Whoa; capitalism is like The Matrix, dude

Paul Raven @ 30-08-2010

The latest book in the wave of economics-for-the-layman texts, piggybacking on the global sense of “WTF just happened?” in the wake of the subprime collapse and its ripples, is 23 Things They Don’t Tell You About Capitalism from Cambridge economist Doctor Ha-Joon Chang, who apparently manages to play a currently popular theme (“free markets are bad”) with a less-popular counterpoint (“the welfare state should be expanded”) [via TheBigThink].

“It is like The Matrix. There is a reality where things could and should be better,” he said. “In order to wake people up to that alternative reality, you need to show them that it isn’t impossible. I’m not necessarily saying that I have a solution, but we have to recognise that some of the things we accept as inevitable aren’t.”

But while Dr Chang may not have the answer, he is sure of the problem – arguing that free-market capitalism has left the global economy more unstable, and people with less job security and greater feelings of insecurity, than ever before. His conviction that, post-recession, we should be rebuilding our country in a “moral” way – by acknowledging the social consequences of economic choices such as benefit cuts and job losses – will strike a chord with many.

“Another myth that needs to be busted is the idea that we can discuss economics without any moral implications,” he said. “What kind of economy we build changes us, so what we do in terms of monetary policy determines who we are.”

Kudos to any pundit honest enough to admit that they don’t have a silver bullet in the breech. I’m in close agreement with Chang’s thoughts about the morality of economic processes, though I take some issue with his rejection of free markets (which is, to be fair, hardly new to Chang). I’d agree that what are usually described as “free markets” are indeed broken (there’s too much evidence to ignore), but I remain to be convinced that those markets are truly “free” in any way that Adam Smith himself would have recognised. I’m no economics boffin, of course, and as such I’m not going to state with certainty that truly free markets would be the solution to all our economic woes… but I think it’s fair to say that regulation is never going to prevent disasters and abuses in a system wherein certain groups and individuals are given (or simply invent for themselves) ways of avoiding or circumventing such.

Like Chang, I don’t have a solution, but I suspect our best route forward is through the territory of transparency. Another thing that would help would be encouraging economic actors to be less trusting, but how that could be achieved is quite beyond me; the duplicitous and deceitful tactics of lending institutions prey on what appears to be a hardwired psychological blindspot whereby we privilege short-term advantage over long-term consequences. For example, would the global collapse still have happened if all the people who simply couldn’t afford the mortgages they were signed up to had looked rationally at their situation and never taken them on? Which is easier: to prevent institutions flogging dodgy deals, or to prevent people from signing a contract they don’t fully understand?

Easier said than done, of course: the rational actor is possibly the greatest myth of economic theory. But could the rational actor be nurtured? I think that perhaps you wouldn’t need to educate everyone in the intricacies of economic theory to achieve this; simply encouraging a pathological cynicism toward the deal that looks too good to be true might be enough (which recent events seem to have gone some small way toward accomplishing), and in a networked peer-to-peer society, more knowledgeable and trustworthy individuals would develop a reputation for reliable advice on complex financial issues. I’d certainly place more trust in a succession of recommendations and reviews from ordinary people more than in a diploma certificate and an expensive office…

… and it looks like my anarcho-utopianism is showing again*. I have no idea whether it would be possible to rationalise the economic thinking of everyday people (though I suspect that, if it were to occur, it would most likely occur as an emergent phenomenon in small local groups at first, possibly piggybacking on local currency movements and/or cooperative communities)… but I doubt it’s any more impossible than building a system of laws that’s big enough to encapsulate the world economy, yet devoid of the regulatory loopholes and protectionism that tend to push us into these periodic catastrophes.

Shorter version: the grass is so much greener on that side of the fence, but I have no idea how we should climb it.

[ * It’s awkward and frustrating, sometimes, being cynical enough to poke holes in one’s own underlying optimism about people. People call me a pessimist, but that’s not the case: if anything, I’m a pragmatic optimist. And so much for nomenclature. ]