In his new book 23 Things They Don’t Tell You About Capitalism, Ha-Joon Chang offers a progressive explanation for what Tyler Cowen calls “The Great Stagnation,” the slowing growth in public goods available for consumption or redistribution. Between his various jibes at a strawman version of the standard economic model, Chang offers a persuasive analysis of the causes and possible solutions to the problem of low real growth. Interestingly, his progressive heterodoxy echoes Cowen’s Austrian public choice heterodoxy in many places. I’ve tried to summarize it below:
The number one reason for the drop in total factor productivity (The Great Stagnation) is that we have failed since the early eighties to continue to invest in research and development at the rate that we had previously sustained. This reduction in R&D happened both in individual corporations and in the economy as a whole, as increased dividends deplete institutional savings and investment. Meanwhile, deindustrialization tricks us into investing in service sectors where productivity gains generally come at the expense of quality or worker’s welfare. Chang suggests this had a number of linked causes:
- 1. Investors demand a larger share of profits:
SOMETHING (perhaps simple shareholder activism, but perhaps also an exogenous stagnation in growth) caused corporations to make up stagnant dividends by increasing the share of profits returned to shareholders from 35% in the 50s to 60% today. This decreased the share of profits that large corporations invested in R&D.
- 2. Lower R&D ratios led to lower productivity gains thereafter:
As dividends from large companies are returned to investors, they are either spent or reinvested. This leads to a general increase in inequality as capital gets a larger share of new growth than labor, but it also leads to a shift in allocations to smaller growth-oriented companies. Innovations now occur in startups and small firms who are nimble but also focused on relatively quick profits as they cannot afford long-term research and development. As a result, productivity and profits are increasingly disconnected, and we get the Internet and not a modern time saver like the washing machine. (Cowen calls this the privatization of productivity gains, but he never connects it to patterns in past investment. For Chang, this is the obvious result as investment is focused on the private enjoyments of the people receiving a larger share of the economy: the educated and relatively rich.)
- 3. Economists misrecognize costs for profits in the service-sector:
The historically massive growth in efficiency in the industrial sector and the cost disease in the various service sectors made it look like the economy was being “driven” by service workers like doctors, lawyers, bankers, and professors. In fact, these four groups are simply unable to match the increases in productivity that engineers and factory workers can manage, but lawyers, doctors, bankers, and professors deliver coveted services while preserving high barriers to entry, which allows us to claim an outsized proportion of new growth. (In this sense, we belong to the new rentier class.)
- 4. De-industrialization masquerades as a viable policy:
Many economies have shifted their emphasis to these low-growth sectors, exacerbating low R&D ratios because research in these fields is not productivity-enhancing. Education focuses on producing low-productivity bankers and professors rather than high productivity engineers. Now growth has to come from spammers, cops, drug traffickers, and prison guards.
- 5. What is to be done?
According to Chang, the solution is a renewed attention to industrial policy, because massive efficiency should be sought and rewarded rather than ignored: why is the Green Revolution less interesting to people (and the stock market) than Farmville?
Below the cut I’ve listed the chapter titles which will give you a sense of Chang’s positions. Some things we can probably agree on: (a) markets and their limits are political, not “free”, (b) managers are overpaid, and (c) Immigration restrictions are the primary source of international wage inequality. Other things are more controversial:
Thing 1 There is no such thing as a free market
Thing 2 Companies should not be run in the interest of their owners
Thing 3 Most people in rich countries are paid more than they should be
Thing 4 The washing machine has changed the world more than the internet has
Thing 5 Assume the worst about people and you get the worst
Thing 6 Greater macroeconomic stability has no made the world economy more stable.
Thing 7 Free-market policies rarely make poor countries rich
Thing 8 Capital has a nationality
Thing 9 We do not live in a post-industrial age
Thing 10 The US does not have the highest living standard in the world
Thing 11 Africa is not destined for underdevelopment
Thing 12 Governments can pick winners
Thing 13 Making rich people richer doesn’t make the rest of us richer
Thing 14 US managers are over-priced
Thing 15 People in poor countries are more entrepreneurial than people in rich countries Thing 16 We are not smart enough to leave things to the market
Thing 17 More education in itself is not going to make a country richer
Thing 18 What is good for General Motors is not necessarily good for the United States
Thing 19 Despite the fall of communism, we are still living in planned economies
Thing 20 Equality of opportunity may not be fair
Thing 21 Big government makes people more open to change
Thing 22 Financial markets need to become less, not more, efficient
Thing 23 Good economic policy does not require good economists