The way the world works

How The World Works in The Atlantic is the best article on economic theory I’ve read in ages. Granted, I don’t exactly go out of my way to read articles on economic theory, but that’s largely because most of them exhibit the blindness cataloged in this article. Certain (mostly American) economic theories have somehow taken on the aura of absolute truth. It is drummed into us that free markets always optimize; what’s best for the individual is best for everyone; protectionism is bad. To question these facts makes you look like some sort of 1960s throwback quoting from a copy of Das Kapital and extolling the virtues of the Five Year Plan.

The Baffler magazine devoted an entire issue to similar topics, titling it “The God That Sucked”. The Market, it proclaimed, has become a kind of god, a divine force that may not be questioned. Its judgements are sacrosanct–and when it demands tribute, you had better pay up immediately or you will suffer. You need not concern yourself with the question of why the poor are starving; nothing can be done about it, it’s just The Market at work. Perhaps if the poor learn the ways of The Market and conduct themselves in accordance with its directives, they too shall be blessed.

The God That Sucked, by the way, was published in 2001. The divine wrath it talked about was the .com crash; but of course, re-read the articles now, and they’re still exactly as relevant to the banking meltdown, perhaps even more so. How The World Works is from even earlier, 1993, and yet we still haven’t started to ask the right questions. When you’re done reading it, I have a question, an observation, and a few annotations regarding things I think were missed.

By the logic of the Anglo-American system, if each individual does what is best for him or her, the result will be what is best for the nation as a whole.

Perhaps someone more familiar with Adam Smith and other icons of modern economic thought can fill in more detail here, or point me at the proof. I hope so, because as phrased, it’s a complete non-sequitur. It’s simply a dressed up version of the fallacy of composition. Google turns up plenty of references to said fallacy, but usually in reference to specific problems such as trade deficits (something I’ve been ranting about since the 80s), or how to get out of a recession. There must be a good argument as to why the entire free market system doesn’t rest on a fallacy, right?

Yes, indeed—ask Hong Kong. Since the end of the Second World War its policy has generally been laissez-faire. Compared with the rest of Asia, Hong Kong interferes less, plans less, and leaves market forces more on their own. What has been the result? During the 1980s the real earnings of Hong Kong’s people rose more slowly than those of the people of Korea, Singapore, Thailand, and Taiwan. It is a busy, bustling entrepot of merchants, especially those handling commerce in and out of China. But as an industrial center it is falling behind its neighbors.

I remember back in the 70s and 80s the words “Made In Hong Kong” were almost ubiquitous, to the point of being fodder for cheap comedy. I can’t recall the last time I saw those words on anything. Does Hong Kong actually make anything any more, or has it become another “advanced” economy that merely shuffles imaginary entities around?

The concepts of consumer welfare, comparative advantage, and freest possible trade now seem not like concepts but like natural laws. But these concepts are detached from historical experience.

I think the best example of how economic growth is at odds with US economic theory is the invention of intellectual property in the 1980s. In the current political climate, where the USA is trying to strongarm other countries into accepting software patents and ever increasing copyright terms, it’s easy to forget that the US didn’t even recognize copyright of overseas works until finally accepting the Berne Convention in 1988. For a full century, the US operated as a rogue state as far as intellectual property was concerned.

Copyright violation was as American as apple pie; famed invention thief and all-round douchebag Thomas Edison funded his work by pirating European movies and showing them for profit in the US.

The message wasn’t lost on developing nations. Singapore didn’t have strong copyright protection until 1987. China, some would say, still doesn’t have it.

Even though copyright is a monopoly, and conventional economic wisdom is that monopolies are bad, it has become another of those things that it seems we are expected to simply accept–even though some rogue economists are now starting to argue that our empirical knowledge of the effect of increased copyright protection is minimal, and we might have gone well past the optimum duration for copyright, given the goals set out for its existence.

America’s economic history follows the same pattern. While American industry was developing, the country had no time for laissez-faire. After it had grown strong, the United States began preaching laissez-faire to the rest of the world—and began to kid itself about its own history, believing its slogans about laissez-faire as the secret of its success.

…and the same is true for ‘intellectual property’.