The New York Review of Ideas » Q&A | June 2009
Free Market Protectionism
Cambridge Professor Ha-Joon Chang on the limits of capitalism.
By Flora Fair
Then why are so many people opposed to the idea of healthy protectionism?
The free market ideology has been so dominant that as soon as you talk about protectionism people think of North Korea. This is very unhelpful. I’ve been very often accused of supporting North Korea and Cuba—my god! But for these people, it’s almost a Pavlovian reaction. This is really preventing rational, balanced debate on the relative virtues of free trade and protectionism. I think this kind of ideological obsession with free trade is really unhelpful. And that’s already showing in the current debate regarding protectionism, with the U.S. evoking this “buy American” clause and the European countries subsidizing their car industries and so on. This has created a lot of anxiety among free-trade advocates. What is the real danger is that because people are so obsessed with this free market ideology, they keep saying, “Oh, we are in favor of free trade, we don’t believe in protectionism,” while having to introduce a lot of hidden, opaque protectionist measures out of political necessity. There’ll come a point when a lot of developing countries will say, “We are going to leave the WTO [World Trade Organization] because you guys give a lot of lip service to free trade, but look what you are doing.”
So what is one of the biggest problems with the structure of the free market system as it applies to this economy?
The problem is that shareholders may technically own the company, but unless they are a big shareholder whose entry and exit would really destabilize the company, these are people who have the greatest mobility. So paradoxically, despite being the owners, they have the least interest in the long-term sustainability of this company, so they keep demanding these short term-oriented policies. Make more profit now—even though it might mean not investing in technology and not investing in workers’ training, and then losing in terms of competition 10 years down the line—you need to make more profit now. And you need to pay high dividends now, even if it means that you reinvest much less of your profit in long term-oriented activity. You could actually say that it’s better for the shareholders, as well, that companies are not run in the interest of the shareholders.
How did growing up in South Korea affect your economic outlook?
There was so much poverty around you, it was impossible not to notice. And seeing what equitable economic growth, as it happened in South Korea, can do to people’s living standard made me put a lot of emphasis on the importance of economic growth. Some critics of neo-liberal capitalism are antigrowth, but I’m not. Having grown up in South Korea, I tend to have a more positive view of what cleverly designed government intervention can do. Back in the early ‘60s when I was born, South Korea’s per-capita income was half that of Ghana. The South Korean government was given money by the World Bank to send people to the Philippines and Pakistan for extra training on government policy. It was one of the poorest countries in the world, but it changed that. [South] Korea has shown that even one of the worst countries can actually make that transition. And that’s what makes me want to shake up people more. I deliberately put these things in a provocative way.
What was your initial connection to economics?
My father was working in the Korean Finance Ministry. He was a very pragmatic person, so he encouraged me to study economics but he made sure that I don’t believe in theoretical economics too much.
Why is that?
Theoretical economics makes all these simplifying assumptions and, especially in developing countries, they often do not hold. In the late ‘70s, he was the deputy head of Korean Inland Revenue. But actually he was running the place, because it was a time of military dictatorship and the head was an ex-army general. On arrival, he told my father, “Look, what do I know about tax? I’ll give you political protection, you run the place.” And my father told me that in the late ‘70s the Korean president was frustrated by the World Bank saying the value-added tax that they have in Europe is the best form of tax. My father’s point was that is, in theory, a great tax, but in a country where there’s no custom of issuing receipts, how do you run a country like that? He said he had to run a campaign to encourage people to ask for receipts. So he had this healthy skepticism about overly theoretical economics and I think that was a very important influence on me.
How would you apply your thinking on protectionism to the current economic crisis?
My view is that we are not smart enough to run the total free market economy. This has always been a problem throughout the history of capitalism, but especially in the recent period—especially in the financial sector. Deregulation has led to a proliferation of very complex financial instruments that no one really understands. OK, the 10 guys who trade in them, they do. But the next guy? No. His boss? No way. The chief executive? Forget it. When it comes to the financial regulators, they haven’t got a clue. So the most important thing is that we have to abandon this hubris. The 1978 Nobel Economics Prize winner, Herbert Simon, who was also an authority on artificial intelligence, famously argued that we have such limited mental capabilities that the best way to make ourselves more creative is to routinize as many things as possible. By routinizing a lot of things, we actually have more time for more important things. In that sense, we have to decide what is more important in our economy. Finance is very important, but we have made it too important. Now we have to restrain this. When you create this kind of totally deregulated financial environment, even productive platforms find it very difficult to cope. So what is the best way for humanity as a whole to spend our limited mental resources? Is it by inventing real products and real processes or inventing new financial instruments?