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How capitalism grows human capital as well – the example of Hong Kong

Last Friday, on another blog, I did a link-to/short-comment-on piece, linking to and commenting on this report. It was about Chinese students lying about their qualifications in order to get into British Universities.

Harry Hutton (esteemed writer of this hugely entertaining and clearly much frequented blog) added the following very interesting comment to my posting:

It’s a big problem with the IELTS exam in mainland China – people turn up to do tests for other people. They also come in with live mobile phones, to record the script. But there is zero cheating in Hong Kong. I don’t know why this big difference, but it is so.

Cards on the table, I do not know why there is this big different either. And never having been to – or for that matter anywhere near – Hong Kong, or mainland China, I am a lot less qualified even to guess than Harry Hutton is.

However, I choose to offer a guess nevertheless.

Hong Kong has been a rampantly capitalistic economy for the last half century, and rampantly capitalistic economies make people more honest. Oh not in the short run, but they do in the long run. People learn, at first the hard way, and then by being eloquently taught by the people who did learn it the hard way, or who already knew it and whose experience confirmed it, that honestly pays off, in the long run. In the short run, you may get some small or even big advantage by cheating. But in the long run, the damage you risk doing to your reputation for honesty by cheating, whether at a game, in the market or in an exam, is a risk not worth taking.

The biggest single reason why someone is unemployable, if he is unemployable, is that he is dishonest. Incompetence can often be corrected, with luck and application. Ignorance, ditto. And if a basically well motivated and honest person simply cannot master the first job you give him despite days or weeks, or even months of honest effort, why then, you can find him another job, if you have one for him. If not, you can enthusiastically recommend him to someone else who can, for his honesty if not his competence. (Remember: your recommendations have to be honest too!) But dishonesty is a deal breaker. Well, it would be. Dishonesty means that you break deals, so why would anyone want to make a deal with you, if that is what you do?

To put all this in modern econmicspeak, in a society in which people are entitled to shun you and have no obligations towards you that they do not freely accept, what is now called ‘human capital’ grows rather than shrinks.

I vividly recall participating in a radio panel discussion in which our chairman, a prmoinent newspaper editor, said that free market capitalism was all very well at accumulating capital of the physical, steel and wheels, bricks and mortar variety, but that when it came to ‘moral capital’, it consumed the stuff, and eventually exhausted it. This is the direct opposite of the truth, which is: that free market capitalism is not only good at encouraging the accumulation of physical capital, but that it is especially good at encouraging the accumulation of moral capital. It is the collectivist, politically dominated societies (such as mainland China), the societies in which how you are paid is quite separate from what sort of character you are or worse, are paid according to how nasty you are willing be, that consume moral capital.

Moral capital is no triviality. It does far more than merely decorate the cake of society with an icing of decency. No moral capital means no cake to put icing on in the first place. A society where people who say that they will ring you back do ring you, in which people turn up for things when and where they say they will turn up, who declare that (for instance) a structure is safe only if they really think that it is safe, is a society that is going to function a whole lot better than one where people are not to be trusted, to keep an appointment, or to express an honest opinion regardless of how much money is being waved under their noses to say something dishonest.

Banks, to take a particularly portentous example, simply cannot work at all unless the people who run them are regarded as trustworthy, and the only way that can happen for any length of time is if they actually are trustworthy.

I know, from reading about eighteenth and nineteenth century Britain, that everyone who was involved in any sort of trade or business – not just those who could ‘afford to be honest’ but everyone – took their reputations for honesty and square deal very seriously. They could not, that is to say, afford not to be honest. So, why should it be different in Hong Kong now? Hong Kong, I am guessing, has recently been a very Victorian sort of place. Long may it last.

This tradition of honest dealing survives only very incompletely in Britain, and this is quite rightly regarded as a major threat to Britain’s economic future. This is because, although wise enough to impose wise economic policies upon Hong Kong, we were not wise enough to impose similarly wise policies upon ourselves.

11 comments to How capitalism grows human capital as well – the example of Hong Kong

  • Slowjoe

    Brian, can you point a finger at where the value of an honest reputation was reinforced in Hong Kong, and likewise, where it was debased in the UK?

  • How about this: capitalism makes people work harder, and people who work hard at something probably don’t need to cheat to be good at it.

  • veryretired

    There are a whole gallery of these types of myths. The common construction is “Of course, capitalism is good for making money, but it destroys (fill in the appropriate non-materialistic quality here) due to its crass materialism and greed.”

    The oh-so-sincere, sniffy types who make these kinds of statements are all very, very morally superior to those of us who actually, you know, worry about making a living and raising a family, and might resent seeing that 20-30% of our paychecks withheld every two weeks for taxes.

    Collectivists claim access to deeper spirituality, more compassion, truer artistic vision, more delicate sensibilities, a wider tolerance of others, and the list goes on and on.

    I know that many here get upset when any reference to Rand is made, but she really does nail this type of phony emotional blackmail very well in her various writings. One has only to recall any of the horrendous examples of “socialist reality” in art to be reminded how utterly disconnected collectivism is from artistic creativity, and the rest of the claims are equally nonsensical.

    I remember vividly a comment by an emigre’ from the Soviet horror back in the ’70’s who came to the US and was asked what he found to be different here from there. He replied, “The people here have human faces, alive and involved in what they are doing. In the USSR, when you meet with some official, their eyes are dead. There is nothing alive behind their faces.”

    It was the most chilling comment I had ever heard. I can only guess at what it must be like to be a living, breathing, free man, but live in a land of the dead.

    Thank God I have never had to learn what it was like to exist in such a nightmare.

  • jon

    I’d like to agree, but cronyism and cheating can appear under any system. In many ways, when the Chinese take an official convicted of bribery and shoot him in the back of the head, China is dealing with issues of honesty. Also, when a board of trustees fires an incompetent manager with a trumped-up resume and bad results, capitalists do so too.

    In the long term, greed is greed and sometimes greedy people take shortcuts regarding trust, honesty, integrity, and the rules. Sometimes the rules are asinine, but that’s not always the issue.

    I see this as a human issue more than a systemic one. As to which system actively rewards honesty, I can’t say either a socialist or a capitalist has a big advantage. An honest person can quite easily get crushed like a bug under the rules of either system. That I largely prefer capitalism doesn’t make me pretend that it is morally superior.

  • J

    “rampantly capitalistic economies make people more honest.”


    Never worked in the merchant banking sector, I take it?

    It’s true to some extent that capitalist systems are less corrupt, but that’s not really a question of honesty. It’s a question of how many rules you have – the few there are, the less often they get broken. Obviously in some extremist control-state people will have to find ways to break laws just to function.

    But countries like Sweden, or Japan with high levels of state control don’t seem more dishonest than countries such as the US.

    Likewise, Britain in 1810 was a pretty laissez-faire place , but was hardly a model of commercial or politcal honesty. Britain in the 1950’s was verging on communist, but was a model of honesty by comparison.

    Hard to say if an anarchy like Afghanistan is ‘corrupt’ or not. I think the social differences of what consitutes honest are so different between the average inhabitant of Kettering and Kabul that it doesn’t make much sense to compare.

  • How about in free market systems people know that ultimately they’re going to get paid what they’re worth/ Cheating at school doesnt therefore matter.

    In socialist systems, education primarily selects the pupils for government. Cheating at school therefore pays.

  • Andrew Robb

    I don’t know if I’d call it a square hit but jon definitely got very close to the nail as far as I’m concerned.

    I do think that capitalism is vastly superior to any of the various forms of collectivism but there are examples of cheating found in schools all over the U.S.

  • The Wobbly Guy

    Wait. I thought schools in the US, especially the public ones, are most prone to cheating while the private ones are more honest?

    So how can you link capitalist education with dishonesty? I would rather think it should be statist education that promotes dishonesty.


  • Euan Gray

    It doesn’t seem to have much, if anything, to do with the economic system, as has been pointed out. To add to the examples above, Finland is markedly less capitalistic than the US, but the US is markedly more corrupt than Finland. Indeed, most of the countries noted as being less corrupt than the US also seem to be less capitalistic.

    It is surely a cultural, rather than an economic, thing. Many, but not all, Asian cultures are more or less renowned for corrupt business and political practices, and it would appear China is just another example. From my admittedly limited knowledge of Chinese history, it seems that China has been fairly corrupt for centuries, irrespective of government. Perhaps the good fortune of HK was that the colonial government was in comparison much more honest and much less corrupt, and so the citizens grow up expecting this and practising it in everyday life. Whether they live under a communist, socialist or aggressively capitalist system is irrelevant.


  • The Wobbly Guy

    Nobody would ever accuse Singapore of being corrupt. Overzealous in pursuing paper qualifications, yes, but not corrupt.

    I attribute it to our British inheritance and institutions left from the colonial days. Can we still join the Anglosphere even if our skin color is yellow?



  • David Gillies

    You could probably model this in a evolutionary biology/game-theoretic fashion as an iterated survival strategy. With iterated strategies the optimum behaviour has to take account of the future. If one can assign a sufficiently harsh penalty to malfeasance by dint of its impact on future interactions, then honesty will indeed be selected for. Capitalism would certainly seem to have an edge here as trade is inherently iterative (everyone knows it’s easy to get customers; the key to success is to keep them). Rigorous and harsh enforcement of honesty, whether in the legal sphere or the social one (as a minarchist, I obviously favour the latter) is bound to alter the risk-reward matrix which will move the equilibrium behaviour.