|
tor workors bonot|t|ng or damag|ng tho company grows
b|ggor as wo|| and thorotoro |t bocomos moro and moro
|mportant to h|ro bottor workors. lt that woro not tho caso,
why do compan|os bothor w|th human rosourcos
dopartmonts?
Voroovor, |t tho |ncroas|ng |mportanco ot top managor|a|
doc|s|ons |s tho ma|n roason tor CEO sa|ary |nt|at|on, why
aro CEOs |n 1apan and Europo runn|ng s|m||ar|y |argo
compan|os pa|d on|y a tract|on ot what tho Amor|can CEOs
aro pa|d? Accord|ng to tho Ell, as ot 200b, 3w|ss and
Gorman CEOs woro pa|d rospoct|vo|y 04 por cont and bb
por cont ot what tho|r Amor|can countorparts roco|vod. 1ho
3wod|sh and tho 0utch woro pa|d on|y around 44 por cont
and 40 por cont ot tho Amor|can CEOs' pay, 1apanoso
CEOs on|y a pa|try 2b por cont. 1ho avorago CEO pay tor
th|rtoon r|ch countr|os othor than tho U3 was on|y 44 por cont
ot tho U3 |ovo|.
4
1ho abovo t|guros actua||y vast|y undorstato tho
|ntornat|ona| d|ttoroncos |n CEO romunorat|on as thoy do not
|nc|udo stock opt|ons, wh|ch tond to bo much h|ghor |n tho
U3 than |n othor countr|os. Othor data trom tho Ell suggost
that, |n tho U3, CEO pay |nc|ud|ng stock opt|ons cou|d bo
oas||y throo to tour t|mos, and poss|b|y t|vo to s|x t|mos, that
ot tho|r pay oxc|ud|ng stock opt|ons, a|though |t |s d|tt|cu|t to
know oxact|y tho magn|tudo |nvo|vod. 1h|s moans that, |t wo
|nc|udo stock opt|ons, tho 1apanoso CEO componsat|on
(w|th on|y a sma|| stock opt|on componont, |t at a||) cou|d bo
as |ow as b por cont, |nstoad ot 2b por cont, that ot U3 CEO
componsat|on.
low, |t tho Amor|can CEOs aro worth anyth|ng botwoon
tw|co (comparod to tho 3w|ss CEOs, oxc|ud|ng stock
opt|ons) and twonty t|mos (comparod to tho 1apanoso
CEOs, |nc|ud|ng stock opt|ons), tho|r countorparts abroad,
how como tho compan|os thoy run havo boon |os|ng out to
tho|r 1apanoso and Europoan r|va|s |n many |ndustr|os?
You may suggost that tho 1apanoso and Europoan CEOs
can work at much |owor abso|uto pay than tho Amor|can
CEOs bocauso tho|r countr|os' gonora| wago |ovo|s aro
|owor. |owovor, wagos |n 1apan and tho Europoan
countr|os aro bas|ca||y at tho samo |ovo| as thoso |n tho U3.
1ho avorago workor pay |n tho th|rtoon countr|os stud|od by
tho Ell was 8b por cont ot tho U3 workor pay |n 200b. 1ho
1apanoso workors got pa|d 01por cont tho Amor|can
wagos, but tho|r CEOs got pa|d on|y 2b por cont ot what tho
Amor|can CEOs got (oxc|ud|ng stock opt|ons). 1ho 3w|ss
workors and tho Gorman workors got blgbor wagos than tho
U3 workors (180 por cont and 100 por cont ot tho U3 wago,
rospoct|vo|y), wh||o tho|r CEOs got pa|d on|y bb por cont and
04 por cont ot tho U3 sa|ar|os (onco aga|n, oxc|ud|ng sharo
opt|ons, wh|ch aro much h|ghor |n tho U3).
b
1hus soon, U3 managors aro ovor-pr|cod. 1ho Amor|can
workors got pa|d on|y 1b por cont or so moro than tho|r
countorparts |n compot|tor nat|ons, wh||o tho Amor|can
CEOs aro pa|d at |oast tw|co (comparod to tho 3w|ss
managors, oxc|ud|ng stock opt|ons) and poss|b|y up to
twonty t|mos (comparod to tho 1apanoso managors,
|nc|ud|ng stock opt|ons) that ot what tho|r countorparts |n
comparab|o countr|os aro pa|d. 0osp|to th|s, tho Amor|can
CEOs aro runn|ng compan|os that aro no bottor, and
troquont|y worso, than tho|r 1apanoso or Europoan
compot|tors.
Heads l wIn, taIls you lose

ln tho U3 (and tho UK, wh|ch has tho socond h|ghost CEO-
workor pay rat|o attor tho U3), tho componsat|on packagos
tor top managors aro |oadod |n ono way. Apart trom bo|ng
pa|d oxcoss|vo amounts, thoso managors do not got
pun|shod tor bad managomont. 1ho most that w||| happon to
thom |s to bo k|ckod out ot tho|r curront job, but that w|||
a|most a|ways bo accompan|od by a tat sovoranco paymont
choquo. 3omot|mos tho oxpo||od CEO w||| got ovon moro
than what |s roqu|rod |n tho contract. Accord|ng to two
oconom|sts, 3obchuk and |r|od, 'whon Vatto| CEO 1|||
3arad ros|gnod undor t|ro [|n 2000|, tho board torgavo a
$4.2 m||||on |oan, gavo hor an add|t|ona| $8.8 m||||on |n cash
to covor tho taxos tor torg|vonoss ot anothor |oan and
a||owod hor unvostod opt|ons to vost automat|ca||y. 1hoso
gratu|tous bonot|ts woro |n add|t|on to tho cons|dorab|o
bonot|ts that sho roco|vod undor hor omp|oymont
agroomont, wh|ch |nc|udod a torm|nat|on paymont ot $20.4
m||||on and a stroam ot rot|romont bonot|ts oxcood|ng
$700,000 por yoar.'
0
3hou|d wo caro? lot roa||y, troo-markot oconom|sts
wou|d arguo. lt somo compan|os aro stup|d onough to pay
gratu|tous bonot|ts to ta||od CEOs, thoy wou|d say, |ot thom
do |t. 1hoy w||| bo outcompotod by moro hard-nosod
compot|tors that do not ongago |n such nonsonso. 3o, ovon
though thoro may bo somo poor|y dos|gnod componsat|on
schomos around, thoy w||| ovontua||y bo o||m|natod through
compot|t|vo prossuros ot tho markot.
1h|s sooms p|aus|b|o. 1ho compot|t|vo procoss works to
o||m|nato |nott|c|ont pract|cos, bo thoy obso|oto toxt||o
tochno|og|os or b|asod oxocut|vo pay schomos. And tho tact
that Amor|can and 3r|t|sh compan|os havo boon |os|ng to
toro|gn compan|os, wh|ch on tho who|o havo bottor
managor|a| |ncont|vos, |s a proot ot |t.
|owovor, |t w||| tako a |ong t|mo tor th|s procoss to
o||m|nato wrong managor|a| componsat|on pract|cos (attor
a||, th|s has boon go|ng on tor docados). 3otoro |ts rocont
bankruptcy, poop|o had known tor at |oast throo docados
that GV was on a doc||no, but no ono d|d anyth|ng to stop
tho top managors trom roco|v|ng componsat|on packagos
moro t|tt|ng to tho|r prodocossors |n tho m|d twont|oth
contury, whon tho company had abso|uto dom|nanco
wor|dw|do (soo 7blog 18).
0osp|to th|s, ||tt|o |s dono to chock oxcoss|vo and b|asod
(|n that ta||uros aro hard|y pun|shod) oxocut|vo pay packagos
bocauso tho managor|a| c|assos |n tho U3 and 3r|ta|n havo
bocomo so powortu|, not |oast bocauso ot tho tat
paychoquos thoy havo boon gott|ng ovor tho |ast tow
docados. 1hoy havo como to contro| tho boardrooms,
through |ntor|ock|ng d|roctorsh|p and man|pu|at|on ot
|ntormat|on that thoy prov|do to |ndopondont d|roctors, and
as a rosu|t tow boards ot d|roctors quost|on tho |ovo| and tho
structuro ot oxocut|vo pay sot by tho CEO. ||gh and r|s|ng
d|v|dond paymonts a|so koop tho sharoho|dors happy (soo
7blog 2). 3y t|ox|ng tho|r oconom|c musc|o, tho managor|a|
c|assos havo ga|nod onormous |nt|uonco ovor tho po||t|ca|
sphoro, |nc|ud|ng tho supposod|y contro-|ott part|os such as
3r|ta|n's low labour and Amor|ca's 0omocrat|c larty.
Espoc|a||y |n tho U3, many pr|vato soctor CEOs ond up
runn|ng govornmont dopartmonts. Vost |mportant|y, thoy
havo usod tho|r oconom|c and po||t|ca| |nt|uonco to sproad
tho troo-markot |doo|ogy that says that whatovor ox|sts must
bo thoro bocauso |t |s tho most ott|c|ont.
1ho powor ot th|s managor|a| c|ass has boon most v|v|d|y
domonstratod by tho attormath ot tho 2008 t|nanc|a| cr|s|s.
Whon tho Amor|can and tho 3r|t|sh govornmonts |njoctod
astronom|ca| sums ot taxpayors' monoy |nto troub|od
t|nanc|a| |nst|tut|ons |n tho autumn ot 2008, tow ot tho
managors who woro rospons|b|o tor tho|r |nst|tut|on's ta||uro
woro pun|shod. Yos, a sma|| numbor ot CEOs havo |ost tho|r
jobs, but tow ot thoso who havo roma|nod |n tho|r jobs havo
takon a sor|ous pay cut and thoro has boon an onormous,
and ottoct|vo, ros|stanco to tho attompt by tho U3 Congross
to put a cap on pay ot tho managors ot t|nanc|a| t|rms
roco|v|ng taxpayors' monoy. 1ho 3r|t|sh govornmont rotusod
to do anyth|ng about tho L1b-20 m||||on pons|ons payout
(wh|ch g|vos h|m around L700,000 yoar|y |ncomo) to tho
d|sgracod tormor boss ot tho l33 (loya| 3ank ot 3cot|and),
3|r |rod Goodw|n, a|though tho |ntonso nogat|vo pub||c|ty
torcod h|m subsoquont|y to roturn L4 m||||on. 1ho tact that tho
3r|t|sh and tho Amor|can taxpayors, who havo bocomo tho
sharoho|dors ot tho ba||od-out t|nanc|a| |nst|tut|ons, cannot
ovon pun|sh tho|r now-omp|oyoos tor poor portormanco and
torco thom to accopt a moro ott|c|ont componsat|on schomo
shows tho oxtont ot powor that tho managor|a| c|ass now
possossos |n thoso countr|os.
Varkots wood out |nott|c|ont pract|cos, but on|y whon no
ono has sutt|c|ont powor to man|pu|ato thom. Voroovor,
ovon |t thoy aro ovontua||y woodod out, ono-s|dod
managor|a| componsat|on packagos |mposo hugo costs on
tho rost ot tho oconomy wh||o thoy |ast. 1ho workors havo to
bo constant|y squoozod through downward prossuro on
wagos, casua||zat|on ot omp|oymont and pormanont
downs|z|ng, so that tho managors can gonorato onough
oxtra prot|ts to d|str|buto to tho sharoho|dors and koop thom
trom ra|s|ng |ssuos w|th h|gh oxocut|vo pay (tor moro on th|s,
soo 7blog 2). |av|ng to max|m|zo d|v|donds to koop tho
sharoho|dors qu|ot, |nvostmont |s m|n|m|zod, woakon|ng tho
company's |ong-torm product|vo capab|||t|os. Whon
comb|nod w|th oxcoss|vo managor|a| pay, th|s puts tho
Amor|can and 3r|t|sh t|rms at a d|sadvantago |n |ntornat|ona|
compot|t|on, ovontua||y cost|ng tho workors tho|r jobs.
||na||y, whon th|ngs go wrong on a |argo sca|o, as |n tho
2008 t|nanc|a| cr|s|s, taxpayors aro torcod to ba|| out tho
ta||od compan|os, wh||o tho managors who croatod tho
ta||uro got ott a|most scot-troo.
Whon tho managor|a| c|assos |n tho U3 and, to a |ossor
oxtont 3r|ta|n, possoss such oconom|c, po||t|ca| and
|doo|og|ca| powor that thoy can man|pu|ato tho markot and
pass on tho nogat|vo consoquoncos ot tho|r act|ons to othor
poop|o, |t |s an |||us|on to th|nk that oxocut|vo pay |s
somoth|ng whoso opt|ma| |ovo|s and structuros aro go|ng to
bo, and shou|d bo, dotorm|nod by tho markot.
1hing 15
PooIo in oor countrioa aro
moro ontroronouriaI than
ooIo in rich countrioa

What they tell you

Entropronoursh|p |s at tho hoart ot oconom|c dynam|sm.
Un|oss thoro aro ontropronours who sook out now monoy-
mak|ng opportun|t|os by gonorat|ng now products and
moot|ng unmot domands, tho oconomy cannot dovo|op.
lndood, ono ot tho roasons boh|nd tho |ack ot oconom|c
dynam|sm |n a rango ot countr|os, trom |ranco to a|| thoso
statos |n tho dovo|op|ng wor|d, |s tho |ack ot
ontropronoursh|p. Un|oss a|| thoso poop|o who a|m|oss|y
|o|tor around |n poor countr|os chango tho|r att|tudos and
act|vo|y sook out prot|t-mak|ng opportun|t|os, tho|r countr|os
aro not go|ng to dovo|op.
What they don't tell you

loop|o who ||vo |n poor countr|os havo to bo vory
ontropronour|a| ovon just to surv|vo. |or ovory |o|toror |n a
dovo|op|ng country, you havo two or throo ch||dron sh|n|ng
shoos and tour or t|vo poop|o hawk|ng th|ngs. What makos
tho poor countr|os poor |s not tho absonco ot ontropronour|a|
onorgy at tho porsona| |ovo|, but tho absonco ot product|vo
tochno|og|os and dovo|opod soc|a| organ|zat|ons, ospoc|a||y
modorn t|rms. 1ho |ncroas|ng|y apparont prob|oms w|th
m|crocrod|t - vory sma|| |oans g|von to poor poop|o |n
dovo|op|ng countr|os w|th tho pronouncod a|m ot ho|p|ng
thom sot up bus|nossos - shows tho ||m|tat|ons ot |nd|v|dua|
ontropronoursh|p. Espoc|a||y |n tho |ast contury,
ontropronoursh|p has bocomo a co||oct|vo act|v|ty, so tho
povorty ot co||oct|vo organ|zat|on has bocomo an ovon
b|ggor obstac|o to oconom|c dovo|opmont rathor than tho
dot|c|ont ontropronour|a| sp|r|ts ot |nd|v|dua|s.
1he problem wIth the French .

Goorgo W. 3ush, tho tormor U3 pros|dont, |s roputod to
havo comp|a|nod that tho prob|om w|th tho |ronch |s that
thoy do not havo a word tor ontropronoursh|p |n tho|r
|anguago. ||s |ronch may not havo boon up to scratch, but
Vr 3ush was art|cu|at|ng a ta|r|y common Ang|o-Amor|can
projud|co aga|nst |ranco as an un-dynam|c and backward-
|ook|ng country tu|| ot |azy workors, shoop-burn|ng tarmors,
protont|ous |ott-w|ng |nto||octua|s, modd||ng buroaucrats and,
|ast but not |oast, pompous wa|tors.
Whothor or not Vr 3ush's concopt|on ot |ranco |s r|ght
(moro on th|s |ator, and soo 7blog 10), tho porspoct|vo
boh|nd h|s statomont |s w|do|y accoptod - you nood
ontropronour|a| poop|o to havo a succosstu| oconomy. ln th|s
v|ow, tho povorty ot tho dovo|op|ng countr|os |s a|so
attr|butod to tho |ack ot ontropronoursh|p |n thoso countr|os.
look at a|| thoso mon s|tt|ng around hav|ng tho|r o|ovonth
cup ot m|nt toa ot tho day, obsorvors trom tho r|ch countr|os
say, thoso countr|os roa||y nood moro go-gottors and
movors-and-shakors |n ordor to pu|| thomso|vos out ot
povorty.
|owovor, anyono who |s trom or has ||vod tor a por|od |n
a dovo|op|ng country w||| know that |t |s toom|ng w|th
ontropronours. On tho stroots ot poor countr|os, you w|||
moot mon, womon and ch||dron ot a|| agos so|||ng ovoryth|ng
you can th|nk ot, and th|ngs that you d|d not ovon know cou|d
bo bought. ln many poor countr|os, you can buy a p|aco |n
tho quouo tor tho v|sa soct|on ot tho Amor|can ombassy
(so|d to you by protoss|ona| quouors), tho sorv|co to 'watch
your car' (moan|ng 'rotra|n trom damag|ng your car') |n
stroot-park|ng s|ots, tho r|ght to sot up a tood sta|| on a
part|cu|ar cornor (porhaps so|d by tho corrupt |oca| po||co
boss) or ovon a patch ot |and to bog trom (so|d to you by tho
|oca| thugs). 1hoso aro a|| products ot human |ngonu|ty and
ontropronoursh|p.
ln contrast, most c|t|zons ot r|ch countr|os havo not ovon
como noar to bocom|ng ontropronours. 1hoy most|y work tor
a company, somo ot thom omp|oy|ng tons ot thousands,
do|ng h|gh|y spoc|a||zod and narrow|y spoc|t|od jobs. Evon
though somo ot thom droam ot, or at |oast |d|y ta|k about,
sott|ng up tho|r own bus|nossos and 'bocom|ng my own
boss', tow put |t |nto pract|co bocauso |t |s a d|tt|cu|t and
r|sky th|ng to do. As a rosu|t, most poop|o trom r|ch countr|os
spond tho|r work|ng ||vos |mp|omont|ng somoono o|so's
ontropronour|a| v|s|on, and not tho|r own.
1ho upshot |s that poop|o aro tar moro ontropronour|a| |n
tho dovo|op|ng countr|os than |n tho dovo|opod countr|os.
Accord|ng to an OEC0 study, |n most dovo|op|ng countr|os
80-b0 por cont ot tho non-agr|cu|tura| worktorco |s so|t-
omp|oyod (tho rat|o tonds to bo ovon h|ghor |n agr|cu|turo). ln
somo ot tho poorost countr|os tho rat|o ot poop|o work|ng as
ono-porson ontropronours can bo way abovo that: 00.0 por
cont |n Ghana, 7b.4 por cont |n 3ang|adosh and a
staggor|ng 88.7 por cont |n 3on|n.
1
ln contrast, on|y 12.8 por
cont ot tho non-agr|cu|tura| worktorco |n dovo|opod countr|os
|s so|t-omp|oyod. ln somo countr|os tho rat|o doos not ovon
roach ono |n ton: 0.7 por cont |n lorway, 7.b por cont |n tho
U3 and 8.0 por cont |n |ranco (|t turns out that Vr 3ush's
comp|a|nt about tho |ronch was a c|ass|c caso ot tho pot
ca|||ng tho kott|o b|ack). 3o, ovon oxc|ud|ng tho tarmors
(wh|ch wou|d mako tho rat|o ovon h|ghor), tho chanco ot an
avorago dovo|op|ng-country porson bo|ng an ontropronour |s
moro than tw|co that tor a dovo|opod-country porson (80 por
cont vs. 12.8 por cont). 1ho d|ttoronco |s ton t|mos, |t wo
comparo 3ang|adosh w|th tho U3 (7.b por cont vs. 7b.4 por
cont). And |n tho most oxtromo caso, tho chanco ot
somoono trom 3on|n bo|ng an ontropronour |s a whopp|ng
th|rtoon t|mos h|ghor than tho oqu|va|ont chanco tor a
lorwog|an (88.7 por cont vs. 0.7 por cont).
Voroovor, ovon thoso poop|o who aro runn|ng
bus|nossos |n tho r|ch countr|os nood not bo as
ontropronour|a| as tho|r countorparts |n tho poor countr|os.
|or dovo|op|ng-country ontropronours, th|ngs go wrong a||
tho t|mo. 1horo aro powor cuts that scrow up tho product|on
schodu|o. Customs won't c|oar tho sparo parts noodod to t|x
a mach|no, wh|ch has boon do|ayod anyway duo to
prob|oms w|th tho porm|t to buy U3 do||ars. lnputs aro not
do||vorod at tho r|ght t|mo, as tho do||vory truck broko down
- yot aga|n - duo to potho|os on tho road. And tho potty |oca|
ott|c|a|s aro bond|ng, and ovon |nvont|ng, ru|os a|| tho t|mo |n
ordor to oxtract br|bos. Cop|ng w|th a|| thoso obstac|os
roqu|ros ag||o th|nk|ng and tho ab|||ty to |mprov|so. An
avorago Amor|can bus|nossman wou|d not |ast a wook |n
tho taco ot thoso prob|oms, |t ho woro mado to manago a
sma|| company |n Vaputo or lhnom lonh.
3o wo aro tacod w|th an apparont puzz|o. Comparod to
tho r|ch countr|os, wo havo tar moro poop|o |n dovo|op|ng
countr|os (|n proport|ona| torms) ongagod |n ontropronour|a|
act|v|t|os. On top ot that, tho|r ontropronour|a| sk|||s aro much
moro troquont|y and sovoro|y tostod than thoso ot tho|r
countorparts |n tho r|ch countr|os. 1hon how |s |t that thoso
moro ontropronour|a| countr|os aro tho pooror onos?
Great expectatIons ~ mIcro|Inance
enters the scene

1ho soom|ng|y bound|oss ontropronour|a| onorgy ot poor
poop|o |n poor countr|os has, ot courso, not gono unnot|cod.
1horo |s an |ncroas|ng|y |nt|uont|a| v|ow that tho ong|no ot
dovo|opmont tor poor countr|os shou|d bo tho so-ca||od
'|ntorma| soctor', mado up ot sma|| bus|nossos that aro not
rog|storod w|th tho govornmont.
1ho ontropronours |n tho |ntorma| soctor, |t |s arguod, aro
strugg||ng not bocauso thoy |ack tho nocossary v|s|on and
sk|||s but bocauso thoy cannot got tho monoy to roa||zo tho|r
v|s|ons. 1ho rogu|ar banks d|scr|m|nato aga|nst thom, wh||o
tho |oca| monoy-|ondors chargo proh|b|t|vo ratos ot |ntorost.
lt thoy aro g|von a sma|| amount ot crod|t (known as a
'm|crocrod|t') at a roasonab|o |ntorost rato to sot up a tood
sta||, buy a mob||o phono to ront out, or got somo ch|ckons to
so|| tho|r oggs, thoy w||| bo ab|o to pu|| thomso|vos out ot
povorty. W|th thoso sma|| ontorpr|sos mak|ng up tho bu|k ot
tho dovo|op|ng country's oconomy, tho|r succossos wou|d
trans|ato |nto ovora|| oconom|c dovo|opmont.
1ho |nvont|on ot m|crocrod|t |s common|y attr|butod to
Vuhammad Yunus, tho oconom|cs protossor who has boon
tho pub||c taco ot tho m|crocrod|t |ndustry s|nco ho sot up tho
p|onoor|ng Gramoon 3ank |n h|s nat|vo 3ang|adosh |n 1088,
a|though thoro woro s|m||ar attompts botoro. 0osp|to |ond|ng
to poor poop|o, ospoc|a||y poor womon, who woro
trad|t|ona||y cons|dorod to bo h|gh-r|sk casos, tho Gramoon
3ank boastod a vory h|gh ropaymont rat|o (0b por cont or
moro), show|ng that tho poor aro h|gh|y bankab|o. 3y tho
oar|y 1000s, tho succoss ot tho Gramoon 3ank, and ot
somo s|m||ar banks |n countr|os such as 3o||v|a, was
not|cod, and tho |doa ot m|crocrod|t - or moro broad|y
m|crot|nanco, wh|ch |nc|udos sav|ngs and |nsuranco, and not
just crod|t - sproad tast.
1ho roc|po sounds portoct. V|crocrod|t a||ows tho poor to
got out ot povorty through tho|r own ottorts, by prov|d|ng
thom w|th tho t|nanc|a| moans to roa||zo tho|r ontropronour|a|
potont|a|. ln tho procoss, thoy ga|n |ndopondonco and so|t-
rospoct, as thoy aro no |ongor ro|y|ng on handouts trom tho
govornmont and toro|gn a|d agonc|os tor tho|r surv|va|. loor
womon aro part|cu|ar|y ompoworod by m|crocrod|t, as |t
g|vos thom tho ab|||ty to oarn an |ncomo and thus |mprovo
tho|r barga|n|ng pos|t|ons vls--vls tho|r ma|o partnors. lot
hav|ng to subs|d|zo tho poor, tho govornmont too|s |oss
prossuro on |ts budgot. 1ho woa|th croatod |n tho procoss,
natura||y, makos tho ovora|| oconomy, and not just tho
|ntorma| soctor ontropronours, r|chor. G|von a|| th|s, |t |s not a
surpr|so that lrotossor Yunus bo||ovos that, w|th tho ho|p ot
m|crot|nanco, wo can croato 'a povorty-troo wor|d [whoro
tho| on|y p|aco you can soo povorty |s |n tho musoum'.
3y tho m|d 2000s, tho popu|ar|ty ot m|crot|nanco roachod
tovor p|tch. 1ho yoar 200b was dos|gnatod tho lntornat|ona|
Yoar ot V|crocrod|t by tho Un|tod lat|ons, w|th
ondorsomonts trom roya|ty, ||ko Ouoon lan|a ot 1ordan, and
co|obr|t|os, ||ko tho actrossos lata||o lortman and
A|shwarya la|. 1ho ascondancy ot m|crot|nanco roachod |ts
poak |n 2000, whon tho lobo| loaco lr|zo was awardod
jo|nt|y to lrotossor Yunus and h|s Gramoon 3ank.
1he grand IllusIon

Untortunato|y, tho hypo about m|crot|nanco |s, wo||, just that -
hypo. 1horo aro grow|ng cr|t|c|sms ot m|crot|nanco, ovon by
somo ot |ts oar|y 'pr|osts'. |or oxamp|o, |n a rocont papor
w|th 0av|d loodman, 1onathan Vorduch, a |ong-t|mo
advocato ot m|crot|nanco, contossos that '[s|tr|k|ng|y, 80
yoars |nto tho m|crot|nanco movomont wo havo ||tt|o so||d
ov|donco that |t |mprovos tho ||vos ot c||onts |n moasurab|o
ways'.
2
1ho prob|oms aro too numorous ovon to ||st horo,
anyono who |s |ntorostod can road tho tasc|nat|ng rocont
book by V||tord 3atoman, by Looso`t Vlcroloooco
ork
8
3ut thoso most ro|ovant to our d|scuss|on aro as
to||ows.
1ho m|crot|nanco |ndustry has a|ways boastod that |ts
oporat|ons roma|n prot|tab|o w|thout govornmont subs|d|os
or contr|but|ons trom |ntornat|ona| donors, oxcopt porhaps |n
tho |n|t|a| tooth|ng phaso. 3omo havo usod th|s as ov|donco
that tho poor aro as good at p|ay|ng tho markot as anyono
o|so, |t you w||| just |ot thom. |owovor, |t turns out that, w|thout
subs|d|os trom govornmonts or |ntornat|ona| donors,
m|crot|nanco |nst|tut|ons havo to chargo, and havo boon
charg|ng, noar-usur|ous ratos. lt has boon rovoa|od that tho
Gramoon 3ank cou|d |n|t|a||y chargo roasonab|o |ntorost
ratos on|y bocauso ot tho (hushod-up) subs|d|os |t was
gott|ng trom tho 3ang|adosh| govornmont and |ntornat|ona|
donors. lt thoy aro not subs|d|zod, m|crot|nanco |nst|tut|ons
havo to chargo |ntorost ratos ot typ|ca||y 40-b0 por cont tor
tho|r |oans, w|th ratos as h|gh as 80-100 por cont |n
countr|os such as Vox|co. Whon, |n tho |ato 1000s, |t camo
undor prossuro to g|vo up tho subs|d|os, tho Gramoon 3ank
had to ro|aunch |tso|t (|n 2001) and start charg|ng |ntorost
ratos ot 40-b0 por cont.
W|th |ntorost ratos runn|ng up to 100 por cont, tow
bus|nossos can mako tho nocossary prot|ts to ropay tho
|oans, so most ot tho |oans mado by m|crot|nanco
|nst|tut|ons (|n somo casos as h|gh as 00 por cont) havo
boon usod tor tho purposo ot 'consumpt|on smooth|ng' -
poop|o tak|ng out |oans to pay tor tho|r daughtor's wodd|ng
or to mako up tor a tomporary ta|| |n |ncomo duo to tho
|||noss ot a work|ng tam||y mombor. ln othor words, tho vast
bu|k ot m|crocrod|t |s oot usod to tuo| ontropronoursh|p by
tho poor, tho a||ogod goa| ot tho oxorc|so, but to t|nanco
consumpt|on.
Voro |mportant|y, ovon tho sma|| port|on ot m|crocrod|t
that goos |nto bus|noss act|v|t|os |s not pu|||ng poop|o out ot
povorty. At t|rst, th|s sounds |noxp||cab|o. 1hoso poor poop|o
who tako out m|crocrod|t know what thoy aro do|ng. Un||ko
tho|r countorparts |n r|ch countr|os, most ot thom havo run
bus|nossos ot ono k|nd or anothor. 1ho|r bus|noss w|ts aro
sharponod to tho ||m|t by tho|r dosporat|on to surv|vo and
shoor dos|ro to got out ot povorty. 1hoy havo to gonorato
vory h|gh prot|ts bocauso thoy havo to pay tho markot rato ot
|ntorost. 3o what |s go|ng wrong? Why aro a|| thoso poop|o
- h|gh|y mot|vatod, |n possoss|on ot ro|ovant sk|||s and
strong|y prossurod by tho markot - mak|ng hugo ottorts w|th
tho|r bus|noss vonturos, produc|ng such moagro rosu|ts?
Whon a m|crot|nanco |nst|tut|on t|rst starts |ts oporat|on |n
a |oca||ty, tho t|rst posso ot |ts c||onts may soo tho|r |ncomo
r|s|ng - somot|mos qu|to dramat|ca||y. |or oxamp|o, whon |n
1007 tho Gramoon 3ank toamod up w|th 1o|onor, tho
lorwog|an phono company, and gavo out m|cro|oans to
womon to buy a mob||o phono and ront |t out to tho|r
v|||agors, thoso 'to|ophono |ad|os' mado handsomo prot|ts -
$7b0-$1,200 |n a country whoso annua| avorago por cap|ta
|ncomo was around $800. |owovor, ovor t|mo, tho
bus|nossos t|nancod by m|crocrod|t bocomo crowdod and
tho|r oarn|ngs ta||. 1o go back to tho Gramoon phono caso,
by 200b thoro woro so many to|ophono |ad|os that tho|r
|ncomo was ost|matod to bo around on|y $70 por yoar, ovon
though tho nat|ona| avorago |ncomo had gono up to ovor
$4b0. 1h|s prob|om |s known as tho 'ta||acy ot compos|t|on'
- tho tact that somo poop|o can succood w|th a part|cu|ar
bus|noss doos not moan that ovoryono can succood w|th |t.
Ot courso, th|s prob|om wou|d not ox|st |t now bus|noss
||nos cou|d bo constant|y dovo|opod - |t ono ||no ot act|v|ty
bocomos unprot|tab|o duo to ovorcrowd|ng, you s|mp|y opon
up anothor. 3o, tor oxamp|o, |t phono ront|ng bocomos |oss
prot|tab|o, you cou|d ma|nta|n your |ovo| ot |ncomo by
manutactur|ng mob||o phonos or wr|t|ng tho sottwaro tor
mob||o phono gamos. You w||| obv|ous|y havo not|cod tho
absurd|ty ot thoso suggost|ons - tho to|ophono |ad|os ot
3ang|adosh s|mp|y do not havo tho whorow|tha| to movo |nto
phono manutactur|ng or sottwaro dos|gn. 1ho prob|om |s
that thoro |s on|y a ||m|tod rango ot (s|mp|o) bus|nossos that
tho poor |n dovo|op|ng countr|os can tako on, g|von tho|r
||m|tod sk|||s, tho narrow rango ot tochno|og|os ava||ab|o,
and tho ||m|tod amount ot t|nanco that thoy can mob|||zo
through m|crot|nanco. 3o, you, a Croat|an tarmor who
bought ono moro m||k cow w|th a m|crocrod|t, st|ck to so|||ng
m||k ovon as you watch tho bottom ta|||ng out ot your |oca|
m||k markot thanks to tho 800 othor tarmors ||ko you so|||ng
moro m||k, bocauso turn|ng yourso|t |nto an oxportor ot buttor
to Gormany or chooso to 3r|ta|n s|mp|y |sn't poss|b|o w|th
tho tochno|og|os, tho organ|zat|ona| sk|||s and tho cap|ta| you
havo.
No more heroes any more

Our d|scuss|on so tar shows that what makos tho poor
countr|os poor |s not tho |ack ot raw |nd|v|dua|
ontropronour|a| onorgy, wh|ch thoy |n tact havo |n
abundanco. 1ho po|nt |s that what roa||y makos tho r|ch
countr|os r|ch |s tho|r ab|||ty to channo| tho |nd|v|dua|
ontropronour|a| onorgy |nto co||oct|vo ontropronoursh|p.
vory much |nt|uoncod by cap|ta||st to|k|oro, w|th
charactors such as 1homas Ed|son and 3||| Gatos, and by
tho p|onoor|ng work ot 1osoph 3chumpotor, tho Austr|an-
born |arvard oconom|cs protossor, our v|ow ot
ontropronoursh|p |s too much t|ngod by tho |nd|v|dua||st|c
porspoct|vo - ontropronoursh|p |s what thoso horo|c
|nd|v|dua|s w|th oxcopt|ona| v|s|on and dotorm|nat|on do. 3y
oxtons|on, wo bo||ovo that any |nd|v|dua|, |t thoy try hard
onough, can bocomo succosstu| |n bus|noss. |owovor, |t |t
ovor was truo, th|s |nd|v|dua||st|c v|ow ot ontropronoursh|p |s
bocom|ng |ncroas|ng|y obso|oto. ln tho courso ot cap|ta||st
dovo|opmont, ontropronoursh|p has bocomo an |ncroas|ng|y
co||oct|vo ondoavour.
1o bog|n w|th, ovon oxcopt|ona| |nd|v|dua|s ||ko Ed|son
and Gatos havo bocomo what thoy havo on|y bocauso thoy
woro supportod by a who|o host ot co||oct|vo |nst|tut|ons (soo
7blog 8): tho who|o sc|ont|t|c |ntrastructuro that onab|od
thom to acqu|ro tho|r know|odgo and a|so oxpor|mont w|th |t,
tho company |aw and othor commorc|a| |aws that mado |t
poss|b|o tor thom subsoquont|y to bu||d compan|os w|th
|argo and comp|ox organ|zat|ons, tho oducat|ona| systom
that supp||od h|gh|y tra|nod sc|ont|sts, ong|noors, managors
and workors that mannod thoso compan|os, tho t|nanc|a|
systom that onab|od thom to ra|so a hugo amount ot cap|ta|
whon thoy wantod to oxpand, tho patont and copyr|ght |aws
that protoctod tho|r |nvont|ons, tho oas||y accoss|b|o markot
tor tho|r products, and so on.
|urthormoro, |n tho r|ch countr|os, ontorpr|sos cooporato
w|th oach othor a |ot moro than do tho|r countorparts |n poor
countr|os, ovon |t thoy oporato |n s|m||ar |ndustr|os. |or
oxamp|o, tho da|ry soctors |n countr|os such as 0onmark,
tho lothor|ands and Gormany havo bocomo what thoy aro
today on|y bocauso tho|r tarmors organ|zod thomso|vos, w|th
stato ho|p, |nto cooporat|vos and jo|nt|y |nvostod |n
procoss|ng tac|||t|os (o.g., croam|ng mach|nos) and
ovorsoas markot|ng. ln contrast, tho da|ry soctors |n tho
3a|kan countr|os havo ta||od to dovo|op dosp|to qu|to a
|argo amount ot m|crocrod|t channo||od |nto thom, bocauso
a|| tho|r da|ry tarmors tr|od to mako |t on tho|r own. |or
anothor oxamp|o, many sma|| t|rms |n lta|y and Gormany
jo|nt|y |nvost |n l80 and oxport markot|ng, wh|ch aro boyond
tho|r |nd|v|dua| moans, through |ndustry assoc|at|ons (ho|pod
by govornmont subs|d|os), whoroas typ|ca| dovo|op|ng
country t|rms do not |nvost |n thoso aroas bocauso thoy do
not havo such a co||oct|vo mochan|sm.
Evon at tho t|rm |ovo|, ontropronoursh|p has bocomo
h|gh|y co||oct|vo |n tho r|ch countr|os. 1oday, tow compan|os
aro managod by char|smat|c v|s|onar|os ||ko Ed|son and
Gatos, but by protoss|ona| managors. Wr|t|ng |n tho m|d
twont|oth contury, 3chumpotor was a|roady awaro ot th|s
trond, a|though ho was nono too happy about |t. |o
obsorvod that tho |ncroas|ng sca|o ot modorn tochno|og|os
was mak|ng |t |ncroas|ng|y |mposs|b|o tor a |argo company
to bo ostab||shod and run by a v|s|onary |nd|v|dua|
ontropronour. 3chumpotor prod|ctod that tho d|sp|acomont
ot horo|c ontropronours w|th what ho ca||od 'oxocut|vo typos'
wou|d sap tho dynam|sm trom cap|ta||sm and ovontua||y |oad
to |ts dom|so (soo 7blog 2).
3chumpotor has boon provon wrong |n th|s rogard. Ovor
tho |ast contury, tho horo|c ontropronour has |ncroas|ng|y
bocomo a rar|ty and tho procoss ot |nnovat|on |n products,
procossos and markot|ng - tho koy o|omonts ot
3chumpotor's ontropronoursh|p - has bocomo |ncroas|ng|y
'co||oct|v|st' |n |ts naturo. Yot, dosp|to th|s, tho wor|d
oconomy has grown much tastor s|nco tho 3ocond Wor|d
War, comparod to tho por|od botoro |t. ln tho caso ot 1apan,
tho t|rms havo ovon dovo|opod |nst|tut|ona| mochan|sms to
oxp|o|t tho croat|v|ty ot ovon tho |ow||ost product|on-||no
workors. Vany attr|buto tho succoss ot tho 1apanoso t|rms,
at |oast part|y, to th|s charactor|st|c (soo 7blog 5).
lt ottoct|vo ontropronoursh|p ovor was a puro|y |nd|v|dua|
th|ng, |t has stoppod bo|ng so at |oast tor tho |ast contury.
1ho co||oct|vo ab|||ty to bu||d and manago ottoct|vo
organ|zat|ons and |nst|tut|ons |s now tar moro |mportant than
tho dr|vos or ovon tho ta|onts ot a nat|on's |nd|v|dua|
mombors |n dotorm|n|ng |ts prospor|ty (soo 7blog 17).
Un|oss wo rojoct tho myth ot horo|c |nd|v|dua| ontropronours
and ho|p thom bu||d |nst|tut|ons and organ|zat|ons ot
co||oct|vo ontropronoursh|p, wo w||| novor soo tho poor
countr|os grow out ot povorty on a susta|nab|o bas|s.
1hing 10
Wo aro not amart onough to
Ioavo thinga to tho markot

What they tell you

Wo shou|d |oavo markots a|ono, bocauso, ossont|a||y,
markot part|c|pants know what thoy aro do|ng - that |s, thoy
aro rat|ona|. 3|nco |nd|v|dua|s (and t|rms as co||oct|ons ot
|nd|v|dua|s who sharo tho samo |ntorosts) havo tho|r own
bost |ntorosts |n m|nd and s|nco thoy know tho|r own
c|rcumstancos bost, attompts by outs|dors, ospoc|a||y tho
govornmont, to rostr|ct tho troodom ot tho|r act|ons can on|y
produco |ntor|or rosu|ts. lt |s prosumptuous ot any
govornmont to provont markot agonts trom do|ng th|ngs thoy
t|nd prot|tab|o or to torco thom to do th|ngs thoy do not want
to do, whon |t possossos |ntor|or |ntormat|on.
What they don't tell you

loop|o do not nocossar||y know what thoy aro do|ng,
bocauso our ab|||ty to comprohond ovon mattors that
concorn us d|roct|y |s ||m|tod - or, |n tho jargon, wo havo
'boundod rat|ona||ty'. 1ho wor|d |s vory comp|ox and our
ab|||ty to doa| w|th |t |s sovoro|y ||m|tod. 1horotoro, wo nood
to, and usua||y do, do||borato|y rostr|ct our troodom ot cho|co
|n ordor to roduco tho comp|ox|ty ot prob|oms wo havo to
taco. Otton, govornmont rogu|at|on works, ospoc|a||y |n
comp|ox aroas ||ko tho modorn t|nanc|a| markot, not
bocauso tho govornmont has supor|or know|odgo but
bocauso |t rostr|cts cho|cos and thus tho comp|ox|ty ot tho
prob|oms at hand, thoroby roduc|ng tho poss|b|||ty that th|ngs
may go wrong.
Markets may |aIl, but .

As oxprossod by Adam 3m|th |n tho |doa ot tho |nv|s|b|o
hand, troo-markot oconom|sts arguo that tho boauty ot tho
troo markot |s that tho doc|s|ons ot |so|atod |nd|v|dua|s (and
t|rms) got roconc||od w|thout anybody consc|ous|y try|ng to
do so. What makos th|s poss|b|o |s that oconom|c actors
aro rat|ona|, |n tho sonso that thoy know bost tho|r own
s|tuat|ons and tho ways to |mprovo thom. lt |s poss|b|o, |t |s
adm|ttod, that corta|n |nd|v|dua|s aro |rrat|ona| or ovon that a
gonora||y rat|ona| |nd|v|dua| bohavos |rrat|ona||y on occas|on.
|owovor, |n tho |ong run, tho markot w||| wood out |rrat|ona|
bohav|ours by pun|sh|ng thom - tor oxamp|o, |nvostors who
'|rrat|ona||y' |nvost |n ovor-pr|cod assots w||| roap |ow roturns,
wh|ch torcos thom o|thor to adjust tho|r bohav|our or bo
w|pod out. G|von th|s, troo-markot oconom|sts arguo,
|oav|ng |t up to tho |nd|v|dua|s to doc|do what to do |s tho
bost way to manago tho markot oconomy.
Ot courso, tow poop|o wou|d arguo that markots aro
portoct. Evon V||ton |r|odman adm|ttod that thoro aro
|nstancos |n wh|ch markots ta||. lo||ut|on |s a c|ass|c
oxamp|o. loop|o 'ovor-produco' po||ut|on bocauso thoy aro
not pay|ng tor tho costs ot doa||ng w|th |t. 3o what aro
opt|ma| |ovo|s ot po||ut|on tor |nd|v|dua|s (or |nd|v|dua| t|rms)
add up to a sub-opt|ma| |ovo| trom tho soc|a| po|nt ot v|ow.
|owovor, troo-markot oconom|sts aro qu|ck to po|nt out that
markot ta||uros, wh||o thoorot|ca||y poss|b|o, aro raro |n
roa||ty. Voroovor, thoy arguo, otton tho bost so|ut|on to
markot ta||uros |s to |ntroduco moro markot torcos. |or
oxamp|o, thoy arguo that tho way to roduco po||ut|on |s to
croato a markot tor |t - by croat|ng 'tradab|o om|ss|on
r|ghts', wh|ch a||ow poop|o to so|| and buy tho r|ghts to po||uto
accord|ng to tho|r noods w|th|n a soc|a||y opt|ma| max|mum.
On top ot that, troo-markot oconom|sts add, govornmonts
a|so ta|| (soo 7blog 12). Govornmonts may |ack tho
nocossary |ntormat|on to corroct markot ta||uros. Or thoy
may bo run by po||t|c|ans and buroaucrats who promoto tho|r
own |ntorosts rathor than nat|ona| |ntorosts (soo 7blog 5). A||
th|s moans that usua||y tho costs ot govornmont ta||uro aro
groator than tho costs ot markot ta||uro that |t |s (a||ogod|y)
try|ng to t|x. 1horotoro, troo-markot oconom|sts po|nt out, tho
prosonco ot markot ta||uro doos not just|ty govornmont
|ntorvont|on.
1ho dobato on tho ro|at|vo |mportanco ot markot ta||uros
and govornmont ta||uros st||| ragos on, and l am not go|ng to
bo ab|o to conc|udo that dobato horo. |owovor, |n th|s
7blog, l can at |oast po|nt out that tho prob|om w|th tho troo
markot doos not ond w|th tho tact that |nd|v|dua||y rat|ona|
act|ons can |oad to a co||oct|vo |rrat|ona| outcomo (that |s,
markot ta||uro). 1ho prob|om |s that wo aro not ovon rat|ona|
to bog|n w|th. And whon tho rat|ona||ty assumpt|on doos not
ho|d, wo nood to th|nk about tho ro|o ot tho markot and ot tho
govornmont |n a vory d|ttoront way ovon trom tho markot
ta||uro tramowork, wh|ch attor a|| a|so assumos that wo oro
rat|ona|. lot mo oxp|a|n.
l| you're so smart .

ln 1007, lobort Vorton and Vyron 3cho|os woro awardod
tho lobo| lr|zo |n oconom|cs tor tho|r 'now mothod to
dotorm|no tho va|uo ot dor|vat|vos'. lnc|donta||y, tho pr|zo |s
not a roo| lobo| pr|zo but a pr|zo g|von by tho 3wod|sh
contra| bank '|n momory ot A|trod lobo|'. As a mattor ot tact,
sovora| yoars ago tho lobo| tam||y ovon throatonod to dony
tho pr|zo tho uso ot tho|r ancostor's namo, as |t had boon
most|y g|von to troo-markot oconom|sts ot whom A|trod
lobo| wou|d not havo approvod, but that |s anothor story.
ln 1008, a hugo hodgo tund ca||od long-1orm Cap|ta|
Vanagomont (l1CV) was on tho vorgo ot bankruptcy,
to||ow|ng tho luss|an t|nanc|a| cr|s|s. 1ho tund was so |argo
that |ts bankruptcy was oxpoctod to br|ng ovoryono o|so
down w|th |t. 1ho U3 t|nanc|a| systom avo|dod a co||apso
on|y bocauso tho |odora| losorvo 3oard, tho U3 contra|
bank, tw|stod tho arms ot tho dozon or so crod|tor banks to
|njoct monoy |nto tho company and bocomo ro|uctant
sharoho|dors, ga|n|ng contro| ovor 00 por cont ot tho sharos.
l1CV was ovontua||y to|dod |n 2000.
l1CV, toundod |n 1004 by tho tamous (now |ntamous)
t|nanc|or 1ohn Vorr|wothor, had on |ts board ot d|roctors -
wou|d you bo||ovo |t? - Vorton and 3cho|os. Vorton and
3cho|os woro not just |ond|ng tho|r namos to tho company
tor a tat choquo: thoy woro work|ng partnors and tho
company was act|vo|y us|ng tho|r assot-pr|c|ng modo|.
Undotorrod by tho l1CV dobac|o, 3cho|os wont on to sot
up anothor hodgo tund |n 1000, l|at|num Grovo Assot
Vanagomont (lGAV). 1ho now backors, ono can on|y
surm|so, thought that tho Vorton-3cho|os modo| must havo
ta||od back |n 1008 duo to a tota||y unprod|ctab|o sol gooorls
ovont - tho luss|an cr|s|s. Attor a||, wasn't |t st||| tho bost
assot-pr|c|ng modo| ava||ab|o |n tho h|story ot human|ty,
approvod by tho lobo| comm|ttoo?
1ho |nvostors |n lGAV woro, untortunato|y, provon
wrong. ln lovombor 2008, |t pract|ca||y wont bust,
tomporar||y trooz|ng |nvostor w|thdrawa|. 1ho on|y comtort
thoy cou|d tako was probab|y that thoy woro not a|ono |n
bo|ng ta||od by a lobo| |auroato. 1ho 1r|nsum Group, tor
wh|ch 3cho|os's tormor partnor, Vorton, was tho ch|ot
sc|onco ott|cor, a|so wont bankrupt |n 1anuary 2000.
1horo |s a say|ng |n Koroa that ovon a monkoy can ta||
trom a troo. Yos, wo a|| mako m|stakos, and ono ta||uro -
ovon |t |t |s a g|gant|c ono ||ko l1CV - wo can accopt as a
m|stako. 3ut tho samo m|stako tw|co? 1hon you know that
tho t|rst m|stako was not roa||y a m|stako. Vorton and
3cho|os d|d not know what thoy woro do|ng.
Whon lobo| lr|zo-w|nnors |n oconom|cs, ospoc|a||y
thoso who got tho pr|zo tor tho|r work on assot pr|c|ng,
cannot road tho t|nanc|a| markot, how can wo run tho wor|d
accord|ng to an oconom|c pr|nc|p|o that assumos poop|o
a|ways know what thoy aro do|ng and thorotoro shou|d bo
|ott a|ono? As A|an Groonspan, tormor cha|rman ot tho
|odora| losorvo 3oard, had to adm|t |n a Congross|ona|
hoar|ng, |t was a 'm|stako' to 'prosumo that tho so|t-|ntorost
ot organ|sat|ons, spoc|t|ca||y banks, |s such that thoy woro
bost capab|o ot protoct|ng sharoho|dors and oqu|ty |n tho
t|rms'. 3o|t-|ntorost w||| protoct poop|o on|y whon thoy know
what |s go|ng on and how to doa| w|th |t.
1horo aro many stor|os com|ng out ot tho 2008 t|nanc|a|
cr|s|s that show how tho supposod|y smartost poop|o d|d not
tru|y undorstand what thoy woro do|ng. Wo aro not ta|k|ng
about tho |o||ywood b|g shots, such as 3tovon 3p|o|borg
and 1ohn Va|kov|ch, or tho |ogondary basoba|| p|tchor
3andy Koutax, dopos|t|ng tho|r monoy w|th tho traudstor
3orn|o Vadott. Wh||o thoso poop|o aro among tho wor|d's
bost |n what thoy do, thoy may not nocossar||y undorstand
t|nanco. Wo aro ta|k|ng about tho oxport tund managors, top
bankors (|nc|ud|ng somo ot tho wor|d's |argost banks, such
as tho 3r|t|sh |33C and tho 3pan|sh 3antandor), and
wor|d-c|ass co||ogos (low York Un|vors|ty and 3ard
Co||ogo, wh|ch had accoss to somo ot tho wor|d's most
roputod oconom|cs tacu|ty mombors) ta|||ng tor tho samo
tr|ck by Vadott.
Worso, |t |sn't just a mattor ot bo|ng doco|vod by
traudstors ||ko Vadott or A|an 3tantord. 1ho ta||uro by tho
bankors and othor supposod oxports |n tho t|o|d to
undorstand what was go|ng on has boon porvas|vo, ovon
whon |t comos to |og|t|mato t|nanco. Ono ot thom apparont|y
shockod A||sta|r 0ar||ng, thon 3r|t|sh Chanco||or ot tho
Exchoquor, by to|||ng h|m |n tho summor ot 2008 that 'trom
now on wo w||| on|y |ond whon wo undorstand tho r|sks
|nvo|vod'.
1
|or anothor, ovon moro aston|sh|ng, oxamp|o,
on|y s|x months botoro tho co||apso ot AlG, tho Amor|can
|nsuranco company ba||od out by tho U3 govornmont |n tho
autumn ot 2008, |ts ch|ot t|nanc|a| ott|cor, 1oo Cassano, |s
roportod to havo sa|d that '[||t |s hard tor us, w|thout bo|ng
t||ppant, to ovon soo a sconar|o w|th|n any k|nd ot roa|m ot
roason that wou|d soo us |os|ng ono do||ar |n any ot tho
[crod|t dotau|t swap, or C03| transact|ons'. Vost ot you -
ospoc|a||y |t you aro an Amor|can taxpayor c|oan|ng up Vr
Cassano's moss - m|ght t|nd that supposod |ack ot
t||ppancy |oss than amus|ng, g|von that AlG wont bust
bocauso ot |ts ta||uro |n |ts $441 b||||on portto||o ot C03,
rathor than |ts coro |nsuranco bus|noss.
Whon tho lobo| lr|zo-w|nnors |n t|nanc|a| oconom|cs, top
bankors, h|gh-t|y|ng tund managors, prost|g|ous co||ogos
and tho smartost co|obr|t|os havo shown that thoy do not
undorstand what thoy aro do|ng, how can wo accopt
oconom|c thoor|os that work on|y bocauso thoy assumo that
poop|o aro tu||y rat|ona|? 1ho upshot |s that wo aro s|mp|y
not smart onough to |oavo tho markot a|ono.
3ut whoro do wo go trom thoro? ls |t poss|b|o to th|nk
about rogu|at|ng tho markot whon wo aro not ovon smart
onough to |oavo |t a|ono? 1ho answor |s yos. Actua||y |t |s
moro than that. vory otton, wo nood rogu|at|on oxact|y
bocauso wo aro not smart onough. lot mo show why.
1he last RenaIssance Man

|orbort 3|mon, tho w|nnor ot tho 1078 lobo| lr|zo |n
oconom|cs, was arguab|y tho |ast lona|ssanco Van on
oarth. |o startod out as a po||t|ca| sc|ont|st and movod on to
tho study ot pub||c adm|n|strat|on, wr|t|ng tho c|ass|c book |n
tho t|o|d, Aomlolstrotlvo Bobovloor. 1hrow|ng |n a coup|o ot
papors |n phys|cs a|ong tho way, ho movod |nto tho study ot
organ|zat|ona| bohav|our, bus|noss adm|n|strat|on,
oconom|cs, cogn|t|vo psycho|ogy and art|t|c|a| |nto|||gonco
(Al). lt anyono undorstood how poop|o th|nk and organ|zo
thomso|vos, |t was 3|mon.
3|mon arguod that our rat|ona||ty |s 'boundod'. |o d|d not
bo||ovo that wo aro ont|ro|y |rrat|ona|, a|though ho h|mso|t
and many othor oconom|sts ot tho bohav|oura||st schoo| (as
wo|| as many cogn|t|vo psycho|og|sts) havo conv|nc|ng|y
documontod how much ot our bohav|our |s |rrat|ona|.
2
Accord|ng to 3|mon, wo try to bo rat|ona|, but our ab|||ty to
bo so |s sovoro|y ||m|tod. 1ho wor|d |s too comp|ox, 3|mon
arguod, tor our ||m|tod |nto|||gonco to undorstand tu||y. 1h|s
moans that vory otton tho ma|n prob|om wo taco |n mak|ng a
good doc|s|on |s not tho |ack ot |ntormat|on but our ||m|tod
capab|||ty to procoss that |ntormat|on - a po|nt n|co|y
|||ustratod by tho tact that tho co|obratod advont ot tho
|ntornot ago doos not soom to havo |mprovod tho qua||ty ot
our doc|s|ons, judg|ng by tho moss wo aro |n today.
1o put |t anothor way, tho wor|d |s tu|| ot uncorta|nty.
Uncorta|nty horo |s not just not know|ng oxact|y what |s go|ng
to happon |n tho tuturo. |or corta|n th|ngs, wo can
roasonab|y ca|cu|ato tho probab|||ty ot oach poss|b|o
cont|ngoncy, ovon though wo cannot prod|ct tho oxact
outcomo - oconom|sts ca|| th|s 'r|sk'. lndood, our ab|||ty to
ca|cu|ato tho r|sk |nvo|vod |n many aspocts ot human ||to -
tho ||ko||hoods ot doath, d|soaso, t|ro, |njury, crop ta||uro, and
so on - |s tho vory toundat|on ot tho |nsuranco |ndustry.
|owovor, tor many othor aspocts ot our ||to, wo do not ovon
know a|| tho poss|b|o cont|ngonc|os, not to spoak ot tho|r
rospoct|vo ||ko||hoods, as omphas|zod, among othors, by
tho |ns|ghttu| Amor|can oconom|st |rank Kn|ght and tho
groat 3r|t|sh oconom|st 1ohn Vaynard Koynos |n tho oar|y
twont|oth contury. Kn|ght and Koynos arguod that tho k|nd ot
rat|ona| bohav|our that torms tho toundat|on ot much ot
modorn oconom|cs |s |mposs|b|o undor th|s k|nd ot
uncorta|nty.
1ho bost oxp|anat|on ot tho concopt ot uncorta|nty - or tho
comp|ox|ty ot tho wor|d, to put |t anothor way - was g|von by,
porhaps surpr|s|ng|y, 0ona|d lumsto|d, tho 0otonso
3ocrotary |n tho t|rst govornmont ot Goorgo W. 3ush. ln a
pross br|ot|ng rogard|ng tho s|tuat|on |n Atghan|stan |n 2002,
lumsto|d op|nod: '1horo aro known knowns. 1horo aro
th|ngs wo know that wo know. 1horo aro known unknowns.
1hat |s to say, thoro aro th|ngs that wo now know wo don't
know. 3ut thoro aro a|so unknown unknowns. 1horo aro
th|ngs wo do not know wo don't know.' l don't th|nk thoso at
tho l|a|n Eng||sh Campa|gn that awardod tho 2008 |oot |n
Vouth award to tho statomont qu|to undorstood tho
s|gn|t|canco ot th|s statomont tor our undorstand|ng ot
human rat|ona||ty.
3o what do wo do, whon tho wor|d |s so comp|ox and our
ab|||ty to undorstand |t so ||m|tod? 3|mon's answor was that
wo do||borato|y rostr|ct our troodom ot cho|co |n ordor to
roduco tho rango and tho comp|ox|ty ot tho prob|oms that wo
havo to doa| w|th.
1h|s sounds osotor|c, but whon you th|nk about |t, th|s |s
oxact|y what wo do a|| tho t|mo. Vost ot us croato rout|nos |n
our ||to so that wo don't havo to mako too many doc|s|ons
too otton. 1ho opt|ma| amount ot s|oop and tho opt|ma|
broaktast monu d|ttor ovory day, dopond|ng on our phys|ca|
cond|t|ons and tho tasks ahoad. Yot most ot us go to bod at
tho samo t|mo, wako up at tho samo t|mo and oat s|m||ar
th|ngs tor broaktast, at |oast dur|ng tho wookdays.
3|mon's tavour|to oxamp|o ot how wo nood somo ru|os |n
ordor to copo w|th our boundod rat|ona||ty was choss. W|th
on|y th|rty-two p|ocos and s|xty-tour squaros, choss may
soom to bo a ro|at|vo|y s|mp|o atta|r, but |n tact |nvo|vos a
hugo amount ot ca|cu|at|on. lt you woro ono ot thoso 'hypor-
rat|ona|' bo|ngs (as 3|mon ca||s thom) that popu|ato
standard oconom|cs toxtbooks, you wou|d, ot courso, t|guro
out a|| tho poss|b|o movos and ca|cu|ato tho|r ||ko||hoods
botoro you mako a movo. 3ut, 3|mon po|nts out, thoro bo|ng
around 10
120
(yos, that |s 120 zoroos) poss|b|||t|os |n an
avorago gamo ot choss, th|s 'rat|ona|' approach roqu|ros
monta| capac|ty that no human bo|ng possossos. lndood,
study|ng choss mastors, 3|mon roa||zod that thoy uso ru|os
ot thumb (hour|st|cs) to tocus on a sma|| numbor ot poss|b|o
movos, |n ordor to roduco tho numbor ot sconar|os that nood
to bo ana|ysod, ovon though tho oxc|udod movos may havo
brought bottor rosu|ts.
lt choss |s th|s comp||catod, you can |mag|no how
comp||catod th|ngs aro |n our oconomy, wh|ch |nvo|vos
b||||ons ot poop|o and m||||ons ot products. 1horotoro, |n tho
samo way |n wh|ch |nd|v|dua|s croato rout|nos |n tho|r da||y
||vos or choss gamos, compan|os oporato w|th 'product|vo
rout|nos', wh|ch s|mp||ty tho|r opt|ons and soarch paths. 1hoy
bu||d corta|n doc|s|on-mak|ng structuros, torma| ru|os and
convont|ons that automat|ca||y rostr|ct tho rango ot poss|b|o
avonuos that thoy oxp|oro, ovon whon tho avonuos thus
oxc|udod outr|ght may havo boon moro prot|tab|o. 3ut thoy
st||| do |t bocauso othorw|so thoy may drown |n a soa ot
|ntormat|on and novor mako a doc|s|on. 3|m||ar|y, soc|ot|os
croato |ntorma| ru|os that do||borato|y rostr|ct poop|o's
troodom ot cho|co so that thoy don't havo to mako trosh
cho|cos constant|y. 3o, thoy dovo|op a convont|on tor
quou|ng so that poop|o do not havo to, tor oxamp|o,
constant|y ca|cu|ato and roca|cu|ato tho|r pos|t|ons at a
crowdod bus stop |n ordor to onsuro that thoy got on tho noxt
bus.
1he government need not know better

3o tar so good, you may th|nk, but what doos 3|mon's thoory
ot boundod rat|ona||ty roa||y havo to say about rogu|at|on?
|roo-markot oconom|sts havo arguod aga|nst
govornmont rogu|at|on on tho (apparont|y roasonab|o)
ground that tho govornmont doos not know bottor than thoso
whoso act|ons aro rogu|atod by |t. 3y dot|n|t|on, tho
govornmont cannot know somoono's s|tuat|on as wo|| as tho
|nd|v|dua| or t|rm concornod. G|von th|s, thoy arguo, |t |s
|mposs|b|o that govornmont ott|c|a|s can |mprovo upon tho
doc|s|ons mado by tho oconom|c agonts.
|owovor, 3|mon's thoory shows that many rogu|at|ons
work oot bocauso tho govornmont nocossar||y knows bottor
than tho rogu|atod (a|though |t may somot|mos do - soo
7blog 12) but bocauso thoy ||m|t tho comp|ox|ty ot tho
act|v|t|os, wh|ch onab|os tho rogu|atod to mako bottor
doc|s|ons. 1ho 2008 wor|d t|nanc|a| cr|s|s |||ustratos th|s
po|nt vory n|co|y.
ln tho run-up to tho cr|s|s, our ab|||ty to mako good
doc|s|ons was s|mp|y ovorwho|mod bocauso th|ngs woro
a||owod to ovo|vo |n too comp|ox a mannor through t|nanc|a|
|nnovat|on. 3o many comp|ox t|nanc|a| |nstrumonts woro
croatod that ovon t|nanc|a| oxports thomso|vos d|d not tu||y
undorstand thom, un|oss thoy spoc|a||zod |n thom - and
somot|mos not ovon thon (soo 7blog 22). 1ho top doc|s|on-
makors ot tho t|nanc|a| t|rms corta|n|y d|d not grasp much ot
what tho|r bus|nossos woro do|ng. lor cou|d tho rogu|atory
author|t|os tu||y t|guro out what was go|ng on. As d|scussod
abovo, now wo aro soo|ng a t|ood ot contoss|ons - somo
vo|untary, othors torcod - trom tho koy doc|s|on-makors.
lt wo aro go|ng to avo|d s|m||ar t|nanc|a| cr|sos |n tho
tuturo, wo nood to rostr|ct sovoro|y troodom ot act|on |n tho
t|nanc|a| markot. ||nanc|a| |nstrumonts nood to bo bannod
un|oss wo tu||y undorstand tho|r work|ngs and tho|r ottocts on
tho rost ot tho t|nanc|a| soctor and, moroovor, tho rost ot tho
oconomy. 1h|s w||| moan bann|ng many ot tho comp|ox
t|nanc|a| dor|vat|vos whoso work|ngs and |mpacts havo
boon shown to bo boyond tho comprohons|on ot ovon tho
supposod oxports.
You may th|nk l am too oxtromo. |owovor, th|s |s what wo
do a|| tho t|mo w|th othor products - drugs, cars, o|octr|ca|
products, and many othors. Whon a company |nvonts a now
drug, tor oxamp|o, |t cannot bo so|d |mmod|ato|y. 1ho ottocts
ot a drug, and tho human body's roact|on to |t, aro comp|ox.
3o tho drug noods to bo tostod r|gorous|y botoro wo can bo
suro that |t has onough bonot|c|a| ottocts that c|oar|y
ovorwho|m tho s|do-ottocts and a||ow |t to bo so|d. 1horo |s
noth|ng oxcopt|ona| about propos|ng to ascorta|n tho satoty
ot t|nanc|a| products botoro thoy can bo so|d.
Un|oss wo do||borato|y rostr|ct our cho|cos by croat|ng
rostr|ct|vo ru|os, thoroby s|mp||ty|ng tho onv|ronmont that wo
havo to doa| w|th, our boundod rat|ona||ty cannot copo w|th
tho comp|ox|ty ot tho wor|d. lt |s not bocauso tho govornmont
nocossar||y knows bottor that wo nood rogu|at|ons. lt |s |n tho
humb|o rocogn|t|on ot our ||m|tod monta| capab|||ty that wo
do.
1hing 17
Noro oducation in itaoIt ia not
going to mako a country richor

What they tell you

A wo||-oducatod worktorco |s abso|uto|y nocossary tor
oconom|c dovo|opmont. 1ho bost proot ot th|s |s tho contrast
botwoon tho oconom|c succossos ot tho East As|an
countr|os, w|th tho|r tamous|y h|gh oducat|ona|
ach|ovomonts, and tho oconom|c stagnat|on ot 3ub-
3aharan Atr|can countr|os, wh|ch havo somo ot tho |owost
oducat|ona| rocords |n tho wor|d. Voroovor, w|th tho r|so ot
tho so-ca||od 'know|odgo oconomy', |n wh|ch know|odgo has
bocomo tho ma|n sourco ot woa|th, oducat|on, ospoc|a||y
h|ghor oducat|on, has bocomo tho abso|uto koy to
prospor|ty.
What they don't tell you

1horo |s romarkab|y ||tt|o ov|donco show|ng that moro
oducat|on |oads to groator nat|ona| prospor|ty. Vuch ot tho
know|odgo ga|nod |n oducat|on |s actua||y not ro|ovant tor
product|v|ty onhancomont, ovon though |t onab|os poop|o to
|oad a moro tu|t||||ng and |ndopondont ||to. A|so, tho v|ow that
tho r|so ot tho know|odgo oconomy has cr|t|ca||y |ncroasod
tho |mportanco ot oducat|on |s m|s|oad|ng. 1o bog|n w|th,
tho |doa ot tho know|odgo oconomy |tso|t |s prob|omat|c, as
know|odgo has a|ways boon tho ma|n sourco ot woa|th.
Voroovor, w|th |ncroas|ng do-|ndustr|a||zat|on and
mochan|zat|on, tho know|odgo roqu|romonts may ovon havo
ta||on tor most jobs |n tho r|ch countr|os. Evon whon |t comos
to h|ghor oducat|on, wh|ch |s supposod to mattor moro |n tho
know|odgo oconomy, thoro |s no s|mp|o ro|at|onsh|p
botwoon |t and oconom|c growth. What roa||y mattors |n tho
dotorm|nat|on ot nat|ona| prospor|ty |s not tho oducat|ona|
|ovo|s ot |nd|v|dua|s but tho nat|on's ab|||ty to organ|zo
|nd|v|dua|s |nto ontorpr|sos w|th h|gh product|v|ty.
EducatIon, educatIon, educatIon

'Educat|on, oducat|on, oducat|on' - th|s |s how tho tormor
3r|t|sh lr|mo V|n|stor 1ony 3|a|r summod up h|s
prospoct|vo govornmont's top throo po||cy pr|or|t|os dur|ng
tho 1007 o|oct|on campa|gn, wh|ch brought h|s 'low' labour
party to powor attor noar|y two docados |n tho w||dornoss.
1ho subsoquont succoss or othorw|so ot low labour's
oducat|on po||cy may bo d|sputod, but what |s |nd|sputab|o
|s that tho commont portoct|y capturod Vr 3|a|r's oxcopt|ona|
ab|||ty to say tho r|ght th|ng at tho r|ght t|mo (that |s, botoro ho
|ost h|s hoad ovor lraq). Vany a po||t|c|an botoro Vr 3|a|r
had ta|kod about and pushod tor bottor oducat|on, but ho
was spoak|ng at a t|mo whon, hav|ng w|tnossod tho r|so ot
tho know|odgo oconomy s|nco tho 1080s, tho who|o wor|d
was bocom|ng conv|ncod that oducat|on was tho koy to
oconom|c prospor|ty. lt oducat|on had boon |mportant tor
oconom|c succoss |n tho days ot smoko-stack |ndustr|os,
moro and moro poop|o woro bocom|ng conv|ncod, |t wou|d
bo tho bo-a|| and ond-a|| |n tho |ntormat|on ago, whon bra|ns,
and not brawn, aro tho ma|n sourco ot woa|th.
1ho argumont sooms stra|ghttorward. Voro oducatod
poop|o aro moro product|vo - as ov|doncod by tho h|ghor
sa|ar|os thoy got. 3o |t |s a mattor ot mathomat|ca| |og|c that
an oconomy w|th moro oducatod poop|o w||| bo moro
product|vo. 1ho tact that pooror countr|os havo a |owor stock
ot oducatod poop|o - or 'human cap|ta|' |n somo
oconom|sts' jargon - a|so provos tho po|nt. 1ho avorago
durat|on ot schoo||ng |s around n|no yoars |n OEC0
countr|os, wh||o |t |s not ovon throo |n 3ub-3aharan Atr|can
countr|os. A|so wo|| known aro tho oxcopt|ona||y h|gh
oducat|ona| ach|ovomonts ot tho 'm|rac|o' oconom|os |n
East As|a - such as 1apan, 3outh Koroa, 1a|wan, |ong
Kong and 3|ngaporo. 1ho|r oducat|ona| ach|ovomonts aro
man|tostod not just |n quant|tat|vo torms such as h|gh ||toracy
ratos or onro|mont ratos at var|ous |ovo|s ot oducat|on. 1ho
qua||ty ot tho|r oducat|on |s vory h|gh as wo||. 1hoy rank r|ght
at tho top ot tho |oaguo |n |ntornat|ona||y standard|zod tosts
such as tho 1ronds |n lntornat|ona| Vathomat|cs and
3c|onco 3tudy (1lV33) tor tourth and o|ghth gradors, and
tho lrogram tor lntornat|ona| 3tudont Assossmont (ll3A),
wh|ch moasuros t|ttoon-yoar-o|ds' ab|||ty to app|y maths
know|odgo to roa|-wor|d prob|oms. lood wo say moro?
We don't need no educatIon .

3o|t-ov|dont though tho |mportanco ot oducat|on |n ra|s|ng
an oconomy's product|v|ty may soom, thoro |s actua||y a |ot
ot ov|donco that quost|ons th|s p|oco ot convont|ona|
w|sdom.
lot's t|rst tako tho caso ot tho East As|an m|rac|o
oconom|os, |n whoso dovo|opmont oducat|on |s supposod
to havo p|ayod a cr|t|ca| ro|o. ln 1000, 1a|wan had a ||toracy
rato ot on|y b4 por cont, wh||o tho lh|||pp|nos' was 72 por
cont. 0osp|to |ts |owor oducat|on |ovo|, 1a|wan has s|nco
thon notchod up ono ot tho bost oconom|c growth
portormancos |n human h|story, wh||o tho lh|||pp|nos has
dono rathor poor|y. ln 1000, tho lh|||pp|nos had a|most
doub|o tho por cap|ta |ncomo ot 1a|wan ($200 vs. $122), but
today 1a|wan's por cap|ta |ncomo |s around ton t|mos that ot
tho lh|||pp|nos ($18,000 vs. $1,800). ln tho samo yoar,
Koroa had a 71 por cont ||toracy rato - comparab|o to that ot
tho lh|||pp|nos but st||| wo|| bo|ow Argont|na's 01 por cont.
0osp|to tho s|gn|t|cant|y |owor ||toracy rato, Koroa has s|nco
grown much tastor than Argont|na. Koroa's por cap|ta
|ncomo was just ovor ono-t|tth that ot Argont|na's |n 1000
($82 vs. $878). 1oday |t |s throo t|mos h|ghor (around
$21,000 vs. around $7,000).
Obv|ous|y, thoro aro many moro th|ngs than oducat|on
that dotorm|no a country's oconom|c growth portormanco.
3ut thoso oxamp|os undorm|no tho common myth that
oducat|on was tho koy to tho East As|an m|rac|o. 1ho East
As|an oconom|os d|d oot havo unusua||y h|gh oducat|ona|
ach|ovomont at tho start ot tho|r oconom|c m|rac|os, wh||o
countr|os ||ko tho lh|||pp|nos and Argont|na d|d vory poor|y
dosp|to hav|ng s|gn|t|cant|y bottor-oducatod popu|at|ons.
At tho othor ond ot tho spoctrum, tho oxpor|onco ot 3ub-
3aharan Atr|ca a|so shows that |nvost|ng moro |n oducat|on
|s no guarantoo ot bottor oconom|c portormanco. 3otwoon
1080 and 2004, ||toracy ratos |n 3ub-3aharan Atr|can
countr|os roso qu|to substant|a||y trom 40 por cont to 01 por
cont.
1
0osp|to such r|sos, por cap|ta |ncomo |n tho rog|on
actua||y o|| by 0.8 por cont por yoar dur|ng th|s por|od. lt
oducat|on |s so |mportant tor oconom|c dovo|opmont, as
most ot us bo||ovo, somoth|ng ||ko th|s shou|d not happon.
1ho apparont |ack ot pos|t|vo ottocts ot oducat|on on
growth |s not tound on|y |n tho oxtromo casos that l havo
choson - East As|a at ono ond and 3ub-3aharan Atr|ca at
tho othor. lt |s a moro gonora| phonomonon. ln a w|do|y c|tod
2004 art|c|o, 'Whoro has a|| tho oducat|on gono?', lant
lr|tchott, a |arvard oconom|st who workod at tho Wor|d
3ank tor a |ong t|mo, ana|ysod tho data trom dozons ot r|ch
and dovo|op|ng countr|os dur|ng tho 1000-87 por|od and
conductod an oxtons|vo rov|ow ot s|m||ar stud|os, |n ordor to
ostab||sh whothor oducat|on pos|t|vo|y |nt|uoncos growth.
2
||s conc|us|on |s that thoro |s vory ||tt|o ov|donco to support
tho v|ow that |ncroasod oducat|on |oads to h|ghor oconom|c
growth.
on't know much about hIstory, don't
know much bIology

Why |s thoro so ||tt|o ov|donco to support what sooms to bo
such an obv|ous propos|t|on that moro oducat|on shou|d
mako a country r|chor? lt |s bocauso, to put |t s|mp|y,
oducat|on |s not as |mportant |n ra|s|ng tho product|v|ty ot an
oconomy as wo bo||ovo.
1o bog|n w|th, not a|| oducat|on |s ovon mooot to ra|so
product|v|ty. 1horo aro many subjocts that havo no |mpact,
ovon |nd|roct|y, on most workors' product|v|ty - ||toraturo,
h|story, ph||osophy and mus|c, tor oxamp|o (soo 7blog 8).
|rom a str|ct|y oconom|c po|nt ot v|ow, toach|ng thoso
subjocts |s a wasto ot t|mo. Wo toach our ch||dron thoso
subjocts bocauso wo bo||ovo that thoy w||| ovontua||y onr|ch
tho|r ||vos and a|so mako thom good c|t|zons. Evon though
th|s just|t|cat|on tor oducat|ona| spond|ng |s |ncroas|ng|y
undor attack |n an ago |n wh|ch ovoryth|ng |s supposod to
just|ty |ts ox|stonco |n torms ot |ts contr|but|on to product|v|ty
growth, |t roma|ns a vory |mportant - |n my v|ow, tho most
|mportant - roason to |nvost |n oducat|on.
Voroovor, ovon subjocts ||ko mathomat|cs or sc|oncos,
wh|ch aro supposod to bo |mportant tor ra|s|ng product|v|ty,
aro not ro|ovant tor most workors - |nvostmont bankors do
not nood b|o|ogy or tash|on dos|gnors mathomat|cs |n ordor
to bo good at what thoy do. Evon tor thoso jobs tor wh|ch
thoso subjocts aro ro|ovant, much ot what you |oarn at schoo|
or ovon un|vors|ty |s otton not d|roct|y ro|ovant tor pract|ca|
work. |or oxamp|o, tho ||nk botwoon what a product|on ||no
workor |n a car tactory |oarnod |n schoo| phys|cs and h|s
product|v|ty |s rathor tonuous. 1ho |mportanco ot
appront|cosh|p and on-tho-job tra|n|ng |n many protoss|ons
tost|t|os to tho ||m|tod ro|ovanco ot schoo| oducat|on tor
workor product|v|ty. 3o, ovon tho supposod|y product|v|ty-
or|ontod parts ot oducat|on aro not as ro|ovant tor ra|s|ng
product|v|ty as wo th|nk.
Cross-country stat|st|ca| ana|ysos havo ta||od to t|nd any
ro|at|onsh|p botwoon a country's maths scoros and |ts
oconom|c portormanco.
8
3ut |ot mo g|vo you moro concroto
oxamp|os. ln tho mathomat|ca| part ot tho 2007 1lV33, U3
tourth-gradors woro boh|nd not on|y tho tamous|y
mathomat|ca| ch||dron ot tho East As|an countr|os but a|so
tho|r countorparts trom countr|os such as Kazakhstan,
latv|a, luss|a and l|thuan|a.
4
Ch||dron |n a|| othor r|ch
Europoan oconom|os |nc|udod |n tho tost, oxcopt Eng|and
and tho lothor|ands, scorod |owor than tho U3 ch||dron.
b
E|ghth-gradors trom lorway, tho r|chost country |n tho wor|d
(|n torms ot por cap|ta |ncomo at markot oxchango rato -
soo 7blog 10), woro boh|nd tho|r countorparts not on|y |n a||
othor r|ch countr|os but a|so |n much pooror countr|os,
|nc|ud|ng l|thuan|a, Czoch lopub||c, 3|ovon|a, Armon|a and
3orb|a (|t |s |ntorost|ng to noto that a|| thoso countr|os aro
tormor soc|a||st countr|os).
0
E|ghth-gradors trom lsrao|, a
country tamous tor |ts oducat|ona| zoa| and oxcopt|ona|
portormanco |n h|gh-ond rosoarch, scorod boh|nd lorway,
ta|||ng boh|nd 3u|gar|a as wo||. 3|m||ar stor|os woro
obsorvod |n sc|onco tosts.
How about the knowledge economy7

Evon |t oducat|on's |mpact on growth has boon moagro so
tar, you may wondor whothor tho rocont r|so ot tho
know|odgo oconomy may havo changod a|| that. W|th |doas
bocom|ng tho ma|n sourco ot woa|th, |t may bo arguod,
oducat|on w||| trom now on bocomo much moro |mportant |n
dotorm|n|ng a country's prospor|ty.
Aga|nst th|s, l must t|rst ot a|| po|nt out that tho know|odgo
oconomy |s noth|ng now. Wo havo a|ways ||vod |n ono |n tho
sonso that |t has a|ways boon a country's command ovor
know|odgo (or |ack ot |t) that mado |t r|ch (or poor). Ch|na
was tho r|chost country |n tho wor|d dur|ng tho t|rst
m|||onn|um bocauso |t possossod tochn|ca| know|odgo that
othors d|d not - papor, movab|o typo, gunpowdor and tho
compass bo|ng tho most tamous, but by no moans tho on|y,
oxamp|os. 3r|ta|n bocamo tho wor|d's oconom|c hogomon
|n tho n|notoonth contury bocauso |t camo to |oad tho wor|d
|n tochno|og|ca| |nnovat|on. Whon Gormany bocamo as poor
as loru and Vox|co r|ght attor tho 3ocond Wor|d War, no
ono suggostod that |t shou|d bo roc|ass|t|od as a dovo|op|ng
country, bocauso poop|o know that |t st||| had command ovor
tochno|og|ca|, organ|zat|ona| and |nst|tut|ona| know|odgo that
had mado |t ono ot tho most torm|dab|o |ndustr|a| powors
botoro tho war. ln that sonso, tho |mportanco (or othorw|so)
ot oducat|on has not changod |n tho rocont por|od.
Ot courso, tho know|odgo stock that tho human|ty
co||oct|vo|y commands today |s much b|ggor than |n tho past,
but that doos not moan that ovoryono, or ovon tho major|ty ot
tho poop|o, has to bo bottor oducatod than |n tho past. lt
anyth|ng, tho amount ot product|v|ty-ro|atod know|odgo that
an avorago workor noods to possoss has ta||on tor many
jobs, ospoc|a||y |n r|ch countr|os. 1h|s may sound absurd, but
|ot mo oxp|a|n.
1o bog|n w|th, w|th tho cont|nuous r|so |n manutactur|ng
product|v|ty, a groator proport|on ot tho worktorco |n r|ch
countr|os now works |n |ow-sk|||od sorv|co jobs that do not
roqu|ro much oducat|on - stack|ng sho|vos |n supormarkots,
try|ng burgors |n tast tood rostaurants and c|oan|ng ott|cos
(soo 7blogs 8 ooo 0). lnsotar as tho proport|on ot poop|o |n
such protoss|ons |ncroasos, wo may actua||y do w|th an
|ncroas|ng|y |oss, not moro, oducatod |abour torco, |t wo aro
on|y |ntorostod |n tho product|v|ty ottocts ot oducat|on.
Voroovor, w|th oconom|c dovo|opmont, a h|ghor
proport|on ot know|odgo bocomos ombod|od |n mach|nos.
1h|s moans that tho oconomy-w|do product|v|ty |ncroasos
dosp|to |nd|v|dua| workors hav|ng |oss undorstand|ng ot
what thoy do than tho|r countorparts |n tho past. |or tho most
str|k|ng oxamp|o, thoso days most shop ass|stants |n r|ch
countr|os do not ovon nood to know how to add - a sk||| that
tho|r countorparts |n oar||or t|mos dot|n|to|y noodod - as bar-
codo mach|nos do that tor thom. |or anothor oxamp|o,
b|acksm|ths |n poor countr|os probab|y know moro about tho
naturo ot mota|s |n ro|at|on to too|-mak|ng than do most
omp|oyoos ot 3osch or 3|ack 8 0ockor. |or yot anothor
oxamp|o, thoso who work at tho sma|| o|octron|cs shops
||ttor|ng tho stroots ot poor countr|os can t|x many moro
th|ngs than can |nd|v|dua| workors at 3amsung or 3ony.
A |argo part ot th|s |s duo to tho s|mp|o tact that
mochan|zat|on |s tho most |mportant way to |ncroaso
product|v|ty. 3ut an |nt|uont|a| Varx|st schoo| ot thought
arguos that cap|ta||sts do||borato|y 'do-sk|||' tho|r workors by
us|ng tho most mochan|zod product|on tochno|og|os
poss|b|o, ovon |t thoy aro not tho most oconom|ca|, |n ordor
to mako tho workors moro oas||y rop|acoab|o and thus
oas|or to contro|.
7
Whatovor tho oxact causo ot tho
mochan|zat|on procoss, tho upshot |s that moro
tochno|og|ca||y dovo|opod oconom|os may actua||y nood
towor oducatod poop|o.
1he 8wIss paradox

low, |t may bo arguod that, ovon though oconom|c
dovo|opmont may not nocossar||y roqu|ro tho avorago
workor to bo moro oducatod, |t noods moro oducatod
poop|o at tho h|ghor ond. Attor a||, as l havo po|ntod out
abovo, tho ab|||ty to gonorato moro product|vo know|odgo
than othors |s what makos a country r|chor than othors. 1hus
soon, |t may bo arguod, |t |s tho qua||ty ot un|vors|t|os, rathor
than that ot pr|mary schoo|s, that dotorm|nos a nat|on's
prospor|ty.
|owovor, ovon |n th|s supposod|y know|odgo-dr|von ora,
tho ro|at|onsh|p botwoon h|ghor oducat|on and prospor|ty |s
not stra|ghttorward. lot us tako tho str|k|ng oxamp|o ot
3w|tzor|and. 1ho country |s ono ot tho top tow r|chost and
most |ndustr|a||zod countr|os |n tho wor|d (soo 7blogs 0 ooo
10), but |t has, surpr|s|ng|y, tho |owost - actua||y by tar tho
|owost - un|vors|ty onro|mont rato |n tho r|ch wor|d, unt|| tho
oar|y 1000s, on|y around ono-th|rd ot tho avorago tor othor
r|ch countr|os. Unt|| as |ato as 1000, tho 3w|ss un|vors|ty
onro|mont rato was st||| |oss than ha|t tho OEC0 avorago (10
por cont vs. 84 por cont).
8
3|nco thon, 3w|tzor|and |ncroasod
|ts rato cons|dorab|y, br|ng|ng |t up to 47 por cont by 2007,
accord|ng to UlE3CO data. |owovor, tho 3w|ss rato st|||
roma|ns tho |owost |n tho r|ch wor|d and |s way bo|ow what
wo t|nd |n tho most un|vors|ty-hoavy countr|os, such as
||n|and (04 por cont), tho U3 (82 por cont) and 0onmark (80
por cont). lt |s, |ntorost|ng|y, a|so tar |owor than that ot many
cons|dorab|y pooror oconom|os, such as Koroa (00 por
cont), Grooco (01 por cont), l|thuan|a (70 por cont) and
Argont|na (08 por cont).
|ow |s |t poss|b|o that 3w|tzor|and has stayod at tho vory
top ot tho |ntornat|ona| product|v|ty |oaguo dosp|to prov|d|ng
much |oss h|ghor oducat|on than not just |ts ma|n
compot|tors but a|so many oconom|os that aro much
pooror?
Ono poss|b|o oxp|anat|on |s that un|vors|t|os |n d|ttoront
countr|os havo d|ttoront qua||t|os. 3o, |t Koroan or l|thuan|an
un|vors|t|os aro not as good as 3w|ss un|vors|t|os, |t may bo
poss|b|o tor 3w|tzor|and to bo r|chor than Koroa or
l|thuan|a, ovon |t a much |owor proport|on ot tho 3w|ss havo
un|vors|ty oducat|on than do tho Koroans or tho l|thuan|ans.
|owovor, th|s argumont |osos much ot |ts torco whon wo
comparo 3w|tzor|and w|th ||n|and or tho U3. Wo cannot |n
a|| sor|ousnoss suggost that 3w|ss un|vors|t|os aro so much
bottor than ||nn|sh or Amor|can onos that 3w|tzor|and can
got away w|th un|vors|ty onro|mont ratos ha|t tho|rs.
1ho ma|n oxp|anat|on tor tho '3w|ss paradox' shou|d bo
tound, onco aga|n, |n tho |ow product|v|ty contont ot
oducat|on. |owovor, |n tho caso ot h|ghor oducat|on, tho
non-product|v|ty componont |s not so much about toach|ng
poop|o subjocts that w||| ho|p thom w|th th|ngs such as
porsona| tu|t||mont, good c|t|zonsh|p and nat|ona| |dont|ty, as
|n tho caso ot pr|mary and socondary oducat|on. lt |s about
what oconom|sts ca|| tho 'sort|ng' tunct|on.
||ghor oducat|on, ot courso, |mparts corta|n product|v|ty-
ro|atod know|odgo to |ts roc|p|onts, but anothor |mportant
tunct|on ot |t |s to ostab||sh oach |nd|v|dua|'s rank|ng |n tho
h|orarchy ot omp|oyab|||ty.
0
ln many ||nos ot work, what
counts |s gonora| |nto|||gonco, d|sc|p||no and tho ab|||ty to
organ|zo onoso|t, rathor than spoc|a||st know|odgo, much ot
wh|ch you can, and havo to, actua||y p|ck up on-tho-job. 3o,
ovon |t what you |oarn |n a un|vors|ty as a h|story major or a
chom|st may not bo ro|ovant to your work as a prospoct|vo
managor |n an |nsuranco company or as a govornmont
ott|c|a| |n tho 0opartmont ot 1ransport, tho tact that you havo
graduatod trom a un|vors|ty to||s your potont|a| omp|oyors
that you aro ||ko|y to bo smartor, moro so|t-d|sc|p||nod and
bottor organ|zod than thoso who havo not. 3y h|r|ng you as a
un|vors|ty graduato, your omp|oyor |s thon h|r|ng you tor
thoso gonora| qua||t|os, not tor your spoc|a||st know|odgo,
wh|ch |s otton |rro|ovant to tho job you w||| bo portorm|ng.
low, w|th tho |ncroas|ng omphas|s on h|ghor oducat|on |n
tho rocont por|od, an unhoa|thy dynam|c has boon
ostab||shod tor h|ghor oducat|on |n many h|gh-|ncomo and
uppor-m|dd|o-|ncomo countr|os that can attord to oxpand
un|vors|t|os (3w|tzor|and has not boon |mmuno to th|s, as
t|guros abovo suggost). Onco tho proport|on ot poop|o go|ng
to un|vors|ty goos ovor a cr|t|ca| throsho|d, poop|o bovo to
go to un|vors|ty |n ordor to got a docont job. Whon, say, b0
por cont ot tho popu|at|on goos to un|vors|ty, not go|ng to
un|vors|ty |s |mp||c|t|y doc|ar|ng that you aro |n tho bottom
ha|t ot tho ab|||ty d|str|but|on, wh|ch |s not tho groatost way to
start your job soarch. 3o, poop|o go to un|vors|ty, tu||y
know|ng that thoy w||| 'wasto t|mo' study|ng th|ngs that thoy
w||| novor nood tor tho|r work. W|th ovoryono want|ng to go to
un|vors|ty, tho domand tor h|ghor oducat|on |ncroasos, wh|ch
thon |oads to tho supp|y ot moro un|vors|ty p|acos, wh|ch
ra|sos un|vors|ty onro|mont rato turthor, |ncroas|ng tho
prossuro to go to un|vors|ty ovon moro. Ovor t|mo, th|s |oads
to a procoss ot dogroo |nt|at|on. low that 'ovoryono' has a
un|vors|ty dogroo, you havo to do a mastor's, or ovon a lh0,
|n ordor to stand out, ovon |t tho product|v|ty contont ot thoso
turthor dogroos may bo m|n|ma| tor your tuturo jobs.
G|von that 3w|tzor|and was unt|| tho m|d 1000s ab|o to
ma|nta|n ono ot tho h|ghost nat|ona| product|v|t|os |n tho
wor|d w|th a un|vors|ty onro|mont ot 10-1b por cont, wo
cou|d say that onro|mont ratos much h|ghor than that aro
roa||y unnocossary. Evon |t wo accopt that sk|||s roqu|romont
has r|son so much w|th tho r|so ot tho know|odgo oconomy
that tho 40-p|us por cont onro|mont rato that 3w|tzor|and now
has |s tho m|n|mum (wh|ch l sor|ous|y doubt), th|s st||| moans
that at |oast ha|t ot un|vors|ty oducat|on |n countr|os such as
tho U3, Koroa and ||n|and |s 'wastod' |n tho ossont|a||y
zoro-sum gamo ot sort|ng. 1ho h|ghor oducat|on systom |n
thoso countr|os has bocomo ||ko a thoatro |n wh|ch somo
poop|o doc|dod to stand to got a bottor v|ow, prompt|ng
othors boh|nd thom to stand. Onco onough poop|o stand,
ovoryono has to stand, wh|ch moans that no ono |s gott|ng a
bottor v|ow, wh||o ovoryono has bocomo moro
uncomtortab|o.
EducatIon vs. enterprIse

lt not just bas|c oducat|on but a|so h|ghor oducat|on doos not
mattor so much |n dotorm|n|ng a nat|on's prospor|ty, wo
must sor|ous|y roth|nk tho ro|o ot oducat|on |n our oconomy.
ln tho caso ot r|ch countr|os, tho|r obsoss|on w|th h|ghor
oducat|on has to bo tamod. 1h|s obsoss|on has |od to
unhoa|thy dogroo |nt|at|on and tho consoquont ovor-
|nvostmont ot hugo sca|o |n h|ghor oducat|on |n many
countr|os. l am not aga|nst countr|os hav|ng a vory h|gh - or
ovon 100 por cont - un|vors|ty onro|mont rato tor othor
roasons, but thoy shou|d not do|udo thomso|vos |nto
bo||ov|ng that |t wou|d havo a s|gn|t|cant product|v|ty ottoct.
ln tho caso ot dovo|op|ng countr|os, an ovon moro rad|ca|
chango ot porspoct|vo |s noodod. Wh||o thoy shou|d oxpand
oducat|on |n ordor to proparo tho|r youngstors tor a moro
moan|ngtu| ||to, whon |t comos to tho quost|on ot product|v|ty
|ncroaso, thoso countr|os nood to |ook boyond tho oducat|on
ot |nd|v|dua|s and pay moro attont|on to bu||d|ng tho r|ght
|nst|tut|ons and organ|zat|ons tor product|v|ty growth.
What roa||y d|st|ngu|shos tho r|ch countr|os trom tho
pooror onos |s much |oss how wo|| oducatod tho|r |nd|v|dua|
c|t|zons aro than how wo|| tho|r c|t|zons aro organ|zod |nto
co||oct|vo ont|t|os w|th h|gh product|v|ty - bo that g|ant t|rms
such as 3oo|ng or vo|kswagon or tho sma||or wor|d-c|ass
t|rms ot 3w|tzor|and and lta|y (soo 7blog 15). 0ovo|opmont
ot such t|rms noods to bo supportod by a rango ot
|nst|tut|ons that oncourago |nvostmont and r|sk-tak|ng - a
trado rog|mo that protocts and nurturos t|rms |n '|ntant
|ndustr|os' (soo 7blogs 7 ooo 12), a t|nanc|a| systom that
prov|dos 'pat|ont cap|ta|' nocossary tor |ong-torm
product|v|ty-onhanc|ng |nvostmonts (soo 7blog 2),
|nst|tut|ons that prov|do socond chancos tor both tho
cap|ta||sts (a good bankruptcy |aw) and tor tho workors (a
good wo|taro stato) (soo 7blog 21), pub||c subs|d|os and
rogu|at|on rogard|ng l80 and tra|n|ng (soo 7blogs 18 ooo
10), and so on.
Educat|on |s va|uab|o, but |ts ma|n va|uo |s not |n ra|s|ng
product|v|ty. lt ||os |n |ts ab|||ty to ho|p us dovo|op our
potont|a|s and ||vo a moro tu|t||||ng and |ndopondont ||to. lt wo
oxpandod oducat|on |n tho bo||ot that |t w||| mako our
oconom|os r|chor, wo w||| bo soro|y d|sappo|ntod, tor tho ||nk
botwoon oducat|on and nat|ona| product|v|ty |s rathor
tonuous and comp||catod. Our ovoronthus|asm w|th
oducat|on shou|d bo tamod, and, ospoc|a||y |n dovo|op|ng
countr|os, tar groator attont|on noods to bo pa|d to tho |ssuo
ot ostab||sh|ng and upgrad|ng product|vo ontorpr|sos and
|nst|tut|ons that support thom.
1hing 18
What ia good tor ConoraI
Notora ia not nocoaaariIy good
tor tho unitod 5tatoa

What they tell you

At tho hoart ot tho cap|ta||st systom |s tho corporato soctor.
1h|s |s whoro th|ngs aro producod, jobs croatod and now
tochno|og|os |nvontod. W|thout a v|brant corporato soctor,
thoro |s no oconom|c dynam|sm. What |s good tor bus|noss,
thorotoro, |s good tor tho nat|ona| oconomy. Espoc|a||y g|von
tho |ncroas|ng |ntornat|ona| compot|t|on |n a g|oba||z|ng
wor|d, countr|os that mako opon|ng and runn|ng bus|nossos
d|tt|cu|t or mako t|rms do unwantod th|ngs w||| |oso
|nvostmont and jobs, ovontua||y ta|||ng boh|nd. Govornmont
noods to g|vo tho max|mum dogroo ot troodom to bus|noss.
What they don't tell you

0osp|to tho |mportanco ot tho corporato soctor, a||ow|ng
t|rms tho max|mum dogroo ot troodom may not ovon bo
good tor tho t|rms thomso|vos, |ot a|ono tho nat|ona|
oconomy. ln tact, not a|| rogu|at|ons aro bad tor bus|noss.
3omot|mos, |t |s |n tho |ong-run |ntorost ot tho bus|noss
soctor to rostr|ct tho troodom ot |nd|v|dua| t|rms so that thoy
do not dostroy tho common poo| ot rosourcos that a|| ot thom
nood, such as natura| rosourcos or tho |abour torco.
logu|at|ons can a|so ho|p bus|nossos by mak|ng thom do
th|ngs that may bo cost|y to thom |nd|v|dua||y |n tho short run
but ra|so tho|r co||oct|vo product|v|ty |n tho |ong run - such as
tho prov|s|on ot workor tra|n|ng. ln tho ond, what mattors |s
not tho quant|ty but tho qua||ty ot bus|noss rogu|at|on.
How etroIt won the war

1hoy say that 0otro|t won tho 3ocond Wor|d War. Yos, tho
3ov|ot Un|on sacr|t|cod tho most poop|o - tho ost|matod
doath to|| |n tho Groat latr|ot|c War (as |t |s known |n
luss|a) was upward ot 2b m||||on, noar|y ha|t ot a|| doaths
wor|dw|do. 3ut |t - and, ot courso, tho UK - wou|d not havo
surv|vod tho laz| ottons|vo w|thout tho arms sont ovor trom
what |rank||n loosovo|t ca||od 'tho arsona| ot domocracy',
that |s, tho Un|tod 3tatos. And most ot thoso arms woro
mado |n tho convortod tactor|os ot tho 0otro|t car-makors -
Gonora| Votors (GV), |ord and Chrys|or. 3o, w|thout tho
|ndustr|a| m|ght ot tho U3, roprosontod by 0otro|t, tho laz|s
wou|d havo takon ovor Europo and at |oast tho wostorn part
ot tho 3ov|ot Un|on.
Ot courso, h|story |s novor stra|ghttorward. What mado
tho oar|y succoss ot laz| Gormany |n tho war poss|b|o was
tho ab|||ty ot |ts army to movo qu|ck|y - |ts tamous B|ltzkrlog,
or l|ghtn|ng War. And what mado that h|gh mob|||ty ot tho
Gorman army poss|b|o was |ts h|gh dogroo ot motor|zat|on,
many tochno|og|os tor wh|ch woro supp||od by nono othor
than GV (through |ts Opo| subs|d|ary, acqu|rod |n 1020).
Voroovor, ov|donco |s omorg|ng that, |n dot|anco ot tho |aw,
throughout tho war GV socrot|y ma|nta|nod |ts ||nk w|th Opo|,
wh|ch bu||t not on|y m|||tary cars but a|rcratt, |andm|nos and
torpodoos. 3o |t sooms that GV was arm|ng both s|dos and
prot|t|ng trom |t.
Evon among tho 0otro|t car-makors - co||oct|vo|y known
as tho 3|g 1hroo - GV by thon stood pro-om|nont. Undor tho
|oadorsh|p ot A|trod 3|oan 1r, who ran |t tor th|rty-t|vo yoars
(1028-b8), GV had ovortakon |ord as tho |argost U3 car-
makor by tho |ato 1020s and gono on to bocomo tho a||-
Amor|can automob||o company, produc|ng, |n 3|oan's
words, 'a car tor ovory purso and purposo', arrangod a|ong
a '|addor ot succoss', start|ng w|th Chovro|ot, mov|ng up
through lont|ac, O|dsmob||o, 3u|ck and t|na||y cu|m|nat|ng |n
Cad|||ac.
3y tho ond ot tho 3ocond Wor|d War, GV was not just tho
b|ggost car-makor |n tho U3, |t had bocomo tho b|ggost
company |n tho country (|n torms ot rovonuo). lt was so
|mportant that, whon askod |n tho Congross|ona| hoar|ng tor
h|s appo|ntmont as U3 0otonso 3ocrotary |n 10b8 whothor
ho saw any potont|a| cont||ct botwoon h|s corporato
background and h|s pub||c dut|os, Vr Char||o W||son, who
usod to bo tho CEO ot Gonora| Votors, tamous|y rop||od that
what |s good tor tho Un|tod 3tatos |s good tor Gonora|
Votors and v|co vorsa.
1ho |og|c boh|nd th|s argumont sooms d|tt|cu|t to d|sputo.
ln a cap|ta||st oconomy, pr|vato soctor compan|os p|ay tho
contra| ro|o |n croat|ng woa|th, jobs and tax rovonuo. lt thoy
do wo||, tho who|o oconomy doos wo|| by oxtons|on.
Espoc|a||y whon tho ontorpr|so |n quost|on |s ono ot tho
|argost and tochno|og|ca||y most dynam|c ontorpr|sos, ||ko
GV |n tho 10b0s, |ts succoss or othorw|so has s|gn|t|cant
ottocts on tho rost ot tho oconomy - tho supp||or t|rms, tho
omp|oyoos ot thoso t|rms, tho producors ot goods that tho
g|ant t|rm's omp|oyoos, who can numbor |n tho hundrods ot
thousands, may buy, and so on. 1horotoro, how thoso g|ant
t|rms do |s part|cu|ar|y |mportant tor tho prospor|ty ot tho
nat|ona| oconomy.
Untortunato|y, propononts ot th|s |og|c say, th|s obv|ous
argumont was not w|do|y accoptod dur|ng much ot tho
twont|oth contury. Ono can undorstand why commun|st
rog|mos woro aga|nst tho pr|vato soctor - attor a||, thoy
bo||ovod that pr|vato proporty was tho sourco ot a|| tho ov||s
ot cap|ta||sm. |owovor, botwoon tho Groat 0opross|on and
tho 1070s, pr|vato bus|noss was v|owod w|th susp|c|on ovon
|n most cap|ta||st oconom|os.
3us|nossos woro, so tho story goos, soon as ant|-soc|a|
agonts whoso prot|t-sook|ng noodod to bo rostra|nod tor
othor, supposod|y |ott|or, goa|s, such as just|co, soc|a|
harmony, protoct|on ot tho woak and ovon nat|ona| g|ory. As
a rosu|t, comp||catod and cumborsomo systoms ot ||cons|ng
woro |ntroducod |n tho bo||ot that govornmonts nood to
rogu|ato wh|ch t|rms do what |n tho |ntorost ot w|dor soc|oty.
ln somo countr|os, govornmonts ovon pushod t|rms |nto
unwantod bus|nossos |n tho namo ot nat|ona| dovo|opmont
(soo 7blogs 7 ooo 12). largo t|rms woro bannod trom
ontor|ng thoso sogmonts ot tho markot popu|atod by sma||
tarms, tactor|os and rota|| shops, |n ordor to prosorvo tho
trad|t|ona| way ot ||to and protoct 'sma|| mon' aga|nst b|g
bus|noss. Onorous |abour rogu|at|ons woro |ntroducod |n tho
namo ot protoct|ng workor r|ghts. ln many countr|os,
consumor r|ghts woro oxtondod to such a dogroo that |t hurt
bus|noss.
1hoso rogu|at|ons, pro-bus|noss commontators arguo,
not on|y harmod tho |argo t|rms but mado ovoryono o|so
worso ott by roduc|ng tho ovora|| s|zo ot tho p|o to bo sharod
out. 3y ||m|t|ng tho ab|||ty ot t|rms to oxpor|mont w|th now
ways ot do|ng bus|noss and ontor now aroas, thoso
rogu|at|ons s|owod down tho growth ot ovora|| product|v|ty. ln
tho ond, howovor, tho to||y ot th|s ant|-bus|noss |og|c bocamo
too obv|ous, tho argumont goos. As a rosu|t, s|nco tho
1070s, countr|os trom a|| around tho wor|d havo como to
accopt that what |s good tor bus|noss |s good tor tho
nat|ona| oconomy and havo adoptod a pro-bus|noss po||cy
stanco. Evon commun|st countr|os havo g|von up tho|r
attompts to st|t|o tho pr|vato soctor s|nco tho 1000s. lood
wo pondor upon th|s |ssuo any moro?
How the mIghty has |allen

||vo docados attor Vr W||son's romark, |n tho summor ot
2000, GV wont bankrupt. lotw|thstand|ng |ts wo||-known
avors|on to stato ownorsh|p, tho U3 govornmont took ovor
tho company and, attor an oxtons|vo rostructur|ng, |aunchod
|t as a now ont|ty. ln tho procoss, |t spont a staggor|ng $b7.0
b||||on ot taxpayors' monoy.
lt may bo arguod that tho roscuo was |n tho Amor|can
nat|ona| |ntorost. lott|ng a company ot GV's s|zo and |ntor-
||nkagos co||apso suddon|y wou|d havo had hugo nogat|vo
r|pp|o ottocts on jobs and domand (o.g., ta|| |n consumor
domand trom unomp|oyod GV workors, ovaporat|on ot
GV's domand tor products trom |ts supp||or t|rms),
aggravat|ng tho t|nanc|a| cr|s|s that was unto|d|ng |n tho
country at tho t|mo. 1ho U3 govornmont choso tho |ossor ot
tho two ov||s, on boha|t ot tho taxpayors. What was good tor
GV was st||| good tor tho Un|tod 3tatos, |t may bo arguod,
ovon though |t was not a vory good th|ng |n abso|uto torms.
|owovor, that doos not moan that wo shou|d not quost|on
how GV got |nto that s|tuat|on |n tho t|rst p|aco. Whon tacod
w|th st|tt compot|t|on trom |mports trom Gormany, 1apan and
thon Koroa trom tho 1000s, GV d|d not rospond |n tho most
natura|, |t d|tt|cu|t, way |t shou|d havo - produc|ng bottor cars
than thoso ot |ts compot|tors. lnstoad, |t tr|od to tako tho
oasy way out.
||rst, |t b|amod 'dump|ng' and othor unta|r trado pract|cos
by |ts compot|tors and got tho U3 govornmont to |mposo
|mport quotas on toro|gn, ospoc|a||y 1apanoso, cars and
torco opon compot|tors' homo markots. ln tho 1000s, whon
thoso moasuros provod |nsutt|c|ont to ha|t |ts doc||no, |t had
tr|od to mako up tor |ts ta|||ngs |n car-mak|ng by dovo|op|ng
|ts t|nanc|a| arm, GVAC (Gonora| Votors Accoptanco
Corporat|on). GVAC movod boyond |ts trad|t|ona| tunct|on
ot t|nanc|ng car purchasos and startod conduct|ng t|nanc|a|
transact|ons tor tho|r own sako. GVAC |tso|t provod qu|to
succosstu| - |n 2004, tor oxamp|o, 80 por cont ot GV's prot|t
camo trom GVAC (soo 7blog 22).
1
3ut that cou|d not roa||y
h|do tho tundamonta| prob|om - that tho company cou|d not
mako good cars at compot|t|vo pr|cos. Around tho samo
t|mo, tho company tr|od to shortcut tho nood tor |nvost|ng |n
tho dovo|opmont ot bottor tochno|og|os by buy|ng up sma||or
toro|gn compot|tors (such as 3aab ot 3wodon and 0aowoo
ot Koroa), but thoso woro nowhoro noar onough to rov|vo tho
company's tormor tochno|og|ca| supor|or|ty. ln othor words,
|n tho |ast tour docados, GV has tr|od ovoryth|ng to ha|t |ts
doc||no oxcopt mak|ng bottor cars bocauso try|ng to mako
bottor cars |tso|t was, wo||, too much troub|o.
Obv|ous|y, a|| thoso doc|s|ons may havo boon bost trom
GV's po|nt ot v|ow at tho t|mo whon thoy woro mado - attor
a||, thoy a||owod tho company to surv|vo tor a tow moro
docados w|th tho |oast ottort - but thoy havo oot boon good
tor tho rost ot tho Un|tod 3tatos. 1ho hugo b||| that Amor|can
taxpayors havo boon |andod w|th through tho roscuo
packago |s tho u|t|mato proot ot that, but a|ong tho way, tho
rost ot tho U3 cou|d havo dono bottor, had GV boon torcod
to |nvost |n tho tochno|og|os and mach|nos noodod to bu||d
bottor cars, |nstoad ot |obby|ng tor protoct|on, buy|ng up
sma||or compot|tors and turn|ng |tso|t |nto a t|nanc|a|
company.
Voro |mportant|y, a|| thoso act|ons that havo onab|od GV
to got out ot d|tt|cu|t|os w|th tho |oast ottort havo u|t|mato|y
not boon good ovon tor GV |tso|t - un|oss you oquato GV
w|th |ts managors and a constant|y chang|ng group ot
sharoho|dors. 1hoso managors drow absurd|y h|gh sa|ar|os
by do||vor|ng h|ghor prot|ts by not |nvost|ng tor product|v|ty
growth wh||o squooz|ng othor woakor 'stakoho|dors' - tho|r
workors, supp||or t|rms and tho omp|oyoos ot thoso t|rms.
1hoy bought tho acqu|osconco ot sharoho|dors by ottor|ng
thom d|v|donds and sharo buybacks to such an oxtont that
tho company's tuturo was joopard|zod. 1ho sharoho|dors d|d
not m|nd, and |ndood many ot thom oncouragod such
pract|cos, bocauso most ot thom woro t|oat|ng sharoho|dors
who woro not roa||y concornod w|th tho |ong-torm tuturo ot
tho company bocauso thoy cou|d |oavo at a momont's not|co
(soo 7blog 2).
1ho story ot GV toachos us somo sa|utary |ossons about
tho potont|a| cont||cts botwoon corporato and nat|ona|
|ntorosts - what |s good tor a company, howovor |mportant |t
may bo, may not bo good tor tho country. Voroovor, |t
h|gh||ghts tho cont||cts botwoon d|ttoront stakoho|dors that
mako up tho t|rm - what |s good tor somo stakoho|dors ot a
company, such as managors and short-torm sharoho|dors,
may not bo good tor othors, such as workors and supp||ors.
U|t|mato|y, |t a|so to||s us that what |s good tor a company |n
tho short run may not ovon bo good tor |t |n tho |ong run -
what |s good tor GV today may not bo good tor GV
tomorrow.
low, somo roadors, ovon onos who woro a|roady
porsuadod by th|s argumont, may st||| wondor whothor tho
U3 |s just an oxcopt|on that provos tho ru|o. Undor-rogu|at|on
may bo a prob|om tor tho U3, but |n most othor countr|os,
|sn't tho prob|om ovor-rogu|at|on?
299 permIts

ln tho oar|y 1000s, tho |ong Kong-basod Eng||sh-|anguago
bus|noss magaz|no, lor Eostoro Ecooomlc Rovlow, ran a
spoc|a| |ssuo on 3outh Koroa. ln ono art|c|o tho magaz|no
oxprossod puzz|omont at tho tact that, ovon though |t noodod
up to 200 porm|ts trom up to 100 agonc|os to opon a tactory
|n tho country, 3outh Koroa had grown at ovor 0 por cont |n
por cap|ta torms tor tho prov|ous throo docados. |ow was
th|s poss|b|o? |ow can a country w|th such an oppross|vo
rogu|atory rog|mo grow so tast?
3otoro try|ng to mako sonso ot th|s puzz|o, l must po|nt
out that |t was not just Koroa botoro tho 1000s |n wh|ch
soom|ng|y onorous rogu|at|ons coox|stod w|th a v|brant
oconomy. 1ho s|tuat|on was s|m||ar |n 1apan and 1a|wan
throughout tho|r 'm|rac|o' yoars botwoon tho 10b0s and tho
1080s. 1ho Ch|noso oconomy has boon hoav||y rogu|atod |n
a s|m||ar mannor dur|ng tho |ast throo docados ot rap|d
growth. ln contrast, ovor tho |ast throo docados, many
dovo|op|ng countr|os |n lat|n Amor|ca and 3ub-3aharan
Atr|ca havo do-rogu|atod tho|r oconom|os |n tho hopo that |t
wou|d st|mu|ato bus|noss act|v|t|os and acco|orato tho|r
growth. |owovor, puzz||ng|y, s|nco tho 1080s, thoy havo
grown tar moro s|ow|y than |n tho 1000s and 70s, whon thoy
woro supposod|y ho|d back by oxcoss|vo rogu|at|ons (soo
7blogs 7 ooo 11).
1ho t|rst oxp|anat|on tor tho puzz|o |s that, strango as |t
may soom to most poop|o w|thout bus|noss oxpor|onco,
bus|nosspoop|o w||| got 200 porm|ts (w|th somo
c|rcumvontod a|ong tho way w|th br|bos, |t thoy can got away
w|th |t), |t thoro |s onough monoy to bo mado at tho ond ot
tho procoss. 3o, |n a country that |s grow|ng tast and whoro
good bus|noss opportun|t|os aro cropp|ng up a|| tho t|mo,
ovon tho hass|o ot acqu|r|ng 200 porm|ts wou|d not dotor
bus|noss poop|o trom opon|ng a now ||no ot bus|noss. ln
contrast, |t thoro |s ||tt|o monoy to bo mado at tho ond ot tho
procoss, ovon twonty-n|no porm|ts may |ook too onorous.
Voro |mportant|y, tho roason why somo countr|os that
havo hoav||y rogu|atod bus|noss havo dono oconom|ca||y
wo|| |s that many rogu|at|ons aro actua||y good tor bus|noss.
3omot|mos rogu|at|ons ho|p bus|noss by ||m|t|ng tho
ab|||ty ot t|rms to ongago |n act|v|t|os that br|ng thom groator
prot|ts |n tho short run but u|t|mato|y dostroy tho common
rosourco that a|| bus|noss t|rms nood. |or oxamp|o,
rogu|at|ng tho |ntons|ty ot t|sh tarm|ng may roduco tho prot|ts
ot |nd|v|dua| t|sh tarms but ho|p tho t|sh-tarm|ng |ndustry as a
who|o by prosorv|ng tho qua||ty ot wator that a|| tho t|sh tarms
havo to uso. |or anothor oxamp|o, |t may bo |n tho |ntorost ot
|nd|v|dua| t|rms to omp|oy ch||dron and |owor tho|r wago b|||s.
|owovor, a w|dosproad uso ot ch||d |abour w||| |owor tho
qua||ty ot tho |abour torco |n tho |ongor run by stunt|ng tho
phys|ca| and monta| dovo|opmont ot ch||dron. ln such a caso,
ch||d |abour rogu|at|on can actua||y bonot|t tho ont|ro
bus|noss soctor |n tho |ong run. |or yot anothor oxamp|o,
|nd|v|dua| banks may bonot|t trom |ond|ng moro
aggross|vo|y. 3ut whon a|| ot thom do tho samo, thoy may a||
suttor |n tho ond, as such |ond|ng bohav|ours may |ncroaso
tho chanco ot systom|c co||apso, as wo havo soon |n tho
2008 g|oba| t|nanc|a| cr|s|s. lostr|ct|ng what banks can do,
thon, may actua||y ho|p thom |n tho |ong run, ovon |t |t doos
not |mmod|ato|y bonot|t thom (soo 7blog 22).
lt |s not just that rogu|at|on can ho|p t|rms by provont|ng
thom trom undorm|n|ng tho bas|s ot tho|r |ong-torm
susta|nab|||ty. 3omot|mos, rogu|at|ons can ho|p bus|nossos
by torc|ng t|rms to do th|ngs that may not bo |n tho|r
|nd|v|dua| |ntorosts but ra|so tho|r co||oct|vo product|v|ty |n
tho |ong run. |or oxamp|o, t|rms otton do not |nvost onough
|n tra|n|ng tho|r workors. 1h|s |s bocauso thoy aro worr|od
about tho|r workors bo|ng poachod by othor t|rms 'troo-
r|d|ng' on tho|r tra|n|ng ottorts. ln such a s|tuat|on, tho
govornmont |mpos|ng a roqu|romont tor workor tra|n|ng on
a|| t|rms cou|d actua||y ra|so tho qua||ty ot tho |abour torco,
thoroby u|t|mato|y bonot|t|ng a|| t|rms. |or anothor oxamp|o,
|n a dovo|op|ng country that noods to |mport tochno|og|os
trom abroad, tho govornmont can ho|p bus|noss ach|ovo
h|ghor product|v|ty |n tho |ong run by bann|ng tho |mportat|on
ot ovor|y obso|oto toro|gn tochno|og|os that may onab|o tho|r
|mportors to undorm|no compot|tors |n tho short run but w|||
|ock thom |nto doad-ond tochno|og|os.
Kar| Varx doscr|bod tho govornmont rostr|ct|on ot
bus|noss troodom tor tho sako ot tho co||oct|vo |ntorost ot
tho cap|ta||st c|ass as |t act|ng as 'tho oxocut|vo comm|ttoo
ot tho bourgoo|s|o'. 3ut you don't nood to bo a Varx|st to
soo that rogu|at|ons rostr|ct|ng troodom tor |nd|v|dua| t|rms
may promoto tho co||oct|vo |ntorost ot tho ont|ro bus|noss
soctor, not to spoak ot tho nat|on as a who|o. ln othor words,
thoro aro many rogu|at|ons that aro pro- rathor than ant|-
bus|noss. Vany rogu|at|ons ho|p prosorvo tho common-poo|
rosourcos that a|| t|rms sharo, wh||o othors ho|p bus|noss by
mak|ng t|rms do th|ngs that ra|so tho|r co||oct|vo product|v|ty
|n tho |ong run. On|y whon wo rocogn|zo th|s w||| wo bo ab|o
to soo that what mattors |s not tho abso|uto amount ot
rogu|at|on, but tho a|ms and contonts ot thoso rogu|at|ons.
1hing 10
Doaito tho taII ot communiam,
wo aro atiII Iiving in Iannod
oconomioa

What they tell you

1ho ||m|ts ot oconom|c p|ann|ng havo boon rosound|ng|y
domonstratod by tho ta|| ot commun|sm. ln comp|ox modorn
oconom|os, p|ann|ng |s no|thor poss|b|o nor dos|rab|o. On|y
docontra||zod doc|s|ons through tho markot mochan|sm,
basod on |nd|v|dua|s and t|rms bo|ng a|ways on tho |ookout
tor a prot|tab|o opportun|ty, aro capab|o ot susta|n|ng a
comp|ox modorn oconomy. Wo shou|d do away w|th tho
do|us|on that wo can p|an anyth|ng |n th|s comp|ox and ovor-
chang|ng wor|d. 1ho |oss p|ann|ng thoro |s, tho bottor.
What they don't tell you

Cap|ta||st oconom|os aro |n |argo part p|annod.
Govornmonts |n cap|ta||st oconom|os pract|so p|ann|ng too,
a|bo|t on a moro ||m|tod bas|s than undor commun|st contra|
p|ann|ng. A|| ot thom t|nanco a s|gn|t|cant sharo ot
|nvostmont |n l80 and |ntrastructuro. Vost ot thom p|an a
s|gn|t|cant chunk ot tho oconomy through tho p|ann|ng ot tho
act|v|t|os ot stato-ownod ontorpr|sos. Vany cap|ta||st
govornmonts p|an tho tuturo shapo ot |nd|v|dua| |ndustr|a|
soctors through soctora| |ndustr|a| po||cy or ovon that ot tho
nat|ona| oconomy through |nd|cat|vo p|ann|ng. Voro
|mportant|y, modorn cap|ta||st oconom|os aro mado up ot
|argo, h|orarch|ca| corporat|ons that p|an tho|r act|v|t|os |n
groat dota||, ovon across nat|ona| bordors. 1horotoro, tho
quost|on |s not whothor you p|an or not. lt |s about p|ann|ng
tho r|ght th|ngs at tho r|ght |ovo|s.
Upper volta wIth rockets

ln tho 1070s, many Wostorn d|p|omats ca||od tho 3ov|ot
Un|on 'Uppor vo|ta w|th rockots'. What an |nsu|t - that |s, to
Uppor vo|ta (ronamod 3urk|na |aso |n 1084), wh|ch was
bo|ng brandod tho qu|ntossont|a| poor country, whon |t
wasn't ovon noar tho bottom ot tho wor|d povorty |oaguo. 1ho
n|cknamo, howovor, succ|nct|y summar|zod what was wrong
w|th tho 3ov|ot oconomy.
|oro was a country that cou|d sond mon |nto spaco but
had poop|o quou|ng up tor bas|c toodstutts such as broad
and sugar. 1ho country had no prob|om churn|ng out
|ntorcont|nonta| ba|||st|c m|ss||os and nuc|oar submar|nos,
but cou|d not manutacturo a docont 1v. lt |s roportod that |n
tho 1080s tho socond-b|ggost causo ot t|ros |n Voscow was
- bo||ovo |t or not - oxp|od|ng 1vs. 1ho top luss|an
sc|ont|sts woro as |nvont|vo as tho|r countorparts |n cap|ta||st
countr|os, but tho rost ot tho country d|d not soom ab|o to ||vo
up to tho samo standard. What was go|ng on?
ln pursu|t ot tho commun|st v|s|on ot a c|ass|oss soc|oty
basod on co||oct|vo ownorsh|p ot tho 'moans ot product|on'
(o.g., mach|nos, tactory bu||d|ngs, roads), tho 3ov|ot Un|on
and |ts commun|st a|||os a|mod tor tu|| omp|oymont and a
h|gh dogroo ot oqua||ty. 3|nco no ono was a||owod to own
any moans ot product|on, v|rtua||y a|| ontorpr|sos woro run by
protoss|ona| managors (w|th m|nor oxcopt|ons such as sma||
rostaurants and ha|rdrossors), provont|ng tho omorgonco ot
v|s|onary ontropronours, ||ko |onry |ord or 3||| Gatos. G|von
tho po||t|ca| comm|tmont to h|gh oqua||ty, thoro was a c|oar
cap on how much a bus|noss managor, howovor succosstu|,
cou|d got. 1h|s moant that thoro was on|y a ||m|tod |ncont|vo
tor bus|noss managors to turn tho advancod tochno|og|os
that tho systom was c|oar|y capab|o ot produc|ng |nto
products that consumors actua||y wantod. 1ho po||cy ot tu||
omp|oymont at a|| costs moant that managors cou|d not uso
tho u|t|mato throat - that ot sack|ng - to d|sc|p||no workors.
1h|s contr|butod to s|oppy work and absontoo|sm, whon ho
was try|ng to rotorm tho 3ov|ot oconomy, Gorbachov
troquont|y spoko ot tho prob|om ot |abour d|sc|p||no.
Ot courso, a|| th|s d|d not moan that no ono |n commun|st
countr|os was mot|vatod to work hard or to run a good
bus|noss. Evon |n cap|ta||st oconom|os, wo don't do th|ngs
just tor tho monoy (soo 7blog 5), but commun|st countr|os
ro||od, w|th somo succoss, much moro on tho |oss so|t|sh
s|dos ot human naturo. Espoc|a||y |n tho oar|y days ot
commun|sm, thoro was a |ot ot |doa||sm about bu||d|ng a
now soc|oty. ln tho 3ov|ot Un|on, thoro was a|so a hugo
surgo ot patr|ot|sm dur|ng and short|y attor tho 3ocond
Wor|d War. ln a|| commun|st countr|os thoro woro many
dod|catod managors and workors who d|d th|ngs wo|| out ot
protoss|ona||sm and so|t-rospoct. Voroovor, by tho 1000s,
tho |doa| oga||tar|an|sm ot oar|y commun|sm had g|von way
to roa||sm and portormanco-ro|atod pay had bocomo tho
norm, m|t|gat|ng (a|though by no moans o||m|nat|ng) tho
|ncont|vo prob|om.
0osp|to th|s, tho systom st||| ta||od to tunct|on wo||
bocauso ot tho |nott|c|oncy ot tho commun|st contra|
p|ann|ng systom, wh|ch was supposod to bo a moro ott|c|ont
a|tornat|vo to tho markot systom.
1ho commun|st just|t|cat|on ot contra| p|ann|ng was basod
on somo qu|to sound |og|c. Kar| Varx and h|s to||owors
arguod that tho tundamonta| prob|om w|th cap|ta||sm was tho
contrad|ct|on botwoon tho soc|a| naturo ot tho product|on
procoss and tho pr|vato naturo ot ownorsh|p ot tho moans ot
product|on. W|th oconom|c dovo|opmont - or tho
dovo|opmont ot product|vo torcos, |n Varx|st jargon - tho
d|v|s|on ot |abour botwoon t|rms dovo|ops turthor and as a
rosu|t tho t|rms bocomo |ncroas|ng|y moro dopondont on
oach othor - or tho soc|a| naturo ot tho product|on procoss
|s |ntons|t|od. |owovor, dosp|to tho grow|ng
|ntordopondonco among t|rms, tho Varx|sts arguod,
ownorsh|p ot tho t|rms t|rm|y roma|ns |n soparato pr|vato
hands, mak|ng |t |mposs|b|o to coord|nato tho act|ons ot
thoso |ntordopondont t|rms. Ot courso, pr|co changos
onsuro that thoro |s somo ox post coord|nat|on ot t|rm
doc|s|ons, but |ts oxtont |s ||m|tod and tho |mba|anco
botwoon domand and supp|y, croatod by such (|n non-
Varx|st torms) 'coord|nat|on ta||uros', accumu|atos |nto
por|od|c oconom|c cr|sos. 0ur|ng an oconom|c cr|s|s, tho
argumont wont, a |ot ot va|uab|o rosourcos aro wastod. Vany
unso|d products aro thrown away, mach|nos that usod to
produco now-unwantod th|ngs aro scrappod, and workors
who aro capab|o and w||||ng to work aro |a|d ott duo to tho
|ack ot domand. W|th tho dovo|opmont ot cap|ta||sm, tho
Varx|sts prod|ctod, th|s systom|c contrad|ct|on wou|d
bocomo |argor and consoquont|y oconom|c cr|sos wou|d
bocomo moro and moro v|o|ont, t|na||y br|ng|ng tho who|o
systom down.
ln contrast, undor contra| p|ann|ng, tho Varx|st arguod, a||
moans ot product|on aro ownod by tho who|o ot soc|oty and
as a rosu|t tho act|v|t|os ot |ntordopondont product|on un|ts
can bo coord|natod ox ooto through a un|t|od p|an. As any
potont|a| coord|nat|on ta||uro |s roso|vod botoro |t happons,
tho oconomy doos not havo to go through thoso por|od|c
cr|sos |n ordor to ba|anco supp|y and domand. Undor contra|
p|ann|ng, tho oconomy w||| produco on|y oxact|y what |s
noodod. lo rosourco w||| ||o |d|o at any t|mo, s|nco thoro w|||
bo no oconom|c cr|s|s. 1horotoro, tho contra| p|ann|ng
systom, |t was arguod, w||| manago tho oconomy much moro
ott|c|ont|y than tho markot systom.
1hat, at |oast, was tho thoory. Untortunato|y, contra|
p|ann|ng d|d not work vory wo|| |n pract|co. 1ho ma|n
prob|om was that ot comp|ox|ty. 1ho Varx|sts may havo
boon r|ght |n th|nk|ng that tho dovo|opmont |n product|vo
torcos, by |ncroas|ng |ntordopondonco among d|ttoront
sogmonts ot cap|ta|, makos |t moro oocossory to p|an
contra||y. |owovor, thoy ta||od to rocogn|zo that |t a|so
makos tho oconomy moro comp|ox, mak|ng |t moro ollco|t
to p|an contra||y.
Contra| p|ann|ng workod wo|| whon tho targots woro
ro|at|vo|y s|mp|o and c|oar, as soon |n tho succoss ot oar|y
3ov|ot |ndustr|a||zat|on, whoro tho ma|n task was to produco
a ro|at|vo|y sma|| numbor ot koy products |n |argo quant|t|os
(stoo|, tractors, whoat, potatoos, otc.). |owovor, as tho
oconomy dovo|opod, contra| p|ann|ng bocamo |ncroas|ng|y
d|tt|cu|t, w|th a grow|ng numbor ot (actua| and potont|a|)
d|vorso products. Ot courso, w|th oconom|c dovo|opmont,
tho ab|||ty to p|an a|so |ncroasod thanks to |mprovomonts |n
managor|a| sk|||s, mathomat|ca| tochn|quos ot p|ann|ng and
computors. |owovor, tho |ncroaso |n tho ab|||ty to p|an was
not sutt|c|ont to doa| w|th tho |ncroaso |n tho comp|ox|ty ot
tho oconomy.
Ono obv|ous so|ut|on was to ||m|t tho var|oty ot products,
but that croatod hugo consumor d|ssat|stact|on. Voroovor,
ovon w|th roducod var|ot|os, tho oconomy was st||| too
comp|ox to p|an. Vany unwantod th|ngs woro producod and
roma|nod unso|d, wh||o thoro woro shortagos ot othor th|ngs,
rosu|t|ng |n tho ub|qu|tous quouos. 3y tho t|mo commun|sm
startod unravo|||ng |n tho 1080s, thoro was so much cyn|c|sm
about tho systom that was |ncroas|ng|y |ncapab|o ot
do||vor|ng |ts prom|sos that tho joko was that |n tho
commun|st countr|os, 'wo protond to work and thoy protond
to pay us'.
lo wondor contra| p|ann|ng was abandonod across tho
board whon tho ru||ng commun|st part|os woro oustod
across tho 3ov|ot b|oc, to||ow|ng tho ta|| ot tho 3or||n Wa||.
Evon countr|os such as Ch|na and v|otnam, wh|ch
ostons|b|y ma|nta|nod commun|sm, havo gradua||y
abandonod contra| p|ann|ng, a|though tho|r statos st||| ho|d
h|gh dogroos ot contro| ovor tho oconomy. 3o, wo a|| now
||vo |n markot oconom|os (wo||, un|oss you ||vo |n lorth
Koroa or Cuba). l|ann|ng |s gono. Or |s |t?
1here Is plannIng and there Is plannIng

1ho tact that commun|sm has d|sappoarod tor a|| pract|ca|
purposos doos not moan that p|ann|ng has coasod to ox|st.
Govornmonts |n cap|ta||st oconom|os a|so p|an, a|bo|t not |n
tho samo comprohons|vo way that tho contra| p|ann|ng
author|t|os |n commun|st countr|os d|d.
Evon |n a cap|ta||st oconomy, thoro aro s|tuat|ons - a
war, tor oxamp|o - |n wh|ch contra| p|ann|ng |s moro
ottoct|vo. |or oxamp|o, dur|ng tho 3ocond Wor|d War, tho
oconom|os ot tho major cap|ta||st bo|||goronts, tho U3, tho
UK and Gormany, woro a|| contra||y p|annod |n ovoryth|ng but
namo.
3ut, moro |mportant|y, many cap|ta||st countr|os havo
succosstu||y usod what |s known as '|nd|cat|vo p|ann|ng'.
1h|s |s p|ann|ng that |nvo|vos tho govornmont |n a cap|ta||st
country sott|ng somo broad targots concorn|ng koy
oconom|c var|ab|os (o.g., |nvostmonts |n stratog|c |ndustr|os,
|ntrastructuro dovo|opmont, oxports) and work|ng w|th, not
aga|nst, tho pr|vato soctor to ach|ovo thom. Un||ko undor
contra| p|ann|ng, thoso targots aro not |oga||y b|nd|ng, honco
tho adjoct|vo '|nd|cat|vo'. |owovor, tho govornmont w||| do |ts
bost to ach|ovo thom by mob|||z|ng var|ous carrots (o.g.,
subs|d|os, grant|ng ot monopo|y r|ghts) and st|cks (o.g.,
rogu|at|ons, |nt|uonco through stato-ownod banks) at |ts
d|sposa|.
|ranco had groat succoss |n promot|ng |nvostmont and
tochno|og|ca| |nnovat|on through |nd|cat|vo p|ann|ng |n tho
10b0s and 00s, thoroby ovortak|ng tho 3r|t|sh oconomy as
Europo's socond |ndustr|a| powor. Othor Europoan
countr|os, such as ||n|and, lorway and Austr|a, a|so
succosstu||y usod |nd|cat|vo p|ann|ng to upgrado tho|r
oconom|os botwoon tho 10b0s and tho 1070s. 1ho East
As|an m|rac|o oconom|os ot 1apan, Koroa and 1a|wan usod
|nd|cat|vo p|ann|ng too botwoon tho 10b0s and tho 1080s.
1h|s |s not to say that a|| |nd|cat|vo p|ann|ng oxorc|sos havo
boon succosstu|, |n lnd|a, tor oxamp|o, |t has not.
lovortho|oss, tho Europoan and East As|an oxamp|os show
that p|ann|ng |n corta|n torms |s not |ncompat|b|o w|th
cap|ta||sm and may ovon promoto cap|ta||st dovo|opmont
vory wo||.
Voroovor, ovon whon thoy do not oxp||c|t|y p|an tho ont|ro
oconomy, ovon |n an |nd|cat|vo way, govornmonts |n most
cap|ta||st oconom|os mako and |mp|omont p|ans tor corta|n
koy act|v|t|os, wh|ch can havo oconomy-w|do |mp||cat|ons
(soo 7blog 12).
Vost cap|ta||st govornmonts p|an and shapo tho tuturo ot
somo koy |ndustr|os through what |s known as 'soctora|
|ndustr|a| po||cy'. 1ho Europoan and East As|an countr|os
wh|ch pract|sod |nd|cat|vo p|ann|ng a|| a|so pract|sod act|vo
soctora| |ndustr|a| po||cy. Evon countr|os that havo not
pract|sod |nd|cat|vo p|ann|ng, such as 3wodon and
Gormany, havo pract|sod soctora| |ndustr|a| po||cy.
ln most cap|ta||st countr|os, tho govornmont owns, and
otton a|so oporatos, a s|zoab|o chunk ot tho nat|ona|
oconomy through stato-ownod ontorpr|sos (3OEs). 3OEs
aro troquont|y tound |n tho koy |ntrastructuro soctors (o.g.,
ra||ways, roads, ports, a|rports) or ossont|a| sorv|cos (o.g.,
wator, o|octr|c|ty, posta| sorv|co), but a|so ox|st |n
manutactur|ng or t|nanco (moro stor|os about 3OEs can bo
tound |n tho chaptor 'Van Exp|o|ts Van' ot my book Boo
5omorltoos). 1ho sharo ot 3OEs |n nat|ona| output cou|d bo
as h|gh as 20 por cont-p|us, |n tho caso ot 3|ngaporo, or as
|ow as 1 por cont, |n tho caso ot tho U3, but tho |ntornat|ona|
avorago |s around 10 por cont. As tho govornmont p|ans tho
act|v|t|os ot 3OEs, th|s moans that a s|gn|t|cant part ot tho
avorago cap|ta||st oconomy |s d|roct|y p|annod. Whon wo
cons|dor tho tact that 3OEs usua||y oporato |n soctors w|th
d|sproport|onato |mpacts on tho rost ot tho oconomy, tho
|nd|roct ottoct ot p|ann|ng through 3OEs |s ovon groator than
what |s suggostod by tho sharo ot 3OEs |n nat|ona| output.
Voroovor, |n a|| cap|ta||st oconom|os, tho govornmont
p|ans tho nat|ona| tochno|og|ca| tuturo by tund|ng a vory h|gh
proport|on (20-b0 por cont) ot rosoarch and dovo|opmont.
lntorost|ng|y, tho U3 |s ono ot tho most p|annod cap|ta||st
oconom|os |n th|s rogard. 3otwoon tho 10b0s and tho
1080s, tho sharo ot govornmont tund|ng |n tota| l80 |n tho
supposod|y troo-markot U3 accountod tor, dopond|ng on tho
yoar, botwoon 47 por cont and 0b por cont, as aga|nst
around 20 por cont |n 1apan and Koroa and |oss than 40 por
cont |n sovora| Europoan countr|os (o.g., 3o|g|um, ||n|and,
Gormany, 3wodon).
1
1ho rat|o has como down s|nco tho
1000s, as m|||tary l80 tund|ng was roducod w|th tho ond ot
tho Co|d War. |owovor, ovon so, tho sharo ot govornmont |n
l80 |n tho U3 |s st||| h|ghor than |n many othor cap|ta||st
oconom|os. lt |s notab|o that most ot tho |ndustr|os whoro tho
U3 has an |ntornat|ona| tochno|og|ca| |oad aro tho |ndustr|os
that havo boon roco|v|ng major govornmont l80 tund|ng
through m|||tary programmos (o.g., computors,
som|conductors, a|rcratt) and hoa|th projocts (o.g.,
pharmacout|ca|s, b|otochno|ogy).
Ot courso, s|nco tho 1080s tho oxtont ot govornmont
p|ann|ng |n most cap|ta||st oconom|os has doc||nod, not
|oast bocauso ot tho r|so ot pro-markot |doo|ogy dur|ng th|s
por|od. lnd|cat|vo p|ann|ng has boon phasod out |n most
countr|os, |nc|ud|ng |n tho onos whoro |t had boon
succosstu|. ln many, a|though not a||, countr|os, pr|vat|zat|on
has rosu|tod |n a ta|||ng sharo ot 3OEs |n nat|ona| output and
|nvostmont. 1ho sharo ot govornmont tund|ng |n tota| l80
tund|ng has a|so ta||on |n v|rtua||y a|| cap|ta||st countr|os,
a|though not by vory much |n most casos. |owovor, l wou|d
arguo, dosp|to tho ro|at|vo doc||no ot govornmont p|ann|ng |n
tho rocont por|od, thoro |s st||| oxtons|vo, and |ncroas|ng,
p|ann|ng |n tho cap|ta||st oconom|os. Why do l say that?
1o plan or not to plan ~ that Is not the
questIon

3upposo that a now CEO arr|vod |n a company and sa|d: 'l
am a groat bo||ovor |n markot torcos. ln th|s tast-chang|ng
wor|d, wo shou|d not havo a t|xod stratogy and shou|d
ma|nta|n max|mum poss|b|o t|ox|b|||ty. 3o, trom now on,
ovoryono |n th|s company |s go|ng to bo gu|dod by ovor-
chang|ng markot pr|cos, and not by somo r|g|d p|an.' What
do you th|nk wou|d happon? Wou|d h|s omp|oyoos wo|como
a |oador w|th a v|s|on t|t tor tho twonty-t|rst contury? Wou|d
tho sharoho|dors app|aud h|s markot-tr|ond|y approach and
award h|m w|th a pay r|so?
|o wou|dn't |ast a wook. loop|o wou|d say ho doos not
havo |oadorsh|p qua||t|os. |o wou|d bo accusod ot |ack|ng
tho 'v|s|on th|ng' (as Goorgo 3ush 3r onco put |t). 1ho top
doc|s|on-makor, |t wou|d bo po|ntod out, shou|d bo w||||ng to
shapo tho tuturo ot tho company, rathor than |ott|ng |t just
happon. 3||nd|y to||ow|ng markot s|gna|s, thoy wou|d say, |s
not how you run a bus|noss.
loop|o wou|d oxpoct a now CEO to say somoth|ng ||ko:
'1h|s |s whoro our company |s today. 1hat |s whoro l want to
tako |t |n ton yoars' t|mo. ln ordor to got thoro, wo w|||
dovo|op now |ndustr|os A, 3 and C, wh||o w|nd|ng down 0
and E. Our subs|d|ary |n |ndustry 0 w||| bo so|d ott. Wo w|||
shut down our subs|d|ary |n |ndustry E at homo, but somo
product|on may bo sh|ttod to Ch|na. ln ordor to dovo|op our
subs|d|ary |n |ndustry A, wo w||| havo to cross-subs|d|zo |t
w|th tho prot|ts trom ox|st|ng bus|nossos. ln ordor to
ostab||sh a prosonco |n |ndustry 3, wo havo to go |nto
stratog|c a|||anco w|th Ka|sha Corporat|on ot 1apan, wh|ch
may |nvo|vo supp|y|ng |t w|th somo |nputs that wo produco at
bo|ow-markot pr|cos. ln ordor to oxpand our bus|noss |n
|ndustry C, wo w||| nood to |ncroaso our l80 |nvostmont |n
tho noxt t|vo yoars. A|| th|s may moan tho company as a
who|o mak|ng |ossos |n tho torosooab|o tuturo. lt that |s tho
caso, so bo |t. 3ocauso that |s tho pr|co wo havo to pay |n
ordor to havo a br|ghtor tuturo.' ln othor words, a CEO |s
oxpoctod to bo a 'man (or a woman) w|th a p|oo'.
3us|nossos p|an tho|r act|v|t|os - otton down to tho |ast
dota||. lndood, that |s whoro Varx got tho |doa ot contra||y
p|ann|ng tho who|o oconomy. Whon ho ta|kod about
p|ann|ng, thoro was |n tact no roa|-||to govornmont that was
pract|s|ng p|ann|ng. At tho t|mo, on|y t|rms p|annod. What
Varx prod|ctod was that tho 'rat|ona|' p|ann|ng approach ot
tho cap|ta||st t|rms wou|d ovontua||y provo supor|or to tho
wastotu| anarchy ot tho markot and thus ovontua||y bo
oxtondod to tho who|o oconomy. 1o bo suro, ho cr|t|c|zod
p|ann|ng w|th|n tho t|rm as dospot|sm by cap|ta||sts, but ho
bo||ovod that, onco pr|vato proporty was abo||shod and tho
cap|ta||sts o||m|natod, tho rat|ona| o|omonts ot such
dospot|sm cou|d bo |so|atod and harnossod tor tho soc|a|
good.
W|th tho dovo|opmont ot cap|ta||sm, moro and moro
aroas ot tho oconomy havo bocomo dom|natod by |argo
corporat|ons. 1h|s moans that tho aroa ot tho cap|ta||st
oconomy that |s covorod by p|ann|ng has |n tact grown. 1o
g|vo you a concroto oxamp|o, thoso days, dopond|ng on tho
ost|mato, botwoon ono th|rd and ono ha|t ot |ntornat|ona|
trado cons|sts ot transtors among d|ttoront un|ts w|th|n
transnat|ona| corporat|ons.
|orbort 3|mon, tho 1078 lobo| |auroato |n oconom|cs
who was a p|onoor ot tho study ot bus|noss organ|zat|ons
(soo 7blog 10), put th|s po|nt succ|nct|y |n 1001 |n
'Organ|sat|ons and Varkots', ono ot tho |ast art|c|os ho
wroto. lt a Vart|an, w|th no proconcopt|ons, camo to Earth
and obsorvod our oconomy, 3|mon musod, wou|d ho
conc|udo that Earth||ngs ||vo |n a morkot ocooomy? lo,
3|mon sa|d, ho wou|d a|most corta|n|y havo conc|udod that
Earth||ngs ||vo |n an orgoolzotlooo| ocooomy |n tho sonso
that tho bu|k ot oarth's oconom|c act|v|t|os |s coord|natod
w|th|n tho boundar|os ot t|rms (organ|zat|ons), rathor than
through markot transact|ons botwoon thoso t|rms. lt t|rms
woro roprosontod by groon and markots by rod, 3|mon
arguod, tho Vart|an wou|d soo '|argo groon aroas
|ntorconnoctod by rod ||nos', rathor than 'a notwork ot rod
||nos connoct|ng groon spots'.
2
And wo th|nk p|ann|ng |s
doad.
3|mon d|d not ta|k much about govornmont p|ann|ng, but
|t wo add govornmont p|ann|ng, modorn cap|ta||st
oconom|os aro ovon moro p|annod than h|s Vart|an
oxamp|o suggosts. 3otwoon tho p|ann|ng that |s go|ng on
w|th|n corporat|ons and var|ous typos ot p|ann|ng by tho
govornmont, modorn cap|ta||st oconom|os aro p|annod to a
vory h|gh dogroo. Ono |ntorost|ng po|nt that to||ows trom
thoso obsorvat|ons |s that r|ch countr|os aro moro p|annod
than poor countr|os, ow|ng to tho moro w|dosproad
ox|stonco ot |argo corporat|ons and otton moro porvas|vo
(a|bo|t otton |oss v|s|b|o, on account ot |ts moro subt|o
approach) prosonco ot tho govornmont.
1ho quost|on, thon, |s not whothor to p|an or not. lt |s what
tho appropr|ato |ovo|s and torms ot p|ann|ng aro tor d|ttoront
act|v|t|os. 1ho projud|co aga|nst p|ann|ng, wh||o
undorstandab|o g|von tho ta||uros ot commun|st contra|
p|ann|ng, makos us m|sundorstand tho truo naturo ot tho
modorn oconomy |n wh|ch govornmont po||cy, corporato
p|ann|ng and markot ro|at|onsh|ps aro a|| v|ta| and |ntoract |n
a comp|ox way. W|thout markots wo w||| ond up w|th tho
|nott|c|onc|os ot tho 3ov|ot systom. |owovor, th|nk|ng that
wo can ||vo by tho markot a|ono |s ||ko bo||ov|ng that wo can
||vo by oat|ng on|y sa|t, bocauso sa|t |s v|ta| tor our surv|va|.
1hing 20
EquaIity ot oortunity may
not bo tair

What they tell you

Vany poop|o got upsot by |noqua||ty. |owovor, thoro |s
oqua||ty and thoro |s oqua||ty. Whon you roward poop|o tho
samo way rogard|oss ot tho|r ottorts and ach|ovomonts, tho
moro ta|ontod and tho hardor-work|ng |oso tho |ncont|vo to
portorm. 1h|s |s oqua||ty ot outcomo. lt's a bad |doa, as
provon by tho ta|| ot commun|sm. 1ho oqua||ty wo sook
shou|d bo tho oqua||ty ot opportun|ty. |or oxamp|o, |t was not
on|y unjust but a|so |nott|c|ont tor a b|ack studont |n apartho|d
3outh Atr|ca not to bo ab|o to go to bottor, 'wh|to',
un|vors|t|os, ovon |t ho was a bottor studont. loop|o shou|d
bo g|von oqua| opportun|t|os. |owovor, |t |s oqua||y unjust
and |nott|c|ont to |ntroduco att|rmat|vo act|on and bog|n to
adm|t studonts ot |owor qua||ty s|mp|y bocauso thoy aro
b|ack or trom a dopr|vod background. ln try|ng to oqua||zo
outcomos, wo not on|y m|sa||ocato ta|onts but a|so pona||zo
thoso who havo tho bost ta|ont and mako tho groatost
ottorts.
What they don't tell you

Equa||ty ot opportun|ty |s tho start|ng po|nt tor a ta|r soc|oty.
3ut |t's not onough. Ot courso, |nd|v|dua|s shou|d bo
rowardod tor bottor portormanco, but tho quost|on |s whothor
thoy aro actua||y compot|ng undor tho samo cond|t|ons as
tho|r compot|tors. lt a ch||d doos not portorm wo|| |n schoo|
bocauso ho |s hungry and cannot concontrato |n c|ass, |t
cannot bo sa|d that tho ch||d doos not do wo|| bocauso ho |s
|nhoront|y |oss capab|o. |a|r compot|t|on can bo ach|ovod
on|y whon tho ch||d |s g|von onough tood - at homo through
tam||y |ncomo support and at schoo| through a troo schoo|
moa|s programmo. Un|oss thoro |s somo oqua||ty ot
outcomo (|.o., tho |ncomos ot a|| tho paronts aro abovo a
corta|n m|n|mum throsho|d, a||ow|ng tho|r ch||dron not to go
hungry), oqua| opportun|t|os (|.o., troo schoo||ng) aro not tru|y
moan|ngtu|.
More CatholIc than the Pope7

ln lat|n Amor|ca, poop|o troquont|y uso tho oxpross|on that
somoono |s 'moro Catho||c than tho lopo' (mos Poplsto
qoo o| Popo). 1h|s rotors to tho tondoncy ot soc|ot|os |n tho
|nto||octua| por|phory to app|y doctr|nos - ro||g|ous,
oconom|c and soc|a| - moro r|g|d|y than do tho|r sourco
countr|os.
Koroans, my own poop|o, aro probab|y tho wor|d
champ|ons at bo|ng moro Catho||c than tho lopo (not qu|to
|n tho ||tora| sonso - on|y around 10 por cont ot thom aro
Catho||cs). Koroa |s not oxact|y a sma|| country. 1ho
comb|nod popu|at|on ot lorth and 3outh Koroas, wh|ch tor
noar|y a m|||onn|um unt|| 104b usod to bo ono country, |s
about 70 m||||on today. 3ut |t happons to bo bang |n tho
m|dd|o ot a zono whoro tho |ntorosts ot tho g|ants - Ch|na,
1apan, luss|a and tho U3 - c|ash. 3o wo havo bocomo vory
adopt at adopt|ng tho |doo|ogy ot ono ot tho b|g boys and
bo|ng moro orthodox about |t than ho |s. Whon wo do
commun|sm (up |n lorth Koroa), wo aro moro commun|st
than tho luss|ans. Whon wo pract|sod 1apanoso-sty|o stato
cap|ta||sm (|n tho 3outh) botwoon tho 1000s and tho 1080s,
wo woro moro stato-cap|ta||st than tho 1apanoso. low that
wo havo sw|tchod ovor to U3-sty|o cap|ta||sm, wo |octuro tho
Amor|cans on tho v|rtuos ot troo trado and shamo thom by
dorogu|at|ng t|nanc|a| and |abour markots |ott, r|ght and
contro.
3o |t was natura| that unt|| tho n|notoonth contury, whon wo
woro undor tho Ch|noso sphoro ot |nt|uonco, wo woro moro
Contuc|an than tho Ch|noso. Contuc|an|sm, tor thoso who
aro not tam|||ar w|th |t, |s a cu|tura| systom basod on tho
toach|ngs ot Contuc|us - tho lat|n|zod namo ot tho Ch|noso
po||t|ca| ph||osophor, Kong 1zo, who ||vod |n tho t|tth contury
3C. 1oday, hav|ng soon tho oconom|c succossos ot somo
Contuc|an countr|os, many poop|o th|nk |t |s a cu|turo
part|cu|ar|y wo|| su|tod to oconom|c dovo|opmont, but |t was
a typ|ca| touda| |doo|ogy unt|| |t camo to bo adaptod to tho
roqu|romonts ot modorn cap|ta||sm |n tho socond ha|t ot tho
twont|oth contury.
1
l|ko most othor touda| |doo|og|os, Contuc|an|sm
ospousod a r|g|d soc|a| h|orarchy wh|ch rostr|ctod poop|o's
cho|co ot occupat|on accord|ng to tho|r b|rths. 1h|s
provontod ta|ontod mon trom |owor castos trom r|s|ng abovo
tho|r stat|on. ln Contuc|an|sm, thoro was a cruc|a| d|v|do
botwoon tho tarmors (who woro cons|dorod to bo tho
bodrock ot soc|oty) and othor work|ng c|assos. 1ho sons ot
tarmors cou|d s|t tor tho (|ncrod|b|y d|tt|cu|t) govornmont c|v||
sorv|co oxam|nat|on and got |ncorporatod |nto tho ru||ng
c|ass, a|though th|s happonod raro|y |n pract|co, wh||o tho
sons ot art|sans and morchants woro not ovon porm|ttod to
s|t tor tho oxam, howovor c|ovor thoy m|ght bo.
Ch|na, bo|ng tho b|rthp|aco ot Contuc|an|sm, had tho
cont|donco to tako a moro pragmat|c approach |n
|ntorprot|ng tho c|ass|ca| doctr|nos and a||owod poop|o trom
morchant and art|sana| c|assos to s|t tor tho c|v|| sorv|co
oxam|nat|on. Koroa - bo|ng moro Contuc|an than Contuc|us
- adamant|y stuck to th|s doctr|no and rotusod to h|ro
ta|ontod poop|o s|mp|y bocauso thoy woro born to tho
'wrong' paronts. lt was on|y attor our ||borat|on trom
1apanoso co|on|a| ru|o (1010-4b) that tho trad|t|ona| casto
systom was tu||y abo||shod and Koroa bocamo a country
whoro b|rth doos not sot a co|||ng to |nd|v|dua| ach|ovomont
(a|though tho projud|co aga|nst art|sans - ong|noors |n
modorn torms - and morchants - bus|noss managors |n
modorn torms - ||ngorod on tor anothor tow docados unt||
oconom|c dovo|opmont mado thoso attract|vo protoss|ons).
Obv|ous|y touda| Koroa was not a|ono |n rotus|ng to g|vo
poop|o oqua||ty ot opportun|ty. Europoan touda| soc|ot|os
oporatod w|th s|m||ar systoms, and |n lnd|a tho casto systom
st||| oporatos, a|bo|t |ntorma||y. lor was |t on|y a|ong tho
casto ||nos that poop|o woro rotusod oqua||ty ot opportun|ty.
Unt|| tho 3ocond Wor|d War, most soc|ot|os rotusod to |ot
womon bo o|octod to pub||c ott|co, |n tact thoy woro rotusod
po||t|ca| c|t|zonsh|p a|togothor and not ovon a||owod to voto.
Unt|| rocont|y, many countr|os usod to rostr|ct poop|o's
accoss to oducat|on and jobs a|ong rac|a| ||nos. ln tho |ato
n|notoonth and tho oar|y twont|oth contur|os, tho U3A
proh|b|tod tho |mm|grat|on ot 'undos|rab|o' racos, ospoc|a||y
As|ans. 3outh Atr|ca, dur|ng tho apartho|d rog|mo, had
soparato un|vors|t|os tor wh|tos and tor tho rost (tho
'co|ourods' and tho b|acks), wh|ch woro vory poor|y tundod.
3o |t has not boon |ong s|nco tho major|ty ot tho wor|d
omorgod trom a s|tuat|on whoro poop|o woro bannod trom
so|t-advancomont duo to tho|r raco, gondor or casto.
Equa||ty ot opportun|ty |s somoth|ng to bo h|gh|y chor|shod.
Markets lIberate7

Vany ot tho torma| ru|os rostr|ct|ng oqua||ty ot opportun|ty
havo boon abo||shod |n tho |ast tow gonorat|ons. 1h|s was |n
|argo part bocauso ot po||t|ca| strugg|os by tho d|scr|m|natod
aga|nst - such as tho Chart|st domand tor un|vorsa| (ma|o)
suttrago |n 3r|ta|n |n tho m|d n|notoonth contury, tho C|v||
l|ghts movomont by b|acks |n tho U3 |n tho 1000s, tho ant|-
apartho|d strugg|o |n 3outh Atr|ca |n tho socond ha|t ot tho
twont|oth contury and tho t|ght by |ow casto poop|o |n lnd|a
today. W|thout thoso and count|oss othor campa|gns by
womon, opprossod racos and |owor casto poop|o, wo wou|d
st||| bo ||v|ng |n a wor|d whoro rostr|ct|ng poop|o's r|ghts
accord|ng to 'b|rth |ottory' wou|d bo cons|dorod natura|.
ln th|s strugg|o aga|nst |noqua||ty ot opportun|ty, tho
markot has boon a groat ho|p. Whon on|y ott|c|oncy onsuros
surv|va|, troo-markot oconom|sts po|nt out, thoro |s no room
tor rac|a| or po||t|ca| projud|cos to croop |nto markot
transact|ons. V||ton |r|odman put |t succ|nct|y |n h|s
Coplto|lsm ooo lroooom: 'lo ono who buys broad knows
whothor tho whoat trom wh|ch |t was mado was grown by a
Commun|st or a lopub||can . by a logro or a wh|to.'
1horotoro, |r|odman arguod, tho markot w||| ovontua||y dr|vo
rac|sm out, or at |oast roduco |t s|gn|t|cant|y, bocauso thoso
rac|st omp|oyors |ns|st|ng on omp|oy|ng on|y wh|to poop|o
wou|d bo dr|von out by moro opon-m|ndod onos who h|ro tho
bost ava||ab|o ta|onts, rogard|oss ot raco.
1h|s po|nt |s powortu||y |||ustratod by tho tact that ovon tho
notor|ous|y rac|st apartho|d rog|mo |n 3outh Atr|ca had to
dos|gnato tho 1apanoso 'honorary wh|tos'. 1horo was no
way tho 1apanoso oxocut|vos runn|ng tho |oca| 1oyota and
l|ssan tactor|os cou|d go and ||vo |n townsh|ps ||ko 3owoto,
whoro non-wh|tos woro torcod to ||vo undor apartho|d |aw.
1horotoro, tho wh|to-supromac|st 3outh Atr|cans had to
swa||ow tho|r pr|do and protond that tho 1apanoso woro
wh|tos, |t thoy wantod to dr|vo around |n 1apanoso cars. 1hat
|s tho powor ot tho markot.
1ho powor ot tho markot as a '|ovo||or' |s moro
w|dosproad than wo th|nk. As tho 3r|t|sh wr|tor A|an
3onnott's p|ay-turnod-mov|o, llstory Boys, so po|gnant|y
shows, studonts trom d|sadvantagod groups tond to |ack
|nto||octua| and soc|a| cont|donco and aro thus
d|sadvantagod |n gott|ng |nto o||to un|vors|t|os - and by
oxtons|on, bottor-pay|ng jobs. Obv|ous|y, un|vors|t|os do not
havo to rospond to markot prossuros as qu|ck|y as t|rms
havo to. |owovor, |t somo un|vors|ty cons|stont|y
d|scr|m|natod aga|nst othn|c m|nor|t|os or work|ng-c|ass
k|ds and took |n on|y poop|o trom tho 'r|ght' backgrounds
dosp|to tho|r |ntor|or qua||ty, potont|a| omp|oyors wou|d
como to protor tho graduatos trom non-rac|st un|vors|t|os.
1ho narrow-m|ndod un|vors|ty, |t |t |s to rocru|t tho bost
poss|b|o studonts, wou|d havo to abandon |ts projud|cos
soonor or |ator.
G|von a|| th|s, |t |s tompt|ng to arguo that, onco you onsuro
oqua||ty ot opportun|ty, troo trom any torma| d|scr|m|nat|on
othor than accord|ng to mor|t, tho markot w||| o||m|nato any
ros|dua| projud|cos through tho compot|t|vo mochan|sm.
|owovor, th|s |s on|y tho start. A |ot moro has to bo dono to
bu||d a gonu|no|y ta|r soc|oty.
1he end o| apartheId and the
cappuccIno socIety

Wh||o thoro aro st||| too many poop|o w|th projud|cos aga|nst
corta|n racos, poor poop|o, |owor castos and womon, today
tow wou|d opon|y objoct to tho pr|nc|p|o ot oqua||ty ot
opportun|ty. 3ut at th|s po|nt, op|n|ons d|v|do sharp|y. 3omo
arguo that oqua||ty shou|d ond w|th that ot opportun|ty.
Othors, |nc|ud|ng myso|t, bo||ovo that |t |s not onough to havo
moro torma| oqua||ty ot opportun|ty.
|roo-markot oconom|sts warn that, |t wo try to oqua||zo
tho outcomos ot poop|o's act|ons and not just tho|r
opportun|t|os to tako corta|n act|ons, that w||| croato hugo
d|s|ncont|vos aga|nst hard work and |nnovat|on. Wou|d you
work hard |t you know that, whatovor you do, you w||| got pa|d
tho samo as tho noxt guy who |s goot|ng ott? lsn't that oxact|y
why tho Ch|noso agr|cu|tura| communos undor Vao Zodong
woro such ta||uros? lt you tax tho r|ch d|sproport|onato|y and
uso tho procoods to t|nanco tho wo|taro stato, won't tho r|ch
|oso tho |ncont|vo to croato woa|th, wh||o tho poor |oso tho
|ncont|vo to work, as thoy aro guarantood a m|n|mum
standard ot ||v|ng whothor thoy work hard or not - or whothor
thoy work at a||? (soo 7blog 21.) 1h|s way, troo-markot
oconom|sts arguo, ovoryono bocomos worso ott by tho
attompt to roduco |noqua||ty ot outcomo (soo 7blog 18).
lt |s abso|uto|y truo that oxcoss|vo attompts to oqua||zo
outcomos - say, tho Vao|st communo, whoro thoro was
v|rtua||y no ||nk botwoon somoono's ottort and tho roward
that sho got - w||| havo an advorso |mpact on poop|o's work
ottort. lt |s a|so unta|r. 3ut l bo||ovo that a corta|n dogroo ot
oqua||zat|on ot outcomos |s nocossary, |t wo aro to bu||d a
gonu|no|y ta|r soc|oty.
1ho po|nt |s that, |n ordor to bonot|t trom tho oqua|
opportun|t|os prov|dod to thom, poop|o roqu|ro tho
capab|||t|os to mako uso ot thom. lt |s no uso that b|ack
3outh Atr|cans now havo tho samo opportun|t|os as wh|tos
to got a h|gh|y pa|d job, |t thoy do not havo tho oducat|on to
qua||ty tor thoso jobs. lt |s no good that b|acks now can ontor
bottor (tormor wh|to-on|y) un|vors|t|os, |t thoy st||| havo to
attond poor|y tundod schoo|s w|th undorqua||t|od toachors,
somo ot whom can baro|y road and wr|to thomso|vos.
|or most b|ack k|ds |n 3outh Atr|ca, tho now|y acqu|rod
oqua||ty ot opportun|ty to ontor good un|vors|t|os doos not
moan that thoy can attond such un|vors|t|os. 1ho|r schoo|s
aro st||| poor and poor|y run. lt |s not as |t tho|r undorqua||t|od
toachors havo suddon|y bocomo smart w|th tho ond ot
apartho|d. 1ho|r paronts aro st||| unomp|oyod (ovon tho
ott|c|a| unomp|oymont rato, wh|ch vast|y undorost|matos truo
unomp|oymont |n a dovo|op|ng country, |s, at 20-28 por
cont, ono ot tho h|ghost |n tho wor|d). |or thom, tho r|ght to
ontor bottor un|vors|t|os |s p|o |n tho sky. |or th|s roason,
post-apartho|d 3outh Atr|ca has turnod |nto what somo
3outh Atr|cans ca|| a 'cappucc|no soc|oty': a mass ot brown
at tho bottom, a th|n |ayor ot wh|to troth abovo |t, and a
spr|nk||ng ot cocoa at tho top.
low, troo-markot oconom|sts w||| to|| you that thoso who
do not havo tho oducat|on, tho dotorm|nat|on and tho
ontropronour|a| onorgy to tako advantago ot markot
opportun|t|os havo on|y thomso|vos to b|amo. Why shou|d
poop|o who havo workod hard and obta|nod a un|vors|ty
dogroo aga|nst a|| odds bo rowardod |n tho samo way as
somoono, com|ng trom tho samo poor background, who
goos |nto a ||to ot potty cr|mo?
1h|s argumont |s corroct. Wo cannot, and shou|d not,
oxp|a|n somoono's portormanco on|y by tho onv|ronmont |n
wh|ch ho has grown up. lnd|v|dua|s do havo rospons|b|||t|os
tor what thoy havo mado out ot tho|r ||vos.
|owovor, wh||o corroct, th|s argumont |s on|y part ot tho
story. lnd|v|dua|s aro not born |nto a vacuum. 1ho soc|o-
oconom|c onv|ronmont thoy oporato |n puts sor|ous
rostr|ct|ons on what thoy can do. Or ovon on what thoy woot
to do. Your onv|ronmont can mako you g|vo up corta|n th|ngs
ovon w|thout try|ng. |or oxamp|o, many acadom|ca||y
ta|ontod 3r|t|sh work|ng-c|ass ch||dron do not ovon try to go
to un|vors|t|os bocauso un|vors|t|os aro 'not tor thom'. 1h|s
att|tudo |s s|ow|y chang|ng, but l st||| romombor soo|ng a
33C documontary |n tho |ato 1080s |n wh|ch an o|d m|nor
and h|s w|to woro cr|t|c|z|ng ono ot tho|r sons, who had gono
to a un|vors|ty and bocomo a toachor, as a 'c|ass tra|tor'.
Wh||o |t |s s|||y to b|amo ovoryth|ng on tho soc|o-oconom|c
onv|ronmont, |t |s oqua||y unaccoptab|o to bo||ovo that
poop|o can ach|ovo anyth|ng |t thoy on|y 'bo||ovo |n
thomso|vos' and try hard onough, as |o||ywood mov|os |ovo
to to|| you. Equa||ty ot opportun|ty |s moan|ng|oss tor thoso
who do not havo tho capab|||t|os to tako advantago ot |t.
1he curIous case o| Alejandro 1oledo

1oday, no country do||borato|y koops poor ch||dron trom
go|ng to schoo|, but many ch||dron |n poor countr|os cannot
go to schoo| bocauso thoy do not havo tho monoy to pay tor
tho tu|t|on. Voroovor, ovon |n countr|os w|th troo pub||c
oducat|on, poor ch||dron aro bound to portorm poor|y |n
schoo|, whatovor tho|r |nnato ab|||ty may bo. 3omo ot thom
go hungry at homo and a|so sk|p |unch at schoo|. 1h|s
makos |t |mposs|b|o tor thom to concontrato, w|th
prod|ctab|o rosu|ts tor tho|r acadom|c portormanco. ln
oxtromo casos, tho|r |nto||octua| dovo|opmont may havo
a|roady boon stuntod bocauso ot a |ack ot tood |n tho|r oar|y
yoars. 1hoso k|ds may a|so suttor moro troquont|y trom
|||noss, wh|ch makos thom sk|p schoo| moro otton. lt tho|r
paronts aro ||||torato and/or havo to work |ong hours, ch||dron
w||| havo no ono to ho|p thom w|th tho|r homowork, wh||o
m|dd|o-c|ass ch||dron w||| bo ho|pod by tho|r paronts and r|ch
k|ds may havo pr|vato tutors. |o|pod or not, thoy may not
ovon havo onough t|mo tor homowork, |t thoy havo to tako
caro ot youngor s|b||ngs or tond tho tam||y goats.
G|von a|| th|s, as tar as wo accopt that wo shou|d not
pun|sh ch||dron tor hav|ng poor paronts, wo shou|d tako
act|on to onsuro that a|| ch||dron havo somo m|n|mum
amounts ot tood, hoa|thcaro and ho|p w|th tho|r homowork.
Vuch ot th|s can bo prov|dod through pub||c po||cy, as
happons |n somo countr|os - troo schoo| |unchos,
vacc|nat|ons, bas|c hoa|th chocks and somo ho|p w|th
homowork attor schoo| by toachors or tutors h|rod by tho
schoo|. |owovor, somo ot th|s st||| noods to bo prov|dod at
homo. 3choo|s can prov|do on|y so much.
1h|s moans that thoro has to bo somo m|n|mum oqua||ty
ot outcomo |n torms ot paronta| |ncomo, |t poor ch||dron aro
to havo anyth|ng approach|ng a ta|r chanco. W|thout th|s,
ovon troo schoo||ng, troo schoo| moa|s, troo vacc|nat|ons,
and so on, cannot prov|do roa| oqua||ty ot opportun|ty tor
ch||dron.
Evon |n adu|t ||to, thoro has to bo somo oqua||ty ot
outcomo. lt |s wo|| known that, onco somoono has boon
unomp|oyod tor a |ong t|mo, |t bocomos oxtromo|y d|tt|cu|t tor
that porson to got back |nto tho |abour markot. 3ut whothor
somoono |osos hor job |s not ont|ro|y dotorm|nod by tho
porson's 'worth'. |or oxamp|o, many poop|o |oso tho|r jobs
bocauso thoy choso to jo|n an |ndustry that |ookod ||ko a
good prospoct whon thoy t|rst startod but s|nco has boon h|t
hard by a suddon |ncroaso |n toro|gn compot|t|on. |ow
Amor|can stoo|workors or 3r|t|sh sh|pbu||d|ng workors who
jo|nod tho|r |ndustr|os |n tho 1000s, or tor that mattor anyono
o|so, cou|d havo prod|ctod that by tho oar|y 1000s tho|r
|ndustr|os wou|d bo v|rtua||y w|pod out by 1apanoso and
Koroan compot|t|on. ls |t roa||y ta|r that thoso poop|o havo to
suttor d|sproport|onato|y and bo cons|gnod to tho scraphoap
ot h|story?
Ot courso, |n an |doa||zod troo markot, th|s shou|d not bo
a prob|om bocauso tho Amor|can stoo|workors and tho
3r|t|sh sh|pbu||dors can got jobs |n oxpand|ng |ndustr|os. 3ut
how many tormor Amor|can stoo|workors do you know who
havo bocomo computor ong|noors or tormor 3r|t|sh
sh|pbu||dors who havo turnod thomso|vos |nto |nvostmont
bankors? 3uch convors|on raro|y, |t ovor, happons.
A moro oqu|tab|o approach wou|d havo boon to ho|p tho
d|sp|acod workors t|nd a now caroor through docont
unomp|oymont bonot|ts, hoa|th |nsuranco ovon whon out ot a
job, rotra|n|ng schomos and ho|p w|th job soarchos, as thoy
do part|cu|ar|y wo|| |n 3cand|nav|an countr|os. As l d|scuss
o|sowhoro |n tho book (soo 7blog 21), th|s can a|so bo a
moro product|vo approach tor tho oconomy as a who|o.
Yos, |n thoory, a shoosh|no boy trom a poor prov|nc|a|
town |n loru can go to 3tantord and do a lh0, as tho tormor
loruv|an lros|dont A|ojandro 1o|odo has dono, but tor ono
1o|odo wo havo m||||ons ot loruv|an ch||dron who d|d not
ovon mako |t to h|gh schoo|. Ot courso, wo cou|d arguo that
a|| thoso m||||ons ot poor loruv|an ch||dron aro |azy good-tor-
noth|ngs, s|nco Vr 1o|odo has provon that thoy too cou|d
havo gono to 3tantord |t thoy had tr|od hard onough. 3ut l
th|nk |t |s much moro p|aus|b|o to say that Vr 1o|odo |s tho
oxcopt|on. W|thout somo oqua||ty ot outcomo (ot paronta|
|ncomo), poor poop|o cannot tako tu|| advantago ot oqua||ty
ot opportun|ty.
lndood, |ntornat|ona| compar|son ot soc|a| mob|||ty
corroboratos th|s roason|ng. Accord|ng to a carotu| study by
a group ot rosoarchors |n 3cand|nav|a and tho UK, tho
3cand|nav|an countr|os havo h|ghor soc|a| mob|||ty than tho
UK, wh|ch |n turn has h|ghor mob|||ty than tho U3.
2
lt |s no
co|nc|donco that tho strongor tho wo|taro stato, tho h|ghor
tho mob|||ty. lart|cu|ar|y |n tho caso ot tho U3, tho tact that
|ow ovora|| mob|||ty |s |argo|y accountod tor by |ow mob|||ty at
tho bottom suggosts that |t |s tho |ack ot a bas|c |ncomo
guarantoo that |s provont|ng poor k|ds trom mak|ng uso ot
tho oqua||ty ot opportun|ty.
Excoss|vo oqua||zat|on ot outcomos |s harmtu|, a|though
what oxact|y |s oxcoss|vo |s dobatab|o. lovortho|oss,
oqua||ty ot opportun|ty |s not onough. Un|oss wo croato an
onv|ronmont whoro ovoryono |s guarantood somo m|n|mum
capab|||t|os through somo guarantoo ot m|n|mum |ncomo,
oducat|on and hoa|thcaro, wo cannot say that wo havo ta|r
compot|t|on. Whon somo poop|o havo to run a 100 motro
raco w|th sandbags on tho|r |ogs, tho tact that no ono |s
a||owod to havo a hoad start doos not mako tho raco ta|r.
Equa||ty ot opportun|ty |s abso|uto|y nocossary but not
sutt|c|ont |n bu||d|ng a gonu|no|y ta|r and ott|c|ont soc|oty.
1hing 21
Big govornmont makoa ooIo
moro oon to chango

What they tell you

3|g govornmont |s bad tor tho oconomy. 1ho wo|taro stato
has omorgod bocauso ot tho dos|ro by tho poor to havo an
oas|or ||to by mak|ng tho r|ch pay tor tho costs ot
adjustmonts that aro constant|y domandod by markot torcos.
Whon tho r|ch aro taxod to pay tor unomp|oymont |nsuranco,
hoa|thcaro and othor wo|taro moasuros tor tho poor, th|s not
on|y makos tho poor |azy and dopr|vos tho r|ch ot an
|ncont|vo to croato woa|th, |t a|so makos tho oconomy |oss
dynam|c. W|th tho protoct|on ot tho wo|taro stato, poop|o do
not too| tho nood to adjust to now markot roa||t|os, thoroby
do|ay|ng tho changos |n tho|r protoss|ons and work|ng
pattorns that aro noodod tor dynam|c oconom|c
adjustmonts. Wo don't ovon havo to |nvoko tho ta||uros ot tho
commun|st oconom|os. 1ust |ook at tho |ack ot dynam|sm |n
Europo w|th |ts b|oatod wo|taro stato, comparod to tho
v|ta||ty ot tho U3.
What they don't tell you

A wo||-dos|gnod wo|taro stato can actua||y oncourago
poop|o to tako chancos w|th tho|r jobs and bo moro, not
|oss, opon to changos. 1h|s |s ono roason why thoro |s |oss
domand tor trado protoct|on|sm |n Europo than |n tho U3.
Europoans know that, ovon |t tho|r |ndustr|os shut down duo
to toro|gn compot|t|on, thoy w||| bo ab|o to protoct tho|r ||v|ng
standards (through unomp|oymont bonot|ts) and got ro-
tra|nod tor anothor job (w|th govornmont subs|d|os), whoroas
Amor|cans know that |os|ng tho|r curront jobs may moan a
hugo ta|| |n tho|r ||v|ng standards and may ovon bo tho ond ot
tho|r product|vo ||vos. 1h|s |s why tho Europoan countr|os
w|th tho b|ggost wo|taro statos, such as 3wodon, lorway
and ||n|and, woro ab|o to grow tastor than, or at |oast as tast
as, tho U3, ovon dur|ng tho post-1000 'Amor|can
lona|ssanco'.
1he oldest pro|essIon In the world7

loprosontat|vos ot d|ttoront protoss|ons |n a Chr|st|an
country woro dobat|ng wh|ch protoss|on |s tho o|dost.
1ho mod|ca| doctor sa|d: 'What was tho t|rst th|ng that
God d|d w|th humans? |o portormod an oporat|on - ho
mado Evo w|th Adam's r|b. 1ho mod|ca| protoss|on |s tho
o|dost.'
'lo, that |s not truo,' tho arch|toct sa|d. '1ho t|rst th|ng ho
d|d was to bu||d tho wor|d out ot chaos. 1hat's what
arch|tocts do - croat|ng ordor out ot chaos. Wo aro tho
o|dost protoss|on.'
1ho po||t|c|an, who was pat|ont|y ||ston|ng, gr|nnod and
askod: 'Who croatod that chaos?'
Vod|c|no may or may not bo tho o|dost protoss|on |n tho
wor|d, but |t |s ono ot tho most popu|ar a|| ovor tho wor|d.
|owovor, |n no country |s |t moro popu|ar than |n my nat|vo
3outh Koroa.
A survoy dono |n 2008 rovoa|od that noar|y tour out ot t|vo
'top-scor|ng un|vors|ty app||cants' (dot|nod as thoso w|th|n
tho top 2 por cont ot tho d|str|but|on) |n tho sc|onco stroam
wantod to study mod|c|no. Accord|ng to unott|c|a| data,
dur|ng tho |ast tow yoars, ovon tho |oast compot|t|vo ot tho
country's twonty-sovon mod|ca| dopartmonts (at
undorgraduato |ovo|) has bocomo moro d|tt|cu|t to ontor than
tho bost ong|noor|ng dopartmonts |n tho country. lt cannot
got moro popu|ar than that.
1ho |ntorost|ng th|ng |s that, ovon though mod|c|no has
a|ways boon a popu|ar subjoct |n Koroa, th|s k|nd ot hypor-
popu|ar|ty |s now. lt |s bas|ca||y a twonty-t|rst-contury
phonomonon. What has changod?
An obv|ous poss|b|||ty |s that, tor whatovor roason (o.g.,
an ago|ng popu|at|on), tho ro|at|vo oarn|ngs ot mod|ca|
doctors havo r|son and tho youngstors aro moro|y
rospond|ng to changos |n tho |ncont|vos - tho markot wants
moro ab|o doctors, so moro and moro ab|o poop|o aro
go|ng |nto tho protoss|on. |owovor, tho ro|at|vo |ncomos ot
mod|ca| doctors |n Koroa havo boon ta|||ng, w|th tho
cont|nuous |ncroaso |n tho|r supp|y. And |t |s not as |t somo
now govornmont rogu|at|on was |ntroducod that makos |t
d|tt|cu|t to got jobs as ong|noors or sc|ont|sts (tho obv|ous
a|tornat|vo cho|cos tor wou|d-bo mod|ca| doctors). 3o what
|s roa||y go|ng on?
What |s dr|v|ng th|s |s tho dramat|c ta|| |n job socur|ty ovor
tho |ast docado or so. Attor tho 1007 t|nanc|a| cr|s|s that
ondod tho country's 'm|rac|o yoars', Koroa abandonod |ts
|ntorvont|on|st, patorna||st|c oconom|c systom and
ombracod markot ||bora||sm that omphas|zos max|mum
compot|t|on. 1ob socur|ty has boon drast|ca||y roducod |n tho
namo ot groator |abour markot t|ox|b|||ty. V||||ons ot workors
havo boon torcod |nto tomporary jobs. lron|ca||y onough,
ovon botoro tho cr|s|s, tho country had ono ot tho most
t|ox|b|o |abour markots |n tho r|ch wor|d, w|th ono ot tho
h|ghost rat|os ot workors w|thout a pormanont contract at
around b0 por cont. 1ho rocont ||bora||zat|on has pushod tho
rat|o up ovon h|ghor - to around 00 por cont. Voroovor, ovon
thoso w|th pormanont contracts now suttor trom ho|ghtonod
job |nsocur|ty. 3otoro tho 1007 cr|s|s, most workors w|th a
pormanont contract cou|d oxpoct, oo octo |t not oo joro,
||tot|mo omp|oymont (as many ot tho|r 1apanoso
countorparts st||| do). lot any moro. low o|dor workors |n
tho|r tort|os and t|tt|os, ovon |t thoy havo a pormanont
contract, aro oncouragod to mako way tor tho youngor
gonorat|on at tho oar||ost poss|b|o chanco. Compan|os
cannot t|ro thom at w|||, but wo a|| know that thoro aro ways to
|ot poop|o know that thoy aro not wantod and thus to mako
thom 'vo|untar||y' |oavo.
G|von th|s, Koroan youngstors aro, undorstandab|y,
p|ay|ng sato. lt thoy bocomo a sc|ont|st or an ong|noor, thoy
rockon, thoro |s a h|gh chanco that thoy w||| bo out ot tho|r
jobs |n tho|r tort|os, ovon |t thoy jo|n major compan|os ||ko
3amsung or |yunda|. 1h|s |s a horrondous prospoct, s|nco
tho wo|taro stato |n Koroa |s so woak - tho sma||ost among
tho r|ch countr|os (moasurod by pub||c soc|a| spond|ng as a
sharo ot G0l).
1
A woak wo|taro stato was not such a b|g
prob|om botoro, bocauso many poop|o had ||tot|mo
omp|oymont. W|th ||tot|mo omp|oymont gono, |t has bocomo
|otha|. Onco you |oso your job, your ||v|ng standard ta||s
dramat|ca||y and, moro |mportant|y, you don't havo much ot a
socond chanco. 1hus, br|ght Koroan youngstors t|guro, and
aro adv|sod by tho|r paronts, that w|th a ||conco to pract|so
mod|c|no thoy can work unt|| thoy chooso to rot|ro. lt tho
worst comos to tho worst, thoy can sot up tho|r own c||n|cs,
ovon |t thoy do not mako much monoy (wo||, tor a mod|ca|
doctor). lo wondor ovory Koroan k|d w|th a bra|n wants to
study mod|c|no (or |aw - anothor protoss|on w|th a ||conco -
|t thoy aro |n tho human|t|os stroam).
0on't got mo wrong. l rovoro mod|ca| doctors. l owo my
||to to thom - l havo had a coup|o ot ||to-sav|ng oporat|ons
and boon curod ot count|oss |ntoct|ons thanks to ant|b|ot|cs
thoy havo proscr|bod tor mo. 3ut ovon l know that |t |s
|mposs|b|o tor 80 por cont ot tho bra|n|ost Koroan k|ds |n tho
sc|onco stroam a|| to bo cut out to bo mod|ca| doctors.
3o, ono ot tho troost |abour markots |n tho r|ch wor|d, that
|s, tho Koroan |abour markot, |s spoctacu|ar|y ta|||ng to
a||ocato ta|ont |n tho most ott|c|ont mannor. 1ho roason?
|o|ghtonod job |nsocur|ty.
1he wel|are state Is the bankruptcy law
|or workers

1ob socur|ty |s a thorny |ssuo. |roo-markot oconom|sts
bo||ovo that any |abour markot rogu|at|on that makos t|r|ng
moro d|tt|cu|t makos tho oconomy |oss ott|c|ont and
dynam|c. 1o start w|th, |t woakons tho |ncont|vo tor workors
to work hard. On top ot that, |t d|scouragos woa|th croat|on
by mak|ng omp|oyors moro ro|uctant to h|ro add|t|ona|
poop|o (tor toar ot not bo|ng ab|o to t|ro thom whon
nocossary).
labour markot rogu|at|ons aro bad onough, |t |s arguod,
but tho wo|taro stato has mado th|ngs ovon worso. 3y
prov|d|ng unomp|oymont bonot|ts, hoa|th |nsuranco, troo
oducat|on and ovon m|n|mum |ncomo support, tho wo|taro
stato has ottoct|vo|y g|von ovoryono a guarantoo to bo h|rod
by tho govornmont - as an 'unomp|oyod workor', |t you ||ko -
w|th a m|n|mum wago. 1horotoro, workors do not havo
onough |ncont|vo to work hard. 1o mako th|ngs worso, thoso
wo|taro statos aro t|nancod by tax|ng tho r|ch, roduc|ng tho|r
|ncont|vos to work hard, croato jobs and gonorato woa|th.
G|von th|s, tho roason|ng goos, a country w|th a b|ggor
wo|taro stato |s go|ng to bo |oss dynam|c - |ts workors aro
|oss compo||od to work, wh||o |ts ontropronours aro |oss
mot|vatod to croato woa|th.
1h|s argumont has boon vory |nt|uont|a|. ln tho 1070s, a
popu|ar oxp|anat|on ot 3r|ta|n's thon |ack|ustro oconom|c
portormanco was that |ts wo|taro stato had bocomo b|oatod
and |ts trado un|ons ovor|y powortu| (wh|ch |s a|so part|y duo
to tho wo|taro stato, |nsotar as tho |attor du||s tho throat ot
unomp|oymont). ln th|s road|ng ot 3r|t|sh h|story, Vargarot
1hatchor savod 3r|ta|n by putt|ng un|ons |n tho|r p|aco and
roduc|ng tho wo|taro stato, ovon though what actua||y
happonod |s moro comp||catod. 3|nco tho 1000s, th|s v|ow
ot tho wo|taro stato has bocomo ovon moro popu|ar w|th tho
(a||ogod|y) supor|or growth portormanco ot tho U3 to thoso
ot othor r|ch countr|os w|th b|ggor wo|taro statos.
2
Whon
govornmonts |n othor countr|os try to cut tho|r wo|taro
spond|ng, thoy troquont|y c|to Vrs 1hatchor's cur|ng ot tho
so-ca||od '3r|t|sh 0|soaso' or tho supor|or dynam|sm ot tho
U3 oconomy.
3ut |s |t truo that groator job socur|ty and a b|ggor wo|taro
stato mako an oconomy |oss product|vo and dynam|c?
As |n our Koroan oxamp|o, a |ack ot job socur|ty can |oad
youngstors to mako consorvat|vo cho|cos w|th tho|r caroor,
tavour|ng socuro jobs |n mod|c|no or tho |aw. 1h|s may bo
tho r|ght cho|co tor thom |nd|v|dua||y, but |t |oads to a
m|sa||ocat|on ot ta|onts and thus roducos oconom|c
ott|c|oncy and dynam|sm.
1ho woakor wo|taro stato |n tho U3 has boon ono
|mportant roason why trado protoct|on|sm |s much strongor
thoro than |n Europo, dosp|to a groator accoptanco ot
govornmont |ntorvont|on |n tho |attor. ln Europo (ot courso, l
am |gnor|ng nat|ona| d|ttoroncos |n tho dota||s), |t your
|ndustry doc||nos and you |oso your job, |t |s a b|g b|ow but
not tho ond ot tho wor|d. You w||| st||| koop your hoa|th
|nsuranco and pub||c hous|ng (or hous|ng subs|d|os), wh||o
roco|v|ng unomp|oymont bonot|ts (up to 80 por cont ot your
|ast pay), govornmont-subs|d|zod rotra|n|ng and govornmont
ho|p |n your job soarch. ln contrast, |t you aro a workor |n tho
U3, you'd bottor mako suro you ho|d on to your curront job, |t
nocossary through protoct|on|sm, bocauso |os|ng your job
moans |os|ng a|most ovoryth|ng. Unomp|oymont |nsuranco
covorago |s patchy and ot shortor durat|on than |n Europo.
1horo |s ||tt|o pub||c ho|p w|th rotra|n|ng and job soarch. Voro
tr|ghton|ng|y, |os|ng your job moans |os|ng your hoa|th
|nsuranco and probab|y your homo, as thoro |s ||tt|o pub||c
hous|ng or pub||c subs|d|os tor your ront. As a rosu|t, workor
ros|stanco to any |ndustr|a| rostructur|ng that |nvo|vos job
cuts |s much groator |n tho U3 than |n Europo. Vost U3
workors aro unab|o to put up an organ|zod ros|stanco, but
thoso who can - un|on|zod workors - w|||, undorstandab|y,
do ovoryth|ng thoy can to prosorvo tho curront job
d|str|but|on.
As tho abovo oxamp|os show, groator |nsocur|ty may
mako poop|o work hardor, but |t makos thom work hardor |n
tho wrong jobs. A|| thoso ta|ontod Koroan youngstors who
cou|d bo br||||ant sc|ont|sts and ong|noors aro |abour|ng ovor
human anatomy. Vany U3 workors who cou|d - attor
appropr|ato rotra|n|ng - bo work|ng |n 'sunr|so' |ndustr|os
(o.g., b|o-ong|noor|ng) aro gr|m|y ho|d|ng on to tho|r jobs |n
'sunsot' |ndustr|os (o.g., automob||os), on|y do|ay|ng tho
|nov|tab|o.
1ho po|nt ot a|| tho abovo oxamp|os |s that, whon poop|o
know thoy w||| havo a socond (or th|rd or ovon tourth) chanco,
thoy w||| bo much moro opon to r|sk-tak|ng whon |t comos to
choos|ng tho|r t|rst job (as |n tho Koroan oxamp|o) or |ott|ng
go ot tho|r ox|st|ng jobs (as |n tho U3- Europo compar|son).
0o you t|nd th|s |og|c strango? You shou|dn't. 3ocauso
th|s |s oxact|y tho |og|c boh|nd bankruptcy |aw, wh|ch most
poop|o accopt as 'obv|ous'.
3otoro tho m|d n|notoonth contury, no country had a
bankruptcy |aw |n tho modorn sonso. What was thon ca||od
bankruptcy |aw d|d not g|vo bankrupt bus|nossmon much
protoct|on trom crod|tors wh||o thoy rostructurod tho|r
bus|noss - |n tho U3, 'Chaptor 11' now g|vos such
protoct|on tor s|x months. Voro |mportant|y, |t d|d not g|vo
thom a socond chanco, as thoy woro roqu|rod to pay back
a|| dobts, howovor |ong |t took, un|oss tho crod|tors gavo
thom a 'd|schargo' trom tho duty. 1h|s moant that, ovon |t tho
bankrupt bus|nossman somohow managod to start a now
bus|noss, ho had to uso a|| h|s now prot|ts to ropay tho o|d
dobts, wh|ch hamporod tho growth ot tho now bus|noss. A||
th|s mado |t oxtromo|y r|sky to start a bus|noss vonturo |n tho
t|rst p|aco.
Ovor t|mo, poop|o camo to roa||zo that tho |ack ot a
socond chanco was hugo|y d|scourag|ng r|sk-tak|ng by
bus|nossmon. 3tart|ng w|th 3r|ta|n |n 1840, countr|os havo
|ntroducod modorn bankruptcy |aws w|th court-grantod
protoct|on trom crod|tors dur|ng |n|t|a| rostructur|ng and,
moro |mportant|y, tho powor tor courts to |mposo pormanont
roduct|ons |n dobts, ovon aga|nst tho w|shos ot tho crod|tors.
Whon comb|nod w|th |nst|tut|ons ||ko ||m|tod ||ab|||ty, wh|ch
was |ntroducod around tho samo t|mo (soo 7blog 2), th|s
now bankruptcy |aw roducod tho dangor ot any bus|noss
undortak|ng and thus oncouragod r|sk-tak|ng, wh|ch has
mado modorn cap|ta||sm poss|b|o.
lnsotar as |t g|vos workors socond chancos, wo can say
that tho wo|taro stato |s ||ko a bankruptcy |aw tor thom. ln tho
samo way that bankruptcy |aws oncourago r|sk-tak|ng by
ontropronours, tho wo|taro stato oncouragos workors to bo
moro opon to chango (and tho rosu|t|ng r|sks) |n tho|r
att|tudos. 3ocauso thoy know that thoro |s go|ng to bo a
socond chanco, poop|o can bo bo|dor |n tho|r |n|t|a| caroor
cho|cos and moro opon to chang|ng jobs |ator |n tho|r
caroors.
CountrIes wIth bIgger governments can
grow |aster

What about tho ov|donco? What aro tho ro|at|vo oconom|c
portormancos ot countr|os that d|ttor |n torms ot tho s|zos ot
tho|r wo|taro statos? As mont|onod, tho convont|ona|
w|sdom |s that countr|os w|th sma||or wo|taro statos aro
moro dynam|c. |owovor, tho ov|donco doos not support th|s
v|ow.
Unt|| tho 1080s, tho U3 grow much moro s|ow|y than
Europo dosp|to tho tact that |t had a much sma||or wo|taro
stato. |or oxamp|o, |n 1080, pub||c soc|a| oxpond|turo as a
sharo ot G0l was on|y 18.8 por cont |n tho U3, comparod
to 10.0 por cont tor tho EU's t|ttoon countr|os. 1ho rat|o was
as h|gh as 28.0 por cont |n 3wodon, 24.1 por cont |n tho
lothor|ands and 28 por cont |n (Wost) Gormany. 0osp|to
th|s, botwoon 10b0 and 1087, tho U3 grow moro s|ow|y than
any Europoan country. lor cap|ta |ncomo grow at 8.8 por
cont |n Gormany, 2.7 por cont |n 3wodon, 2.b por cont |n tho
lothor|ands and 1.0 por cont |n tho U3 dur|ng th|s por|od.
Obv|ous|y, tho s|zo ot tho wo|taro stato |s on|y ono tactor |n
dotorm|n|ng a country's oconom|c portormanco, but th|s
shows that a |argo wo|taro stato |s not |ncompat|b|o w|th h|gh
growth.
Evon s|nco 1000, whon tho ro|at|vo growth portormanco
ot tho U3 has |mprovod, somo countr|os w|th |argo wo|taro
statos havo grown tastor. |or oxamp|o, botwoon 1000 and
2008, por cap|ta |ncomo |n tho U3 grow at 1.8 por cont. 1h|s
|s bas|ca||y tho samo as |n tho prov|ous por|od, but g|von tho
s|owdown |n tho Europoan oconom|os, th|s mado tho U3
ono ot tho tastost-grow|ng oconom|os |n tho 'coro' OEC0
group (that |s, oxc|ud|ng tho not-tu||y-r|ch-yot countr|os, such
as Koroa and 1urkoy).
1ho |ntorost|ng th|ng, howovor, |s that tho two tastost-
grow|ng oconom|os |n tho coro OEC0 group dur|ng tho
post-1000 por|od aro ||n|and (2.0 por cont) and lorway (2.b
por cont), both w|th a |argo wo|taro stato. ln 2008, tho sharo
ot pub||c soc|a| spond|ng |n G0l was 22.b por cont |n
||n|and and 2b.1 por cont |n lorway, comparod to tho
OEC0 avorago ot 20.7 por cont and 10.2 por cont |n tho
U3. 3wodon, wh|ch has ||tora||y tho |argost wo|taro stato |n
tho wor|d (81.8 por cont, or tw|co as |argo as that ot tho U3),
at 1.8 por cont, rocordod a growth rato that was on|y a
shado bo|ow tho U3 rato. lt you count on|y tho 2000s (2000-
8), tho growth ratos ot 3wodon (2.4 por cont) and ||n|and
(2.8 por cont) woro tar supor|or to that ot tho U3 (1.8 por
cont). Woro tho troo-markot oconom|sts r|ght about tho
dotr|monta| ottocts ot tho wo|taro stato on work oth|c and tho
|ncont|vos tor woa|th croat|on, th|s k|nd ot th|ng shou|d not
happon.
Ot courso, by a|| th|s l am not suggost|ng that tho wo|taro
stato |s nocossar||y good. l|ko a|| othor |nst|tut|ons, |t has |ts
ups|dos and downs|dos. Espoc|a||y |t |t |s basod on
targotod, rathor than un|vorsa|, programmos (as |n tho U3), |t
can st|gmat|zo wo|taro roc|p|onts. 1ho wo|taro stato ra|sos
poop|o's 'rosorvat|on wagos' and dotors thom trom tak|ng
|ow-pay|ng jobs w|th poor work|ng cond|t|ons, a|though
whothor th|s |s a bad th|ng |s a mattor ot op|n|on (porsona||y l
th|nk tho ox|stonco ot a |argo numbor ot 'work|ng poor', as |n
tho U3, |s as much ot a prob|om as tho gonora||y h|ghor
unomp|oymont ratos wo soo |n Europo). |owovor, |t |t |s wo||
dos|gnod, w|th a v|ow to g|v|ng workors a socond chanco,
as |t |s |n 3cand|nav|an countr|os, |t can oncourago
oconom|c growth by mak|ng poop|o bo moro opon to
changos and thus mak|ng |ndustr|a| rostructur|ng oas|or.
Wo can dr|vo our cars tast on|y bocauso wo havo brakos.
lt cars had no brakos, ovon tho most sk||tu| dr|vors wou|d not
daro to dr|vo at moro than 20-80 m||os por hour tor toar ot
tata| acc|donts. ln tho samo way, poop|o can accopt tho r|sk
ot unomp|oymont and tho nood tor occas|ona| ro-too||ng ot
tho|r sk|||s moro w||||ng|y whon thoy know that thoso
oxpor|oncos aro not go|ng to dostroy tho|r ||vos. 1h|s |s why
a b|ggor govornmont can mako poop|o moro opon to
chango and thus mako tho oconomy moro dynam|c.
1hing 22
FinanciaI markota nood to
bocomo Ioaa, not moro,
otticiont

What they tell you

1ho rap|d dovo|opmont ot tho t|nanc|a| markots has onab|od
us to a||ocato and roa||ocato rosourcos sw|tt|y. 1h|s |s why
tho U3, tho UK, lro|and and somo othor cap|ta||st oconom|os
that havo ||bora||zod and oponod up tho|r t|nanc|a| markots
havo dono so wo|| |n tho |ast throo docados. l|bora| t|nanc|a|
markots g|vo an oconomy tho ab|||ty to rospond qu|ck|y to
chang|ng opportun|t|os, thoroby a||ow|ng |t to grow tastor.
1ruo, somo ot tho oxcossos ot tho rocont por|od havo g|von
t|nanco a bad namo, not |oast |n tho abovo-mont|onod
countr|os. |owovor, wo shou|d not rush |nto rostra|n|ng
t|nanc|a| markots s|mp|y bocauso ot th|s onco-|n-a-contury
t|nanc|a| cr|s|s that no ono cou|d havo prod|ctod, howovor
b|g |t may bo, as tho ott|c|oncy ot |ts t|nanc|a| markot |s tho
koy to a nat|on's prospor|ty.
What they don't tell you

1ho prob|om w|th t|nanc|a| markots today |s that thoy aro too
ott|c|ont. W|th rocont t|nanc|a| '|nnovat|ons' that havo
producod so many now t|nanc|a| |nstrumonts, tho t|nanc|a|
soctor has bocomo moro ott|c|ont |n gonorat|ng prot|ts tor
|tso|t |n tho short run. |owovor, as soon |n tho 2008 g|oba|
cr|s|s, thoso now t|nanc|a| assots havo mado tho ovora||
oconomy, as wo|| as tho t|nanc|a| systom |tso|t, much moro
unstab|o. Voroovor, g|von tho ||qu|d|ty ot tho|r assots, tho
ho|dors ot t|nanc|a| assots aro too qu|ck to rospond to
chango, wh|ch makos |t d|tt|cu|t tor roa|-soctor compan|os to
socuro tho 'pat|ont cap|ta|' that thoy nood tor |ong-torm
dovo|opmont. 1ho spood gap botwoon tho t|nanc|a| soctor
and tho roa| soctor noods to bo roducod, wh|ch moans that
tho t|nanc|a| markot noods to bo do||borato|y mado |oss
ott|c|ont.
1hree useless phrases

v|s|tors to lco|and |n tho 1000s roportod that tho ott|c|a|
tour|st gu|do handod out at loykjav|k a|rport had, ||ko a||
othor such gu|dos, a 'usotu| phrasos' soct|on. Un||ko thom, l
was to|d, tho lco|and|c gu|do a|so had a 'uso|oss phrasos'
soct|on. Apparont|y |t conta|nod throo phrasos, wh|ch woro,
|n Eng||sh: 'Whoro |s tho ra||way stat|on?', 'lt's a n|co day
today', and 'ls thoro anyth|ng choapor?'
1ho ra||ways th|ng |s, surpr|s|ng though |t may bo, truo -
lco|and doos not havo any ra||ways. About tho woathor, tho
gu|do was porhaps bo|ng ovor|y harsh. l havon't ||vod thoro,
but by a|| accounts lco|and doos soom to havo at |oast a tow
sunny days a yoar. As tor ovoryth|ng bo|ng so oxpons|vo,
th|s was a|so protty accurato and a consoquonco ot tho
country's oconom|c succoss. labour sorv|cos aro oxpons|vo
|n h|gh-|ncomo countr|os (un|oss thoy havo a constant supp|y
ot |ow-wago |mm|grants, as tho U3 or Austra||a), mak|ng
ovoryth|ng moro oxpons|vo than what tho ott|c|a| oxchango
rato shou|d suggost (soo 7blog 10). Onco ono ot tho
poorost oconom|os |n Europo, by 100b lco|and had
dovo|opod |nto tho o|ovonth r|chost oconomy |n tho wor|d
(attor luxomburg, 3w|tzor|and, 1apan, lorway, 0onmark,
Gormany, tho Un|tod 3tatos, Austr|a, 3|ngaporo and
|ranco).
l|ch as |t a|roady was, tho lco|and|c oconomy got a turbo-
chargod boost |n tho |ato 1000s, thanks to tho thon
govornmont's doc|s|on to pr|vat|zo and ||bora||zo tho
t|nanc|a| soctor. 3otwoon 1008 and 2008, tho country
pr|vat|zod stato-ownod banks and |nvostmont tunds, wh||o
abo||sh|ng ovon tho most bas|c rogu|at|ons on tho|r
act|v|t|os, such as rosorvo roqu|romonts tor tho banks.
|o||ow|ng th|s, tho lco|and|c banks oxpandod at an
aston|sh|ng spood, sook|ng customors abroad as wo||. 1ho|r
|ntornot bank|ng tac|||t|os mado b|g |nroads |n 3r|ta|n, tho
lothor|ands and Gormany. And lco|and|c |nvostors took
advantago ot tho aggross|vo |ond|ng by tho|r banks and
wont on corporato shopp|ng sproos, ospoc|a||y |n 3r|ta|n, |ts
tormor advorsary |n tho tamous 'Cod Wars' ot tho 10b0s to
1070s. 1hoso |nvostors, dubbod tho 'v|k|ng ra|dors', woro
bost roprosontod by 3augur, tho |nvostmont company
ownod by 1on 1ohannoson, tho young bus|noss tycoon.
3urst|ng on to tho scono on|y |n tho oar|y 2000s, by 2007
3augur had bocomo a major torco |n tho 3r|t|sh rota||
|ndustry, w|th major stakos |n bus|nossos omp|oy|ng about
0b,000 poop|o, turn|ng ovor L10 b||||on across 8,800 storos,
|nc|ud|ng |am|oys, 0obonhams, Oas|s and lco|and (tho
tompt|ng|y namod 3r|t|sh trozon-tood cha|n).
|or a wh||o, tho t|nanc|a| oxpans|on soomod to work
wondors tor lco|and. Onco a t|nanc|a| backwator w|th a
roputat|on tor oxcoss|vo rogu|at|on (|ts stock markot was
on|y sot up |n 108b), tho country was transtormod |nto a
v|brant now hub |n tho omorg|ng g|oba| t|nanc|a| systom.
|rom tho |ato 1000s, lco|and grow at an oxtraord|nary rato
and bocamo tho t|tth r|chost country |n tho wor|d by 2007
(attor lorway, luxomburg, 3w|tzor|and and 0onmark). 1ho
sky soomod to bo tho ||m|t.
Untortunato|y, attor tho g|oba| t|nanc|a| cr|s|s ot 2008, tho
lco|and|c oconomy wont |nto mo|tdown. 1hat summor, a||
throo ot |ts b|ggost banks wont bankrupt and had to bo takon
ovor by tho govornmont. 1h|ngs got so bad that, |n Octobor
2000, Vc0ona|d's doc|dod to w|thdraw trom lco|and,
ro|ogat|ng |t to tho bordor|and ot g|oba||zat|on. At tho t|mo ot
wr|t|ng (oar|y 2010), tho lV| ost|mato was that |ts oconomy
shrank at tho rato ot 8.b por cont |n 2000, tho tastost rato ot
contract|on among tho r|ch countr|os.
1ho r|sky naturo ot lco|and's t|nanc|a| dr|vo s|nco tho |ato
1000s |s |ncroas|ng|y com|ng to ||ght. 3ank|ng assots had
roachod tho oqu|va|ont ot 1,000 por cont ot G0l |n 2007,
wh|ch was doub|o that ot tho UK, a country w|th ono ot tho
most dovo|opod bank|ng soctors |n tho wor|d. Voroovor,
lco|and's t|nanc|a| oxpans|on had boon tuo||od by toro|gn
borrow|ng. 3y 2007, not toro|gn dobt (toro|gn dobts m|nus
toro|gn |ond|ng) roachod noar|y 2b0 por cont ot G0l, up
trom b0 por cont ot G0l |n 1007. Countr|os havo gono to
p|ocos w|th tar |oss oxposuro - toro|gn dobts woro
oqu|va|ont to 2b por cont ot G0l |n Koroa and 8b por cont
ot G0l |n lndonos|a on tho ovo ot tho As|an t|nanc|a| cr|s|s
|n 1007. On top ot that, tho shady naturo ot tho t|nanc|a|
doa|s boh|nd tho lco|and|c oconom|c m|rac|o was rovoa|od -
vory otton tho ma|n borrowors trom tho banks woro koy
sharoho|dors ot thoso samo banks.
New engIne o| growth7

Why am l spond|ng so much t|mo ta|k|ng about a sma||
|s|and w|th just ovor 800,000 poop|o that doos not ovon havo
a tra|n stat|on or a Vc0ona|d's, howovor dramat|c |ts r|so
and ta|| may havo boon? lt |s bocauso lco|and op|tom|zos
what |s wrong w|th tho dom|nant v|ow ot t|nanco today.
Extraord|nary though lco|and's story may sound, |t was
not a|ono |n tuo|||ng growth by pr|vat|z|ng, ||bora||z|ng and
opon|ng up tho t|nanc|a| soctor dur|ng tho |ast throo
docados. lro|and tr|od to bocomo anothor t|nanc|a| hub
through tho samo stratogy, w|th |ts t|nanc|a| assots roach|ng
tho oqu|va|ont ot 000 por cont ot G0l |n 2007. l|ko lco|and,
lro|and a|so had a bad ta|| |n tho 2008 g|oba| t|nanc|a| cr|s|s.
At tho t|mo ot wr|t|ng, tho lV| ost|mato was that |ts oconomy
contractod by 7.b por cont |n 2000. latv|a, anothor asp|r|ng
t|nanc|a| hub, has had |t ovon worso. |o||ow|ng tho co||apso
ot |ts t|nanco-dr|von boom, |ts oconomy was ost|matod by
tho lV| to havo shrunk by 10 por cont |n 2000. 0uba|, tho
so|t-appo|ntod t|nanc|a| hub ot tho V|dd|o East, soomod to
ho|d on a b|t |ongor than |ts Europoan r|va|s, but throw |n tho
towo| by doc|ar|ng a dobt morator|um tor |ts ma|n stato-
ownod cong|omorato |n lovombor 2000.
3otoro tho|r rocont ta||s trom graco, thoso oconom|os
woro toutod as oxamp|os ot a now t|nanco-|od bus|noss
modo| tor countr|os that want to got ahoad |n tho ora ot
g|oba||zat|on. As |ato as lovombor 2007, whon tho storm
c|ouds woro rap|d|y gathor|ng |n tho |ntornat|ona| t|nanc|a|
markots, l|chard lortos, a prom|nont 3r|t|sh po||cy
oconom|st, and |r|dr|k 3a|dursson, an lco|and|c protossor,
so|omn|y doc|arod |n a roport tor tho lco|and Chambor ot
Commorco that '[o|vora||, tho |ntornat|ona||sat|on ot tho
lco|and|c t|nanc|a| soctor |s a romarkab|o succoss story that
tho markots shou|d bottor acknow|odgo'.
1
|or somo, ovon
tho rocont co||apsos ot lco|and, lro|and and latv|a havo not
boon onough roason to abandon a t|nanco-|od oconom|c
stratogy. ln 3optombor 2000, 1urkoy announcod that |t w|||
|mp|omont a sor|os ot po||c|os that w||| turn |tso|t |nto (yot
anothor) t|nanc|a| hub ot tho V|dd|o East. Evon tho
govornmont ot Koroa, a trad|t|ona| manutactur|ng
poworhouso, |s |mp|omont|ng po||c|os a|mod at turn|ng |tso|t
|nto tho t|nanc|a| hub ot lorthoast As|a, a|though |ts
onthus|asm has boon dontod s|nco tho co||apso ot lro|and
and 0uba|, attor wh|ch |t was hop|ng to modo| tho country.
low, tho roa| troub|o |s that what countr|os ||ko lco|and
and lro|and woro |mp|omont|ng woro on|y moro oxtromo
torms ot tho oconom|c stratogy bo|ng pursuod by many
countr|os - a growth stratogy basod on t|nanc|a|
dorogu|at|on, t|rst adoptod by tho U3 and tho UK |n tho oar|y
1080s. 1ho UK put |ts t|nanc|a| dorogu|at|on programmo |nto
a h|ghor goar |n tho |ato 1080s, w|th tho so-ca||od '3|g 3ang'
dorogu|at|on and s|nco thon has pr|dod |tso|t on '||ght-touch'
rogu|at|on. 1ho U3 matchod |t by abo||sh|ng tho 1088 G|ass-
3toaga|| Act |n 1000, thoroby toar|ng down tho wa|| botwoon
|nvostmont bank|ng and commorc|a| bank|ng, wh|ch had
dot|nod tho U3 t|nanc|a| |ndustry s|nco tho Groat
0opross|on. Vany othor countr|os to||owod su|t.
What was oncourag|ng moro and moro countr|os to
adopt a growth stratogy basod on dorogu|atod t|nanco was
tho tact that |n such a systom |t |s oas|or to mako monoy |n
t|nanc|a| act|v|t|os than through othor oconom|c act|v|t|os -
or so |t soomod unt|| tho 2008 cr|s|s. A study by two |ronch
oconom|sts, Gorard 0umon|| and 0om|n|quo lovy - ono ot
tho tow stud|os soparato|y ost|mat|ng tho prot|t rato ot tho
t|nanc|a| soctor and that ot tho non-t|nanc|a| soctor - shows
that tho tormor has boon much h|ghor than tho |attor |n tho
U3 and |n |ranco dur|ng tho |ast two or throo docados.
2
Accord|ng to th|s study, |n tho U3 tho rato ot prot|t tor
t|nanc|a| t|rms was |owor than that ot tho non-t|nanc|a| t|rms
botwoon tho m|d 1000s and tho |ato 1070s. 3ut, to||ow|ng
t|nanc|a| dorogu|at|on |n tho oar|y 1080s, tho prot|t rato ot
t|nanc|a| t|rms has boon on a r|s|ng trond, and rangod
botwoon 4 por cont and 12 por cont. 3|nco tho 1080s, |t has
a|ways boon s|gn|t|cant|y h|ghor than that ot non-t|nanc|a|
t|rms, wh|ch rangod botwoon 2 por cont and b por cont. ln
|ranco, tho prot|t rato ot t|nanc|a| corporat|ons was oogotlvo
botwoon tho oar|y 1070s and tho m|d 1080s (no data |s
ava||ab|o tor tho 1000s). |owovor, w|th tho t|nanc|a|
dorogu|at|on ot tho |ato 1080s, |t startod r|s|ng and ovortook
that ot non-t|nanc|a| t|rms |n tho oar|y 1000s, whon both woro
about b por cont, and roso to ovor 10 por cont by 2001. ln
contrast, tho prot|t rato ot |ronch non-t|nanc|a| t|rms doc||nod
trom tho oar|y 1000s, to roach around 8 por cont |n 2001.
ln tho U3, tho t|nanc|a| soctor bocamo so attract|vo that
ovon many manutactur|ng compan|os havo turnod
thomso|vos ossont|a||y |nto t|nanco compan|os. 1|m Crotty,
tho d|st|ngu|shod Amor|can oconom|st, has ca|cu|atod that
tho rat|o ot t|nanc|a| assots to non-t|nanc|a| assots ownod by
non-t|nanc|a| corporat|ons |n tho U3 roso trom around 0.4 |n
tho 1070s to noar|y 1 |n tho oar|y 2000s.
8
Evon compan|os
such as GE, GV and |ord - onco tho symbo|s ot Amor|can
manutactur|ng prowoss - havo boon 't|nanc|a||zod' through a
cont|nuous oxpans|on ot tho|r t|nanc|a| arms, coup|od w|th
tho doc||no ot tho|r coro manutactur|ng act|v|t|os. 3y tho oar|y
twonty-t|rst contury, thoso manutactur|ng t|rms woro mak|ng
most ot tho|r prot|ts through t|nanc|a| act|v|t|os, rathor than
tho|r coro manutactur|ng bus|nossos (soo 7blog 18). |or
oxamp|o, |n 2008, 4b por cont ot GE's prot|t camo trom GE
Cap|ta|. ln 2004, 80 por cont ot prot|ts ot GV woro trom |ts
t|nanc|a| arm, GVAC, wh||o |ord mado a|| |ts prot|ts trom
|ord ||nanco botwoon 2001 and 2008.
4
Weapons o| |InancIal mass destructIon7

1ho rosu|t ot a|| th|s was an oxtraord|nary growth |n tho
t|nanc|a| soctor across tho wor|d, ospoc|a||y |n tho r|ch
countr|os. 1ho growth was not s|mp|y |n abso|uto torms. 1ho
moro s|gn|t|cant po|nt |s that tho t|nanc|a| soctor has grown
much tastor - no, much, much tastor - than tho undor|y|ng
oconomy.
Accord|ng to a ca|cu|at|on basod on lV| data by Gabr|o|
la|ma, my co||oaguo at Cambr|dgo and a |oad|ng author|ty
on t|nanc|a| cr|sos, tho rat|o ot tho stock ot t|nanc|a| assots
to wor|d output roso trom 1.2 to 4.4 botwoon 1080 and
2007.
b
1ho ro|at|vo s|zo ot tho t|nanc|a| soctor was ovon
groator |n many r|ch countr|os. Accord|ng to h|s ca|cu|at|on,
tho rat|o ot t|nanc|a| assots to G0l |n tho UK roachod 700
por cont |n 2007. |ranco, wh|ch otton sty|os |tso|t as a
countorpo|nt to Ang|o-Amor|can t|nanco cap|ta||sm, has not
|aggod tar boh|nd tho UK |n th|s rospoct - tho rat|o ot |ts
t|nanc|a| assots to G0l |s on|y marg|na||y |owor than that ot
tho UK. ln tho study c|tod abovo, Crotty, us|ng Amor|can
govornmont data, ca|cu|atos that tho rat|o ot t|nanc|a| assots
to G0l |n tho U3 t|uctuatod botwoon 400 and b00 por cont
botwoon tho 10b0s and tho 1070s, but startod shoot|ng up
trom tho oar|y 1080s w|th t|nanc|a| dorogu|at|on, to broak
through tho 000 por cont mark by tho oar|y 2000s.
1h|s moant that moro and moro t|nanc|a| c|a|ms woro
bo|ng croatod tor oach undor|y|ng roa| assot and oconom|c
act|v|ty. 1ho croat|on ot t|nanc|a| dor|vat|vos |n tho hous|ng
markot, wh|ch was ono ot tho ma|n causos ot tho 2008
cr|s|s, |||ustratos th|s po|nt vory wo||.
ln tho o|d days, whon somoono borrowod monoy trom a
bank and bought a houso, tho |ond|ng bank usod to own tho
rosu|t|ng t|nanc|a| product (mortgago) and that was that.
|owovor, t|nanc|a| |nnovat|ons croatod mortgago-backod
socur|t|os (V33s), wh|ch bund|o togothor up to sovora|
thousand mortgagos. ln turn, thoso V33s, somot|mos as
many as 1b0 ot thom, woro packod |nto a co||atora||zod dobt
ob||gat|on (C0O). 1hon C0Os-squarod woro croatod by
us|ng othor C0Os as co||atora|. And thon C0Os-cubod woro
croatod by comb|n|ng C0Os and C0Os-squarod. Evon
h|ghor-poworod C0Os woro croatod. Crod|t dotau|t swaps
(C03s) woro croatod to protoct you trom dotau|t on tho
C0Os. And thoro aro many moro t|nanc|a| dor|vat|vos that
mako up tho a|phabot soup that |s modorn t|nanco.
3y now ovon l am gott|ng contusod (and, as |t turns out,
so woro tho poop|o doa||ng w|th thom), but tho po|nt |s that
tho samo undor|y|ng assots (that |s, tho housos that woro |n
tho or|g|na| mortgagos) and oconom|c act|v|t|os (tho
|ncomo-oarn|ng act|v|t|os ot thoso mortgago-ho|dors) woro
bo|ng usod aga|n and aga|n to 'dor|vo' now assots. 3ut,
whatovor you do |n torms ot t|nanc|a| a|chomy, whothor thoso
assots do||vor tho oxpoctod roturns doponds u|t|mato|y on
whothor thoso hundrods ot thousands ot workors and sma||-
sca|o bus|noss-ownors who ho|d tho or|g|na| mortgagos ta||
boh|nd tho|r mortgago paymonts or not.
1ho rosu|t was an |ncroas|ng|y ta|| structuro ot t|nanc|a|
assots tootor|ng on tho samo toundat|on ot roa| assots (ot
courso, tho baso |tso|t was grow|ng, |n part tuo||od by th|s
act|v|ty, but |ot us abstract trom that tor tho momont, s|nco
what mattors horo |s that tho s|zo ot tho suporstructuro
ro|at|vo to tho baso was grow|ng). lt you mako an ox|st|ng
bu||d|ng ta||or w|thout w|don|ng tho baso, you |ncroaso tho
chanco ot |t topp||ng ovor. lt |s actua||y a |ot worso than that.
As tho dogroo ot 'dor|vat|on' - or tho d|stanco trom tho
undor|y|ng assots - |ncroasos, |t bocomos hardor and
hardor to pr|co tho assot accurato|y. 3o, you aro not on|y
add|ng t|oors to an ox|st|ng bu||d|ng w|thout broadon|ng |ts
baso, but you aro us|ng mator|a|s ot |ncroas|ng|y uncorta|n
qua||ty tor tho h|ghor t|oors. lo wondor Warron 3uttot, tho
Amor|can t|nanc|or known tor h|s down-to-oarth approach to
|nvostmont, ca||od t|nanc|a| dor|vat|vos 'woapons ot t|nanc|a|
mass dostruct|on' - wo|| botoro tho 2008 cr|s|s provod tho|r
dostruct|vonoss.
MInd the gap

A|| my cr|t|c|sms so tar about tho ovordovo|opmont ot tho
t|nanc|a| soctor |n tho |ast two or throo docados aro oot to
say that a|| t|nanco |s a bad th|ng. |ad wo ||stonod to Adam
3m|th, who opposod ||m|tod ||ab|||ty compan|os (soo 7blog
2) or 1homas 1ottorson, who cons|dorod bank|ng to bo
'moro dangorous than stand|ng arm|os', our oconom|os
wou|d st||| bo mado up ot tho '3atan|c m|||s' ot tho v|ctor|an
ago, |t not nocossar||y Adam 3m|th's p|n tactor|os.
|owovor, tho tact that t|nanc|a| dovo|opmont has boon
cruc|a| |n dovo|op|ng cap|ta||sm doos not moan that a|| torms
ot t|nanc|a| dovo|opmont aro good.
What makos t|nanc|a| cap|ta| nocossary tor oconom|c
dovo|opmont but potont|a||y countorproduct|vo or ovon
dostruct|vo |s tho tact that |t |s much moro ||qu|d than
|ndustr|a| cap|ta|. 3upposo that you aro a tactory ownor who
suddon|y noods monoy to buy raw mator|a|s or mach|nos to
tu|t|| unoxpoctod oxtra ordors. 3upposo a|so that you havo
a|roady |nvostod ovoryth|ng you havo |n bu||d|ng tho tactory
and buy|ng tho mach|nos and tho |nputs noodod, tor tho
|n|t|a| ordors. You w||| bo gratotu| that thoro aro banks that
aro w||||ng to |ond you tho monoy (us|ng your tactory as
co||atora|) |n tho know|odgo that you w||| bo ab|o to gonorato
oxtra |ncomo w|th thoso now |nputs. Or supposo that you
want to so|| ha|t ot your tactory (say, to start anothor ||no ot
bus|noss), but that no ono w||| buy ha|t a bu||d|ng and ha|t a
product|on ||no. ln th|s caso, you w||| bo ro||ovod to know that
you can |ssuo sharos and so|| ha|t your sharos. ln othor
words, tho t|nanc|a| soctor ho|ps compan|os to oxpand and
d|vors|ty through |ts ab|||ty to turn ||||qu|d assots such as
bu||d|ngs and mach|nos |nto ||qu|d assots such as |oans and
sharos.
|owovor, tho vory ||qu|d|ty ot t|nanc|a| assots makos thom
potont|a||y nogat|vo tor tho rost ot tho oconomy. 3u||d|ng a
tactory takos at |oast months, |t not yoars, wh||o
accumu|at|ng tho tochno|og|ca| and organ|zat|ona| know-how
noodod to bu||d a wor|d-c|ass company takos docados. ln
contrast, t|nanc|a| assots can bo movod around and
roarrangod |n m|nutos, |t not soconds. 1h|s onormous gap
has croatod hugo prob|oms, bocauso t|nanco cap|ta| |s
'|mpat|ont' and sooks short-torm ga|ns (soo 7blog 2). ln tho
short run, th|s croatos oconom|c |nstab|||ty, as ||qu|d cap|ta|
s|oshos around tho wor|d at vory short not|co and |n
'|rrat|ona|' ways, as wo havo rocont|y soon. Voro |mportant|y,
|n tho |ong run, |t |oads to woak product|v|ty growth, bocauso
|ong-torm |nvostmonts aro cut down to sat|sty |mpat|ont
cap|ta|. 1ho rosu|t has boon that, dosp|to onormous
progross |n 't|nanc|a| doopon|ng' (that |s, tho |ncroaso |n tho
rat|o botwoon t|nanc|a| assots and G0l), growth has
actua||y s|owod down |n rocont yoars (soo 7blogs 7 ooo 18).
1hus, oxact|y bocauso t|nanco |s ott|c|ont at rospond|ng
to chang|ng prot|t opportun|t|os, |t can bocomo harmtu| tor
tho rost ot tho oconomy. And th|s |s why 1amos 1ob|n, tho
1081 lobo| |auroato |n oconom|cs, ta|kod ot tho nood to
'throw somo sand |n tho whoo|s ot our oxcoss|vo|y ott|c|ont
|ntornat|ona| monoy markots'. |or th|s purposo, 1ob|n
proposod a t|nanc|a| transact|on tax, do||borato|y |ntondod to
s|ow down t|nanc|a| t|ows. A taboo |n po||to c|rc|os unt||
rocont|y, tho so-ca||od 1ob|n 1ax has rocont|y boon
advocatod by Gordon 3rown, tho tormor 3r|t|sh pr|mo
m|n|stor. 3ut tho 1ob|n 1ax |s not tho on|y way |n wh|ch wo
can roduco tho spood gap botwoon t|nanco and tho roa|
oconomy. Othor moans |nc|udo mak|ng host||o takoovors
d|tt|cu|t (thoroby roduc|ng tho ga|ns trom spocu|at|vo
|nvostmont |n stocks), bann|ng short-so|||ng (tho pract|co ot
so|||ng sharos that you do not own today), |ncroas|ng marg|n
roqu|romonts (that |s, tho proport|on ot tho monoy that has to
bo pa|d uptront whon buy|ng sharos) or putt|ng rostr|ct|ons
on cross-bordor cap|ta| movomonts, ospoc|a||y tor
dovo|op|ng countr|os.
A|| th|s |s not to say that tho spood gap botwoon t|nanco
and tho roa| oconomy shou|d bo roducod to zoro. A t|nanc|a|
systom portoct|y synchron|zod w|th tho roa| oconomy wou|d
bo uso|oss. 1ho who|o po|nt ot t|nanco |s that |t can movo
tastor than tho roa| oconomy. |owovor, |t tho t|nanc|a| soctor
movos too tast, |t can dora|| tho roa| oconomy. ln tho prosont
c|rcumstancos, wo nood to row|ro our t|nanc|a| systom so
that |t a||ows t|rms to mako thoso |ong-torm |nvostmonts |n
phys|ca| cap|ta|, human sk|||s and organ|zat|ons that aro
u|t|mato|y tho sourco ot oconom|c dovo|opmont, wh||o
supp|y|ng thom w|th tho nocossary ||qu|d|ty.
1hing 28
Cood oconomic oIicy dooa
not roquiro good oconomiata

What they tell you

Whatovor tho thoorot|ca| just|t|cat|ons may bo tor
govornmont |ntorvont|on, tho succoss or othorw|so ot
govornmont po||c|os doponds |n |argo part on tho
compotonco ot thoso who dos|gn and oxocuto thom.
Espoc|a||y, a|bo|t not oxc|us|vo|y, |n dovo|op|ng countr|os,
govornmont ott|c|a|s aro not vory wo|| tra|nod |n oconom|cs,
wh|ch thoy nood to bo |t thoy aro to |mp|omont good
oconom|c po||c|os. 1hoso ott|c|a|s shou|d rocogn|zo tho|r
||m|ts and shou|d rotra|n trom |mp|omont|ng 'd|tt|cu|t'
po||c|os, such as so|oct|vo |ndustr|a| po||cy, and st|ck to |oss-
domand|ng troo-markot po||c|os, wh|ch m|n|m|zo tho ro|o ot
tho govornmont. 1hus soon, troo-markot po||c|os aro doub|y
good, bocauso not on|y aro thoy tho bost po||c|os but thoy
aro a|so tho ||ghtost |n tho|r domands tor buroaucrat|c
capab|||t|os.
What they don't tell you

Good oconom|sts aro oot roqu|rod to run good oconom|c
po||c|os. 1ho oconom|c buroaucrats that havo boon most
succosstu| aro usua||y not oconom|sts. 0ur|ng tho|r 'm|rac|o'
yoars, oconom|c po||c|os |n 1apan and (to a |ossor oxtont)
Koroa woro run by |awyors. ln 1a|wan and Ch|na, oconom|c
po||c|os havo boon run by ong|noors. 1h|s domonstratos that
oconom|c succoss doos not nood poop|o wo|| tra|nod |n
oconom|cs - ospoc|a||y |t |t |s ot tho troo-markot k|nd.
lndood, dur|ng tho |ast throo docados, tho |ncroas|ng
|nt|uonco ot troo-markot oconom|cs has rosu|tod |n pooror
oconom|c portormancos a|| ovor tho wor|d, as l havo shown
throughout th|s book - |owor oconom|c growth, groator
oconom|c |nstab|||ty, |ncroasod |noqua||ty and t|na||y
cu|m|nat|ng |n tho d|sastor ot tho 2008 g|oba| t|nanc|a| cr|s|s.
lnsotar as wo nood oconom|cs, wo nood d|ttoront k|nds ot
oconom|cs trom troo-markot oconom|cs.
EconomIc mIracle wIthout economIsts

1ho East As|an oconom|os ot 1apan, 1a|wan, 3outh Koroa,
3|ngaporo, |ong Kong and Ch|na aro otton ca||od 'm|rac|o'
oconom|os. 1h|s |s, ot courso, hyporbo|o, but as tar as
hyporbo|os go, |t |s not too out|and|sh.
0ur|ng tho|r lndustr|a| 'lovo|ut|on' |n tho n|notoonth
contury, por cap|ta |ncomo |n tho oconom|os ot Wostorn
Europo and |ts ottshoots (lorth Amor|ca, Austra||a and low
Zoa|and) grow botwoon 1 por cont and 1.b por cont por yoar
(tho oxact numbor dopond|ng on tho oxact t|mo por|od and
tho country you |ook at). 0ur|ng tho so-ca||od 'Go|don Ago' ot
cap|ta||sm botwoon tho oar|y 10b0s and tho m|d 1070s, por
cap|ta |ncomo |n Wostorn Europo and |ts ottshoots grow at
around 8.b-4 por cont por yoar.
ln contrast, dur|ng tho|r m|rac|o yoars, rough|y botwoon
tho 10b0s and tho m|d 1000s (and botwoon tho 1080s and
today |n tho caso ot Ch|na), por cap|ta |ncomos grow at
somoth|ng ||ko 0-7 por cont por yoar |n tho East As|an
oconom|os mont|onod abovo. lt growth ratos ot 1-1.b por
cont doscr|bo a 'rovo|ut|on' and 8.b-4 por cont a 'go|don
ago', 0-7 por cont dosorvos to bo ca||od a 'm|rac|o'.
1
G|von thoso oconom|c rocords, ono wou|d natura||y
surm|so that thoso countr|os must havo had a |ot ot good
oconom|sts. ln tho samo way |n wh|ch Gormany oxco|s |n
ong|noor|ng bocauso ot tho qua||ty ot |ts ong|noors and
|ranco |oads tho wor|d |n dos|gnor goods bocauso ot tho
ta|onts ot |ts dos|gnors, |t sooms obv|ous tho East As|an
countr|os must havo ach|ovod oconom|c m|rac|os bocauso
ot tho capab|||ty ot tho|r oconom|sts. Espoc|a||y |n 1apan,
1a|wan, 3outh Koroa and Ch|na - countr|os |n wh|ch tho
govornmont p|ayod a vory act|vo ro|o dur|ng tho m|rac|o
yoars - thoro must havo boon many t|rst-rato oconom|sts
work|ng tor tho govornmont, ono wou|d roason.
lot so. Econom|sts woro |n tact consp|cuous by tho|r
absonco |n tho govornmonts ot tho East As|an m|rac|o
oconom|os. 1apanoso oconom|c buroaucrats woro most|y
|awyors by tra|n|ng. ln 1a|wan, most koy oconom|c ott|c|a|s
woro ong|noors and sc|ont|sts, rathor than oconom|sts, as |s
tho caso |n Ch|na today. Koroa a|so had a h|gh proport|on ot
|awyors |n |ts oconom|c buroaucracy, ospoc|a||y botoro tho
1080s. Oh Won-Chu|, tho bra|ns boh|nd tho country's hoavy
and chom|ca| |ndustr|a||zat|on programmo |n tho 1070s -
wh|ch transtormod |ts oconomy trom an ott|c|ont oxportor ot
|ow-grado manutactur|ng products |nto a wor|d-c|ass p|ayor
|n o|octron|cs, stoo| and sh|pbu||d|ng - was an ong|noor by
tra|n|ng.
lt wo don't nood oconom|sts to havo good oconom|c
portormanco, as |n tho East As|an casos, what uso |s
oconom|cs? |avo tho lV|, tho Wor|d 3ank and othor
|ntornat|ona| organ|zat|ons boon wast|ng monoy whon thoy
prov|dod oconom|cs tra|n|ng coursos tor dovo|op|ng-country
govornmont ott|c|a|s and scho|arsh|ps tor br|ght young th|ngs
trom thoso countr|os to study |n Amor|can or 3r|t|sh
un|vors|t|os ronownod tor tho|r oxco||onco |n oconom|cs?
A poss|b|o oxp|anat|on ot tho East As|an oxpor|onco |s
that what |s noodod |n thoso who aro runn|ng oconom|c
po||cy |s gonora| |nto|||gonco, rathor than spoc|a||st
know|odgo |n oconom|cs. lt may bo that tho oconom|cs
taught |n un|vors|ty c|assrooms |s too dotachod trom roa||ty
to bo ot pract|ca| uso. lt th|s |s tho caso, tho govornmont w|||
acqu|ro moro ab|o oconom|c po||cy-makors by rocru|t|ng
thoso who havo stud|od what happons to bo tho most
prost|g|ous subjoct |n tho country (wh|ch cou|d bo |aw,
ong|noor|ng or ovoo oconom|cs, dopond|ng on tho country),
rathor than a subjoct that |s not|ona||y most ro|ovant tor
oconom|c po||cy-mak|ng (that |s, oconom|cs) (soo 7blog
17). 1h|s conjocturo |s |nd|roct|y supportod by tho tact that
a|though oconom|c po||c|os |n many lat|n Amor|can
countr|os havo boon run by oconom|sts, and vory h|gh|y
tra|nod onos at that (tho 'Ch|cago 3oys' ot Gonora| l|nochot
bo|ng tho most prom|nont oxamp|o), tho|r oconom|c
portormanco has boon much |ntor|or to that ot tho East
As|an countr|os. lnd|a and lak|stan a|so havo many wor|d-
c|ass oconom|sts, but tho|r oconom|c portormanco |s no
match tor tho East As|an ono.
1ohn Konnoth Ga|bra|th, tho w|tt|ost oconom|st |n h|story,
was corta|n|y oxaggorat|ng whon ho sa|d that 'oconom|cs |s
oxtromo|y usotu| as a torm ot omp|oymont tor oconom|sts',
but ho may not havo boon tar ott tho mark. Econom|cs doos
not soom vory ro|ovant tor oconom|c managomont |n tho roa|
wor|d.
Actua||y, |t |s worso than that. 1horo aro roasons to th|nk
that oconom|cs may bo pos|t|vo|y harmtu| tor tho oconomy.
How come nobody could |oresee It7

ln lovombor 2008, Ouoon E||zaboth ll v|s|tod tho london
3choo| ot Econom|cs, wh|ch has ono ot tho most h|gh|y
rogardod oconom|cs dopartmonts |n tho wor|d. Whon g|von
a prosontat|on by ono ot tho protossors thoro, lrotossor
lu|s Gar|cano, on tho t|nanc|a| cr|s|s that had just ongu|tod
tho wor|d, tho Ouoon askod: '|ow como nobody cou|d
torosoo |t?' |or Vajosty askod a quost|on that had boon |n
most poop|o's m|nds s|nco tho outbroak ot tho cr|s|s |n tho
autumn ot 2008.
0ur|ng tho |ast coup|o ot docados, wo woro ropoatod|y
to|d by a|| thoso h|gh|y qua||t|od oxports - trom lobo| lr|zo-
w|nn|ng oconom|sts through wor|d-c|ass t|nanc|a| rogu|ators
to tr|ghton|ng|y br|ght young |nvostmont bankors w|th
oconom|cs dogroos trom tho wor|d's top un|vors|t|os - that
a|| was wo|| w|th tho wor|d oconomy. Wo woro to|d that
oconom|sts had t|na||y tound tho mag|c tormu|a that a||owod
our oconom|os to grow rap|d|y w|th |ow |nt|at|on. loop|o
ta|kod ot tho 'Go|d||ocks' oconomy, |n wh|ch th|ngs aro just
r|ght - not too hot, not too co|d. A|an Groonspan, tho tormor
cha|rman ot tho |odora| losorvo 3oard, who pros|dod ovor
tho wor|d's b|ggost and (t|nanc|a||y and |doo|og|ca||y) most
|nt|uont|a| oconomy tor two docados, was ha||od as a
'maostro', as tho t|t|o ot tho book on h|m by tho journa||st
3ob Woodward ot Watorgato tamo had |t. ||s succossor,
3on 3ornanko, ta|kod ot a 'groat modorat|on', wh|ch camo
w|th tho tam|ng ot |nt|at|on and d|sappoaranco ot v|o|ont
oconom|c cyc|os (soo 7blog 0).
3o |t was a roa| puzz|o to most poop|o, |nc|ud|ng tho
Ouoon, that th|ngs cou|d go so spoctacu|ar|y wrong |n a
wor|d whoro c|ovor oconom|sts woro supposod to havo
sortod out a|| tho major prob|oms. |ow cou|d a|| thoso c|ovor
guys w|th dogroos trom somo ot tho bost un|vors|t|os, w|th
hypor-mathomat|ca| oquat|ons com|ng out ot tho|r oars, havo
boon so wrong?
loarn|ng ot tho sovoro|gn's concorn, tho 3r|t|sh Acadomy
convonod a moot|ng ot somo ot tho top oconom|sts trom
acadom|a, tho t|nanc|a| soctor and tho govornmont on 17
1uno 2000. 1ho rosu|t ot th|s moot|ng was convoyod to tho
Ouoon |n a |ottor, datod 22 1u|y 2000, wr|tton by lrotossor
1|m 3os|oy, a prom|nont oconom|cs protossor at tho l3E,
and lrotossor lotor |onnossy, a ronownod h|stor|an ot
3r|t|sh govornmont at Ouoon Vary, Un|vors|ty ot london.
2
ln tho |ottor, lrotossors 3os|oy and |onnossy sa|d that
|nd|v|dua| oconom|sts woro compotont and 'do|ng tho|r job
propor|y on |ts own mor|t, but that thoy |ost s|ght ot tho wood
tor tho troos' |n tho run-up to tho cr|s|s. 1horo was, accord|ng
to thom, 'a ta||uro ot tho co||oct|vo |mag|nat|on ot many br|ght
poop|o, both |n th|s country and |ntornat|ona||y, to undorstand
tho r|sks to tho systom as a who|o'.
A ta||uro ot tho co||octlvo lmoglootloo? |adn't most
oconom|sts, |nc|ud|ng most (a|though not a||) ot thoso who
woro at tho 3r|t|sh Acadomy moot|ng, to|d tho rost ot us that
troo markots work bost bocauso wo aro rotlooo| and
loolvlooo|lstlc and thus know what wo want tor ourso|vos
(and no ono o|so, poss|b|y oxcopt tor our |mmod|ato
tam|||os) and how to got |t most ott|c|ont|y? (5oo 7blogs 5
ooo 10.) l don't romombor soo|ng much d|scuss|on |n
oconom|cs about |mag|nat|on, ospoc|a||y ot tho co||oct|vo
k|nd, and l'vo boon |n tho oconom|cs protoss|on tor tho |ast
two docados. l am not ovon suro whothor a concopt ||ko
|mag|nat|on, co||oct|vo or othorw|so, has a p|aco |n tho
dom|nant rat|ona||st d|scourso |n oconom|cs. 1ho groat and
tho good ot tho oconom|cs wor|d ot 3r|ta|n, thon, woro
bas|ca||y adm|tt|ng that thoy don't know what has gono
wrong.
3ut th|s undorstatos |t. Econom|sts aro not somo |nnocont
tochn|c|ans who d|d a docont job w|th|n tho narrow cont|nos
ot tho|r oxport|so unt|| thoy woro co||oct|vo|y wrong-tootod by
a onco-|n-a-contury d|sastor that no ono cou|d havo
prod|ctod.
Ovor tho |ast throo docados, oconom|sts p|ayod an
|mportant ro|o |n croat|ng tho cond|t|ons ot tho 2008 cr|s|s
(and dozons ot sma||or t|nanc|a| cr|sos that camo botoro |t
s|nco tho oar|y 1080s, such as tho 1082 1h|rd Wor|d dobt
cr|s|s, tho 100b Vox|can poso cr|s|s, tho 1007 As|an cr|s|s
and tho 1008 luss|an cr|s|s) by prov|d|ng thoorot|ca|
just|t|cat|ons tor t|nanc|a| dorogu|at|on and tho unrostra|nod
pursu|t ot short-torm prot|ts. Voro broad|y, thoy advancod
thoor|os that just|t|od tho po||c|os that havo |od to s|owor
growth, h|ghor |noqua||ty, ho|ghtonod job |nsocur|ty and moro
troquont t|nanc|a| cr|sos that havo doggod tho wor|d |n tho
|ast throo docados (soo 7blogs 2, 0, 18 ooo 21). On top ot
that, thoy pushod tor po||c|os that woakonod tho prospocts
tor |ong-torm dovo|opmont |n dovo|op|ng countr|os (soo
7blogs 7 ooo 11). ln tho r|ch countr|os, thoso oconom|sts
oncouragod poop|o to ovorost|mato tho powor ot now
tochno|og|os (soo 7blog 4), mado poop|o's ||vos moro and
moro unstab|o (soo 7blog 0), mado thom |gnoro tho |oss ot
nat|ona| contro| ovor tho oconomy (soo 7blog 8) and
rondorod thom comp|acont about do-|ndustr|a||zat|on (soo
7blog 0). Voroovor, thoy supp||od argumonts that |ns|st that
a|| thoso oconom|c outcomos that many poop|o t|nd
objoct|onab|o |n th|s wor|d - such as r|s|ng |noqua||ty (soo
7blog 18), sky-h|gh oxocut|vo sa|ar|os (soo 7blog 14) or
oxtromo povorty |n poor countr|os (soo 7blog 8) - aro roa||y
|nov|tab|o, g|von (so|t|sh and rat|ona|) human naturo and tho
nood to roward poop|o accord|ng to tho|r product|vo
contr|but|ons.
ln othor words, oconom|cs has boon worso than
|rro|ovant. Econom|cs, as |t has boon pract|sod |n tho |ast
throo docados, has boon pos|t|vo|y harmtu| tor most poop|o.
How about the other' economIsts7

lt oconom|cs |s as bad as l say |t |s, what am l do|ng work|ng
as an oconom|st? lt |rro|ovanco |s tho most bon|gn soc|a|
consoquonco ot my protoss|ona| act|ons and harm tho moro
||ko|y ono, shou|d l not chango my protoss|on to somoth|ng
moro soc|a||y bonot|c|a|, such as o|octron|c ong|noor|ng or
p|umb|ng?
l st|ck to oconom|cs bocauso l bo||ovo that |t doos not
havo to bo uso|oss or harmtu|. Attor a||, throughout th|s book l
havo myso|t usod oconom|cs |n try|ng to oxp|a|n how
cap|ta||sm roa||y works. lt |s a part|cu|ar typo ot oconom|cs -
that |s, troo-markot oconom|cs as |t has boon pract|sod |n
tho |ast tow docados - that |s dangorous. 1hroughout
h|story, thoro havo boon many schoo|s ot oconom|c th|nk|ng
that havo ho|pod us bottor manago and dovo|op our
oconom|os.
1o start trom whoro wo aro today, what has savod tho
wor|d oconomy trom a tota| mo|tdown |n tho autumn ot 2008
|s tho oconom|cs ot 1ohn Vaynard Koynos, Char|os
K|nd|oborgor (tho author ot tho c|ass|c book on t|nanc|a|
cr|sos, Voolos, Poolcs, ooo Crosbos) and |yman V|nsky
(tho groat|y undorva|uod Amor|can scho|ar ot t|nanc|a|
cr|sos). 1ho wor|d oconomy has not doscondod |nto a rorun
ot tho 1020 Groat 0opross|on bocauso wo absorbod tho|r
|ns|ghts and ba||od out koy t|nanc|a| |nst|tut|ons (a|though wo
havo not propor|y pun|shod tho bankors rospons|b|o tor tho
moss or rotormod tho |ndustry yot), |ncroasod govornmont
spond|ng, prov|dod strongor dopos|t |nsuranco, ma|nta|nod
tho wo|taro stato (that props up tho |ncomos ot thoso who
aro unomp|oyod) and t|ushod tho t|nanc|a| markot w|th
||qu|d|ty on an unprocodontod sca|o. As oxp|a|nod |n oar||or
7blogs, many ot thoso act|ons that havo savod tho wor|d aro
onos opposod by troo-markot oconom|sts ot oar||or
gonorat|ons and ot today.
Evon though thoy woro not tra|nod as oconom|sts, tho
oconom|c ott|c|a|s ot East As|a know somo oconom|cs.
|owovor, ospoc|a||y unt|| tho 1070s, tho oconom|cs thoy
know was most|y not ot tho troo-markot var|oty. 1ho
oconom|cs thoy happonod to know was tho oconom|cs ot
Kar| Varx, |r|odr|ch l|st, 1osoph 3chumpotor, l|cho|as
Ka|dor and A|bort ||rschman. Ot courso, thoso oconom|sts
||vod |n d|ttoront t|mos, contondod w|th d|ttoront prob|oms
and had rad|ca||y d|ttor|ng po||t|ca| v|ows (rang|ng trom tho
vory r|ght-w|ng l|st to vory |ott-w|ng Varx). |owovor, thoro
was a commona||ty botwoon tho|r oconom|cs. lt was tho
rocogn|t|on that cap|ta||sm dovo|ops through |ong-torm
|nvostmonts and tochno|og|ca| |nnovat|ons that transtorm tho
product|vo structuro, and not moro|y an oxpans|on ot ox|st|ng
structuros, ||ko |nt|at|ng a ba||oon. Vany ot tho th|ngs that tho
East As|an govornmont ott|c|a|s d|d |n tho m|rac|o yoars -
protoct|ng |ntant |ndustr|os, torcotu||y mob|||z|ng rosourcos
away trom tochno|og|ca||y stagnant agr|cu|turo |nto tho
dynam|c |ndustr|a| soctor and oxp|o|t|ng what ||rschman
ca||od tho '||nkagos' across d|ttoront soctors - dor|vo trom
such oconom|c v|ows, rathor than tho troo-markot v|ow (soo
7blog 7). |ad tho East As|an countr|os, and |ndood most ot
tho r|ch countr|os |n Europo and lorth Amor|ca botoro thom,
run tho|r oconom|os accord|ng to tho pr|nc|p|os ot troo-
markot oconom|cs, thoy wou|d not havo dovo|opod tho|r
oconom|os |n tho way thoy havo.
1ho oconom|cs ot |orbort 3|mon and h|s to||owors has
roa||y changod tho way wo undorstand modorn t|rms and,
moro broad|y, tho modorn oconomy. lt ho|ps us broak away
trom tho myth that our oconomy |s oxc|us|vo|y popu|atod by
rat|ona| so|t-sookors |ntoract|ng through tho markot
mochan|sm. Whon wo undorstand that tho modorn oconomy
|s popu|atod by poop|o w|th ||m|tod rat|ona||ty and comp|ox
mot|vos, who aro organ|zod |n a comp|ox way, comb|n|ng
markots, (pub||c and pr|vato) buroaucrac|os and notworks,
wo bog|n to undorstand that our oconomy cannot bo run
accord|ng to troo-markot oconom|cs. Whon wo moro c|oso|y
obsorvo tho moro succosstu| t|rms, govornmonts and
countr|os, wo soo thoy aro tho onos that havo th|s k|nd ot
nuancod v|ow ot cap|ta||sm, not tho s|mp||st|c troo-markot
v|ow.
Evon w|th|n tho dom|nant schoo| ot oconom|cs, that |s, tho
noo-c|ass|ca| schoo|, wh|ch prov|dos much ot tho toundat|on
tor troo-markot oconom|cs, thoro aro thoor|os that oxp|a|n
why troo markots aro ||ko|y to produco sub-opt|ma| rosu|ts.
1hoso aro thoor|os ot 'markot ta||uro' or 'wo|taro
oconom|cs', t|rst proposod by tho oar|y twont|oth-contury
Cambr|dgo protossor Arthur l|gou, and |ator dovo|opod by
modorn-day oconom|sts such as Amartya 3on, W||||am
3aumo| and 1osoph 3t|g||tz, to namo just a tow ot tho most
|mportant onos.
|roo-markot oconom|sts, ot courso, havo o|thor |gnorod
thoso othor oconom|sts or, worso, d|sm|ssod thom as ta|so
prophots. 1hoso days, tow ot tho abovo-mont|onod
oconom|sts, oxcopt thoso bo|ong|ng to tho markot-ta||uro
schoo|, aro ovon mont|onod |n tho |oad|ng oconom|cs
toxtbooks, |ot a|ono propor|y taught. 3ut tho ovonts that havo
boon unto|d|ng tor tho |ast throo docados havo shown that
wo actua||y havo a |ot moro pos|t|vo th|ngs to |oarn trom
thoso othor oconom|sts than trom troo-markot oconom|sts.
1ho ro|at|vo succossos and ta||uros ot d|ttoront t|rms,
oconom|os and po||c|os dur|ng th|s por|od suggost that tho
v|ows ot thoso oconom|sts who aro now |gnorod, or ovon
torgotton, havo |mportant |ossons to toach us. Econom|cs
doos not havo to bo uso|oss or harmtu|. Wo just havo to
|oarn r|ght k|nds ot oconom|cs.
ConcIuaion
Eow to robuiId tho worId
oconomy

1ho daunt|ng task ahoad ot us |s to comp|oto|y robu||d tho
wor|d oconomy. 1h|ngs aro not as bad as thoy woro dur|ng
tho Groat 0opross|on on|y bocauso govornmonts havo
proppod up domand through hugo dot|c|t spond|ng and
unprocodontod oas|ng ot monoy supp|y (tho 3ank ot
Eng|and has novor had a |owor |ntorost rato s|nco |t was
toundod |n 1044), wh||o provont|ng bank runs through
oxpans|on ot dopos|t |nsuranco and tho ba|||ng-out ot many
t|nanc|a| t|rms. W|thout thoso moasuros, and tho substant|a|
automat|c |ncroaso |n wo|taro spond|ng (o.g., unomp|oymont
bonot|t), wo cou|d bo ||v|ng through a much worso oconom|c
cr|s|s than that ot tho 1080s.
1horo aro poop|o who bo||ovo tho curront|y dom|nant troo-
markot systom to bo tundamonta||y sound. 1hoy assumo that
t|nkor|ng on tho marg|ns w||| bo a sutt|c|ont so|ut|on to our
cond|t|on - a b|t moro transparoncy horo, a tad moro
rogu|at|on thoro, and a mod|cum ot rostra|nts on oxocut|vo
pay ovor thoro. |owovor, as l havo tr|od to show, tho
tundamonta| thoorot|ca| and omp|r|ca| assumpt|ons boh|nd
troo-markot oconom|cs aro h|gh|y quost|onab|o. loth|ng
short ot a tota| ro-onv|s|on|ng ot tho way wo organ|zo our
oconomy and soc|oty w||| do.
3o what |s to bo dono?
1h|s |s not a p|aco to spo|| out a|| tho dota||od proposa|s
roqu|rod tor tho roconstruct|on ot tho wor|d oconomy, many
ot wh|ch havo boon d|scussod |n tho torogo|ng 28 7blogs
anyway. |oro l w||| on|y out||no somo prloclp|os - o|ght ot
thom - that l th|nk wo nood to havo |n m|nd |n rodos|gn|ng
our oconom|c systom.

1o bog|n w|th: paraphras|ng what W|nston Church||| onco
sa|d about domocracy, |ot mo rostato my oar||or pos|t|on
that coplto|lsm ls tbo worst ocooomlc systom oxcopt or o||
tbo otbors. Vy cr|t|c|sm |s ot troo-markot cap|ta||sm, and not
a|| k|nds ot cap|ta||sm.
1ho prot|t mot|vo |s st||| tho most powortu| and ottoct|vo
tuo| to powor our oconomy and wo shou|d oxp|o|t |t to tho tu||.
3ut wo must romombor that |ott|ng |t |ooso w|thout any
rostra|nt |s not tho bost way to mako tho most ot |t, as wo
havo |oarnod at groat cost ovor tho |ast throo docados.
l|kow|so, tho markot |s an oxcopt|ona||y ottoct|vo
mochan|sm tor coord|nat|ng comp|ox oconom|c act|v|t|os
across numorous oconom|c agonts, but |t |s no moro than
that - a mochan|sm, a mach|no. And ||ko a|| mach|nos, |t
noods carotu| rogu|at|on and stoor|ng. ln tho samo way that a
car can bo usod to k||| poop|o whon dr|von by a drunkon
dr|vor, or to savo ||vos whon |t ho|ps us do||vor an omorgoncy
pat|ont to hosp|ta| |n t|mo, tho markot can do wondortu|
th|ngs but a|so dop|orab|o onos. 1ho samo car can bo mado
bottor by putt|ng |n |mprovod brakos, moro powortu| ong|nos
or moro ott|c|ont tuo|, and tho samo markot can bo mado to
portorm bottor through appropr|ato changos to tho att|tudos
ot tho part|c|pants, tho|r mot|vos and tho ru|os that govorn |t.
1horo aro d|ttoront ways to organ|zo cap|ta||sm. |roo-
markot cap|ta||sm |s on|y ono ot thom - and not a vory good
ono at that. 1ho |ast throo docados havo shown that, contrary
to tho c|a|ms ot |ts propononts, |t s|ows down tho oconomy,
|ncroasos |noqua||ty and |nsocur|ty, and |oads to moro
troquont (and somot|mos mass|vo) t|nanc|a| crashos.
1horo |s no ono |doa| modo|. Amor|can cap|ta||sm |s vory
d|ttoront trom 3cand|nav|an cap|ta||sm, wh|ch |n turn d|ttors
trom tho Gorman or |ronch var|ot|os, not to spoak ot tho
1apanoso torm. |or oxamp|o, countr|os wh|ch t|nd
Amor|can-sty|o oconom|c |noqua||ty unaccoptab|o (wh|ch
somo may not) may roduco |t through a wo|taro stato
t|nancod by h|gh progross|vo |ncomo taxos (as |n 3wodon)
or through rostr|ct|ons on monoy-mak|ng opportun|t|os
thomso|vos by, say, mak|ng tho opon|ng ot |argo rota|| storos
d|tt|cu|t (as |n 1apan). 1horo |s no s|mp|o way to chooso
botwoon tho two, ovon though l porsona||y th|nk that tho
3wod|sh modo| |s bottor than tho 1apanoso ono, at |oast |n
th|s rospoct.
3o cap|ta||sm, yos, but wo nood to ond our |ovo atta|r w|th
unrostra|nod troo-markot cap|ta||sm, wh|ch has sorvod
human|ty so poor|y, and |nsta|| a bottor-rogu|atod var|oty.
What that var|oty wou|d bo doponds on our goa|s, va|uos
and bo||ots.
3ocond: wo sboo|o bol|o oor oow ocooomlc systom oo tbo
rocogoltloo tbot bomoo rotlooo|lty ls sovoro|y |lmltoo. 1ho
2008 cr|s|s has rovoa|od how tho comp|ox|ty ot tho wor|d wo
havo croatod, ospoc|a||y |n tho sphoro ot t|nanco, has vast|y
outpacod our ab|||ty to undorstand and contro| |t. Our
oconom|c systom has had a m|ghty ta|| bocauso |t was
row|rod to||ow|ng tho adv|co ot oconom|sts who bo||ovo tho
human ab|||ty to doa| w|th comp|ox|ty |s ossont|a||y un||m|tod.
1ho now wor|d shou|d bo tormod w|th a c|oar rocogn|t|on
that wo havo on|y ||m|tod powors ot objoct|vo roason|ng. lt |s
suggostod that wo can provont anothor major t|nanc|a| cr|s|s
by onhanc|ng transparoncy. 1h|s |s wrong. 1ho tundamonta|
prob|om |s not our |ack ot |ntormat|on but our ||m|tod ab|||ty
to procoss |t. lndood, |t |ack ot transparoncy was tho
prob|om, tho 3cand|nav|an countr|os - tamous|y transparont
- wou|d not havo oxpor|oncod a t|nanc|a| cr|s|s |n tho oar|y
1000s. As |ong as wo cont|nuo to a||ow un||m|tod 't|nanc|a|
|nnovat|ons', our ab|||ty to rogu|ato w||| a|ways bo outstr|ppod
by our ab|||ty to |nnovato.
lt wo aro roa||y sor|ous about provont|ng anothor cr|s|s
||ko tho 2008 mo|tdown, wo shou|d s|mp|y ban comp|ox
t|nanc|a| |nstrumonts, un|oss thoy can bo unamb|guous|y
shown to bonot|t soc|oty lo tbo |oog roo. 1h|s |doa w||| bo
d|sm|ssod by somo as outragoous. lt's not. Wo do that a||
tho t|mo w|th othor products - th|nk about tho satoty
standards tor tood, drugs, automob||os and aorop|anos.
What wou|d rosu|t |s an approva| procoss whoroby tho
|mpact ot oach now t|nanc|a| |nstrumont, concoctod by
'rockot sc|ont|sts' w|th|n t|nanc|a| t|rms, |s assossod |n torms
ot r|sks and rowards to our systom as a who|o |n tho |ong
run, and not just |n torms ot short-torm prot|ts tor thoso t|rms.
1h|rd: wh||o acknow|odg|ng that wo aro not so|t|oss ango|s,
wo sboo|o bol|o o systom tbot brlogs oot tbo bost, rotbor
tboo worst, lo poop|o.
|roo-markot |doo|ogy |s bu||t on tho bo||ot that poop|o
won't do anyth|ng 'good' un|oss thoy aro pa|d tor |t or
pun|shod tor not do|ng |t. 1h|s bo||ot |s thon app||od
asymmotr|ca||y and roconco|vod as tho v|ow that r|ch poop|o
nood to bo mot|vatod to work by turthor r|chos, wh||o poor
poop|o must toar povorty tor tho|r mot|vat|on.
Vator|a| so|t-|ntorost |s a powortu| mot|vo. 1ho commun|st
systom turnod out to bo unv|ab|o bocauso |t |gnorod, or
rathor wantod to dony, th|s human dr|vor. 1h|s doos not,
howovor, provo that mator|a| so|t-|ntorost |s our on|y mot|vo.
loop|o aro oot as much propo||od by mator|a| so|t-|ntorost
as troo-markot toxtbooks c|a|m. lt tho roa| wor|d woro as tu||
ot rat|ona| so|t-sook|ng agonts as tho ono dop|ctod |n thoso
toxtbooks, |t wou|d co||apso undor tho wo|ght ot cont|nuous
choat|ng, mon|tor|ng, pun|shmont and barga|n|ng.
Voroovor, by g|or|ty|ng tho pursu|t ot mator|a| so|t-|ntorost
by |nd|v|dua|s and corporat|ons, wo havo croatod a wor|d
whoro mator|a| onr|chmont abso|vos |nd|v|dua|s and
corporat|ons ot othor rospons|b|||t|os to soc|oty. ln tho
procoss, wo havo a||owod our bankors and tund managors,
d|roct|y and |nd|roct|y, to dostroy jobs, shut down tactor|os,
damago our onv|ronmont and ru|n tho t|nanc|a| systom |tso|t
|n tho pursu|t ot |nd|v|dua| onr|chmont.
lt wo aro to provont th|s k|nd ot th|ng happon|ng aga|n, wo
shou|d bu||d a systom whoro mator|a| onr|chmont |s takon
sor|ous|y but |s not a||owod to bocomo tho on|y goa|.
Organ|zat|ons - bo thoy corporat|ons or govornmont
dopartmonts - shou|d bo dos|gnod to roward trust,
so||dar|ty, honosty and cooporat|on among tho|r mombors.
1ho t|nanc|a| systom noods to bo rotormod to roduco tho
|nt|uonco ot short-torm sharoho|dors so that compan|os can
attord to pursuo goa|s othor than short-torm prot|t
max|m|zat|on. Wo shou|d bottor roward bohav|our w|th
pub||c bonot|ts (o.g., roduc|ng onorgy consumpt|on,
|nvostmont |n tra|n|ng), not s|mp|y through govornmont
subs|d|os but a|so by bostow|ng |t w|th a h|ghor soc|a|
status.
1h|s |s not just a mora| argumont. lt |s a|so an appoa| to
on||ghtonod so|t-|ntorost. 3y |ott|ng short-torm so|t-|ntorost
ru|o ovoryth|ng wo r|sk dostroy|ng tho ont|ro systom, wh|ch
sorvos no ono's |ntorost |n tho |ong run.
|ourth: wo sboo|o stop bo|lovlog tbot poop|o oro o|woys
polo wbot tboy oosorvo`.
loop|o trom poor countr|os aro, |nd|v|dua||y, otton moro
product|vo and ontropronour|a| than tho|r countorparts |n r|ch
countr|os. 3hou|d thoy bo g|von oqua| opportun|ty through
troo |mm|grat|on, thoso poop|o can, and w|||, rop|aco tho
bu|k ot tho worktorco |n r|ch countr|os, ovon though that
wou|d bo po||t|ca||y unaccoptab|o and undos|rab|o. 1hus
soon, |t |s tho nat|ona| oconom|c systoms and |mm|grat|on
contro| ot tho r|ch countr|os, rathor than tho|r |ack ot porsona|
qua||t|os, that koop poor poop|o |n poor countr|os poor.
Emphas|z|ng that many poop|o stay poor bocauso thoy
do not havo truo oqua| opportun|ty |s not to say that thoy
dosorvo to roma|n poor |nsotar as thoy havo had oqua|
opportun|ty. Un|oss thoro |s somo oqua||z|ng |n outcomo,
ospoc|a||y (a|though not oxc|us|vo|y) so that a|| ch||dron can
havo moro than m|n|mum nutr|t|on and paronta| attont|on, tho
oqua||ty ot opportun|ty prov|dod by tho markot mochan|sm
w||| not guarantoo tru|y ta|r compot|t|on. lt w||| bo ||ko a raco
whoro no ono has a hoad start but somo poop|o run w|th
wo|ghts on tho|r |ogs.
At tho othor ond ot tho spoctrum, oxocut|vo pay |n tho U3
has gono |nto tho stratosphoro |n tho |ast tow docados. U3
managors havo |ncroasod tho|r ro|at|vo pay by at |oast ton
t|mos botwoon tho 10b0s and today (an avorago CEO usod
to got pa|d th|rty-t|vo t|mos an avorago workor's sa|ary thon,
wh||o today ho |s pa|d 800-400 t|mos that), but that |s not
bocauso tho|r product|v|ty has r|son ton t|mos tastor than that
ot tho|r workors. Evon oxc|ud|ng stock opt|ons, U3
managors aro pa|d two and a ha|t t|mos what tho|r 0utch
countorparts aro or tour t|mos what tho|r 1apanoso
countorparts aro, dosp|to no apparont supor|or|ty |n tho|r
product|v|ty.
On|y whon wo aro troo to quost|on tho hand ot cards that
tho markot has doa|t us w||| wo bo ab|o to t|nd ways to
ostab||sh a moro just soc|oty. Wo can, and shou|d, chango
tho ru|os ot tho stock markot and tho corporato govornanco
systom |n ordor to rostra|n oxcoss|vo oxocut|vo pay |n
||m|tod ||ab|||ty compan|os. Wo shou|d not on|y prov|do oqua|
opportun|ty but a|so oqua||zo, to an oxtont, tho start|ng po|nts
tor a|| ch||dron tor a tru|y mor|tocrat|c soc|oty. loop|o shou|d
bo g|von a roa|, not suport|c|a|, socond chanco through
unomp|oymont bonot|ts and pub||c|y subs|d|zod rotra|n|ng.
loor poop|o |n poor countr|os shou|d not bo b|amod tor tho|r
povorty, whon tho b|ggor oxp|anat|ons ||o |n tho povorty ot
tho|r nat|ona| oconom|c systoms and |mm|grat|on contro| |n
tho r|ch countr|os. Varkot outcomos aro not 'natura|'
phonomona. 1hoy can bo changod.
||tth: wo oooo to toko moklog tblogs` moro sorloos|y. 1ho
post-|ndustr|a| know|odgo oconomy |s a myth. 1ho
manutactur|ng soctor roma|ns v|ta|.
Espoc|a||y |n tho U3 and tho UK, but a|so |n many othor
countr|os, |ndustr|a| doc||no |n tho |ast tow docados has
boon troatod as an |nov|tab|||ty ot a post-|ndustr|a| ago, |t not
act|vo|y wo|comod as a s|gn ot post-|ndustr|a| succoss.
3ut wo aro mator|a| bo|ngs and cannot ||vo on |doas,
howovor groat tho know|odgo oconomy may sound.
Voroovor, wo havo a|ways ||vod |n a know|odgo oconomy |n
tho sonso that |t has a|ways boon a command ovor supor|or
know|odgo, rathor than tho phys|ca| naturo ot act|v|t|os, that
has u|t|mato|y doc|dod wh|ch country |s r|ch or poor. lndood,
most soc|ot|os aro st||| mak|ng moro and moro th|ngs. lt |s
ma|n|y bocauso thoso who mako th|ngs havo bocomo so
much moro product|vo that th|ngs havo bocomo choapor, |n
ro|at|vo torms, than sorv|cos that wo th|nk wo don't consumo
as many th|ngs as botoro.
Un|oss you aro a t|ny tax havon (a status that |s go|ng to
bocomo moro and moro d|tt|cu|t to ma|nta|n, to||ow|ng tho
2008 cr|s|s), such as luxomburg and Vonaco, or a sma||
country t|oat|ng on o||, such as 3runo| or Kuwa|t, you havo to
bocomo bottor at mak|ng th|ngs |n ordor to ra|so your ||v|ng
standard. 3w|tzor|and and 3|ngaporo, wh|ch aro otton toutod
as post-|ndustr|a| succoss stor|os, aro |n tact two ot tho most
|ndustr|a||zod oconom|os |n tho wor|d. Voroovor, most h|gh-
va|uo sorv|cos aro dopondont (somot|mos ovon paras|t|c)
on tho manutactur|ng soctor (o.g., t|nanco, tochn|ca|
consu|t|ng). And sorv|cos aro not vory tradab|o, so an ovor|y
|argo sorv|co soctor makos your ba|anco ot paymonts
s|tuat|on moro procar|ous and thus your oconom|c growth
moro d|tt|cu|t to susta|n.
1ho myth ot tho post-|ndustr|a| know|odgo oconomy has
a|so m|sd|roctod our |nvostmonts. lt has oncouragod
oxcoss|vo omphas|s on, tor oxamp|o, torma| oducat|on,
whoso |mpact on oconom|c growth turns out to bo h|gh|y
comp|ox and uncorta|n, and on tho sproad ot tho |ntornot,
whoso product|v|ty |mpacts aro actua||y qu|to modost.
lnvostmont |n 'bor|ng' th|ngs ||ko mach|nory, |ntrastructuro
and workor tra|n|ng noods to bo oncouragod through
appropr|ato changos |n tax ru|os (o.g., acco|oratod
doproc|at|on tor mach|nory), subs|d|os (o.g., to workor
tra|n|ng) or pub||c |nvostmont (o.g., rod|roct|on |nto
|ntrastructura| dovo|opmont). lndustr|a| po||cy noods to bo
rodos|gnod to promoto koy manutactur|ng soctors w|th h|gh
scopo tor product|v|ty growth.
3|xth: wo oooo to strlko o bottor bo|ooco botwooo loooco
ooo roo|` octlvltlos.
A product|vo modorn oconomy cannot ox|st w|thout a
hoa|thy t|nanc|a| soctor. ||nanco p|ays, among othor th|ngs,
tho cruc|a| ro|o ot roso|v|ng tho m|smatch botwoon tho act ot
|nvostmont and tho boar|ng ot |ts tru|ts. 3y '||qu|d|z|ng'
phys|ca| assots whoso charactor|st|cs cannot bo changod
qu|ck|y, t|nanco a|so ho|ps us to roa||ocato rosourcos
qu|ck|y.
|owovor, |n tho |ast throo docados, t|nanco has bocomo
tho provorb|a| ta|| that wags tho dog. ||nanc|a| ||bora||zat|on
has mado |t oas|or tor monoy to movo around, ovon across
nat|ona| bordors, a||ow|ng t|nanc|a| |nvostors to bocomo
moro |mpat|ont tor |nstant rosu|ts. As a consoquonco, both
corporat|ons and govornmonts havo boon torcod to
|mp|omont po||c|os that produco qu|ck prot|ts, rogard|oss ot
tho|r |ong-torm |mp||cat|ons. ||nanc|a| |nvostors havo ut|||zod
tho|r groator mob|||ty as a barga|n|ng ch|p |n oxtract|ng a
b|ggor sharo ot nat|ona| |ncomo. Eas|or movomont ot
t|nanco has a|so rosu|tod |n groator t|nanc|a| |nstab|||ty and
groator job |nsocur|ty (wh|ch |s noodod tor do||vor|ng qu|ck
prot|ts).
||nanco noods to bo s|owod down. lot to put us back to
tho days ot dobtors' pr|son and sma|| workshops t|nancod by
porsona| sav|ngs. 3ut, un|oss wo vast|y roduco tho spood
gap botwoon t|nanco and tho roa| oconomy, wo w||| not
oncourago |ong-torm |nvostmont and roa| growth, bocauso
product|vo |nvostmonts otton tako a |ong t|mo to boar tru|t. lt
took 1apan torty yoars ot protoct|on and govornmont
subs|d|os botoro |ts automob||o |ndustry cou|d bo an
|ntornat|ona| succoss, ovon at tho |owor ond ot tho markot. lt
took lok|a sovontoon yoars botoro |t mado any prot|t |n tho
o|octron|cs bus|noss, whoro |t |s ono ot tho wor|d |oadors
today. |owovor, to||ow|ng tho |ncroas|ng dogroo ot t|nanc|a|
dorogu|at|on, tho wor|d has oporatod w|th |ncroas|ng|y
shortor t|mo hor|zons.
||nanc|a| transact|on taxos, rostr|ct|ons on cross-bordor
movomont ot cap|ta| (ospoc|a||y movomonts |n and out ot
dovo|op|ng countr|os), groator rostr|ct|ons on morgors and
acqu|s|t|ons aro somo ot tho moasuros that w||| s|ow down
t|nanco to tho spood at wh|ch |t ho|ps, rathor than woakons
or ovon dora||s, tho roa| oconomy.
3ovonth: govoromoot oooos to bocomo blggor ooo moro
octlvo.
ln tho |ast throo docados, wo havo boon constant|y to|d by
troo-markot |doo|oguos that tho govornmont |s part ot tho
prob|om, not a so|ut|on to tho |||s ot our soc|oty. 1ruo, thoro
aro |nstancos ot govornmont ta||uro - somot|mos
spoctacu|ar onos - but markots and corporat|ons ta|| too
and, moro |mportant|y, thoro aro many oxamp|os ot
|mpross|vo govornmont succoss. 1ho ro|o ot tho govornmont
noods to bo thorough|y roassossod.
1h|s |s not just about cr|s|s managomont, ov|dont s|nco
2008, ovon |n tho avowod|y troo-markot oconom|os, such as
tho U3. lt |s moro about croat|ng a prosporous, oqu|tab|o
and stab|o soc|oty. 0osp|to |ts ||m|tat|ons and dosp|to
numorous attompts to woakon |t, domocrat|c govornmont |s,
at |oast so tar, tho bost voh|c|o wo havo tor roconc|||ng
cont||ct|ng domands |n our soc|oty and, moro |mportant|y,
|mprov|ng our co||oct|vo wo||-bo|ng. ln cons|dor|ng how wo
can mako tho bost out ot tho govornmont, wo nood to
abandon somo ot tho standard 'trado-otts' band|od about by
troo-markot oconom|sts.
Wo havo boon to|d that a b|g govornmont, wh|ch co||octs
h|gh |ncomo taxos trom tho woa|thy and rod|str|butos thom to
tho poor, |s bad tor growth, as |t d|scouragos woa|th croat|on
by tho r|ch and makos |owor c|assos |azy. |owovor, |t hav|ng
a sma|| govornmont |s good tor oconom|c growth, many
dovo|op|ng countr|os that havo such a govornmont shou|d do
wo||. Ev|dont|y th|s |s not tho caso. At tho samo t|mo, tho
3cand|nav|an oxamp|os, whoro a |argo wo|taro stato has
coox|stod w|th (or ovon oncouragod) good growth
portormanco, shou|d a|so oxposo tho ||m|ts to tho bo||ot that
sma||or govornmonts aro a|ways bottor tor growth.
|roo-markot oconom|sts havo a|so to|d us that act|vo (or
|ntrus|vo, as thoy put |t) govornmonts aro bad tor oconom|c
growth. |owovor, contrary to common porcopt|on, v|rtua||y a||
ot today's r|ch countr|os usod govornmont |ntorvont|on to got
r|ch (|t you aro st||| not conv|ncod about th|s po|nt, soo my
oar||or book, Boo 5omorltoos). lt dos|gnod and
|mp|omontod appropr|ato|y, govornmont |ntorvont|on can
|ncroaso oconom|c dynam|sm by augmont|ng tho supp|y ot
|nputs that markots aro bad at supp|y|ng (o.g., l80, workor
tra|n|ng), shar|ng r|sk tor projocts w|th h|gh soc|a| roturns but
|ow pr|vato roturns, and, |n dovo|op|ng countr|os, prov|d|ng
tho spaco |n wh|ch nascont t|rms |n '|ntant' |ndustr|os can
dovo|op tho|r product|vo capab|||t|os.
Wo nood to th|nk moro croat|vo|y how tho govornmont
bocomos an ossont|a| o|omont |n an oconom|c systom
whoro thoro |s moro dynam|sm, groator stab|||ty and moro
accoptab|o |ovo|s ot oqu|ty. 1h|s moans bu||d|ng a bottor
wo|taro stato, a bottor rogu|atory systom (ospoc|a||y tor
t|nanco) and bottor |ndustr|a| po||cy.
E|ghth: tbo wor|o ocooomlc systom oooos to ooolr|y`
ovoor oovo|oplog coootrlos.
3ocauso ot tho constra|nts |mposod by tho|r domocrat|c
chocks, tho troo-markot advocatos |n most r|ch countr|os
havo actua||y tound |t d|tt|cu|t to |mp|omont tu||-b|own troo-
markot rotorm. Evon Vargarot 1hatchor tound |t |mposs|b|o
to cons|dor d|smant||ng tho lat|ona| |oa|th 3orv|co. As a
rosu|t, |t was actua||y dovo|op|ng countr|os that havo boon
tho ma|n subjocts ot troo-markot po||cy oxpor|monts.
Vany pooror countr|os, ospoc|a||y |n Atr|ca and lat|n
Amor|ca, havo boon torcod to adopt troo-markot po||c|os |n
ordor to borrow monoy trom troo-markot-|ov|ng |ntornat|ona|
t|nanc|a| organ|zat|ons (such as tho lV| and tho Wor|d
3ank) and r|ch-country govornmonts (that a|so u|t|mato|y
contro| tho lV| and tho Wor|d 3ank). 1ho woaknoss ot tho|r
domocrac|os moant that troo-markot po||c|os cou|d bo
|mp|omontod moro ruth|oss|y |n dovo|op|ng countr|os, ovon
whon thoy hurt a |ot ot poop|o. 1h|s |s tho u|t|mato |rony ot a||
- poop|o nood|ng most ho|p woro worst h|t. 1h|s tondoncy
was ro|ntorcod by tho strongthon|ng ot g|oba| ru|os ovor tho
|ast coup|o ot docados on what govornmonts can do to
protoct and dovo|op tho|r oconom|os (moro nocossary |n tho
poor countr|os) through tho ostab||shmont and/or
strongthon|ng ot organ|zat|ons such as tho W1O, tho 3l3
and var|ous b||atora| and rog|ona| troo-trado and |nvostmont
agroomonts. 1ho rosu|t has boon a much moro thorough
|mp|omontat|on ot troo-markot po||c|os and much worso
portormanco |n torms ot growth, stab|||ty and |noqua||ty than
|n dovo|opod countr|os.
1ho wor|d oconom|c systom noods to bo comp|oto|y
ovorhau|od |n ordor to prov|do groator 'po||cy spaco' tor tho
dovo|op|ng countr|os to pursuo po||c|os that aro moro
su|tab|o to thom (tho r|ch countr|os havo much groator scopo
to bond, or ovon |gnoro, |ntornat|ona| ru|os). 1ho dovo|op|ng
countr|os nood a moro porm|ss|vo rog|mo rogard|ng tho uso
ot protoct|on|sm, rogu|at|on ot toro|gn |nvostmont and
|nto||octua| proporty r|ghts, among othors. 1hoso aro po||c|os
that tho r|ch countr|os actua||y usod whon thoy woro
dovo|op|ng countr|os thomso|vos. A|| th|s roqu|ros a rotorm
ot tho W1O, abo||t|on and/or rotorm ot ox|st|ng b||atora| trado
and |nvostmont agroomonts botwoon r|ch and poor
countr|os, and changos |n tho po||cy cond|t|ons attachod to
|oans trom |ntornat|ona| t|nanc|a| organ|zat|ons and to
toro|gn a|d trom tho r|ch countr|os.
Ot courso, thoso th|ngs aro 'unta|r|y tavourab|o' to tho
dovo|op|ng countr|os, as somo r|ch countr|os wou|d arguo.
|owovor, dovo|op|ng countr|os a|roady suttor trom so many
d|sadvantagos |n tho |ntornat|ona| systom that thoy nood
thoso broaks to havo a hopo ot catch|ng up.
1ho o|ght pr|nc|p|os a|| d|roct|y go aga|nst tho roco|vod
oconom|c w|sdom ot tho |ast throo docados. 1h|s w||| havo
mado somo roadors uncomtortab|o. 3ut un|oss wo now
abandon tho pr|nc|p|os that havo ta||od us and that aro
cont|nu|ng to ho|d us back, wo w||| moot s|m||ar d|sastors
down tho road. And wo w||| havo dono noth|ng to a||ov|ato
tho cond|t|ons ot b||||ons suttor|ng povorty and |nsocur|ty,
ospoc|a||y, but not oxc|us|vo|y, |n tho dovo|op|ng wor|d. lt |s
t|mo to got uncomtortab|o.
Notoa
1HlNG 1

1 On how tar|tt (hampor|ng troo trado |n goods) was
anothor |mportant |ssuo |n tho mak|ng ot tho
Amor|can C|v|| War, soo my oar||or book Klcklog
Awoy tbo Loooor - Lovo|opmoot 5trotogy lo
llstorlco| Porspoctlvo (Anthom lross, london,
2002), pp. 24-8 and rotoroncos thoroot.
1HlNG 2

1 A. 3m|th, Ao loqolry loto tbo Notoro ooo Coosos o
tbo oo|tb o Notloos (C|arondon lross, Oxtord,
1070), p. 741.
2 l. losonborg and l. 3|rdzo||, low tbo ost Orow
Rlcb (l3 1aur|s 8 Co., london, 1080), p. 200.
8 A. G|yn, Coplto|lsm Uo|oosboo - lloooco,
O|obo|lsotloo, ooo o|oro (Oxtord Un|vors|ty lross,
Oxtord, 2004), p. 7, t|g. 1.8.
4 1. G. la|ma, '1ho rovongo ot tho markot on tho
ront|ors - Why noo-||bora| roports on tho ond ot
h|story turnod out to bo promaturo', Combrlogo
1ooroo| o Ecooomlcs, 2000, vo|. 88, no. 4, p. 8b1,
t|g. 12.
b 3oo W. lazon|ck and V. O'3u|||van, 'Vax|m|s|ng
sharoho|dor va|uo: A now |doo|ogy tor corporato
govornanco', Ecooomy ooo 5ocloty, 2000, vo|. 20,
no. 1, and W. lazon|ck, '1ho buyback boondogg|o',
Boslooss ook, 24 August 2000.
0 lazon|ck, op. c|t.
1HlNG 4

1 l. 3art|, '0omost|c sorv|co: last and prosont |n
3outhorn and lorthorn Europo', Ooooor ooo llstory,
2000, vo|. 18, no. 2, p. 228, tab|o 1.
2 As c|tod |n 1. Groonwood, A. 3oshadr| and V.
Yorukog|u, 'Eng|nos ot ||borat|on', Rovlow o
Ecooomlc 5toolos, 200b, vo|. 72, p. 112.
8 C. Go|d|n, '1ho qu|ot rovo|ut|on that transtormod
womon's omp|oymont, oducat|on, and tam||y',
Amorlcoo Ecooomlc Rovlow, 2000, vo|. 00, no. 2, p.
4, t|g. 1.
4 l. lub|now, '1ho prob|om ot domost|c sorv|co',
1ooroo| o Po|ltlco| Ecooomy, 1000, vo|. 14, no. 8, p.
b0b.
b 1ho book |s |.-1. Chang and l. Grabo|, Roc|olmlog
Lovo|opmoot - Ao A|torootlvo Ecooomlc Po|lcy
Voooo| (Zod lross, london, 2004).
0 K. Ohmao, 7bo Boroor|oss or|o. Powor ooo
5trotogy lo tbo lotor|lokoo Ecooomy (|arpor 8 low,
low York, 1000).
1HlNG 5

1 An accoss|b|o summary ot tho acadom|c ||toraturo on
tho comp|ox|ty ot human mot|vat|ons can bo tound |n
3. |roy, Not 1ost or tbo Voooy - Ecooomlc 7boory
o Porsooo| Votlvotloo (Edward E|gar, Cho|tonham,
1007).
2 1ho oxamp|o |s an o|aborat|on ot tho ono usod by K.
3asu, 'On why wo do not try to wa|k ott w|thout pay|ng
attor a tax|-r|do', Ecooomlc ooo Po|ltlco| ook|y,
1088, no. 48.
1HlNG

1 3. ||schor, 'Va|nta|n|ng pr|co stab|||ty', lloooco ooo
Lovo|opmoot, 0ocombor 1000.
2 A study by lobort 3arro, a |oad|ng troo-markot
oconom|st, conc|udos that modorato |nt|at|on (10-20
por cont) has |ow nogat|vo ottocts on growth, and
that, bo|ow 10 por cont, |nt|at|on has no ottoct at a||.
3oo l. 3arro, 'lnt|at|on and growth', Rovlow o
loooro| Rosorvo Book o 5t Lools, 1000, vo|. 78, no.
8. A study by V|chao| 3aro|, an lV| oconom|st,
ost|matos that bo|ow 8 por cont |nt|at|on has ||tt|o
|mpact on growth - |t anyth|ng, ho po|nts out, tho
ro|at|onsh|p |s pos|t|vo bo|ow that |ovo| - that |s,
|nt|at|on ho|ps rathor than h|ndors growth. 3oo V.
3aro|, 'lon-||noar ottocts ot |nt|at|on on oconom|c
growth', lVl 5to Popors, 1000, vo|. 48, Varch.
8 3oo: V. 3runo, '0oos |nt|at|on roa||y |owor growth?',
lloooco ooo Lovo|opmoot, 100b, vo|. 82, pp. 8b-8,
V. 3runo and W. Eastor|y, 'lnt|at|on and growth: ln
soarch ot a stab|o ro|at|onsh|p', Rovlow o loooro|
Rosorvo Book o 5t Lools, 1000, vo|. 78, no. 8.
4 ln tho 1000s, Koroa's |nt|at|on rato was much h|ghor
than that ot t|vo lat|n Amor|can countr|os (vonozuo|a,
3o||v|a, Vox|co, loru and Co|omb|a) and not much
|owor than that ot Argont|na. ln tho 1070s, tho Koroan
|nt|at|on rato was h|ghor than that tound |n vonozuo|a,
Ecuador and Vox|co, and not much |owor than that ot
Co|omb|a and 3o||v|a. 1ho |ntormat|on |s trom A.
3|ngh, '|ow d|d East As|a grow so tast? - 3|ow
progross towards an ana|yt|ca| consonsus', 100b,
UlC1A0 0|scuss|on lapor, no. 07, tab|o 8.
b 1horo aro many d|ttoront ways to ca|cu|ato prot|t
ratos, but tho ro|ovant concopt horo |s roturns on
assots. Accord|ng to 3. C|aossons, 3. 0jankov and
l. lang, 'Corporato growth, t|nanc|ng, and r|sks |n tho
docados botoro East As|a's t|nanc|a| cr|s|s', 1008,
lo||cy losoarch Work|ng lapor, no. 2017, Wor|d
3ank, Wash|ngton, 0C, t|g. 1, tho roturns on assots |n
torty-s|x dovo|opod and dovo|op|ng countr|os dur|ng
1088-00 rangod botwoon 8.8 por cont (Austr|a) and
0.8 por cont (1ha||and). 1ho rat|o rangod botwoon 4
por cont and 7 por cont |n torty ot tho torty-s|x
countr|os, |t was bo|ow 4 por cont |n throo countr|os
and abovo 7 por cont |n throo countr|os. Anothor
Wor|d 3ank study puts tho avorago prot|t rato tor non-
t|nanc|a| t|rms |n 'omorg|ng markot' oconom|os
(m|dd|o-|ncomo countr|os) dur|ng tho 1000s (1002-
2001) at an ovon |owor |ovo| ot 8.1 por cont (not
|ncomo/assots). 3oo 3. Vohapatra, 0. latha and l.
3utt|o, 'Corporato t|nanc|ng pattorns and
portormanco |n omorg|ng markots', m|moo., Varch
2008, Wor|d 3ank, Wash|ngton, 0C.
0 C. lo|nhart and K. logott, 7bls 7lmo ls Lloroot
(lr|ncoton Un|vors|ty lross, lr|ncoton and Oxtord,
2008), p. 2b2, t|g. 10.1.
1HlNG 7

1 On l|nco|n's protoct|on|st v|ows, soo my oar||or book
Klcklog Awoy tbo Loooor (Anthom lross, london,
2002), pp. 27-8 and tho rotoroncos thoroot.
2 1h|s story |s to|d |n groator dota|| |n my oar||or books:
Klcklog Awoy tbo Loooor |s a hoav||y rotoroncod and
annotatod acadom|c - but by no moans d|tt|cu|t-to-
road - monograph, tocusod part|cu|ar|y on trado
po||cy, Boo 5omorltoos (landom |ouso, london,
2007, and 3|oomsbury U3A, low York, 2008) covors
a broador rango ot po||cy aroas and |s wr|tton |n a
moro usor-tr|ond|y way.
1HlNG 8

1 |or turthor ov|donco, soo my rocont book Boo
5omorltoos (landom |ouso, london, 2007, and
3|oomsbury U3A, low York, 2008), ch. 4, '1ho ||nn
and tho E|ophant', and l. Kozu|-Wr|ght and l.
laymont, 7bo Roslstlb|o Rlso o Vorkot
loooomooto|lsm (Zod 3ooks, london, 2007), ch. 4.
1HlNG 9

1 K. Coutts, A. G|yn and 3. lowthorn, '3tructura|
chango undor low labour', Combrlogo 1ooroo| o
Ecooomlcs, 2007, vo|. 81, no. b.
2 1ho torm |s borrowod trom tho 2008 roport by tho
3r|t|sh govornmont's 0opartmont tor 3Ell
(3us|noss, Entorpr|so and logu|atory lotorm),
O|obo|lsotloo ooo tbo Cbooglog UK Ecooomy
(2008).
8 3. A|tord, '0o-|ndustr|a||sat|on', RolRE5l, Autumn
1007, p. 0, tab|o 1.
4 3. lowthorn and K. Coutts, '0o-|ndustr|a||sat|on and
tho ba|anco ot paymonts |n advancod oconom|os',
Combrlogo 1ooroo| o Ecooomlcs, 2004, vo|. 28, no.
b.
1HlNG 10

1 1. Gy|tason, 'Why Europo works |oss and grows
ta||or', Cbo||oogo, 2007, 1anuary/|obruary.
1HlNG 11

1 l. Co|||or and 1. Gunn|ng, 'Why has Atr|ca grown
s|ow|y?', 1ooroo| o Ecooomlc Porspoctlvos, 1000,
vo|. 18, no. 8, p. 4.
2 0an|o| Etounga-Vanguo||o, a Camoroon|an ong|noor
and wr|tor, notos: '1ho Atr|can, anchorod |n h|s
ancostra| cu|turo, |s so conv|ncod that tho past can
on|y ropoat |tso|t that ho worr|os on|y suport|c|a||y
about tho tuturo. |owovor, w|thout a dynam|c
porcopt|on ot tho tuturo, thoro |s no p|ann|ng, no
toros|ght, no sconar|o bu||d|ng, |n othor words, no
po||cy to attoct tho courso ot ovonts' (p. 00). And thon
ho goos on to say that 'Atr|can soc|ot|os aro ||ko a
tootba|| toam |n wh|ch, as a rosu|t ot porsona| r|va|r|os
and a |ack ot toam sp|r|t, ono p|ayor w||| not pass tho
ba|| to anothor out ot toar that tho |attor m|ght scoro a
goa|' (p. 7b). 0. Etounga-Vanguo||o, '0oos Atr|ca
nood a cu|tura| adjustmont program?' |n l. |arr|son
and 3. |unt|ngton (ods.), Co|toro Vottors - low
Vo|oos 5bopo lomoo Progross (3as|c 3ooks, low
York, 2000).
8 Accord|ng to Wobor, |n 1808, around a quartor ot
|ranco's popu|at|on d|d not spoak |ronch. ln tho
samo yoar, 11 por cont ot schoo|ch||dron agod sovon
to th|rtoon spoko no |ronch at a||, wh||o anothor 87
por cont spoko or undorstood |t but cou|d not wr|to |t.
E. Wobor, Poosoots loto lroocbmoo - 7bo
Vooorolsotloo o Roro| lrooco, 1870-1014
(3tantord Un|vors|ty lross, 3tantord, 1070), p. 07.
4 3oo |-1. Chang, 'Undor-oxp|orod troasuro trovos ot
dovo|opmont |ossons - |ossons trom tho h|stor|os ot
sma|| r|ch Europoan countr|os (3lECs)' |n V.
Kromor, l. van l|oshoust and l. Wont (ods.), Lolog
Oooo or Lolog Bottor - Lovo|opmoot Po|lclos lo o
O|obo|lslog or|o (Amstordam Un|vors|ty lross,
Amstordam, 2000), and |-1. Chang, 'Econom|c
h|story ot tho dovo|opod wor|d: lossons tor Atr|ca', a
|octuro do||vorod |n tho Em|nont 3poakors
lrogrammo ot tho Atr|can 0ovo|opmont 3ank, 20
|obruary 2000 (can bo down|oadod trom:
http://www.ocon.cam.ac.uk/tacu|ty/chang/pubs/
ChangAt03|octurotoxt.pdt).
b 3oo |-1. Chang, '|ow |mportant woro tho |n|t|a|
cond|t|ons' tor oconom|c dovo|opmont - East As|a
vs. 3ub-3aharan Atr|ca' (ch. 4) |n |-1. Chang, 7bo
Eost Asloo Lovo|opmoot Exporlooco. 7bo Vlroc|o,
tbo Crlsls, ooo tbo lotoro (Zod lross, london,
2000).
0 |or compar|son ot tho qua||ty ot |nst|tut|ons |n today's
r|ch countr|os whon thoy woro at s|m||ar |ovo|s ot
dovo|opmont w|th thoso tound |n today's dovo|op|ng
countr|os, soo |-1. Chang, Klcklog Awoy tbo Loooor
(Anthom lross, london, 2002), ch. 8.
1HlNG 12

1 |or a usor-tr|ond|y oxp|anat|on and cr|t|c|sm ot tho
thoory ot comparat|vo advantago, soo 'Vy s|x-yoar-
o|d son shou|d got a job', ch. 8 ot my Boo
5omorltoos (landom |ouso, london, 2007, and
3|oomsbury U3A, low York, 2008).
2 |urthor dota||s can bo tound trom my oar||or books,
Klcklog Awoy tbo Loooor (Anthom lross, london,
2002) and Boo 5omorltoos.
1HlNG 13

1 1ho s|xtoon countr|os whoro |noqua||ty |ncroasod aro,
|n doscond|ng ordor ot |ncomo |noqua||ty as ot 2000,
tho U3, 3outh Koroa, tho UK, lsrao|, 3pa|n, lta|y, tho
lothor|ands, 1apan, Austra||a, Canada, 3wodon,
lorway, 3o|g|um, ||n|and, luxomburg and Austr|a.
1ho tour countr|os whoro |ncomo |noqua||ty to|| woro
Gormany, 3w|tzor|and, |ranco and 0onmark.
2 l. V|sho|, 1. 3ornsto|n and |. 3h|orho|z, 7bo 5toto o
orklog Amorlco, 2008/0 (Econom|c lo||cy lnst|tuto,
Wash|ngton, 0C, 2000), p. 20, tab|o 8.
8 Accord|ng to tho OEC0 (Organ|zat|on tor Econom|c
0ovo|opmont and Cooporat|on), botoro taxos and
transtors, tho U3, as ot m|d 2000s, had a G|n|
coott|c|ont (tho moasuro ot |ncomo |noqua||ty, w|th 0
as abso|uto oqua||ty and 1 as abso|uto |noqua||ty) ot
0.40. 1ho t|guros woro 0.b1 tor Gormany, 0.40 tor
3o|g|um, 0.44 tor 1apan, 0.48 tor 3wodon and 0.42
tor tho lothor|ands.
1HlNG 14

1 l. V|sho|, 1. 3ornsto|n and |. 3h|orho|z, 7bo 5toto o
orklog Amorlco, 2008/0 (Econom|c lo||cy lnst|tuto,
Wash|ngton, 0C, 2000), tab|o 8.2.
2 lb|d., tab|o 8.1.
8 '3hou|d Congross put a cap on oxocut|vo pay?', Now
York 7lmos, 8 1anuary 2000.
4 V|sho| ot a|., op. c|t., tab|o 8.A2. 1ho th|rtoon
countr|os aro Austra||a, 3o|g|um, Canada, |ranco,
Gormany, lta|y, 1apan, tho lothor|ands, low Zoa|and,
3pa|n, 3wodon, 3w|tzor|and and tho UK.
b lb|d., tab|o 8.A2.
0 l. A. 3obchuk and 1. V. |r|od, 'Exocut|vo
componsat|on as an agoncy prob|om', 1ooroo| o
Ecooomlc Porspoctlvos, 2008, vo|. 17, no. 8, p. 81.
1HlNG 15

1 OEC0, 'ls |ntorma| norma|? - 1owards moro and
bottor jobs |n dovo|op|ng countr|os', 2000.
2 0. loodman and 1. Vorduch, '1ho |mpact ot
m|crocrod|t on tho poor |n 3ang|adosh: lov|s|t|ng tho
ov|donco', 2000, work|ng papor, no. 174, Contor tor
G|oba| 0ovo|opmont, Wash|ngton, 0C.
8 V. 3atoman, by Looso`t Vlcroloooco ork (Zod
3ooks, london, 2010).
1HlNG 1

1 Vans|on |ouso spooch, 10 1uno 2000.
2 |or a vory ongag|ng and usor-tr|ond|y prosontat|on ot
tho rosoarchos on tho |rrat|ona| s|do ot human naturo,
soo l. Ubo|, lroo Vorkot Vooooss. by lomoo
Notoro ls ot Ooos wltb Ecooomlcs - ooo by lt
Vottors (|arvard 3us|noss 3choo| lross, 3oston,
2000).
1HlNG 17

1 1. 3amott, 'Educat|on tor a|| |n Atr|ca: 3t||| a d|stant
droam' |n l. Arnovo and C. 1orros (ods.),
Comporotlvo Eoocotloo - 7bo Llo|octlc o tbo
O|obo| ooo tbo Loco| (lowman and l|tt|ot|o|d
lub||shors lnc., lanham, Vary|and, 2007), p. 801,
tab|o 10.8.
2 l. lr|tchott, 'Whoro has a|| tho oducat|on gono?', 7bo
or|o Book Ecooomlc Rovlow, 2001, vo|. 18, no. 8.
8 A. Wo|t, Loos Eoocotloo Vottor (longu|n 3ooks,
london, 2002), p. 42.
4 ln tho o|ghth grado, tho U3 ovortook l|thuan|a, but
was st||| boh|nd luss|a and |ungary, tourth-grador
scoro tor |ungary and o|ghth-grador scoros tor
latv|a and Kazakhstan aro not ava||ab|o.
b 1ho othor Europoan countr|os woro, |n ordor ot tho|r
rank|ngs |n tho tost, Gormany, 0onmark, lta|y, Austr|a,
3wodon, 3cot|and and lorway. 3oo tho wobs|to ot
tho lat|ona| Contor tor Educat|ona| 3tat|st|cs ot tho
U3 0opartmont ot Educat|on lnst|tuto ot Educat|on
3c|oncos, http://ncos.od.gov/t|mss/tab|o07_1.asp.
0 1ho othor r|ch countr|os woro, |n ordor ot tho|r
rank|ngs |n tho tost, 1apan, Eng|and, tho U3,
Austra||a, 3wodon, 3cot|and and lta|y. 3oo tho abovo
wobs|to.
7 1ho most |nt|uont|a| works |n th|s schoo| ot thought
woro |arry 3ravorman's Lobor ooo Vooopo|y
Coplto|. 7bo Logroootloo o ork lo tbo 7wootlotb
Cootory (Vonth|y lov|ow lross, low York, 1074)
and 3tophon Varg||n's 'What do bossos do?',
pub||shod |n two parts |n 7bo Rovlow o Roolco|
Po|ltlco| Ecooomy |n 1074 and 107b.
8 Wo|t, op. clt., p. 204.
0 On tho |ssuo ot sort|ng and many othor |ns|ghttu|
obsorvat|ons on tho ro|o ot oducat|on |n oconom|c
dovo|opmont, soo Wo|t, op. clt.
1HlNG 18

1 l. 3|ackburn, '||nanco and tho tourth d|mons|on',
Now Lot Rovlow, Vay/1uno 2000, p. 44.
1HlNG 19

1 1ho sharo ot todora| govornmont |n tota| l80
spond|ng |n tho U3 was b8.0 por cont |n 10b8, b0.8
por cont |n 10bb, 04.0 por cont |n 1000, 04.0 por cont
|n 100b, b7.1 por cont |n 1070, b1.7 por cont |n 107b,
47.2 por cont |n 1080, 47.0 por cont |n 108b and 47.8
por cont |n 1080 (ost|matod). 3oo 0. Vowory and l.
losonborg, '1ho U.3. lat|ona| lnnovat|on 3ystom' |n
l. lo|son (od.), Notlooo| looovotloo 5ystoms
(Oxtord Un|vors|ty lross, low York and Oxtord,
1008), p. 41, tab|o 2.8.
2 |. 3|mon, 'Organ|zat|ons and markots', 1ooroo| o
Ecooomlc Porspoctlvos, 1001, vo|. b, no. 2, p. 27.
1HlNG 20

1 On how tho Contuc|an cu|turo was oot a causo ot
East As|an oconom|c dovo|opmont, soo 'lazy
1apanoso and th|ov|ng Gormans', ch. 0 |n my book
Boo 5omorltoos (landom |ouso, london, 2007,
and 3|oomsbury U3A, low York, 2008).
2 V. 1ntt| ot a|., 'Amor|can oxcopt|ona||sm |n a now
||ght: a compar|son ot |ntorgonorat|ona| oarn|ngs
mob|||ty |n tho lord|c countr|os, tho Un|tod K|ngdom
and tho Un|tod 3tatos', 1ho Warw|ck Econom|c
losoarch lapor 3or|os, 0opartmont ot Econom|cs,
Un|vors|ty ot Warw|ck, Octobor 200b.
1HlNG 21

1 OEC0 |s tho Organ|zat|on tor Econom|c
Cooporat|on and 0ovo|opmont. lt |s tho c|ub ot tho
r|ch countr|os, w|th sovora| mombors doscr|b|ng
whom as 'r|ch' may bo dobatab|o, such as lortuga|,
Koroa, Czoch lopub||c, |ungary, 3|ovak lopub||c,
lo|and, Vox|co and 1urkoy (|n doscond|ng ordor ot
por cap|ta |ncomo). Ot thoso, lortuga| and Koroa aro
tho r|chost, w|th around $18,000 por cap|ta |ncomo
(|n 2000), and 1urkoy tho poorost, w|th por cap|ta
|ncomo ot $b,400 (|n 2000). 1ho noxt poorost OEC0
mombor attor lortuga| and Koroa |s Grooco, wh|ch
has a por cap|ta |ncomo ovor $24,000. ln 2008 (tho
|atost yoar tor wh|ch tho OEC0 has tho data), pub||c
soc|a| spond|ng accountod tor b.7 por cont ot G0l |n
Koroa. 1ho h|ghost was 3wodon, w|th 81.8 por cont.
1ho OEC0 avorago was 20.7 por cont. 3oo OECL
loctbook 2008. Ecooomlc, Eovlroomooto| ooo
5oclo| 5totlstlcs.
2 ln 2008 (tho |atost yoar tor wh|ch tho OEC0 has tho
data), pub||c soc|a| spond|ng accountod tor 10.2 por
cont ot G0l |n tho U3, comparod to tho OEC0
avorago ot 20.7 por cont and tho EU1b avorago ot
28.0 por cont. Among tho OEC0 mombor statos,
on|y Koroa (b.7 por cont) and Vox|co (0.8 por cont) -
two countr|os that aro usua||y not cons|dorod tu||y
dovo|opod - had a |owor rat|o. lb|d.
1HlNG 22

1 l. lortos and |. 3a|dursson, 7bo
lotorootlooo|lsotloo o lco|ooo`s lloooclo| 5octor
(lco|and Chambor ot Commorco, loykjav|k, 2007), p.
0.
2 G. 0umon|| and 0. lovy, 'Costs and bonot|ts ot
noo||bora||sm: A c|ass ana|ys|s', |n G. Epsto|n (od.),
lloooclo|lsotloo ooo tbo or|o Ecooomy (Edward
E|gar, Cho|tonham, 200b).
8 1. Crotty, 'lt t|nanc|a| markot compot|t|on |s so
|ntonso, why aro t|nanc|a| t|rm prot|ts so h|gh? -
lot|oct|ons on tho curront go|don ago' ot t|nanco',
Work|ng lapor, no. 184, lEll (lo||t|ca| Economy
losoarch lnst|tuto), Un|vors|ty ot Vassachusotts,
Amhorst, Apr|| 2007.
4 1ho |ntormat|on tor GE |s trom l. 3|ackburn,
'||nanco and tho tourth d|mons|on', Now Lot Rovlow,
Vay/1uno 2000, p. 44. 1. |roud ot a|.,
lloooclo|lsotloo ooo 5trotogy. Norrotlvo ooo
Nombors (lout|odgo, london, 2000), ost|matos that
tho rat|o cou|d bo as h|gh as b0 por cont. 1ho |ord
numbor comos trom tho |roud ot a|. study and tho
GV numbor trom tho 3|ackburn study.
b 1. G. la|ma, '1ho rovongo ot tho markot on tho
ront|ors - Why noo||bora| roports ot tho ond ot h|story
turnod out to bo promaturo', Combrlogo 1ooroo| o
Ecooomlcs, 2000, vo|. 88, no. 4.
1HlNG 23


1 Your por cap|ta |ncomo w||| doub|o |n ton yoars, |t you
aro a 'm|rac|o' oconomy grow|ng at 7 por cont. lt you
aro a 'go|don ago' oconomy grow|ng at 8.b por cont
por yoar por cap|ta, |t w||| tako around twonty yoars to
doub|o your por cap|ta |ncomo. ln thoso twonty yoars,
por cap|ta |ncomo ot tho m|rac|o oconomy w||| havo
quadrup|od. ln contrast, |t w||| tako around sovonty
yoars tor an '|ndustr|a| rovo|ut|on' oconomy, grow|ng
at 1 por cont |n por cap|ta torms, to doub|o |ts por
cap|ta |ncomo.
2 1ho |ottor can bo down|oadod trom tho wobs|to,
http://mod|a.tt.com/cms/8o8b0ca8-7a08-11do-b80t-
00144toabdc0.pdt.
|ndox

act|vo oconom|c c|t|zonsh|p xv|, xv||
Aomlolstrotlvo Bobovloor (3|mon) 178-4
Atr|ca soo 3ub-3aharan Atr|ca
AlG 172-8
A|r |ranco 181
AOl 182-8
apartho|d 214-10
Argont|na
oducat|on and growth 181
growth 78
hypor|nt|at|on b8-4
Austr|a
goography 121
govornmont d|roct|on 182
protoct|on|sm 70
ba|anco ot paymonts 07-100, 101
3a|dursson, |r|dr|k 28b
3ang|adosh
ontropronoursh|p 1b0-00
and m|crot|nanco 101-2, 108, 104
3ank ot Eng|and 2b2
(socond) 3ank ot tho U3A 08
3ank tor lntornat|ona| 3ott|omonts (3l3) 202
bankruptcy |aw 227-8
3arad, 1||| 1b4
3ard Co||ogo 172
3atoman, V||tord 102
3augur 288
3aumo|, W||||am 2b0
3obchuk, luc|an 1b4
bohav|oura||st schoo| 178-4
3o|g|um
othn|c d|v|s|on 122
|ncomo |noqua||ty 144, 140
manutactur|ng 70, 01
l80 tund|ng 200
standard ot ||v|ng 100
3on|n, ontropronoursh|p 1b0
3onnott, A|an 214
3os|oy, 1|m 240
b|g govornmont 221-2, 200-01
and growth 228-80
soo o|so govornmont d|roct|on, |ndustr|a| po||cy
3l3 (3ank tor lntornat|ona| 3ott|omonts) 202
3|ack, Eugono 120
3|a|r, 1ony 82, 148, 170
bordor|oss wor|d 80-40
boundod rat|ona||ty thoory 108, 170, 178-7, 2b0, 2b4
3raz|||an |nt|at|on bb
3r|ta|n
|ndustr|a| dom|nanco/doc||no 80-01
protoct|on|sm 00-70
3r|t|sh Acadomy 240-7
3r|t|sh A|rways 181
brownt|o|d |nvostmont 84
3runo| 2b8
3uttot, Warron 80, 280
3ukhar|n, l|ko|a| 180
3unn|ng, 3onator 1|m 8
3urk|na |aso (tormor|y Uppor vo|ta) 121, 200
3ush, Goorgo W. 8, 1b8, 1b0, 174
3ush 3r, Goorgo 207
bus|noss soctor soo corporato soctor
Camoroon 110
cap|ta|
mob|||ty b0-00
nat|ona||ty 74-b, 70-7
cap|ta||sm
Go|don Ago ot 142, 147, 248
modo|s 2b8-4
cap|ta||sts, vs. workors 140-42
capta|ns ot |ndustry 10
Carnog|o, Androw 1b
Caso, 3tovo 182-8
Cassano, 1oo 172-8
C0Os (co||atora||zod dobt ob||gat|ons) 288
C03s (crod|t dotau|t swaps) 288
CEO componsat|on soo oxocut|vo pay, |n U3
Corborus 77-8
Chavoz, |ugo 08
choss, comp|ox|ty ot 17b-0
ch||d-|abour rogu|at|on 2-8, 107
Ch|na
bus|noss rogu|at|on 100
communos 210
oconom|c ott|c|a|s 244
|ndustr|a| prodom|nanco 80, 01, 08, 00
as p|annod oconomy 208-4
lll |ncomo 107
protoct|on|sm and growth 08-4, 0b
Choco|ato mob||o phono 120
Chrys|or 77-8, 101
Chung, 1u-Yung 120
Church|||, W|nston 2b8
c||mato tactors 120-21
C||nton, 3||| 148
cogn|t|vo psycho|ogy 178-4
co||atora||zod dobt ob||gat|ons (C0Os) 288
co||oct|vo ontropronoursh|p 10b
commun|st systom 200-204
Concordo projoct 180-81
cond|t|ons ot trado b
Contuc|an|sm 212-18
Congo (0omocrat|c lopub||c) 110, 121
consumpt|on smooth|ng 108
cooporat|vos 100
corporato soctor
|mportanco 100-01
p|ann|ng |n 207-0
rogu|at|on ottoct 100-8
susp|c|on ot 102-8
soo o|so rogu|at|on, transnat|ona| corporat|ons
Cotton |actor|os logu|at|on Act 1810 2
crod|t dotau|t swaps (C03s) 288
Crotty, 1|m 280-8
cu|turo |ssuos 128, 212-18
0a|m|or-3onz 77-8
0ar||ng, A||sta|r 172
do-|ndustr|a||zat|on 01
ba|anco ot paymonts 07-100, 101
causos 01-0
concorns 00-0
dot|at|on, 1apan b4
do||borat|on counc||s 184
0onmark
cooporat|vos 100
protoct|on|sm 00
standard ot ||v|ng 104, 100, 282-8
dorogu|at|on soo oooor rogu|at|on
dor|vat|vos 280
0otro|t car-makors 101-2
dovo|op|ng countr|os
ontropronoursh|p and povorty 1b8-00
and troo markot po||c|os 02-8, 71-8, 118-10, 201-2
po||cy spaco 202-8
d|g|ta| d|v|do 80
d|shwashors 84
d|str|but|on ot |ncomo soo downward rod|str|but|on ot
|ncomo, |ncomo |rrogu|ar|ty, upward rod|str|but|on
ot |ncomo
domost|c sorv|co 82-8
doub|o-d|p rocoss|on x|||
downward rod|str|but|on ot |ncomo 142-8, 140-7
0uba| 28b
0umon||, Gorard 280
East As|a
oconom|c ott|c|a|s 240-b0
oducat|ona| ach|ovomonts 180-81
othn|c d|v|s|ons 122-8
govornmont d|roct|on 181-2
growth 42, b0, 248-4
|ndustr|a| po||cy 12b-80, 20b
Eco|o lat|ona|o d'Adm|n|strat|on (ElA) 188
oconom|c cr|sos 247
Econom|c lo||cy lnst|tuto (Ell) 144, 1b0
oconom|sts
a|tornat|vo schoo|s 248-b1
as buroaucrats 242-8
co||oct|vo |mag|nat|on 247
and oconom|c growth 248-b
ro|o |n oconom|c cr|sos 247-8
Ecuador 78
Edgorton, 0av|d 87
Ed|son, 1homas 1b, 10b, 100
oducat|on
and ontorpr|so 188-0
h|ghor oducat|on ottoct 18b-8
|mportanco 178-0
know|odgo oconomy 188-b
mochan|zat|on ottoct 184-b
outcomo oqua||ty 217-18
and product|v|ty 170-81
ro|ovanco 182-8
E||zaboth ll, Ouoon 24b-7
ElA (Eco|o lat|ona|o d'Adm|n|strat|on) 188
on||ghtonod so|t-|ntorost 2bb-0
ontropronoursh|p, and povorty 1b7-8
and co||oct|vo |nst|tut|ons 10b-7
as dovo|op|ng country toaturo 1b8-00
t|nanco soo m|crot|nanco
onv|ronmonta| rogu|at|ons 8
Ell (Econom|c lo||cy lnst|tuto) 144, 1b0
oqua||ty ot opportun|ty 210-11, 2b0-7
and oqua||ty ot outcomo 217-20, 2b7
and markots 218-1b
soc|o-oconom|c onv|ronmont 21b-17
oqua||ty ot outcomo 217-20
othn|c d|v|s|ons 122-8
oxocut|vo pay
and non-markot torcos 1b8-0
|ntornat|ona| compar|sons 1b2-8
ro|at|vo to workors' pay 140-b8, 2b7
U3 148-0
ta|r trado, vs. troo trado 0-7
|ann|o Vao 8
lor Eostoro Ecooomlc Rovlow 100
|odora| losorvo 3oard (U3) 171, 172, 240
toma|o occupat|ona| structuro 8b-0
||at 78
t|nanc|a| cr|s|s (2008) x|||, 1bb-0, 171-2, 288-4, 2b4
t|nanc|a| dor|vat|vos 280, 2b4-b
t|nanc|a| markots
dorogu|at|on 284-8, 2b0-00
ottocts 280-41
ott|c|oncy 281-2, 240-41
soctor growth 287-0
||n|and
govornmont d|roct|on 188
|ncomo |noqua||ty 144
|ndustr|a| product|on 100
protoct|on|sm 00, 70
l80 tund|ng 200
wo|taro stato and growth 220
||schor, 3tan|oy b4
|ord cars 101, 287
|ord, |onry 1b, 200
toro|gn d|roct |nvostmont (|0l) 88-b
|ranco
and ontropronoursh|p 1b8
t|nanc|a| dorogu|at|on 280
govornmont d|roct|on 182, 188-4, 18b
|nd|cat|vo p|ann|ng 204-b
protoct|on|sm 70
|rank, lobort | 1b1
|rank||n, 3onjam|n 0b-0, 07
|rodd|o Vac 8
troo markot
boundar|os 8-10
and dovo|op|ng countr|os 02-8, 71-8, 118-10, 201-2
|abour soo oooor |abour
n|notoonth-contury rhotor|c 140-48
as po||t|ca| dot|n|t|on 1-2
rat|ona|o x|||-x|v, 100-70
rosu|ts x|v-xv, xv|-xv||
systom rodos|gn 2b2, 208
soo o|so markots, noo-||bora||sm
troo trado, vs. ta|r trado 0-7
|r|od, 1osso 1b4
|r|odman, V||ton 1, 100, 214
Ga|bra|th, 1ohn Konnoth 10, 24b
Gar|cano, lu|s 24b
Gatos, 3||| 10b, 100, 200
Gonora| E|octr|c (GE) 17, 4b, 80, 287
Gonora| Votors Accoptanco Corporat|on (GVAC) 104,
287
Gonora| Votors (GV) 20, 22, 4b, 80, 80, 1b4, 100-08
doc||no 108-0
t|nanc|a||zat|on 287
pro-om|nonco 101-2
goograph|ca| tactors 121
Gormany
b|ltzkrlog mob|||ty 101
CEO romunorat|on 1b2-8
cooporat|vos 100
om|grat|on 00
hypor|nt|at|on b2-4
|ndustr|a| po||cy 20b
manutactur|ng 00
l80 tund|ng 200
wo|taro stato and growth 228-0
Ghana, ontropronoursh|p 1b0
Ghosn, Car|os 7b-0, 78
g|oba||zat|on
ot managomont 7b-0
and tochno|og|ca| chango 40
GV soo Gonora| Votors
GVAC (Gonora| Votors Accoptanco Corporat|on) 104,
287
Go|don Ago ot Cap|ta||sm 142, 147, 248
Go|d||ocks oconomy 240
Goodw|n, 3|r |rod 1b0
Gosp|an 14b
govornmont d|roct|on
ba|anco ot rosu|ts 184-0
and bus|noss |ntormat|on 182-4
ta||uro oxamp|os 180-81
and markot d|sc|p||no 44-b, 120-80, 184
sharo ownorsh|p 21
succoss oxamp|os 12b-0, 181-4
soo o|so b|g govornmont, |ndustr|a| po||cy
Gramoon 3ank 101-4
Grant, U|yssos 07
Groat 0opross|on 1020 24, 102, 280, 240, 2b2
groont|o|d |nvostmont 84
Groonspan, A|an 172, 240
|am||ton, A|oxandor 00-7, 00
|ayam|, Vasaru b4
|onnossy, lotor 240-7
h|ghor oducat|on 18b-8
||rschman, A|bort 240
llstory Boys (3onnott) 214
||t|or, Ado|t b4
homo country b|as 78-82, 88, 80-7
|onda 18b
|ong Kong 71
housoho|d app||ancos 84-0, 87
|33C 172
|uman ro|at|ons schoo| 47
|ungary, hypor|nt|at|on b8-4
hypor|nt|at|on b2-4
soo o|so |nt|at|on
|yunda| Group 120, 244
lco|and
t|nanc|a| cr|s|s 282-4, 28b
toro|gn dobt 284
standard ot ||v|ng 104-b
lC1 (lntormat|on and Commun|cat|on 1ochno|ogy) 80
llO (lntornat|ona| labour Organ|zat|on) 82, 148-4
lV| soo lntornat|ona| Vonotary |und
|mm|grat|on contro| b, 28, 20-8, 80
|ncomo
por cap|ta |ncomo 104-11
soo o|so downward rod|str|but|on ot |ncomo, |ncomo
|noqua||ty, upward rod|str|but|on ot |ncomo
|ncomo |noqua||ty 18, 72-8, 102, 104-b, 108, 110,
148-b, 147, 247-8, 2b8, 202
lnd|a 00, 121
|nd|cat|vo p|ann|ng 20b
|nd|cat|vo p|ann|ng 204-0
lndonos|a 284
|ndustr|a| po||cy 84, 12b-80, 100, 20b, 242, 2b0, 201
soo o|so govornmont d|roct|on
lndustr|a| lovo|ut|on 70, 00, 248
|ntant |ndustry argumont 00-8, 00-70, 71-2
|nt|at|on
contro| b1-2
and growth b4-0, 00-01
hypor|nt|at|on b2-4
and stab|||ty b0-01
lntormat|on and Commun|cat|on 1ochno|ogy (lC1) 80
|nst|tut|ona| qua||ty 20-80, 112-18, 11b, 117, 128-4,
10b-7
|ntorost rato contro| b-0
|ntornat|ona| do||ar 100-7
lntornat|ona| labour Organ|zat|on (llO) 82, 148-4
lntornat|ona| Vonotary |und (lV|) b4-b, b7, 00, 72,
244, 202
3Als 118
lntornat|ona| Yoar ot V|crocrod|t 102
|ntornot rovo|ut|on 81-2
|mpact 80-7, 88, 80
and rat|ona||ty 174
|nvostmont
brownt|o|d/groont|o|d 84
toro|gn d|roct |nvostmont 88-b
sharo 18-10
|nv|s|b|o roward/sanct|on mochan|sms 48-b0
lro|and
t|nanc|a| cr|s|s 284-b
lta|y
cooporat|vos 100
om|grants to U3 108
1ackson, Androw 08
1apan
bus|noss rogu|at|on 100
CEO romunorat|on 1b2-8
dot|at|on b4
do||borat|on counc||s 184
govornmont d|roct|on 188-4, 18b, 2b0
|nd|cat|vo p|ann|ng 20b
|ndustr|a| po||cy 181, 18b, 242-b
|ndustr|a| product|on 100
product|on systom 47, 107
protoct|on|sm 02, 70
l80 tund|ng 200
1ottorson, 1homas 07-8, 280
job socur|ty/|nsocur|ty 20, b8-01, 108-0, 111, 22b-8,
247, 2b8, 2b0
1ooroo| o Po|ltlco| Ecooomy 84
Ka|dor, l|co|as 240
Koynos, 1ohn Vaynard 240
K|nd|oborgor, Char|os 240
know|odgo oconomy 188-b
Kobo 3too| 42-8, 40
Kong 1zo (Contuc|us) 212
Koroa
trad|t|ona| 211-18
soo o|so lorth Koroa, 3outh Koroa
Koutax, 3andy 172
Kuwa|t 2b8
|abour
troo markot rowards 28-80
job socur|ty b8-00
|n manutactur|ng 01-2
markot t|ox|b|||ty b2
rogu|at|on 2-8
ro|at|vo pr|co 88, 84
lat|n Amor|ca 82-8, bb, 78, 112, 122, 140, 100-7,
211, 24b, 202
latv|a 28b
lazon|ck, W||||am 20
lon|n, v|ad|m|r 188
lov|n, 1orry 188
lovy, 0om|n|quo 280
lG Group 120, 184
||bora|s
noo-||bora||sm xv, 00, 78
n|notoonth-contury 140-42
||m|tod ||ab|||ty 12-1b, 21, 228, 280, 2b7
l|nco|n, Abraham 87, 07
l|st, |r|odr|ch 240
london 3choo| ot Econom|cs 24b-0
l1CV (long-1orm Cap|ta| Vanagomont) 170-71
luxomburg, standard ot ||v|ng 102, 104-b, 107, 100,
282-8, 2b8
macro-oconom|c stab|||ty b1-01, 240, 2b0, 201
Vadott, 3orn|o 172
Va|thus, 1homas 141
managor|a| cap|ta||sm 14-17
Vando|son, lord (lotor) 82-8, 87
manutactur|ng |ndustry
comparat|vo dynam|sm 00
omp|oymont changos 01-2
|mportanco 88-101, 2b7-0
product|v|ty r|so 01-0, 184-b
ro|at|vo pr|cos 04-b
stat|st|ca| changos 02-8
Vao Zodong 21b-10
Varch|onno, 3org|o 78
markots
and boundod rat|ona||ty thoory 108, 178-0, 177, 2b4
cond|t|ons ot trado b
and oqua||ty ot opportun|ty 218-1b
ta||uro thoor|os 2b0
t|nanc|a| soo t|nanc|a| markots
govornmont d|roct|on 44-b, 12b-80
govornmont rogu|at|on 4-0, 108-0, 170-7
part|c|pat|on rostr|ct|ons 4
pr|co rogu|at|ons b-0
and so|t-|ntorost 44-b
soo o|so troo markot
Varx, Kar| 14, 108, 201, 208, 240
Varx|sm 80, 18b, 201-8
mathomat|cs 180, 182-8
V33s (mortgago-backod socur|t|os) 288
mod|c|no's popu|ar|ty 222-4
Vorr|wothor, 1ohn 171
Vorton, lobort 170-71
V|cho||n 7b-0
m|crot|nanco
cr|t|quo 102 and dovo|opmont 100-02
V|crosott 18b
V|nsky, |yman 240
Vonaco 2b8
mora||ty, as opt|ca| |||us|on 48-b0
Vorduch, 1onathan 102
mortgago-backod socur|t|os (V33s) 288
mot|vat|on comp|ox|ty 40-7
Vugabo, lobort b4
lA|1A (lorth Amor|can |roo 1rado Agroomont) 07
lat|ona| |oa|th 3orv|co (UK) 201
nat|ona||ty ot cap|ta| 74-87
natura| rosourcos 00, 11b-10, 110-20, 121-2
noo-||bora||sm xv, 00, 78, 14b
noo-c|ass|ca| schoo| 2b0
soo o|so troo markot
lost|o 70-7, 70
lothor|ands
CEO romunorat|on 1b2-8
cooporat|vos 100
|nto||octua| proporty r|ghts 71
protoct|on|sm 71
wo|taro stato and growth 228-0
low lub||c Vanagomont 3choo| 4b
Now York 7lmos 87, 1b1
low York Un|vors|ty 172
l|ssan 7b-0, 84, 18b, 214
lobo|
loaco lr|zo 102
lr|zo |n oconom|cs 170, 171-2, 178, 208, 240
lobo|, A|trod 170
lok|a 18b, 2b0-00
lorth Amor|can |roo 1rado Agroomont (lA|1A) 07
lorth Koroa 211
lorway
govornmont d|roct|on 182, 188, 20b
standard ot ||v|ng 104
wo|taro stato and growth 222, 220
Obama, 3arack 140
OEC0 (Organ|zat|on tor Econom|c Cooporat|on and
0ovo|opmont) b7, 1b0, 220
Oh, Won-Chu| 244
Ohmao, Kon|ch| 80
Opo| 101
Op|um War 0
opportun|t|os soo oqua||ty ot opportun|ty
Organ|zat|on tor Econom|c Cooporat|on
and 0ovo|opmont (OEC0) b7, 1b0, 220
organ|zat|ona| oconomy 208-0
outcomos oqua||ty 217-20
la||n, 3arah 118
la|ma, Gabr|o| 287
lark, Chung-|oo 120
lark, 1ao-1oon 127-8
part|c|pat|on rostr|ct|ons 4
lorot, loss 07
loru 210
lGAV (l|at|num Grovo Assot Vanagomont) 171
lh|||pp|nos, oducat|on and growth 180, 181
lhoon|x vonturo |o|d|ngs 80
l|gou, Arthur 2b0
l|nochot, Augusto 24b
ll3A (lrogram tor lntornat|ona| 3tudont Assossmont)
180
l|a|n Eng||sh Campa|gn 17b
p|annod oconom|os
commun|st systom 200-204
|nd|cat|vo systoms 204-0
surv|va| 100-200, 208-0
l|at|num Grovo Assot Vanagomont (lGAV) 171
lohang lron and 3too| Company (lO3CO) 127-8
po||ut|on 8, 0, 100
poor |nd|v|dua|s 28-80, 140-42, 210-18
lortos, l|chard 28b
lortman, lata||o 102
lO3CO (lohang lron and 3too| Company) 127-8
post-|ndustr|a| soc|oty 80, 88-0, 01-2, 00, 08, 101,
2b7-8
lovorty loduct|on 3tratogy lapors (ll3ls) 118
soo o|so 3Als
lll (purchas|ng powor par|ty) 100-0
lroobrazhonsky, Yovgon| 188-40, 141
pr|co
rogu|at|ons b-0
stab|||ty b1-01
lr|tchott, lant 181
pr|vato oqu|ty tunds 8b-0, 87
protoss|ona| managors 14-22, 44-b, 100, 200
lrogram tor lntornat|ona| 3tudont Assossmont (ll3A)
180
protoct|on|sm
and growth 02-8, 72-8
|ntant |ndustry argumont 00-8, 00-70, 71-2
pos|t|vo oxamp|os 08-b, 00
ll3ls soo lovorty loduct|on 3tratogy lapors
purchas|ng powor par|ty (lll) 100-0
l80 soo rosoarch and dovo|opmont (l80)
la|, A|shwarya 102
lan|a, Ouoon 102
rat|ona||ty soo boundod rat|ona||ty thoory
l33 (loya| 3ank ot 3cot|and) 1b0
roa| domand ottoct 04
rogu|at|on
bus|noss/corporato 100-8
ch||d |abour 2-8, 107
dorogu|at|on 284-8, 2b0-00
|og|t|macy 4-0
markots 4-0, 108-0, 170-7
pr|co b-0
lo|nhart, Carmon b7, b0
lonau|t 21, 7b-0
Roport oo tbo 5objoct o Vooooctoros (|am||ton) 00
7bo Roscoors (0|snoy an|mat|on) 118-14
rosoarch and dovo|opmont (l80) 78-0, 87, 182, 100
tund|ng 200
roward/sanct|on mochan|sms 48-b0
l|cardo, 0av|d 141
r|ch |nd|v|dua|s 28-80, 140-42
r|vor transport 121
logott, Konnoth b7, b0
loodman, 0av|d 102
loosovo|t, |rank||n 101
lovor 80
loya| 3ank ot 3cot|and (l33) 1b0
lub|now, l.V. 84
luhr occupat|on b2
lumsto|d, 0ona|d 174-b
lwanda 128
3antandor 172
3Als (3tructura| Adjustmont lrograms) 118, 124
3arkozy, l|co|as 00
3cho|os, Vyron 170-71
3chumpotor, 1osoph 10, 10b-7, 240
3ocond Wor|d War p|ann|ng 204
(socond) 3ank ot tho U3A 08
so|t-|ntorost 41-2, 4b
cr|t|quo 42-8
on||ghtonod 2bb-0
|nv|s|b|o roward/sanct|on mochan|sms 48-b0
and markot d|sc|p||no 44-b
and mot|vat|on comp|ox|ty 40-7
3on, Amartya 2b0
3onoga| 118
sorv|co |ndustr|os 02-8
ba|anco ot paymonts 07-100, 101
comparat|vo dynam|sm 04-b, 00-7
know|odgo-basod 08, 00
3oycho||os 100
sharo buybacks 10-20
sharoho|dor va|uo max|m|sat|on 17-22
sharoho|dors
govornmont 21
ownorsh|p ot compan|os 11
short-torm |ntorosts 11-12, 10-20
sh|pbu||dors 210
3|mon, |orbort 178-0, 208-0, 2b0
3|ngaporo
govornmont d|roct|on 188
|ndustr|a| product|on 100
lll |ncomo 107
protoct|on|sm 70
3OEs 20b
3|oan 1r, A|trod 101-2
3m|th, Adam 18, 14, 1b, 41, 48, 100, 280
soc|a| dump|ng 07
soc|a| mob|||ty 108-4, 220
soc|o-oconom|c onv|ronmont 21b-17
3OEs (stato-ownod ontorpr|sos) 127, 182, 188, 20b-0
3outh Atr|ca bb, 121
and apartho|d 218-10
3outh Koroa
bank |oans 81
oconom|c ott|c|a|s 244
oducat|on and growth 181
othn|c d|v|s|ons 128
t|nanc|a| dr|vo 28b
toro|gn dobt 284
govornmont d|roct|on 120-0, 188-4, 18b, 180
|nd|cat|vo p|ann|ng 20b
|ndustr|a| po||cy 12b-80, 20b, 242-b
|nt|at|on bb, b0
job |nsocur|ty ottoct 222-4, 220, 227
post-war 212-14
protoct|on|sm 02, 00, 70
l80 tund|ng 200
rogu|at|on 100-7
3ov|ot Un|on 200-204
3pa|n 122
3p|o|borg, 3tovon 172
3r| lanka 121
3ta||n, 1osot 180-40, 14b
standard ot ||v|ng
compar|sons 10b-7
U3 102-11
3tantord, A|an 172
stato ownod ontorpr|sos (3OEs) 127, 182, 188, 20b-0
stoo|
m||| subs|d|os 120-8
workors 210
3t|g||tz, 1osoph 2b0
3tructura| Adjustmont lrograms (3Als) 118, 124
3ub-3aharan Atr|ca 78, 112-24
cu|turo |ssuos 128
oducat|on and growth 181
othn|c d|v|s|ons 122-8
troo markot po||c|os 118-10, 202
goograph|ca| tactors 121
growth ratos 78, 112, 110-10
|nst|tut|ona| qua||ty 128
natura| rosourcos 110-20, 121-2
structura| cond|t|ons 114-10, 110-24
undordovo|opmont 112-18, 124
3utton, W||||o b2
3wodon 1b, 21-2
CEO romunorat|on 1b2
|ncomo |noqua||ty 144
|ndustr|a| po||cy 20b
|ndustr|a| product|on 100
por cap|ta |ncomo 104
l80 tund|ng 200
wo|taro stato and growth 220
3w|tzor|and
CEO romunorat|on 1b2-8
othn|c d|v|s|ons 122
goography 121
h|ghor oducat|on 18b-0, 188
|nto||octua| proporty r|ghts 71
manutactur|ng 100, 2b8
protoct|on|sm 00, 71
standard ot ||v|ng 104-0, 282-8
1a|wan
bus|noss rogu|at|on 100
oconom|c ott|c|a|s 244
oducat|on and growth 180
govornmont d|roct|on 180
|nd|cat|vo p|ann|ng 20b
protoct|on|sm 00, 70
1anzan|a 110
1All (1roub|od Assot lo||ot lrogram) 8
tax havons 2b8
tochno|og|ca| rovo|ut|on 81-2, 88-40
to|ograph 87-8
1o|onor 104
1hatchor, Vargarot b0, 22b-0, 201
1|mo-Warnor group 182-8
1lV33 (1ronds |n lntornat|ona| Vathomat|cs and
3c|onco 3tudy) 180, 188
1o|odo, A|ojandro 210
1oyota
and apartho|d 214
product|on systom 47
pub||c monoy ba||-out 80
trado rostr|ct|ons 4
transnat|ona| corporat|ons
h|stor|ca| dobts 80
homo country b|as 78-82, 88, 80-7
nat|ona||ty ot cap|ta| 74-b, 70-7
product|on movomont 70, 81-2
soo o|so corporato soctor
1ronds |n lntornat|ona| Vathomat|cs and 3c|onco 3tudy
(1lV33) 180, 188
tr|ck|o-down oconom|cs 187-8
and upward d|str|but|on ot |ncomo 144-7
1rotsky, loon 188
1roub|od Assot lo||ot lrogram (1All) 8
2008 t|nanc|a| cr|s|s x|||, 144, 1bb-0, 171-2, 107-8,
288-4, 280, , 288-0, 24b-7, 240, 2b4
Uganda 11b-10
uncorta|nty 174-b
unomp|oymont 218-10
Un|tod K|ngdom
CEO romunorat|on 1b8, 1bb-0
t|nanc|a| dorogu|at|on 28b-0, 287
l|3 201
sh|pbu||dors 210
soo o|so 3r|ta|n
Un|tod lat|ons 102
Un|tod 3tatos
oconom|c modo| 104
|odora| losorvo 3oard 171, 172, 240
t|nanc|a| dorogu|at|on 28b-8
|mm|grant oxpoctat|ons 108-4
|ncomo |noqua||ty 144
|noqua||t|os 107-11
protoct|on|sm and growth 04-8, 00
l80 tund|ng 200
standard ot ||v|ng 102-11
stoo| workors 210
wo|taro stato and growth 228-80
Un|tod 3tatos Agoncy tor lntornat|ona| 0ovo|opmont
(U3Al0) 180
un|vors|ty oducat|on ottoct 18b-8
Uppor vo|ta (now 3urk|na |aso) 200
upward rod|str|but|on ot |ncomo 148-4
and tr|ck|o-down oconom|cs 144-7
Uruguay
growth 78
|ncomo |noqua||ty 144
U3Al0 (Un|tod 3tatos Agoncy tor lntornat|ona|
0ovo|opmont) 180
vacuum c|oanors 84
vonozuo|a 144
vorsa|||os 1roaty b2
v|otnam 208-4
vo|kswagon
govornmont sharo ownorsh|p 21
pub||c monoy ba||-out 80
wago gaps
po||t|ca| dotorm|nat|on 28-8
and protoct|on|sm 28-0, 07
wago |og|s|at|on b
Wagonor, l|ck 4b
o|| 5troot 1ooroo| 08, 88
Wa|po|o, lobort 00-70
wash|ng mach|nos 81-2, 84-0
Wash|ngton, Goorgo 0b, 00-7
Wo|ch, 1ack 17, 22, 4b
wo|taro oconom|cs 2b0
wo|taro statos b0, 110-48, 140-7, 21b, 220, 221-80
and growth 228-80
W||son, Char||o 102, 108
W|ndows v|sta systom 18b
woo||on manutactur|ng |ndustry 70
work to ru|o 40-7
work|ng hours 2, 7, 100-10
Wor|d 3ank
and troo markot 202
and troo trado 72
and lO3CO 120-8
govornmont |ntorvont|on 42, 44, 00
macro-oconom|c stab|||ty b0
3Als 118
W1O (Wor|d 1rado Organ|zat|on) 00, 202
Yos, Vlolstor/Prlmo Vlolstor (comody sor|os) 44
Yunus, Vuhammad 101-2
Z|mbabwo, hypor|nt|at|on b8-4