All Commentary
Monday, March 2, 2009

Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism

Most people seize on the failure to practice what one preaches as proof of the error of the message preached. This is the logical fallacy known as tu quoque. It is far more often the case, however, that the message is virtuous but virtue is not what the hypocritical preacher truly seeks. Ha-Joon Chang, author of Bad Samaritans, similarly draws a fallacious conclusion when he takes the wealthy nations of the West to task for not adhering to the doctrines of free trade, monetary stability, and fiscal responsibility to which they pay lip service.

But tu quoque is the least of the logical errors informing this book’s misguided policy conclusions. Once we get beyond the silly comparison of an infant industry with his six-year-old son, we see the real shortcoming of his attack on free trade: his attenuated understanding of entrepreneurship. Entrepreneurs use resources for which they are responsible (either their own or those they have borrowed and must repay) based on their appraisals, in the face of uncertainty, of consumer demand and resource availability in the future. The infant-industry argument central to this book implicitly assumes that the only investments that can contribute to economic growth are those that compete with imports. But of all the import-competing industries in any developing country, which ones should be fostered through protectionism? Also, there’s no reason to presume that government leaders making those choices would do so on the basis of objective appraisal of their profitability. Favoritism towards relatives and cronies is far more likely.

Rather than let real entrepreneurs bear the risk and reap the rewards, infant industry protectionism is little more than a socialization of risk. While it may yield more investment, the investment to be protected is likely to be misdirected and thus less conducive to growth than investment that must meet a harsher market test.

The author rails against “neo-liberal” ideologues (the bad Samaritans of his title), blissfully unaware of his own ideological biases—namely, a touching faith in the ability of government leaders to make the right choices more often than private entrepreneurs risking their own capital. Entrepreneurs are not necessary in this view, since the government can do their job at least as well. The government can determine pragmatically which industries to protect, how much inflation will maximize growth, which foreign investments to permit, and which enterprises it should own.

Not only does Chang get the big picture wrong, he commits a lot of smaller errors along the way. He misplaces Jean-Baptiste Colbert’s tenure as France’s finance minister by 200 years (1865–1883 instead of 1665–1683). He cites the “failure of electricity deregulation in California, which resulted in the infamous blackout in 2001,” oblivious to the continued price controls that made “deregulation” a terrible mischaracterization of what really went on. He avers that “[s]trengthening of the welfare state . . . will also help reduce political corruption by making the poor less vulnerable to vote buying,”—as if the welfare state were much more than vote-buying on a wholesale basis. Another howler is his description of the late socialist John Kenneth Galbraith as a non-leftist. I guess he was just another non-ideological pragmatic centrist like Chang himself.

He also sneaks some subtle premises into his work, which helps explain why he supports so many bad policies. His tacit approval of Britain’s ban on the migration of skilled workers in the 1700s could only come from someone who believes the state owns its residents. Much of his discussion of less-developed countries’ lack of respect for intellectual property rights seems to be based on the premise that if you need something you can’t afford you have the right to steal it. Throughout the book he cites the existence of specific policies as prima facie evidence that they are justified. For example, “When they were backwards themselves in terms of knowledge, all of today’s rich countries blithely violated other people’s patents, trademarks and copyrights.”

Even when Chang raises interesting points his statist views put him on the wrong side of the issue. For example, he is critical of what he calls the unholy trinity of the IMF, World Bank, and WTO, but for the wrong reasons—downplaying the high taxes and additional regulations they impose in exchange for the putative “benefits” they provide.

Overall, Bad Samaritans gives us a good picture of what we champions of freedom are up against. The author J. Wallace Day once said, “Always keep your friends close, but your enemies keep closer.” That is the best rationale I can come up with to recommend that supporters of economic liberty read this book—to know what enemies of free trade are saying today.