23 Things They Don't Tell You about Capitalism

by Ha-Joon Chang

  The main reason why there are so much fewer (of course, in proportional terms) domestic servants in the rich countries – although obviously not the only reason, given the cultural differences among countries at similar levels of income, today and in the past – is the higher relative price of labour. With economic development, people (or rather the labour services they offer) become more expensive in relative terms than ‘things’ (see also Thing 9). As a result, in rich countries, domestic service has become a luxury good that only the rich can afford, whereas it is still cheap enough to be consumed even by lower-middle-class people in developing countries.

  Enter the washing machine

  Now, whatever the movements in the relative prices of ‘people’ and ‘things’, the fall in the share of people working as domestic servants would not have been as dramatic as it has been in the rich countries over the last century, had there not been the supply of a host of household technologies, which I have represented by the washing machine. However expensive (in relative terms) it may be to hire people who can wash clothes, clean the house, heat the house, cook and do the dishes, they would still have to be hired, if these things could not be done by machines. Or you would have to spend hours doing these things yourselves.

  Washing machines have saved mountains of time. The data are not easy to come by, but a mid 1940s study by the US Rural Electrification Authority reports that, with the introduction of the electric washing machine and electric iron, the time required for washing a 38 lb load of laundry was reduced by a factor of nearly 6 (from 4 hours to 41 minutes) and the time taken to iron it by a factor of more than 2.5 (from 4.5 hours to 1.75 hours).2 Piped water has meant that women do not have to spend hours fetching water (for which, according to the United Nations Development Program, up to two hours per day are spent in some developing countries). Vacuum cleaners have enabled us to clean our houses more thoroughly in a fraction of the time that was needed in the old days, when we had to do it with broom and rags. Gas/electric kitchen stoves and central heating have vastly reduced the time needed for collecting firewood, making fires, keeping the fires alive, and cleaning after them for heating and cooking purposes. Today many people in rich countries even have the dishwasher, whose (future) inventor a certain Mr I. M. Rubinow, an employee of the US Department of Agriculture, said would be ‘a true benefactor of mankind’ in his article in the Journal of Political Economy in 1906.

  The emergence of household appliances, as well as electricity, piped water and piped gas, has totally transformed the way women, and consequently men, live. They have made it possible for far more women to join the labour market. For example, in the US, the proportion of married white women in prime working ages (35–44 years) who work outside the home rose from a few per cent in the late 1890s to nearly 80 per cent today.3 It has also changed the female occupational structure dramatically by allowing society to get by with far fewer people working as domestic servants, as we have seen above – for example, in the 1870s, nearly 50 per cent of women employed in the US were employed as ‘servants and waitresses’ (most of whom we can take to have been servants rather than waitresses, given that eating out was not yet big business).4 Increased labour market participation has definitely raised the status of women at home and in society, thus also reducing preference for male children and increasing investment in female education, which then further increases female labour market participation. Even those educated women who in the end choose to stay at home with their children have higher status at home, as they can make credible threats that they can support themselves should they decide to leave their partners. With outside employment opportunities, the opportunity costs of children have risen, making families have fewer children. All of these have changed the traditional family dynamics. Taken together, they constitute really powerful changes.

  Of course, I am not saying that these changes have happened only – or even predominantly – because of changes in household technologies. The ‘pill’ and other contraceptives have had a powerful impact on female education and labour market participation by allowing women to control the timing and the frequency of their childbirths. And there are non-technological causes. Even with the same household technologies, countries can have quite different female labour market participation ratios and different occupation structures, depending on things like social conventions regarding the acceptability of middle-class women working (poor women have always worked), tax incentives for paid work and child rearing, and the affordability of childcare. Having said all this, however, it is still true that, without the washing machine (and other labour-saving household technologies), the scale of change in the role of women in society and in family dynamics would not have been nearly as dramatic.

  The washing machine beats the internet

  Compared to the changes brought about by the washing machine (and company), the impact of the internet, which many think has totally changed the world, has not been as fundamental – at least so far. The internet has, of course, transformed the way people spend their out-of-work hours – surfing the net, chatting with friends on Facebook, talking to them on Skype, playing electronic games with someone who’s sitting 5,000 miles away, and what not. It has also vastly improved the efficiency with which we can find information about our insurance policies, holidays, restaurants, and increasingly even the price of broccoli and shampoo.

  However, when it comes to production processes, it is not clear whether the impacts have been so revolutionary. To be sure, for some, the internet has profoundly changed the way in which they work. I know that by experience. Thanks to the internet, I have been able to write a whole book with my friend and sometime co-author, Professor Ilene Grabel, who teaches in Denver, Colorado, with only one face-to-face meeting and one or two phone calls.5 However, for many other people, the internet has not had much impact on productivity. Studies have struggled to find the positive impact of the internet on overall productivity – as Robert Solow, the Nobel laureate economist, put it, ‘the evidence is everywhere but in numbers’.

  You may think that my comparison is unfair. The household appliances that I mention have had at least a few decades, sometimes a century, to work their magic, whereas the internet is barely two decades old. This is partly true. As the distinguished historian of science, David Edgerton, said in his fascinating book The Shock of the Old – Technology and Global History Since 1900, the maximum use of a technology, and thus the maximum impact, is often achieved decades after the invention of the technology. But even in terms of its immediate impact, I doubt whether the internet is the revolutionary technology that many of us think it is.

  The internet is beaten by the telegraph

  Just before the start of the trans-Atlantic wired telegraph service in 1866, it took about three weeks to send a message to the other side of the ‘pond’ – the time it took to cross the Atlantic by sail ships. Even going ‘express’ on a steamship (which did not become prevalent until the 1890s), you had to allow two weeks (the record crossings of the time were eight to nine days).

  With the telegraph, the transmission time for, say, a 300-word message was reduced to 7 or 8 minutes. It could even be quicker still. The New York Times reported on 4 December 1861 that Abraham Lincoln’s State of the Union address of 7,578 words was transmitted from Washington, DC to the rest of the country in 92 minutes, giving an average of 82 words per minute, which would have allowed you to send the 300-word message in less than 4 minutes. But that was a record, and the average was more like 40 words per minute, giving us 7.5 minutes for a 300-word message. A reduction from 2 weeks to 7.5 minutes is by a factor of over 2,500 times.

  The internet reduced the transmission time of a 300-word message from 10 seconds on the fax machine to, say, 2 seconds, but this is only a reduction by a factor of 5. The speed reduction by the internet is greater when it comes to longer messages – it can send in 10 seconds (considering that it has to be loaded), say, a 30,000-word document, which would have taken more than 16 minut
es (or 1,000 seconds) on the fax machine, giving us an acceleration in transmission speed of 100 times. But compare that to the 2,500-time reduction achieved by the telegraph.

  The internet obviously has other revolutionary features. It allows us to send pictures at high speed (something that even telegraph or fax could not do and thus relied on physical transportation). It can be accessed in many places, not just in post offices. Most importantly, using it, we can search for particular information we want from a vast number of sources. However, in terms of sheer acceleration in speed, it is nowhere near as revolutionary as the humble wired (not even wireless) telegraphy.

  We vastly overestimate the impacts of the internet only because it is affecting us now. It is not just us. Human beings tend to be fascinated by the newest and the most visible technologies. Already in 1944, George Orwell criticized people who got over-excited by the ‘abolition of distance’ and the ‘disappearance of frontiers’ thanks to the aeroplane and the radio.

  Putting changes into perspective

  Who cares if people think wrongly that the internet has had more important impacts than telegraphy or the washing machine? Why does it matter that people are more impressed by the most recent changes?

  It would not matter if this distortion of perspectives was just a matter of people’s opinions. However, these distorted perspectives have real impacts, as they result in misguided use of scarce resources.

  The fascination with the ICT (Information and Communication Technology) revolution, represented by the internet, has made some rich countries – especially the US and Britain – wrongly conclude that making things is so ‘yesterday’ that they should try to live on ideas. And as I explain in Thing 9, this belief in ‘post-industrial society’ has led those countries to unduly neglect their manufacturing sector, with adverse consequences for their economies.

  Even more worryingly, the fascination with the internet by people in rich countries has moved the international community to worry about the ‘digital divide’ between the rich countries and the poor countries. This has led companies, charitable foundations and individuals to donate money to developing countries to buy computer equipment and internet facilities. The question, however, is whether this is what the developing countries need the most. Perhaps giving money for those less fashionable things such as digging wells, extending electricity grids and making more affordable washing machines would have improved people’s lives more than giving every child a laptop computer or setting up internet centres in rural villages. I am not saying that those things are necessarily more important, but many donors have rushed into fancy programmes without carefully assessing the relative long-term costs and benefits of alternative uses of their money.

  In yet another example, a fascination with the new has led people to believe that the recent changes in the technologies of communications and transportation are so revolutionary that now we live in a ‘borderless world’, as the title of the famous book by Kenichi Ohmae, the Japanese business guru, goes.6 As a result, in the last twenty years or so, many people have come to believe that whatever change is happening today is the result of monumental technological progress, going against which will be like trying to turn the clock back. Believing in such a world, many governments have dismantled some of the very necessary regulations on cross-border flows of capital, labour and goods, with poor results (for example, see Things 7 and 8). However, as I have shown, the recent changes in those technologies are not nearly as revolutionary as the corresponding changes of a century ago. In fact, the world was a lot more globalized a century ago than it was between the 1960s and the 1980s despite having much inferior technologies of communication and transportation, because in the latter period governments, especially the powerful governments, believed in tougher regulations of these cross-border flows. What has determined the degree of globalization (in other words, national openness) is politics, rather than technology. However, if we let our perspective be distorted by our fascination with the most recent technological revolution, we cannot see this point and end up implementing the wrong policies.

  Understanding technological trends is very important for correctly designing economic policies, both at the national and the international levels (and for making the right career choices at the individual level). However, our fascination with the latest, and our under-valuation of what has already become common, can, and has, led us in all sorts of wrong directions. I have made this point deliberately provocatively by pitting the humble washing machine against the internet, but my examples should have shown you that the ways in which technological forces have shaped economic and social developments under capitalism are much more complex than is usually believed.

  Thing 5

  Assume the worst about people

  and you get the worst

  What they tell you

  Adam Smith famously said: ‘It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.’ The market beautifully harnesses the energy of selfish individuals thinking only of themselves (and, at most, their families) to produce social harmony. Communism failed because it denied this human instinct and ran the economy assuming everyone to be selfless, or at least largely altruistic. We have to assume the worst about people (that is, they only think about themselves), if we are to construct a durable economic system.

  What they don’t tell you

  Self-interest is a most powerful trait in most human beings. However, it’s not our only drive. It is very often not even our primary motivation. Indeed, if the world were full of the self-seeking individuals found in economics textbooks, it would grind to a halt because we would be spending most of our time cheating, trying to catch the cheaters, and punishing the caught. The world works as it does only because people are not the totally self-seeking agents that free-market economics believes them to be. We need to design an economic system that, while acknowledging that people are often selfish, exploits other human motives to the full and gets the best out of people. The likelihood is that, if we assume the worst about people, we will get the worst out of them.

  How (not) to run a company

  In the mid 1990s, I was attending a conference in Japan on the ‘East Asian growth miracle’, organized by the World Bank. On one side of the debate were people like myself, arguing that government intervention had played a positive role in the East Asian growth story by going against market signals and protecting and subsidizing industries such as automobiles and electronics. On the other side, there were economists supporting the World Bank, who argued that government intervention had at best been an irrelevant sideshow or at worst done more harm than good in East Asia. More importantly, they added, even if it were true that the East Asian miracle owed something to government intervention, that does not mean that policies used by the East Asian countries can be recommended to other countries. Government officials who make policies are (like all of us) self-seeking agents, it was pointed out, more interested in expanding their own power and prestige rather than promoting national interests. They argued that government intervention worked in East Asia only because they had exceptionally selfless and capable bureaucrats for historical reasons (which we need not go into here). Even some of the economists who were supporting an active role for government conceded this point.

  Listening to this debate, a distinguished-looking Japanese gentleman in the audience raised his hand. Introducing himself as one of the top managers of Kobe Steel, the then fourth-largest steel producer in Japan, the gentleman chided the economists for misunderstanding the nature of modern bureaucracy, be it in the government or in the private sector.

  The Kobe Steel manager said (I am, of course, paraphrasing him): ‘I am sorry to say this, but you economists don’t understand how the real world works. I have a PhD in metallurgy and have been working in Kobe Steel for nearly three decades, so I know a thing or two about steel-making. However, my company is now so large and complex th
at even I do not understand more than half the things that are going on within it. As for the other managers – with backgrounds in accounting and marketing – they really haven’t much of a clue. Despite this, our board of directors routinely approves the majority of projects submitted by our employees, because we believe that our employees work for the good of the company. If we assumed that everyone is out to promote his own interests and questioned the motivations of our employees all the time, the company would grind to a halt, as we would spend all our time going through proposals that we really don’t understand. You simply cannot run a large bureaucratic organization, be it Kobe Steel or your government, if you assume that everyone is out for himself.’

  This is merely an anecdote, but it is a powerful testimony to the limitations of standard economic theory, which assumes that self-interest is the only human motivation that counts. Let me elaborate.

  Selfish butchers and bakers

  Free-market economics starts from the assumption that all economic agents are selfish, as summed up in Adam Smith’s assessment of the butcher, the brewer and the baker. The beauty of the market system, they contend, is that it channels what seems to be the worst aspect of human nature – self-seeking, or greed, if you like – into something productive and socially beneficial.

  Given their selfish nature, shopkeepers will try to over-charge you, workers will try their best to goof off from work, and professional managers will try to maximize their own salaries and prestige rather than profits, which go to the shareholders rather than themselves. However, the power of the market will put strict limits to, if not completely eliminate, these behaviours: shopkeepers won’t cheat you if they have a competitor around the corner; workers would not dare to slack off if they know they can be easily replaced; hired managers will not be able to fleece the shareholders if they operate in a vibrant stock market, which will ensure that managers who generate lower profits, and thus lower share prices, risk losing their jobs through takeover.