Another long piece from the NYRB - Paul Krugman on Milton Friedman

For those that might not know, Milton Friedman was a conservative/libertarian economist who died just recently. Paul Krugman is a Princeton economist who writes for the New York Times. If that is enough to satisfy your curiosity, too bad. This is a long essay on what Friedman got right and got wrong. I have a jaundiced view of economists and economic theory. In my view, economists sound off like prophets keep looking back down the path.

The odds are that the great swing back toward laissez-faire policies that took place around the world beginning in the 1970s would have happened even if there had been no Milton Friedman. But his tireless and brilliantly effective campaign on behalf of free markets surely helped accelerate the process, both in the United States and around the world. By any measure —protectionism versus free trade; regulation versus deregulation; wages set by collective bargaining and government minimum wages versus wages set by the market—the world has moved a long way in Friedman's direction. And even more striking than his achievement in terms of actual policy changes has been the transformation of the conventional wisdom: most influential people have been so converted to the Friedman way of thinking that it is simply taken as a given that the change in economic policies he promoted has been a force for good. But has it?

Considering how influential Friedman has been, it is worth a critical review of his ideas. It may also be a good idea to remind ourselves what the world was like before 1980. A comment in one of my earlier posts blames Anderson's retirees for its current condition. It might do all some good to remember that before Reagan the country was comfortably insulated from international competition. That our fathers and mothers wanted a steady, secure world after the Great Depression and World War Two. General Motors could operate in an inefficient manner because they were still raking in the dollars (if you think differently, read On A Clear Day You Can See General Motors by Delorean) heedless of any competition. (Competition would be Ford, not Toyota). Our unions wanted not a proletarian revolution but security and a house and a chicken in every pot - and a boat and health benefits and retirement and a color television and everything else that they could buy. In turn, that consumerism fed our economy. Japanese products were cheap and not to be compared to our American products. How many remember Zenith or Motorola or RCA or American Motors Corporation compared with those who recognize Sony or Mitsubishi or Toyota?

This raises an interesting point. Milton Friedman often assured audiences that no special institutions, like minimum wages and unions, were needed to ensure that workers would share in the benefits of economic growth. In 1976 he told Newsweek readers that tales of the evil done by the robber barons were pure myth:

There is probably no other period in history, in this or any other country, in which the ordinary man had as large an increase in his standard of living as in the period between the Civil War and the First World War, when unrestrained individualism was most rugged.

(What about the remarkable thirty-year stretch after World War II, which encompassed much of Friedman's own career?) Yet in the decades that followed that pronouncement, as the minimum wage was allowed to fall behind inflation and unions largely disappeared as an important factor in the private sector, working Americans saw their fortunes lag behind growth in the economy as a whole. Was Friedman too sanguine about the generosity of the invisible hand?

We live in a more complicated world than our grandparents just as our parents lived in a more complicated world than their grandparents. We possess our own conventional wisdom. Our parents could not imagine a General Motors that was not the largest employer in the nation. Can we imagine a world where Wal-mart is not the nation's largest employer. I do not know if our world is necessary better than that of forty years ago. I do know that it is a riskier world. I do not think that the increased riskiness has been fully understood by us Americans even by those who embrace the laissez-faire ideas of Milton Friedman.

Historians look back down the path just like economists. Historians rarely try to prophesy, though. I make that point because if we do not know our history we lack any ability not fall into a pit of mythology and superstition. I like free markets but I see them as piratical devices. That is, they are not there for any charitable benefit and they are not therefore always beneficial to everyone. Just substitute "casino" for "market" in the preceding sentences and see if the meaning of the sentences change, or even if they change the meaning of free market. We all have our hobby horses we like to ride. Problems only arise when we fail to recognize that our hobby horses have led us into irrationality. I know no one will ever mistake me for Brad Pitt. On the other hand, our vice-president thinks we have done a fine job in Iraq.

Friedman's laissez-faire absolutism contributed to an intellectual climate in which faith in markets and disdain for government often trumps the evidence. Developing countries rushed to open up their capital markets, despite warnings that this might expose them to financial crises; then, when the crises duly arrived, many observers blamed the countries' governments, not the instability of international capital flows. Electricity deregulation proceeded despite clear warnings that monopoly power might be a problem; in fact, even as the California electricity crisis was happening, most commentators dismissed concerns about price-rigging as wild conspiracy theories. Conservatives continue to insist that the free market is the answer to the health care crisis, in the teeth of overwhelming evidence to the contrary

In the end, we want the assurance that blind faith gives us rather than the ordeals of reality. Reality has the bad taste to knock our blind faith on its behind. Go read the whole thing. It is worth the effort.