Ha-Joon Chang - 23 Things They Don't Tell You about Capitalism

Moreover, in all capitalist economies, the government plans the national technological future by funding a very high proportion (20–50 per cent) of research and development. Interestingly, the US is one of the most planned capitalist economies in this regard. Between the 1950s and the 1980s, the share of government funding in total R&D in the supposedly free-market US accounted for, depending on the year, between 47 per cent and 65 per cent, as against around 20 per cent in Japan and Korea and less than 40 per cent in several European countries (e.g., Belgium, Finland, Germany, Sweden). [62] The share of federal government in total R&D spending in the US was 53.6 per cent in 1953, 56.8 per cent in 1955, 64.6 per cent in 1960, 64.9 per cent in 1965, 57.1 per cent in 1970, 51.7 per cent in 1975, 47.2 per cent in 1980, 47.9 per cent in 1985 and 47.3 per cent in 1989 (estimated). See D. Mowery and N. Rosenberg, ‘The U.S. National Innovation System’ in R. Nelson (ed.), National Innovation Systems (Oxford University Press, New York and Oxford, 1993), p. 41, table 2.3. The ratio has come down since the 1990s, as military R&D funding was reduced with the end of the Cold War. However, even so, the share of government in R&D in the US is still higher than in many other capitalist economies. It is notable that most of the industries where the US has an international technological lead are the industries that have been receiving major government R&D funding through military programmes (e.g., computers, semiconductors, aircraft) and health projects (e.g., pharmaceuticals, biotechnology).

Of course, since the 1980s the extent of government planning in most capitalist economies has declined, not least because of the rise of pro-market ideology during this period. Indicative planning has been phased out in most countries, including in the ones where it had been successful. In many, although not all, countries, privatization has resulted in a falling share of SOEs in national output and investment. The share of government funding in total R&D funding has also fallen in virtually all capitalist countries, although not by very much in most cases. However, I would argue, despite the relative decline of government planning in the recent period, there is still extensive, and increasing, planning in the capitalist economies. Why do I say that?

Suppose that a new CEO arrived in a company and said: ‘I am a great believer in market forces. In this fast-changing world, we should not have a fixed strategy and should maintain maximum possible flexibility. So, from now on, everyone in this company is going to be guided by ever-changing market prices, and not by some rigid plan.’ What do you think would happen? Would his employees welcome a leader with a vision fit for the twenty-first century? Would the shareholders applaud his market-friendly approach and award him with a pay rise?

He wouldn’t last a week. People would say he does not have leadership qualities. He would be accused of lacking the ‘vision thing’ (as George Bush Sr once put it). The top decision-maker, it would be pointed out, should be willing to shape the future of the company, rather than letting it just happen. Blindly following market signals, they would say, is not how you run a business.

People would expect a new CEO to say something like: ‘This is where our company is today. That is where I want to take it in ten years’ time. In order to get there, we will develop new industries A, B and C, while winding down D and E. Our subsidiary in industry D will be sold off. We will shut down our subsidiary in industry E at home, but some production may be shifted to China. In order to develop our subsidiary in industry A, we will have to cross-subsidize it with the profits from existing businesses. In order to establish a presence in industry B, we have to go into strategic alliance with Kaisha Corporation of Japan, which may involve supplying it with some inputs that we produce at below-market prices. In order to expand our business in industry C, we will need to increase our R&D investment in the next five years. All this may mean the company as a whole making losses in the foreseeable future. If that is the case, so be it. Because that is the price we have to pay in order to have a brighter future.’ In other words, a CEO is expected to be a ‘man (or a woman) with a plan ’.

Businesses plan their activities – often down to the last detail. Indeed, that is where Marx got the idea of centrally planning the whole economy. When he talked about planning, there was in fact no real-life government that was practising planning. At the time, only firms planned. What Marx predicted was that the ‘rational’ planning approach of the capitalist firms would eventually prove superior to the wasteful anarchy of the market and thus eventually be extended to the whole economy. To be sure, he criticized planning within the firm as despotism by capitalists, but he believed that, once private property was abolished and the capitalists eliminated, the rational elements of such despotism could be isolated and harnessed for the social good.

With the development of capitalism, more and more areas of the economy have become dominated by large corporations. This means that the area of the capitalist economy that is covered by planning has in fact grown. To give you a concrete example, these days, depending on the estimate, between one third and one half of international trade consists of transfers among different units within transnational corporations.

Herbert Simon, the 1978 Nobel laureate in economics who was a pioneer of the study of business organizations ( see Thing 16 ), put this point succinctly in 1991 in ‘Organisations and Markets’, one of the last articles he wrote. If a Martian, with no preconceptions, came to Earth and observed our economy, Simon mused, would he conclude that Earthlings live in a market economy ? No, Simon said, he would almost certainly have concluded that Earthlings live in an organizational economy in the sense that the bulk of earth’s economic activities is coordinated within the boundaries of firms (organizations), rather than through market transactions between those firms. If firms were represented by green and markets by red, Simon argued, the Martian would see ‘large green areas interconnected by red lines’, rather than ‘a network of red lines connecting green spots’. [63] H. Simon, ‘Organizations and markets’, Journal of Economic Perspectives , 1991, vol. 5, no. 2, p. 27. And we think planning is dead.

Simon did not talk much about government planning, but if we add government planning, modern capitalist economies are even more planned than his Martian example suggests. Between the planning that is going on within corporations and various types of planning by the government, modern capitalist economies are planned to a very high degree. One interesting point that follows from these observations is that rich countries are more planned than poor countries, owing to the more widespread existence of large corporations and often more pervasive (albeit often less visible, on account of its more subtle approach) presence of the government.

The question, then, is not whether to plan or not. It is what the appropriate levels and forms of planning are for different activities. The prejudice against planning, while understandable given the failures of communist central planning, makes us misunderstand the true nature of the modern economy in which government policy, corporate planning and market relationships are all vital and interact in a complex way. Without markets we will end up with the inefficiencies of the Soviet system. However, thinking that we can live by the market alone is like believing that we can live by eating only salt, because salt is vital for our survival.