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Reviving the Invisible Hand: The Case for Classical Liberalism in the Twenty-first Century | 
 enlarge | Author: Deepak Lal
Publisher: Princeton University Press
Category: Book
List Price: £27.95
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Rating:  1 reviews
Sales Rank: 144373
Media: Hardcover
Pages: 336
Number Of Items: 1
Shipping Weight (lbs): 1.3
Dimensions (in): 9.2 x 6.3 x 1.1
ISBN: 0691125910
Dewey Decimal Number: 320.512
EAN: 9780691125916
ASIN: 0691125910
Publication Date: July 3, 2006
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A good message but a flawed messenger July 27, 2007
Marc van Wegberg (Maastricht, the Netherlands)
0 out of 2 found this review helpful
Lal, D. (2006). Reviving the Invisible Hand: The Case for Classical Liberalism in the Twenty-First Century. Princeton: Princeton University Press.
The fall of the Berlin Wall, the opening up of China to the world economy, and liberalization of formerly monopoly industries such as telecommunication and airlines have all expanded the scope of the market economy. Now we see the beginning of an intellectual revival of the market economy. Capitalism does not just deliver the goods. It is morally superior to its alternatives. Mrs. Deirdre McCloskey makes this case in her major book The Bourgeois Virtues. Mr. Deepak Lal in this book makes a similar case for capitalism. Capitalism does not create poverty in the Third World, it is not morally offensive to non-Western cultures, it does not undermine happiness of the many by the display of status by the happy few, and it does not destroy the natural environment. Poverty does exist, but it recedes where the market economy takes hold. Capitalism does change beliefs, and thus spreads modernism. But it mainly changes beliefs about how the world works, not about the moral order that people wish to maintain among each other.
Capitalism is, however, hugely controversial since it very start. The book is about these two contradictory findings: that capitalism is overwhelmingly good for development, yet hugely controversial and even hated the world over. Mr. Lal goes some way in accounting for this contradiction by pointing to two facts. One is that ideologically-based faulty reasoning blames capitalism for ills unrelated to it. Development aid is based on lies. Organisations such as the World Bank continue to spread these lies. Whoever blames ills on capitalism has the fond attention of corrupt powers challenged by the dynamics that capitalism unleashes. This then is the second cause of controversy. Capitalism is a system in change, a cause of constant turmoil. Besides all the winners, there are always bound to be losers at every turn. Pressure groups capture the state and its attendant organisations to rally support for their cause. They exaggerate the ills and defame capitalism. The stronger the government is, the more it becomes beholden to powerful pressure groups that are hurt by the wrenching changes that capitalism brings about.
The book explores notably two aspects of the market economy. One is trade and globalization. Trade increases productivity and wealth. Opening up markets for trade increases the size of the product market. As Adam Smith argued, this allows firms to achieve economies of scale and allows them to specialize. Trade liberalization is good, argues Lal, even if a country does so unilaterally. He is able to identify only a single case where a country might be harmed by trade liberalization. And yet trade liberalization is hugely controversial. Lal traces this to the income effects of trade liberalization. Opening up a market for trade stimulates companies to increase productions that use up the factors of production in a country (such as land or labour) that are abundant and relatively cheap. By means of trade the country can also cut back on productions that use factors of production that are relatively scarce and expensive. This is a boon to owners of the abundant factors and hurts the owners of scarce factors. The latter now have a motive to turn against trade liberalization. It hurts their revenues by switching production abroad. They have a motive to organize. They will capture the state. The result is government policy to roll back trade liberalization, even though society as a whole would benefit.
The second point the book explores is that capitalism is felt by people in the Third World to Westernize them. Capitalism is a vehicle for alien moral (or immoral) influences that overwhelm the local community's culture, religious beliefs, and traditions. Yes, Lal admists, capitalism will modernize a society. It will change its material beliefs, its beliefs about how the world works, about facts and insights. But it need not Westernize a nation. Capitalism need not change a culture's cosmological beliefs, its beliefs about morality, about relationships, about values and virtues that people hold dear. As Japan and now, perhaps, China and India show, huge success with capitalism can be combined with non-Western cultural conservatism.
I feel rather attracted to mr. Lal's overall message. The material success of capitalism in creating development and spreading wealth is undeniable. So let's accept that then. Let's give up romantic notions of traditional communities where people cooperate for a song. Capitalism works, so let's embrace it.
Yet the book leaves a sour aftertaste. A very sour aftertaste. It is not the core message itself that is wrong. It is how the message is conveyed. I see three problems in this book. First, the author continues to be wedded to the economist's model of homo economicus. Economic man is self-interested and rational, focused entirely on maximizing private utility. This model is not culturally neutral. It exists at odds with certain non-Western more communal societies. It represents the amoral attitude that people both in the West and outside of it criticize capitalism for. Only by a contrived detour can Mr. Lal salvage his morally righteous capitalism based on economic man. Here, Mrs. Deirdre McCloskey's book is far more credible: she restores captialism's moral credibility by rejecting economic man. Economic man was a figment of the imagination of western scholars who by this invention betrayed the moral basis of capitalism. These intellectuals betrayed capitalism by stressing its greedy nature. This opened the door for opponents of the market economy, who since then have had a field day.
A second problem with the book is its sloppiness. This is not a detail, I believe. There is sloppiness everywhere in the book. The data in table 1.2 on page 14 can't all be right, just look at some of the population data in 1870. The $365 annual per capita income on page 137 should be ten times that. Worse still are the names misspelled. The president of the World Bank, Mr. Lal's bete noire, is alternatively identified as John Wolfensohn, James Wolfensohn, and Wolfhenson (see pages 143 and 147). The founder of the Turkish republic is identified as Attaturk. The J in BJP, a political party in India, is identified as standing for Janata and Janta on pages 165 and 167. Even worse than this is intellectual sloppiness. Here is how Mr. Lal dispatches a well known and respected Marxist academic: 'the Marxist economist John Roemer .. argued that as in modern economies most inequalities were due to the differing intellectual endowments of individuals, higher IQ individuals should be taxed more heavily. Without having read Roemer, the Khmer Rouge leader Pol Pot followed this advice to its logical conclusion when he had anyone with any education clubbed to death in the killing fields of Cambodia.' (p. 193) Killing high IQ people is not the logical conclusion of taxing them, but, instead, denies the society the revenues that taxing them would give.
The worst excess of intellectual sloppiness is I think Mr. Lal's description of the European Union on pages 72 to 74. This has to be read to be believed. I would not have been able to imagine that such invective filled with hatred would find a place in a purportedly academic book, printed by Princeton University Press no less. I will just give a flavour of these pages: Italy's motive to join the EU is reduced to one motive only, 'to unload the unending burden of subsidizing its South -the Mezzogiorno- to a larger body of European taxpayers' (p. 73). For each leading member country a similar argument is listed. That makes for sad reading. At no point is credit given to the stated objectives, that the European Union is a voluntary project of cooperation to overcome war and achieve economic benefit.
The point I want to make is this. The only way out of the dilemma that capitalism stimulates development and is yet heavily attacked is to separate lies and distortions from genuine critiques and to acknowledge the latter in a analysis of the free market. This requires reasoning with both care and respect, neither of which mr. Deepak Lal brings to the table. A good message then, brought by a flawed messenger. (Marc van Wegberg, Maastricht)
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