Tuesday, March 6, 2012

Why we must read History

When you read some western commentators’ take on state capitalism today, one may have the wrong impression that the West has embraced Adam Smith from the very beginning and never had to rely on state protection in growing their economy and achieving their economic success. The truth however will show the opposite.

Let me explain.

Adam Smith Vs Friedrich List

“Americans persist in thinking that Adam Smith’s rules for free trade are the only legitimate ones. But today’s fastest growing economies are using a very different set of rules. Once, we knew them – knew them so well that we played by them, and won. Now we seem to have forgotten.” James Farlow

The Anglo-American system of economics and politics, like any other system, rest in certain principles or beliefs. Basically, the world of Adam Smith. However, instead of seeing their system as one of many systems, Britons and Americans tend to elevate their version of political-economics almost to the level of a religion.

Outside United States and Britain, however, the Anglo-American world of Adam Smith is but one theory amongst several theorists who had important ideas about organizing the economy. For example, during the Meiji era from 1868-1912, Japanese scholars, individualist, industrialist and administrators while ‘shopping’ for a model for development found Friederich List’s the German economist and some other contributors’ theories about how economies grew more persuasive than the laissez-faire teachings of Adam Smith. Malaysia, just like many other East Asian economies adopted the Japanese model.

Smith’s policy of laissez-faire indicates a belief that the nation’s economy functions best when it is free from government intervention by what popularly known as the ‘invisible hand’. List suggested a government policy that is more paternalistic. Individuals might not automatically choose the best action or will act with complete rationale. As such the state must also be concerned with the processes as well as the results of the economy. In other words, society did not automatically move from farming to small industries then jump to major industries, just because millions of small merchants were making decisions for themselves.

If every person put his money where the return is the greatest, the money might not automatically go where it would do the nation best. For it to do so, it requires a plan, a push, or exercise of a central power. As such, in List’s view, economic policies will be good or bad depending on how far it is in the national economic interest, that is, national interest as compared to other nations.

How did List come to these theories? He drew his hypothesis heavily on the history of America and Britain. Yes, you heard me right - American and Britain’s. Didn’t the Americans reach their heights in economic power via laissez fair and opening of the market as they seem to claim today? Not really.

Serious studies by Fallow and other economic historians like, William Lazonick, Thomas McCraw, Geffrey Perret etc will show otherwise.

They suggested that none of the major economies today like America, Britain, Germany nor Japan conformed to today’s model of ‘getting-prices right’ and putting the consumer’s welfare first as their early model for development. All had to ‘cheat’ somehow to succeed. In other words, when their economies were growing and still developing, the countries had no time for laissez faire.

America for example, only began to preach laissez faire to the rest of the world after it had grown strong. The traditional American support and portrayal to worldwide free trade and laissez faire (as the secret of its success) is quite recent – and not telling the whole truth. A phenomenon made popular since after the Second World War.

Prior to that, from economic activities like steel and arms industries, to transportation and agriculture etc. it was more so directed by the state. In short, America took steps and actions and did not wait for them to occur. They deliberately promoted the results they desired. Tariff, was a potent weapon. Similarly, the nineteenth-century British began advocating laissez faire and free trade after their economic development had already achieved a position of strength to withstand and benefit from open competition.

In summary, what America and Britain did while industrializing is not what they have been telling the world about industrialization today. Commenting on the ‘Asian model’, Farlow stressed,

“Today’s Americans and Britons may not like this new system, which makes their economic life more challenging and confusing than it would otherwise be. They are not obliged to try to initiate its structure, which in many ways fits the social circumstances of East Asia better than those of the modern United States or Britain. But, the English-speaking world should stop ignoring the existence of this system and stop pretending that it doesn’t work.”

It is not a surprise for student of economics that Joseph Schumpeter who popularized the term ‘creative destruction’ in economics never lectured on his own theories despite entreaties from his students and colleagues. Some scholars suggested that he felt that in the last analysis, his formulations were inadequate. However, everyone who is interested in economics must come to grip with him. Not only because of what he accomplished within the discipline, but because in his very achievements he demonstrated its limitation. Thus, it is interesting to note that Shumpeter towards the end of his long career as an economist, contemplated that if he were to be given a second chance to start all over again, he would have devoted his life to studying economic history instead of economic theory or statistics.

Economic history is very telling. It can help us debunk some very strong beliefs and open our minds to other alternatives.

Anas Zubedy

Kuala Lumpur

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