Joe: Here’s a wild thought: what if the best way to make an economy more dynamic and innovative is to make its financial markets less efficient? And what if a bigger government with a strong safety net actually makes people more willing to take risks? Lewis: Okay, that sounds like you're trying to break my brain. Less efficient is better? Bigger government is more dynamic? That goes against everything we're ever told. It’s like saying the best way to win a race is to run slower. Joe: Exactly. It feels completely backward, but it’s the kind of provocative thinking that fills the book we're diving into today: 23 Things They Don’t Tell You About Capitalism by Ha-Joon Chang. Lewis: Ah, I've heard of this one. It’s one of those books that gets people talking. Highly rated, but also stirs up a lot of debate. Joe: It really does. And to understand why, you have to know a bit about the author. Chang is a Cambridge-trained economist from South Korea, and he wrote this right after the 2008 financial crisis—a moment when the whole world was questioning the free-market gospel. His perspective is shaped by seeing a country like South Korea rapidly develop using policies that completely defy the rules we in the West are told to follow. Lewis: So he’s seen a different way of doing things succeed. That’s a powerful starting point. Joe: It is. And his first big myth-bust is one we take for granted every single day, and it’s the very foundation of this whole debate.

Joe: He kicks things off with "Thing 1: There is no such thing as a free market." Lewis: Hold on, that’s the whole ball game, isn't it? The 'free market' is the bedrock of capitalism. What does he mean it doesn't exist? Joe: He argues that what we call a 'free market' is an illusion. It's not a natural state; it's a human creation, defined by a web of rules and regulations. And many of those rules are so deeply ingrained we don't even see them as regulations anymore. Lewis: Like what? Give me an example. Joe: The most powerful one he uses is from history. Let’s go back to Britain in 1819. The Parliament is debating a new law, the Cotton Factories Regulation Act. It proposed banning children under nine from working in cotton factories. Lewis: Banning children under nine. That sounds... horrifyingly reasonable. Joe: You'd think so. But the opponents of the bill were outraged. They stood up in the House of Lords and argued that this law would undermine the "sanctity of freedom of contract." Their logic was: if children want to work, and factory owners want to employ them, the government has no right to interfere. They claimed it was an attack on the very principles of the free market. Lewis: Wow. They were defending child labor on the grounds of economic freedom? That’s just… morally bankrupt. It’s chilling to hear that logic applied to something so obviously wrong. Joe: It is. But it perfectly illustrates Chang's point. Today, no one in their right mind would argue that child labor laws are an 'unjustified' infringement on market freedom. We accept them as a given. They've become an invisible rule. The boundary of the market has shifted. Lewis: I see. So the 'free market' is like a sport. It seems free-flowing, but it only works because of a thousand hidden rules that everyone agrees on, like the size of the field or what counts as a foul. And changing those rules is a political fight, not a scientific one. Joe: Precisely. Think about environmental regulations. Or professional licenses for doctors and lawyers. Or rules about what can be sold—we don't allow the sale of human organs or court verdicts. These are all political and moral decisions that define the limits of the market. Free-market advocates aren't against regulation; they just want their preferred set of regulations, the ones that benefit them, to be seen as natural and invisible. Lewis: That’s a huge shift in perspective. It’s not about 'free' versus 'regulated.' It’s about who gets to write the rules and what values those rules reflect. Joe: Exactly. And once you see that, you start to question other so-called 'natural' rules of capitalism. Which brings us to another sacred cow.

Lewis: Okay, so the market has rules. But within those rules, surely a company should be run to make the most money for its owners, the shareholders? Isn't that the whole point of capitalism? It seems like the most straightforward, efficient way to run a business. Joe: That's the dominant theory, but Chang argues against it in "Thing 2: Companies should not be run in the interest of their owners." He says this idea, known as shareholder value maximization, is not only bad for society but is often disastrous for the company itself. Lewis: How can that be? If the owners are happy, the company must be doing well. Joe: Let's look at the story of General Motors. For decades, GM was the undisputed king of the auto world, a symbol of American industrial might. But starting in the 1980s, a new philosophy took hold, championed by figures like Jack Welch at GE: the sole duty of a company is to maximize shareholder value. Lewis: Right, boost that stock price. Joe: And how do you do that quickly? You cut costs. You slash long-term research and development. You squeeze your suppliers. And you use profits for massive stock buybacks to artificially inflate the share price, instead of reinvesting in better products or worker training. GM did all of this. Lewis: So they started chasing short-term gains instead of building better cars. Joe: They did. It got to the point where, by 2004, a staggering 80% of GM's profit came from its financial arm, GMAC. They were making more money from car loans and other financial bets than from actually manufacturing cars. Lewis: So they stopped being a car company that had a finance department and became a finance company that happened to make cars. And that's what led to the 2009 bankruptcy and the massive government bailout? Joe: It was a huge factor. They had neglected their core business for so long that when the financial crisis hit, the whole house of cards came down. The relentless pursuit of short-term shareholder value hollowed out the company from the inside, leaving it unable to compete. The irony is that the very people who were supposed to have the company's best interests at heart—the shareholders—pushed for policies that ultimately destroyed it. Lewis: But the classic argument is that shareholders are the ones taking all the risk. They're the 'residual claimants'—if the company goes bust, they lose everything. So they have the biggest incentive to ensure its long-term health. Joe: Chang has a brilliant counter to that. He says shareholders are actually the least committed stakeholders. Think about it. A worker has invested years of their life and has skills specific to that company. A supplier might have built their entire business around serving that one company. They have deep, long-term stakes. But a shareholder? Lewis: They can sell their stock in a nanosecond. Joe: Exactly. They are the most mobile, the most transient, the least loyal. They can exit at the first sign of trouble. To put them in charge of the company's long-term future is, in Chang's view, like putting the most flighty person in charge of a long-term project. Lewis: That's a powerful point. It makes you look at things like stock buybacks in a totally different light. It's not a sign of health; it can be a sign that a company is eating itself to please its most fickle stakeholders. Joe: And this flawed logic isn't just about corporate governance. It stems from a deeper misunderstanding of what actually drives a successful economy.

Joe: This short-term thinking isn't just bad for companies; it's based on a flawed view of what makes people tick, which in turn makes our whole economy more fragile. This leads us to "Thing 5: Assume the worst about people and you get the worst." Lewis: The Adam Smith idea, right? "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." Self-interest makes the world go 'round. Joe: That's the cornerstone of free-market thought. But Chang argues it’s a dangerously incomplete picture. He points to the phenomenon of 'work to rule.' Have you heard of this? Lewis: I think so. It's a form of industrial protest where workers don't strike, they just... do their jobs exactly as written in the rulebook? Joe: Precisely. No cutting corners, no using their initiative, no helping out a colleague. They follow every single rule to the letter. And what happens? Lewis: Everything grinds to a halt. Joe: Productivity plummets, often by 30 to 50 percent. This proves that our complex modern economy doesn't run on self-interest alone. It runs on the invisible oil of trust, goodwill, and loyalty. It relies on people doing more than they are contractually obligated to do, simply because they take pride in their work or feel a sense of duty to their team. Lewis: So our entire system relies on people doing more than they're paid for, out of a sense of pride or duty? That's a huge vulnerability for a system that tells us to be selfish. Joe: It's a massive contradiction. And when you design a system that assumes everyone is a selfish maximizer, you get... well, you get the worst. You create a low-trust environment that requires mountains of inefficient monitoring and control. But if you build a system on trust, you unlock that goodwill. Lewis: That feels right, but it also sounds a bit idealistic. How do you build that trust when people are facing real-world pressures, like the fear of losing their job? Joe: This is where Chang makes his most counter-intuitive and brilliant point, in "Thing 21: Big government makes people more open to change." Lewis: Okay, you're back to breaking my brain. Big government, welfare states... we're told those create dependency and make people lazy and resistant to change. Joe: The conventional wisdom, yes. But Chang argues the opposite. He says a well-designed welfare state acts as a powerful economic lubricant. Think of it this way: why are Americans generally more resistant to free trade and industrial change than, say, Swedes or Norwegians? Lewis: I'd guess because in the US, losing your job can be a catastrophe. You might lose your health insurance, your home, everything. It's a terrifying prospect. Joe: Exactly. In a country with a weak social safety net, people will fight tooth and nail to protect their current job, even if it's in a declining industry. They can't afford to take a risk. But in a country with robust unemployment benefits, retraining programs, and universal healthcare, losing your job is a setback, not a personal apocalypse. Lewis: You have a cushion. You have the breathing room to retrain, to find a new job that's a better fit, maybe even to start your own business. Joe: You got it. Chang uses a fantastic analogy: a strong safety net is like brakes on a car. Lewis: Brakes don't slow you down. They give you the confidence to go faster because you know you can stop safely if you need to. Joe: That's the one. A strong welfare state gives workers and the entire economy the confidence to embrace change, to adapt, to innovate. It makes the economy more dynamic, not less. It's not a bug; it's a feature.

Lewis: Wow. So, let me see if I can tie this all together. The 'free market' isn't really free; it's a set of politically-decided rules. The idea that companies should only serve shareholders is a relatively new invention that can destroy long-term value. And the belief that we're all just selfish actors is not only wrong, but building a system on that assumption actually makes us all poorer and more insecure. Joe: That's a perfect summary. What Chang is really showing us is that the version of capitalism we've been sold for the last 40 years is a story, a powerful one, but a story nonetheless. It's a system built on invisible rules we're not supposed to question, a flawed idea of corporate purpose that hollows out companies from the inside, and a cynical view of human nature that ignores the very things—trust, cooperation, security—that make an economy truly thrive. Lewis: It makes you wonder what other 'truths' about our economy are just convenient myths. The book is so highly-rated but also seen as quite controversial because it pokes at these sacred cows. It's not anti-capitalist, more like... pro-a-smarter-capitalism. Joe: It's reformist, absolutely. He's not trying to tear the system down; he's trying to rebuild it on a more honest and realistic foundation. He's asking us to be active economic citizens, to question the story we're being told. Lewis: Which feels more important now than ever. It leaves me with a question for everyone listening: What's one economic 'rule' you've always been told that just doesn't feel right to you? Maybe it's about student debt, or the housing market, or the value of your work. Let us know your thoughts. We'd love to hear them. Joe: This is Aibrary, signing off.