23 Things They Don't Tell You About Capitalism

During their Industrial ‘Revolution’ in the nineteenth century, per capita income in the economies of Western Europe and its offshoots (North America, Australia and New Zealand) grew between 1 per cent and 1.5 per cent per year (the exact number depending on the exact time period and the country you look at). During the so-called ‘Golden Age’ of capitalism between the early 1950s and the mid 1970s, per capita income in Western Europe and its offshoots grew at around 3.5–4 per cent per year.

In contrast, during their miracle years, roughly between the 1950s and the mid 1990s (and between the 1980s and today in the case of China), per capita incomes grew at something like 6–7 per cent per year in the East Asian economies mentioned above. If growth rates of 1–1.5 per cent describe a ‘revolution’ and 3.5–4 per cent a ‘golden age’, 6–7 per cent deserves to be called a ‘miracle’.[1]

Given these economic records, one would naturally surmise that these countries must have had a lot of good economists. In the same way in which Germany excels in engineering because of the quality of its engineers and France leads the world in designer goods because of the talents of its designers, it seems obvious the East Asian countries must have achieved economic miracles because of the capability of their economists. Especially in Japan, Taiwan, South Korea and China – countries in which the government played a very active role during the miracle years – there must have been many first-rate economists working for the government, one would reason.

Not so. Economists were in fact conspicuous by their absence in the governments of the East Asian miracle economies. Japanese economic bureaucrats were mostly lawyers by training. In Taiwan, most key economic officials were engineers and scientists, rather than economists, as is the case in China today. Korea also had a high proportion of lawyers in its economic bureaucracy, especially before the 1980s. Oh Won-Chul, the brains behind the country’s heavy and chemical industrialization programme in the 1970s – which transformed its economy from an efficient exporter of low-grade manufacturing products into a world-class player in electronics, steel and shipbuilding – was an engineer by training.

If we don’t need economists to have good economic performance, as in the East Asian cases, what use is economics? Have the IMF, the World Bank and other international organizations been wasting money when they provided economics training courses for developing-country government officials and scholarships for bright young things from those countries to study in American or British universities renowned for their excellence in economics?

A possible explanation of the East Asian experience is that what is needed in those who are running economic policy is general intelligence, rather than specialist knowledge in economics. It may be that the economics taught in university classrooms is too detached from reality to be of practical use. If this is the case, the government will acquire more able economic policy-makers by recruiting those who have studied what happens to be the most prestigious subject in the country (which could be law, engineering or eveneconomics, depending on the country), rather than a subject that is notionally most relevant for economic policy-making (that is, economics) (see Thing 17). This conjecture is indirectly supported by the fact that although economic policies in many Latin American countries have been run by economists, and very highly trained ones at that (the ‘Chicago Boys’ of General Pinochet being the most prominent example), their economic performance has been much inferior to that of the East Asian countries. India and Pakistan also have many world-class economists, but their economic performance is no match for the East Asian one.

John Kenneth Galbraith, the wittiest economist in history, was certainly exaggerating when he said that ‘economics is extremely useful as a form of employment for economists’, but he may not have been far off the mark. Economics does not seem very relevant for economic management in the real world.

Actually, it is worse than that. There are reasons to think that economics may be positively harmful for the economy.

How come nobody could foresee it?

In November 2008, Queen Elizabeth II visited the London School of Economics, which has one of the most highly regarded economics departments in the world. When given a presentation by one of the professors there, Professor Luis Garicano, on the financial crisis that had just engulfed the world, the Queen asked: ‘How come nobody could foresee it?’ Her Majesty asked a question that had been in most people’s minds since the outbreak of the crisis in the autumn of 2008.