naked capitalism

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.