What was missing in the economic theory that lead to the financial crisis in 2008-09? This was the first question Drennan want to answer in this book. His thesis is that income inequality plays a role in the lead-up to the financial crisis by maintaining consumption through surging household debt. The second question he asks was ‘Why the economist get it wrong?’. Drennan’s answer to the second question is that the consumption theory of neo-classical economics does not include income distribution to their economic theory.

To prove his points, Drennan brought forward econometric evidence to link income inequality with the financial crisis. He also used various set of data to show that many people resort to debt to maintain their consumption, meaning that people borrow more money to buy the necessities to maintain their lifestyle. He also present historical data as evidence to show that the 2008-09 crisis is not something new and has happen before.

Drennan also noted that the two feature that were on the rise leading to financial crash were the stagnant growth of income and income inequality – although this two do not necessarily occur together. Although Drennan try to back his argument with data and statistics, layman reader will not find this useful, understandable, and almost definitely lost in the process.

What are the possible causes of rising income inequality? Asked Drennan. Economist pointed out that one of the candidates is globalization, but he cast doubt to this theory as other countries such as Japan, Germany, and France were exposed with the same globalization forces but does not produce higher income inequality. Other candidate favoured by economist to explain income inequality is skill-biased technological change (SBTC). This include higher order specialization, for example box mover can learn to operate forklift easily, but factory worker might have problems changing their career to higher-order specialization such as a programmer. Some economist listed SBTC as the cause of the rising income inequality.

But all these candidates do not give the whole picture. The more compelling cause, is the institutional structure. Drennan noted that as the economy turn from manufacturing to service economy, the labor union diminished. This is because the service sector does not have a strong labor union traditionally. The structure of the law also plays important roles in containing the labor union force, without them worker have a lower protection and had to accept lower wages as they don’t have any bargaining power.

Then there is government intervention. Contrary to free-market ideology, that income stabilize in its current level due to rigorous market forces, there are many government legislation interferences that favors the rich and enlarge the income inequality gap. Among the law includes treatment to corporate stock option award, access to bankruptcy, copyright and patent protection, to name a few. Various conservative think-tanks served as an advocacy lobby to ensure government keep policies for the benefit of the rich, their objective is rent-seeking – spending money not on production of product or service but to take advantage and enlarge their own economic pie at the expense of someone else’s share.

After presenting his theoretical background, Drennan continue with the data to back his theory. Although he emphasized in the introduction that the role of the data presentation is ‘not to obscure the fact’, he did just that for a layman reader as they lost in the jargon terms and various graph. Drennan drew from Federal Reserve’s data that there are a huge build-up of debt-to-income ratio for the bottom 95 percent whilst consumption remains more or less the same, which means that consumer are shifting to debt to maintain their consumption, this lead to financial burst eventually. These consumptions include shelter, health care, and education which are a necessary expenditure which cannot be postponed, such as taking a vacation trip.

In the book, Drennan also help explain economic principle such as the Pareto efficiency principle which stated that “any change that make one people better off, without making any other worse off, is an improvement”. This principle is a fundamental tenet of neoclassical economics, which describe the gain of top 1% of the income distribution as Pareto efficient. This is one reason why economist turn away from income inequality.

Other theory, such as Kuznets’s inverted-U hypothesis, also made economist less worry on the income inequality and its effect. Drawing from various historical data from numerous countries, Kuznets argued that the economic shift from agriculture to industrialization will lead to the rise of income inequality for some time, but as countries develop, democracy expands and more protection were given to labor causing the inequality to fall back. He also discussed Arthur Okun’s tradeoff theory although Okun provided no strong evidence.

In analyzing the data, Drennan also drew his criticism towards Milton Friedman model for theory of consumption, noting that the theory does not true for the period 1984-2007 and for the early twentieth century. He went further to underline the basic flaw of Friedman, Modigliani, and Brumberg’s model which become the mainstream theory for consumption, the models devoid of motive and proclivities, whereas in real life human behavior play an important role in their daily choices and consumption.

In his final chapter Drennan drew attention that this crash has happen before, and in his conclusion, he argue for the need to drop traditional economic theory that did not stood the empirical test from the data. Unless we take into account other element such as ‘behavior’ in our economic theory, we will be chasing unrealistic economic development using unrealistic theory.

If you have read ‘Freakonomics’ by Dubner & Levitt and searching for a kind of book that provide the same unconventional, myth-busting analysis on economics occurrence, this book is definitely it!

Written in layman term without heavy technical terms, Chang open the access gate to wide range of ordinary readers about the working of economics. As he himself noted in the introduction, you don’t need to be an economist to understand his book. He lay out his aim explicitly on what he intended to do, which is to exposed free-market capitalism, he still believes that capitalism is the best economic system, his problem lay on specific type of capitalism which has dominated the world economy which is the free-market capitalism.

Chang argues that free market does not exist. Every market has rules, boundaries, and restriction which govern them. As we accept all these rules unconditionally, we fail to see them as market restriction. Labor market has many restrictions, you can’t hire child laborer this day. Also, most countries have immigration control to protect local labor market, and to hold the wage standard from falling. All these restrictions were not been put based on sound economic reason, they are political decisions. That is why Chang argues that the free-marketeer was as political as the one who opposed them. 

Workers in rich countries doing the same job are paid more compared to their counterpart in poor countries. Why is this so? It is not because of the people in rich countries are more productive, brilliant, or creative. It is precisely because of the immigration control that retain the wage standard. The gap also presented not because individual in rich countries are highly educated, it is because they have better technologies, better institutions, and better infrastructure. This line of analysis is consistent with what was presented by Turkish American economist, Daron Acemoglu and British political scientist, James A. Robinson in their famous book ‘Why Nations Fail’.

Chang discussed about Alexander Hamilton, the first Treasury Secretary and the architect of the modern American economic system. Hamilton laid out protectionism strategy to protect American industries ‘in their infancy’. Have he come up with the same policy that develop America then today, Chang argued that he will be criticized by US Treasury Department and denied loan by IMF and World Bank. Chang brilliantly argued that developed countries forced market liberalization on developing countries, whilst they themselves used protectionism policy when they were developing. In other words, the rich countries said to poor countries “do what we say not as we did”.

Why do European migrated to the U.S. in 1880-1914? – asked Chang. He argued that the New World lack of feudal legacy which led to higher social mobility compared to the Old World. The U.S. also had a massive tract of land and a shortage of labour, thus wages are three to four time higher than Europe. But he argued, today American does not have the highest living standards. They worked longer hours and had inferior healthcare system. Average income also did not gave an accurate living standard in the U.S. as she had a bigger unequal income distribution, with bigger size of underclass.

Chang also criticized many economist approaches on the question of Africa’s poverty. Chang argued that  rather than blaming free-market policy failure to develop Africa, free-market economist shift the blame towards Africa’s geography, climate, history, demography and ‘resource curse’. While all these factors are not all irrelevant, the outcome can change, for example, there are many resource-rich countries that were well developed. Some factors like geography and history cannot solve the question as they can’t be change. The most important factor, Chang noted, is policy. Policies can be change when they failed, especially and evidently in Africa.

On trickle-down economics, Chang brought evidence that the policy failed to deliver its promise and failed to accelerate growth. The book also discussed the failure of micro-credit, as a system to finance small enterprise and lift people out of poverty. The idea was famously attributed to the economist who won a Nobel Peace Prize, Muhammad Yunus and his Grameen Bank. Factors for the micro-credit failure includes the used of the funding for consumption, not for their initial intended purpose. While some used the funding for their business, the business failed to develop and re-create itself once their market was overcrowded and profit fell.

One of the most profound idea I found in the book is on how we limit our choices to make decision. Chang brought this idea base on Herbert Simon’s thought. Human cannot easily make decision when they were flooded with seas of information. That is why we develop routine, although they might be a better way to do things, people stick to routine so that they don’t have to make too many decisions. Market, Chang argued, were far more complex with billions of product, people, and companies. So, government intervention using regulations is justified, to limit the uncertainties and risk in the market, so that we can make a more rational and easier decisions.

Switzerland is one of the top few richest and most industrialized countries, but it is by far the lowest in term of university enrollment. Chang argued that excessive education does not lead to more productive economy. Subject such as history and biology does not much needed for average factory workers. He argued that knowledge-based economy is an exaggeration with many rich countries still rely on their manufacturing output, so, developing countries cannot skip manufacturing phase of the economic development.

Equality is not enough, said Chang. It does not make any sense if a rich boy and poor boy given the same opportunity to attend school, but the poor need to compete with a hungry stomach. So, its not just the opportunity to enter competition needs to be given, but the condition must be equalized.

His logic about big government is a compelling one. Big government he argued, make the economy more dynamic. When basic income was guaranteed, people will not be afraid of changing jobs from sunset industries into sunrise industries. When government provide re-skilling opportunities, people can more easily shifted from less productive industry into more productive one. People don’t afraid of loosing job because they know it will not be the end of the world, they have a safety net, and can move on.

Overall, the book is very rich with myth busting, facts, case studies, jokes, that will transform your understanding about economics. You know that the system is broken, but it is broken for a wrong reason and can be fix. The fix, as argued by professor Chang in his concluding remark, will not be comfortable or fair, but it is needed to give a chance for billions of people, and alleviate them from poverty.

Every Nation for Itself: Winners and Losers in a G-Zero World by Ian Bremmer published by Portfolio Penguin in 2012.

The book was written by Ian Bremmer which was also the author of ‘The End of the Free Market’. In this book, Bremmer put forward his thesis that the world is moving toward a leaderless world, a world where no single nation or group of nations can impose anything to other states to coordinate international respond and solve global problems. He termed this new world G-Zero, as opposed to the grouping of established power which created a club G7- a club of 7 powerful nation.

The G7 has diminishing power as the U.S. power slowly wane off and the EU disintegrates, while a much larger club like the G20 produces nothing of substance. On contrary, we have a number of emerging nations assuming greater economic and political power on the global arena, but none of them was capable or willing to assume global leadership.

One of the areas which are crucial for the survival of our planet is on the issue of global warming. This global problem cannot be solved by individual nation, it needs a coordinated and planned international effort. Copenhagen climate summit in 2009, for example, produced nothing substantial to come up with a global solution. India and China unwilling to cut emission that will hamper their economic development, they instead remind western counterpart that today’s problem was the result of the western industrial revolution, and they are the one who needs to foot the bill.

Bremmer explained that the waning of American global dominance is due to their swelling debt. With China on the rise, and the Chinese willingness to invest in U.S. debt, it is harder for the U.S. to impose anything on China. The U.S. also spending too much money on foreign war trying to keep the world “peace, democratic and stable”. Although many would disagree with Bremmer assessment, Chomsky for example once stated that the best way of ending terrorism is by stop participate in one. One can argue that U.S. wars were good or not, but no one can deny that it help dries the U.S. from the fund it needs for productive economic development.

China also benefited from the service of U.S. navy patrol of the major trade route but has no incentive to take over the lead. Russia on the other hand, since the fall of the Soviet Union has lost military clout and the ideological appeal for much of the developing world.

The book also is dense with ‘American exceptionalism’ which made it non-objective and highly political. Some of it was not based on fact but an assumption. For example, in discussing the Nuclear Non-Proliferation Treaty (NPT), Bremmer wrote that “Iran join the club but cheat”. No evidence cited for this accusation, instead,  in the following line he said Iran “generally assumes” to be hiding its nuclear weapons program. So, this accusation is not based on fact but an assumption.

In discussing the US-China trade relationship, Bremmer prediction turns to be not very far stretched, as China keeps Yuan devalued, the trade war looms as the U.S. and China have already slapped tariff to each other. China manufacturing strategies also seem to be working, especially in the telecommunication industries which has put the Western counterpart unease, the latest is the Huawei case.

Market forces were also discussed in the book, he connected the dots and explain how these forces impacted the price of commodities. The growing middle-class for example, given rise to the demand of meat-based diet. This, in turn, will push the grain price up as grain is needed so much more to nourish livestock rather than feeding human. The rising price of grain will hit poor countries the most as they spend a large portion of their income on food, whilst in rich countries, the food is highly processed and the price fluctuation usually lost after adding other costs such as processing, manufacturing and transportation.

Who are is the possible winner in the leaderless world?

To this question, Bremmer suggests that countries with broad cooperation and does not rely on any single superpower will thrive. As there is no single power can impose any standard global system, these emerging states can play using their own rules. Countries like Brazil, Turkey are possible winners, as does the African continent.

States which does not obey the American leadership (Bremmer called it rogues states) which have powerful friends will also have a good advantage in the leaderless world. As the U.S. is plagued by war fatigue, Europe troubled with fiscal austerity, the military threat was seen less credible whilst economic sanctions were ineffective and porous.

Who will be the losers?

To this Bremmer answered states that still hang on to the old power structure. They resist changes and stick to their own rules and institutions. Institutions that have already accomplished their mission but not yet decommissioned, such as NATO will also be on the losing end.

Closing the book, Bremmer comes out with what the future might look like. The future according to Bremmer depends on the U.S., China, and the other countries. This book was written in 2012, whilst this review was written in 2019. So, we already in the future and can look back at Bremmer proposed image of the future.

Bremmer suggested 4 possibilities, judging from the current world affairs the most suitable candidate will be the “Wold of Regions” where the emerging countries become stronger whilst the U.S. and China relationship becoming more hostile. We can see the trade war currently brewing between these two superpowers, with tariff been imposed on each other and the growing tension on Huawei expanding their technological reach. While other countries climbing the global political ladder. Even the U.S. sanction on Venezuela is not working as India continue to buy Venezuelan oil. Whilst Turkey ignored U.S. threat and continue purchasing Russian missiles system. 

Bremmer concludes the book on looking at the U.S. fate in the G-Zero world. He ends the book with his last touch of American exceptionalism saying that the U.S. always has a second act and can rise again. To do this they need to accept the world as it is and innovate to adapt.