Thursday, December 28, 2006

The Knowing Hand of Government

One of the things I like about this blog, and which I hope you like too, is that you never quite know what will appear next. What follows is another illustration of this: Terry McKenna on the life and ideas of the late economist Milton Friedman. I think you'll find this one to be a real eye-opener.

Milton Friedman died a few weeks ago. In the immediate aftermath, a colleague suggested that I write about Mr. Friedman in my blog segment, but I needed a few weeks to digest his contribution. Now I’m ready.

At one time, Milton Friedman was my hero. When I was in college in the late 60’s and early 70’s, his words were an antidote to the nonsense spouted by leftist professors who continued to teach the advantages of a planned economy. I studied at the Cooper Union in New York City; at the time, the humanities department was a hotbed of Marxists. One of my profs was even a victim of the McCarthy era blacklist. He lost his gig at Columbia and turned to Cooper as the only place left that would employ him. One of the best teachers was a former employee at the Fed. Even he was a Marxist. He was a compelling lecturer - he made complex concepts clear with lots of visual aids (teachers used the blackboard in that pre-electronic era). He explained exactly why a planned economy should be able to deliver more growth than an unplanned one. It looked great on paper. But it turned out to be unadulterated crap. So, in his day, Milton Friedman’s work was a welcome relief from the bullshit that was paraded as economic truth. But even he was a product of his time. In due course, an economist of a later generation will show us where Friedman went too far in his free market message.*

Friedman’s major contribution was to explain how economic stimulus led to inflation. Before the late 1960’s, it was economic gospel that inflation went along with growth, and deflation with a stagnant economy. To everyone’s surprise, in the late 60’s and early 70’s the US economy somehow managed to include both severe inflation and low growth. By the way, this conundrum wasn’t entirely new. In the early years of the depression there was a similar economic dilemma – low interest rates mixed with almost no business activity. It was just as perplexing to folks in that supposedly simpler era (at the time, the central economic truth that everyone believed was that after a recession, low interest rates would stimulate investment - but in the early 1930’s they didn’t). So the problem of what to do when opposing economic fundamentals exist at the same time was not unprecedented. Still Friedman broke his era’s intellectual logjam and suddenly everyone understood that the money supply was the key to inflation.

The problem with Milton Friedman was that he gave too much credit to free markets. The problem for the rest of us was that we believed him. Conservative Republicans took him entirely to heart and gave up any attempt to craft genuine policy. If you look at any republican or conservative website you’ll see the solution to any problem is just another round of targeted tax incentives designed to encourage the free market to invent solutions. That’s it. Just hope that the unseen hand will guide the market to produce some form of miracle.

But the track record on free market solutions is not good. Yes, the market place sets the best price. But a complete reliance of markets ignores history, most particularly ours. Do you want better public health? A more educated populace? A safe and sound banking system? Or safe drugs? Then you need the knowing hand of government.

What Milton Friedman neglects to do is to make a distinction between capitalism and the free market. There is a difference. Capitalism is private property and the profit motive. The free market is an ideal (and one that is not experienced anywhere). Markets should be as free as we can make them, but as long as investors can make profits, even a controlled market will prosper. I remember a film clip from the early 1980’s in which Friedman is shown commenting on worker protections (as demanded by OSHA). He explained how “we” don’t need to force employers to use safe methods when dealing with environmental hazards (respirators and hazmat suits); that it is enough that job seekers know the risks. They can be relied upon to understand their best interests, and to negotiate for a mix of better wages and job safety that will satisfy their needs. But that’s all nonsense; the ability of workers to negotiate is highly overrated except for very highly skilled specialists. (I suspect Milton Friedman has never loaded a grimy barrel of a strange chemical onto the back of a straight truck - I have, and remember thinking that there was the distinct possibility that whatever was in the barrel could hurt me. I’d keep telling myself that whatever I did, I should not let my hands near my eyes and that I had to wash my hands thoroughly as soon as I could). Even in the US, where OSHA mandates adequate worker protections, there are still low-end employers who try to forego best practices - hence a reason for some of the popularity of illegal immigrant workers. I wonder how many untrained workers have removed an asbestos laden tile floor in the course of a low cost renovation. In the wider world, the most dangerous tasks have been moved to some of the poorest places in the world – just search the internet about how old cruise ships are demolished – it’s an eye opener.

Then we have matters like public education. Friedman was against it, and used as his illustration the comparison of a person who learned French at Berlitz compared to a public school student. His point is that the free market does a better job of teaching. What he failed to mention is that there are NO societies that rely on the market to construct an education system. At least none that actually educates large numbers of citizens. Despite the bad press, the typical US public school system is a success. Our schools deliver workers capable of succeeding in college, and eventually succeeding in the real world. Yes, there are abundant examples of failures in poor and minority schools, but those failures are in line with the rest of life for the poor. For our poorest citizens, crime rates, life expectancy, job success all mirror the poor educational results. Thus the failure of public schools to help the poor must be evaluated along with the rest of impoverished life. On a personal note, my wife and son both attended public schools; I attended Catholic schools. All three of us did well in school. My son and I had full scholarships to college, my wife and I had a free ride to graduate school.

I omitted the matter of foreign trade, because it’s just too big for a simple essay like this. It’s enough to mention that for 30 years, we’ve been waiting for the new opportunities that would replace the job losses that occurred as we let manufacturing collapse. It turns out they simply haven’t occurred. Yes there are some jobs, but none that will give high school grads the wages they once earned in our unionized factories. There are good reasons to support open US markets, but economists should fess up about who gains and who loses. And of course, despite the WTO, significant overseas markets remain unavailable to US producers. Example: what good are one billion Chinese customers for American films and entertainment, if cheap bootlegs drive our goods off the shelves?

So, when will the Friedman era end? Like the Keynesian era before him, and the era before that, change will only follow a big upheaval. It took the 1930’s to overthrow the bad old days and the stagflation of the 1970’s overthrew Keynes. I shudder to think of the major collapse that will be necessary before we finally put Milton Friedman aside.

—T. McKenna

* I recommend John Kay’s The Truth About Markets. He challenges the Chicago School with specifics. What his book lacks is more specific US examples - but he’s British, so that’s to be expected.

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