For Project Syndicate, Brad DeLong writes that the Friedman era may be over and gives some initial thought to what a new system (he doesn’t attach a name to it) might look like (hat tip Mark Thoma).
I’m always amazed by the deference with which American economists, even those of a liberal persuasion, treat Friedman’s ideas about the role of markets. Although my sample is limited, his notions don’t appear to garner the same respect overseas.
Indeed. DeLong seems to feel the need to explain at some length why Friedman’s days are numbered. His supposed followers, Reagan, Thatcher, Deng Xiaoping, in fact failed to deliver on some core elements of Friedman’s prescription. He also argues that we’ve reached the point of maximum advantage in following his precepts.
I’m disappointed that DeLong failed to make a more forceful argument against Friedman. Those notions failed to operate as promised because they are internally consistent. Unfettered markers (remember, Friedman wanted to abolish the FDA) leads to concentrations of wealth and power. It’s a reversion, at best, to the world circa 1900, before consumer protection laws and trust busting afforded small players some protection against the mighty.
Remember, a perfectly competitive market has undifferentiated sellers and products, access to complete information on behalf of buyer and seller, and a lot of other conditions pretty much never seen in the real world. The creation of profit opportunities is all about creating market inefficiencies. They can be a win/win for buyer and seller (you make a nifty new product that flies off the shelves) but they can also come through actions that are anti-competitive (think of oligopoly pricing) and/or anti-customer, like China and Wall Street selling toxic products. So I doubt that Friedman’s paradise where government has no role in business is one that we’d actually want to live in.
Similarly, DeLong gives Friedman’s adherents more credit that they deserve. He boils Friedman’s political economic thinking down to five precepts. Number two is “a government that understood that it was the people’s agent and not a dispenser of favors and benefits” number three is “a government that kept its nose out of people’s economic business,” He claims that Reagan failed at number two and succeeded at number three.
You can’t succeed at number three if you fail at number two. They are interlinked. Failure at number two has the government interfering in enterprise, via its disbursements and tax policy.
DeLong suggests that the tensions between the dictates of a market economy and the demands of human society require compromises. Despite the criticisms that the libertarian crowd makes of the world pre-1980, in fact it delivered a high level of growth and more social justice than we have now.
From DeLong:
Harvard professor Dani Rodrik — perhaps the finest political economist of my generation — recently said on his blog that a colleague has been declaring the past three decades “the Age of Milton Friedman.”
According to this view, the coming to power of former US president Ronald Reagan, former British prime minister Margaret Thatcher and former Chinese leader Deng Xiaoping (鄧小平) led to an enormous upward leap in human liberty and prosperity. I say yes — and no — to this proposition.
Friedman adhered throughout his life to five basic principles: strongly anti-inflationary monetary policy; a government that understood that it was the people’s agent and not a dispenser of favors and benefits; a government that kept its nose out of people’s economic business; a government that kept its nose out of people’s private lives; and an enthusiastic and optimistic belief in what free discussion and political democracy could do to convince people to adopt principles one through four.
MEASURING UP?
Measured against these principles, Reagan failed on numbers two and four and adopted the first one only by default — former Federal Reserve chairman Paul Volcker’s anti-inflation policy in the 1980s dismayed many of Reagan’s close aides. Thatcher failed on number four.
And Deng, while a vast improvement over his predecessors — former Soviet leaders Vladimir Lenin, Joseph Stalin, Nikita Khrushchev and former Chinese leader Mao Zedong (毛澤東) — failed on all five, with the possible exception of number three. We do not know what Deng’s desired set of economic arrangements for a system of “socialism with Chinese characteristics” was, and, in all likelihood, he did not know, either.
But I say yes in part to the “Age of Friedman” proposition, because only Friedman’s set of principles self-confidently proposed both to explain the world and to tell us how to change it.
Still, I would build up a counterbalancing set of principles, because I believe that Friedman’s principles do not, ultimately, deliver what they promise.
My principles would start from the observation that market economies and free and democratic societies are built on a very old foundation of human sociability, communication and interdependence. That foundation had a hard enough time functioning when human societies had 60 members — eight orders of magnitude less than today’s 6 billion.
So my principles would then be developed from Karl Polanyi’s old observation that the logic of market exchange puts considerable pressure on that underlying foundation. The market for labor compels people to move to where they earn the most, at the price of potentially creating strangers in strange lands. The market for consumer goods makes human status rankings the result of market forces rather than social norms and views about justice.
This critique of the market is, of course, one-sided. After all, other arrangements for allocating labor appear to involve more domination and alienation than the labor market, which offers opportunities, not constraints.
Similarly, “social norms” and “views about distributive justice” usually turn out to favor whomever has the biggest spear or can convince others that obedience to the powerful is obedience to God. Market arrangements have a larger meritocratic component than the alternatives, and they encourage positive-sum entrepreneurship, making it easier to do well by doing good.
Nevertheless, the distribution of economic welfare produced by the market economy does not fit anyone’s conception of the just or the best. Rightly or wrongly, we have more confidence in the correctness and appropriateness of political decisions made by democratically elected representatives than of decisions implicitly made as the unanticipated consequences of market processes.
We also believe that government should play a powerful role in managing the market to avoid large depressions, redistributing income to produce higher social welfare, and preventing pointless industrial structuring produced by the fads and fashions that sweep the minds of financiers.
AFTER THE WAR
Indeed, there is a conservative argument for social-democratic principles. Post-World War II social democracy produced the wealthiest and most just societies the world has ever seen. You can complain that redistribution and industrial policy were economically inefficient, but not that they were unpopular. It seems a safe bet that the stable politics of the post-war era owe a great deal to the coexistence of rapidly growing, dynamic market economies and social-democratic policies.
Friedman would say that, given the the world in 1975, a move in the direction of his principles was a big improvement. When I think of former US president Jimmy Carter’s energy policy, Arthur Scargill at the head of the British mineworkers’ union and Mao’s Cultural Revolution, I have a hard time disagreeing with Friedman about the world in the mid-1970s.
But there I would draw the line: While movement in Friedman’s direction was by and large positive over the past generation, the gains to be had from further movement in that direction are far less certain.
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Friedman and those who worship him as an idol have wreaked at least as much damage on this planet and its people as any of the other, more well known 20th century tyrants. There really are only three tenets to Friedmanism:
Government must not interfere with business in any way whatsoever.
Business has but one responsibility: generate wealth for its owners.
Business has no social responsibility whatsoever (other than profit/wealth generation).
And, so Prof DeLong, here’s what we get (from CreditSlips):
Back on February 24, I posted the story of Erica Stevens (again, not her real name). Erica is one of the respondents of the Consumer Bankruptcy Project 2007. I described how her bank had held a check from the bankruptcy study for five days, without telling Erica, thus causing a couple of her checks to bounce—to the tune of $33 per check. In our outrage over the way Erica was treated, a couple of us who blog here on Credit Slips volunteered to contact her bank on her behalf (with no charge to Erica whatsoever). The objective was simply to attempt to get the charges reversed. When our interviewer, Denise McDaniel, called Erica with the offer, her reaction surprised us.
Erica refused our assistance—out of fear that the bank would retaliate against her. She told Denise that when she and her husband filed for bankruptcy, their attorney insisted that a couple of loans from this particular bank be included in the petition. (Which, of course, they had to be.) She said that she believes that the bank has been particularly harsh with them and has singled them out since they filed. Thus, she does not want to risk angering them with our calls. She can’t afford to make them mad.
And Erica recognizes that it might be in their best interest to change banks, but since her husband’s paycheck is automatically deposited into this bank, she’s afraid that things would get messed up in the transition and they would be hit with additional charges and fees. Which is something that this couple truly cannot afford.
In February, when I first posted Erica’s story, there were several readers of the blog who responded. Their comments strongly suggest that this type of financial mistreatment is quite common. Indeed, I would encourage you to take the time to read what they had to say. And if you are an academic looking for a new research project, well, this would make a great topic!
In sociology, we often weigh the power of individual agency against the power of social structure. In this case, it would be the power of Erica against the banking industry. Clearly, the playing field is not level. Once again, I assert that for real change to occur, government leaders need to take a stand against the banking industry, hold them accountable for their abuse of consumers, and give some power back to the people.
Polanyi? It’s been a long time since that name’s been mentioned, hasn’t it? Hmmm…
As for ‘overseas’ responses to Friedman, I believe that he generates a kind of mouth-agape speechlessness – right across the political spectrum.
Great take on Friedman by Yves, who accurately notes: “Remember, a perfectly competitive market has undifferentiated sellers and products, access to complete information on behalf of buyer and seller, and a lot of other conditions pretty much never seen in the real world. The creation of profit opportunities is all about creating market inefficiencies. They can be a win/win for buyer and seller…”
But these win/win’s are only temporary and partial, for some members of society, not others. Inefficiencies per se are by definition not good for society as a whole, in the long run, and should only be tolerated if they are necessary to achieve other societal goals that cannot be achieved without creating the inefficiencies.
Whether profit from market inefficiencies is societally necessary boils down to whether people who seek such profit when allowed to, and who are often creative, industrious, or intelligent, would contribute to society their talents and energies anyway, if not allowed to make a profit (over and above a normal compensatory wage for their work.) That is, can humans establish and enjoy a society where profit is not required to motivate some societally desired endeavors?
Ayn Rand implied in Atlas Shrugged that the answer to that question is no. There is no scientific evidence to support that conclusion, however, and little reason to believe it.
Didn’t Friedman also advocate replacing the Fed with a computer? All those so-called Friedman followers should be calling for Bernanke’s head. Yet realizing that Friedman’s computer would probably be raising interest rates right now, the supposed “free marketers” and “govt get off my back” types are quite happy with Uncle Ben and his anti-market interventions.
Silly Yves, don’t you know? Internal consistency is for communists…
Rightly or wrongly, we have more confidence in the correctness and appropriateness of political decisions made by democratically elected representatives than of decisions implicitly made as the unanticipated consequences of market processes.
Do I take this as an argument that Professor DeLong wishes that (a) the Fed chairman was a “democratically elected representative,” or that (b) Congress set interest rates? Or, considering the level of “democratic” interest in Congressional elections, perhaps (c) the White House should set them?
Of course not. What Professor DeLong means is that the decisions should be taken by him and his friends. Indeed “we” have more confidence in the rule of this oligarchy than in any “democratic representatives,” ie, politicians. But I’m not sure this is saying a lot.
It’s especially amusing that people cite Friedman, whose effectiveness with the old formula pas d’ennemis a gauche, pas d’amis a droit was legendary, as some grand dragon of capitalism. Try Murray Rothbard, kids. Friedman may indeed have run out of remedies. Rothbard hasn’t even been tried. But the reckoning is coming…
Yves,
I think DeLong’s article is fantastic. I think it has the right balance of respect for market forces and recognition that they aren’t perfect.
Importantly, I believe that DeLong explicitly expresses your primary concerns. Take your two statements…
“Unfettered markers (remember, Friedman wanted to abolish the FDA) leads to concentrations of wealth and power.”
and
“The creation of profit opportunities is all about creating market inefficiencies.”
In order for these two to be consistent, unfettered markets must allow inefficiencies to arise and these must be undesirable. I think we’d all accept those assertions without the posturing (even Freidman would accept the later, though he *might* debate the former).
To which DeLong responds,
“This critique of the market is, of course, one-sided. After all, other arrangements for allocating labor appear to involve more domination and alienation than the labor market, which offers opportunities, not constraints… Market arrangements have a larger meritocratic component than the alternatives, and they encourage positive-sum entrepreneurship, making it easier to do well by doing good.”
Consequently, for your argument to be complete, you must establish that alternatives are *better* not merely that markets are inefficient (which is where I believe Freidman would argue).
Obviously, there are well defined situations where your argument is fundamentally correct (and thus DeLong argues fairly to limit markets). For example, there are certainly inefficiencies that are artificially created (like oligopolies) and therefore should be addressed.
However… there are other situations where inefficiencies arise that are not necessarily innately unfair. An inventor has “asymetric information” but that doesn’t necessarily imply that the government has any role in altering that situation.
I believe that most laissez-faire policies are in fact consisent with these critera.
Consequently, in promoting your arguments, I challenge you to find sufficient evidence for the relative benefit of an alternative and to identify situations where inefficiences are clearly improper and not generated (in this case fairly) by individual labor, whether those of the body or mind (like those of inventors).
Frankly, I think we are coming to the end of the “progressive” era in that the Fed is the central institution of progressivism. To think that much of the financial trouble today is due primarily to the vanity of one man, is to think that the Fed should be abolished and its functions roled into the Dept of the Treasury.
Friedman will go down in history as a great economist and thinker. Anyone who doubts me should watch this video staring the subject at hand.
http://www.youtube.com/watch?v=JfdRpyfEmBE
I saw the first few minutes of the video. Aside from the fact that Friedmam is condescending, he said policies should be judged by the results they produce.
Well, his theories on money supply are used by no central bank in the world because they have been found not to work.
25 years of deregulation and policies that favor “free markets” have produced lower GDP growth, despite substantial innovation (PCs, then the Internet). And that’s before you discount GDP growth post 1980 for the hedonic adjustments introduced then which raise reported GDP.
We’ve had stagnant worker wages.
We’ve had many more financial crises.
We are in the process of having a crisis that may rival or exceed the Great Depression,and marks the end of the US’s reign as the dominant economic power.
If that’s what great economic thinking yields, I’ll take a dart board instead.