Bill Black: Thomas Friedman Wants A “Center-Left” Democratic Party Based on Austrian Economic Myths

Yves here. No matter how bad you think Thomas Friedman is, he always manages to outdo himself on the downside. And Black has not stooped to comment on Friedman’s offensive new coinage of “Web People” as All Correct Thinking Members of the Elite. Apparently Friedman got wind of Thomas Frank’s blistering criticism of how Team Dem has found new ways to stroke the egos of members of the professional classes by calling them the inevitable and deserving representatives of where America was destined to go and then coming up with more self-important roles like “The Creative Innovator”. So Friedeman is now apparently trying for faux egalitarianism. But “Web People” sounds an awful lot like another phenomenon that Lambert has observed of late among Acela corridor denizens…that they are all acting like Pod People. Is Friedman unconsciously telling one on himself and his allied?

By Bill Black, the author of The Best Way to Rob a Bank is to Own One and an associate professor of economics and law at the University of Missouri-Kansas City. Jointly published with New Economic Perspectives

Thomas Friedman has written two columns advising Hillary Clinton to renounce her campaign promises and the Democratic Party’s platform and move to the right of the Republican Party on economic issues. My first column in this series critiqued the centerpiece of his plea to her – deregulate banking.

This column discusses Friedman’s economic assumption, which he probably does not understand he was making, that is (a) false and (b) dangerous. Friedman doesn’t cite it as an economic assumption. Instead, he makes a systems theory assertion without even trying to explain why it would be applicable to his proposed sharp move to the right on economic policies.

“Open Systems”

In his column entitled “Web People vs. Wall People,” Friedman unleashes this stream of slogans.

Web People instinctively understand that Democrats and Republicans both built their platforms largely in response to the Industrial Revolution, the New Deal and the Cold War, but that today, a 21st-century party needs to build its platform in response to the accelerations in technology, globalization and climate change, which are the forces transforming the workplace, geopolitics and the very planet.

As such, the instinct of Web People is to embrace the change in the pace of change and focus on empowering more people to be able to compete and collaborate in a world without walls. In particular, Web People understand that in times of rapid change, open systems are always more flexible, resilient and propulsive; they offer the chance to feel and respond first to change. So Web People favor more trade expansion, along the lines of the Trans-Pacific Partnership, and more managed immigration that attracts the most energetic and smartest minds, and more vehicles for lifelong learning.

In both sentences, Friedman describes “web people” as supposedly “understand[ing]” the world based on “instinct.” “Web people” are instinctively great people because they share Friedman’s instincts.

The quoted sentences are almost entirely meaningless jargon in the service of Friedman’s self-flattery and sucking up to the Silicon Valley CEOs that buy him lunch. The phrase that was lifted from systems theory is this:

[I]n times of rapid change, open systems are always more flexible, resilient and propulsive; they offer the chance to feel and respond first to change

Friedman has become a self-caricature because of his hagiographic praise for slogans he’s lifted from Silicon Valley CEOs. He presents the slogans as if they are brilliant insights that if followed would transform the (supposedly “flat”) world in great ways.

True “Open Systems” Cannot Exist in the Social Spheres

There are numerous problems with this ode to “open systems.” First, in the real world of social relationships there is no reason to believe that an “open system” has ever existed or could exist. “Open systems” are defined as producing “self-organization.” They are characterized not by rigid rules and outcomes, but by feedback mechanisms and evolution. It is primarily a concept used in information systems.

It is doubtful that even information systems actually meet the definition of open systems, for proponents tend to ignore the institutions supplied by others, such as the FBI, courts, prosecutors, and the rule of law, that are essential to the purported “self-organization.” The reader can see that the word “self” is the cheat. Information systems are in fact subject to catastrophic failure and endemic fraud and abuse absent effective enforcement of the rule of law and other governmental institutions.

“Flexible, Resilient and Propulsive” Can Be A Euphemism for Genocidal

Second, in the social sphere, “self-organization” leading to “flexible, resilient and propulsive” actions is often a prescription for disaster. In the social sphere, what happens when the Shiites in Lebanon become enraged by the outdated demographics underlying the Lebanese accord that divvies up power among the Shia, Sunni, Christians, and Druze? What happens when the “rapid change” is the defeat of the Shah of Iran and the rise of Hezbollah? What happens when Israel invades, the IDF funds Christian militias, and Mossad does targeted assassinations? What happens when Syria, which believes in “Greater Syria” takes over the Beqaa Valley? What happens when a six-party combination of civil and international war breaks out with shifting alliances, plus Washington and Moscow, plus terrorism for ransom and arms?

No one would describe Lebanon or the Occupied Territories and Gaza as an “open system.” Social and economic systems without a rule of law will virtually never be open systems. Friedman has also forgotten that each of the “actors” that I have described are not simply reacting to “rapid change” – they are deliberately and strategically inducing and shaping “rapid change.” Open systems are exceptionally unlikely to exist when the actors can cause deliberate, strategic, and nasty “rapid change.” The best way to do this in Lebanon was to kill leaders and a whole lot of civilians from the rival group. Once you and your family are targeted for murder because of your group identity, the only survival strategies are to emigrate (which is not generally available) or embrace your group identity and become a partisan.

Friedman knows this fact as well as anyone given his time in Lebanon during its civil war and in the Occupied Territories and Gaza. Friedman’s description of this perverse dynamic of forcing people who once thought of themselves as “Lebanese” to adopt an identification with one’s religious or ethnic group was the centerpiece of his book From Beirut to Jerusalem.

“Flexible, resilient and propulsive” is a list of amoral descriptors that can include torture, terror, mass rape, slavery, and genocide. The “system” is “resilient” because the winner is “resilient.” The losers may be dead or slaves. The “flexibility” can mean moral flexibility. The ethnic or religious group with the most flexible approach to ethics may be the first to use poison gas and win the war. “Propulsive” is a revealing term. The side with the best artillery can propel the most 155mm shells on the rival city, and (to switch countries to Syria) annihilate its rivals by applying “Hama Rules.”

Hafez al-Assad’s destruction of Hama illustrates other reasons why social systems are not “open systems” – and even if they were, would not inherently produce civilized results. Notice that power is the key. The entity that wins a conflict will often combine power, ruthlessness, deception, and treachery. Hafez al-Assad was an Alawite, a branch of the Shia faith that is a minority group in Syria. A minority group can maintain control in a nation for many decades if it controls the military – and is prepared to use it ruthlessly against its fellow-citizens.

Colonization and the seizure of continents from the native peoples was a “flexible, resilient and propulsive” process. Stealing extremely valuable assets is an excellent way to produce “growth” – among the people that steal.

Friedman’s book described how even the most cosmopolitan financial and scientific elites (“Web People” even before there was a web) in Lebanon had to adopt a murderous group identification to survive. But he seems to have forgotten his own book.

[T]he instinct of Web People is to embrace the change in the pace of change and focus on empowering more people to be able to compete and collaborate in a world without walls.

Really? What selfless saints. They “instinct[ively]” spend their lives “empowering more people to be able to compete” with their own companies? I’ll grant you that Silicon Valley CEOs “collaborate.” Under Bill Gates, Microsoft illegally “collaborated” (extorted) software developers to extend their operating system monopoly to other fields. Silicon Valley CEOs, led by Apple’s Steven Jobs, collaborated illegally for years via a “no poaching” pact (notice how they phrased competition as immoral with that term) to suppress workers’ wages. Jobs also collaborated with other officers to backdate his stock options to receive even larger compensation. Scores of CEOs collaborated to engage in accounting fraud through “round trip” scam broadband swaps and “channel stuffing.” Other Silicon Valley CEOs collaborated with other officers to get away for years with sexual harassment.

Each of these crimes and abuses is an example of why economics is not an “open system.” Each of these crimes and abuses demonstrates the essential role of government enforcing an effective rule of law in producing desirable economic outcomes.

Friedman’s proposed economic policies both boil down to deregulation – in finance and health and safety. As I quoted in my first column in this series, he explicitly calls for banking deregulation as his paramount policy. But he also calls for Hillary to support the Trans-Pacific Partnership (TPP). The paramount purpose of the TPP, though you would not learn this from Friedman, is destroying effective financial and health and safety regulation. The “investment protection” clauses allow powerful corporations to extort government to deter or penalize them if they dare to adopt vital regulations.

Friedman is Peddling Long-Falsified Austrian Economic Dogmas

Austrian economists are famous for asserting that, absent the evil government, economics is self-organizing and optimal. Their term for this is “spontaneous order” and they were great believers in Social Darwinism. They also predict that stimulus must fail and that austerity must succeed. Each of these claims has been falsified for decades by economists, regulators, courts, and criminologists. It turns out that fraud is a profit-opportunity that is subject to spontaneous criminal order. Fraud can create a “Gresham’s” dynamic in which bad ethics drives good ethics from the markets.

The Austrians’ ideological heirs supplemented this “self-correcting” myth through three primary claims – each of them discredited.

Efficient markets and contracts

Markets were asserted to be self-correcting. Any pricing error creates a profit opportunity and all public information is promptly taken into account by market participants. The optimal trading strategy when there is a pricing error is to buy the undervalued asset and sell the overvalued asset. This strategy automatically causes both pricing errors to disappear. The profit opportunity disappears when the pricing error is fixed. This means that prices will self-correct and tend to move toward their “true” value.

The problem is that the world’s largest asset bubbles in history have occurred in the heart of this era in which markets are supposedly ever more efficient. Fraud does fool markets. Asset prices move systematically – for many years – further away from “real” values. Rather than “self-correcting,” financial markets collapsed and were saved only through massive governmental interventions.

Frank Easterbrook and Daniel Fischel: Financial Markets Automatically Exclude Fraud

Easterbrook and Fischel claimed that financial, professional, and employment markets automatically excluded frauds. This exclusion occurred because honest corporations had the financial incentive – and unique ability that could not be mimicked by frauds – to “signal” that they were honest. To be kind, no aspect of their claims was true and when they attempted to apply their theory in the real world they ended up praising three financial firms – each of which proved to be massive frauds. Naturally, when they wrote their book promoting their theories there was insufficient space to disclose this embarrassment.

General Equilibrium Theory and Pareto Optimality

The Italian economist Vilfredo Pareto argued that voluntary exchange would inherently lead to both parties being made better off. These voluntary exchanges would take place until all such mutually beneficial exchanges were made. When that point was reached the economy would have reached optimality.

Microeconomists created a general equilibrium theory that relied on Pareto optimality as a means to claim that an economy with minimal governmental “interference” would produce a grand equilibrium. Macroeconomists decided to torture the concept even more aggressively and make it their basis for claiming that if the government could be reduced to economic insignificance even the overall economy would be self-correcting and would move naturally toward optimality.

There are so many things wrong with these claims that it would take volumes to develop simply the fatal errors. I’ll mention only three of those fatal errors. First, fraud. Both parties are not made better off and the “markets” massively magnify the pricing “errors.” One party, the bank CEO is made massively better off. More junior officers and employees and the “independent professionals” who aid and abet the frauds prosper enormously. The borrowers, shareholders, and the general public losses vastly exceed these gains.

Second, externalities. Pareto optimal transactions could be a global suicide pact due to pollution, ozone holes, and global climate change. Calling something “optimal” that is actually suicidal exemplifies the insanity of this economic ideology.

Third, the economists who promoted those dogmas have argued for decades that their claims should be judged on their productive ability. I agree. They failed – catastrophically and repeatedly. But they did not stop spreading dogmas they knew had repeatedly been proved false.

Austrian Economics as “Center-Left”

Friedman’s claim that banking deregulation and health and safety deregulation, through the extortion provided by the “investment protection” obscenity in the TPP, are the keys to super-charging growth and creating a self-correcting economy is based on a slogan rather than real economics, real systems theory, or any historical reality. The economic dogmas that Friedman is peddling have all been falsified.

The dishonest aspect of all this is that Friedman advises Hillary to adopt these hard-right dogmas, which have repeatedly led to the epidemics of elite fraud that drove our last three financial crises, as a means to achieve rapid economic growth and financial stability. The hilarious aspect of this is that Friedman claims that Hillary’s embrace of ultra-right wing tropes would produce a “compassionate, center-left Web party for the 21st century.” Center-left?

 

 

 

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35 comments

  1. diptherio

    Third, the economists who promoted those dogmas have argued for decades that their claims should be judged on their productive ability.

    Should be “predictive ability.”

    As per usual, Bill is on the money (no pun intended). I will just add though, that self-organization of economic entities does happen…kinda…but it takes a heck of a lot of thought and organizing before it will “happen on it’s own…” I’m involved right now in a self-organized group that’s formed around a little start-up business…but that group didn’t just organize itself, you know. Takes a lot of hard work.

    1. sgt_doom

      Seriously, there is only one possible choice as to what to do with T. Friedman: offshore his butt.

      1. Knute Rife

        I’m waiting for the day I get a spam phone call that says, “Hello, this is Thomas, and I’m calling from Delhi…err…Atlanta with a great credit card offer for you.” Then I’ll know he’s learning just how flat the world is.

  2. George Phillies

    This appears to be proposing some variation on the Libertarian Party. Friedman may not know who they are.

    1. MojaveWolf

      Possibly cab people are people who “embrace the change in the pace of change”

      OMG if Black hadn’t already called this incoherent jargon I would so make fun of this phrase and I just have to make fun of this phrase anyway. Maybe it’s some kind of typo but good grief, he gets paid to write this. And someone gets paid to edit him. How did this happen?

      Also, I haven’t heard “Pareto Optimality” since the 90’s. I didn’t miss hearing this phrase. Though back then, even the hard core conservative Richard Posner loving economic types acknowledged the need to deal with environmental externalities of the sort the TPP seems designed to sweep under the rug, at a time when those problems are a far more obvious and immediate threat to humanity than they appeared back then. Maybe the system has opted to “self-regulate” itself into non-existence? I… don’t think that’s a good idea, since that particular form of non-existence involves taking the rest of the world down with it.

      Better idea: The cab people are the people who push down the accelerator when they see “web people” walking in front of them, laughing and shaking their fist yelling “Viva La Revolucion!”

      Those cab people would rock.

      I like that idea. Yay cab people. =)

  3. James McFadden

    Thomas Friedman – the perennial corporate shill. Always useful to consult the wiki page on propaganda techniques before reading Friedman.

    Thank you Bill Black for debunking the nonsense this guy peddles.

    I wonder if anyone has put together a list of these corporate shills – like Malcolm Gladwell, John Tierney, Betsy McCaughey, Michael Shermer, ….
    Even better a list with some links describing why they are on the list.

    1. Scott F

      I was greatly saddened to see Michael Shermer – who had done a great deal of good exposing fraud – drink the Kool-Aid of extreme open market ideology, insisting on pegging economies to natural selection like a two-bit social darwinist.

      1. sgt_doom

        Shermer has long been a redirection specialist, he’s never really and truly exposed any fraud.

  4. FortyYearsInThe UniversitySystem

    Why does a.. character like Friedman command widespread interest but a true hero like Bill Black not? That must itself be part of the culture of fraud that we are forced to live in nowadays. Tragic is the only possible word for it.

    1. sgt_doom

      I believe Prof. Black does — among those with an IQ above a door knob!

      Now Friedman on the other hand . . . . .?

  5. Scott F

    Since Friedman only takes taxis, he has never heard of Uber which is not a Web company as much as it is a predatory exploiter of under-employed car owners and scofflaw that will take advantage of very opportunity to enrich itself while claiming to be the top echelon of the Web People.

  6. Pepsi

    Whenever someone uses that word, “center,” hold onto your wallet, they’re trying to run some sort of scam. It’s like a salesman calling you “friend.”

  7. Adrian H.

    Add Friedman to the pantheon of Donald Trump and Elizabeth Holmes whose prominence and continued paychecks exemplify a deep, disastrous dysfunction in modern society.

  8. Lee

    I continue to be mystified that Friedman is still taken seriously after his adulation of Enron as an exemplar of corporate excellence in his 2000 book The Lexus and the Olive Tree.

  9. Synoia

    Thomas Friedman has written two columns advising documenting how Hillary Clinton to will renounce her campaign promises and the Democratic Party’s platform and move to the right of the Republican Party on economic issues.

    Fixed the speculation.

  10. Starveling

    I guess I’m a wall person, then? His web people sound atrocious and a world of rootless, shiftless striving seems more atomizing than the Dickensian nightmares of Marx’s time.

    Normal, everyday folk want safety and stability- a chance to do an honest day’s work for an honest day’s pay with knowledge that they can plan for an anticipatable future.

    Only an insulated elite could possibly want the total obliteration of all things beautiful to juice up profits for another quarter. And Austrian economics… Christ.

  11. FluffytheObeseCat

    to be in the middle class, just working hard and playing by the rules doesn’t cut it anymore. To have a lifelong job, you need to be a lifelong learner, constantly raising your game.

    Stated by a man who hasn’t learned anything noteworthy in decades. His contempt for the average American is somewhat veiled until you get to this sentence, near the end of his screed. The entire piece was a soggy rehash of his stock column, the one he’s re-published ad nauseum for the last 18 years.

    Friedman is a truly tragic figure, but at this point he more a creature of bathos than pathos. Too well-to-do, too secure due to inherited money* even if he loses his pundit perch, and frankly not very sharp. Yet as mentioned above, he was once a journalist.

    *(They took a significant hit in the Great Recession, but are still securely in the lower reaches of the upper class.)

    1. sgt_doom

      Naaaah. . . . I see and hear all these newsies-for-life who haven’t read squat lately.

  12. Darren Kenworthy

    All systems arise out of constraints. Recognizing constraints that balk our desires presents no difficulty. Seeing constraints make our activities possible, or offer advantages because they constrain others, requires considerable effort and imagination.

    For Friedman’s “web people” existing constraints form pathways to greater power and wealth that they can traverse but others cannot. Most of the rest of us experience those pathways as a trap that binds us in place and exposes us to the depredations the unconstrained. Little wonder the spiders wish to spin a web that covers the world.

  13. Seamus Padraig

    I really can’t imagine why anyone would take a semi-coherent buffoon like Friedman seriously.

    1. Skippy

      Milgram experiment…

      Disheveled Marsupial…. Think of bespoke suit instead authoritarian uniform….

  14. Reality's Stooge

    I worry what will happen when it becomes clear to the man and woman on the street that the American empire is in irreversible decline. Because people like Friedman and the elites he serves seem to have a problem separating reality from fanciful thinking and their own spin and PR. A person with a functioning brain, no matter what side of the political spectrum they are on, would not call Austrian School economics center-left or anything “left”. And yet…the people with the power to destroy lives and nations believe just that. When Bush, Rumsfeld and the PNAC gang decided to invade Iraq I think they believed their own BS too. At least the part about the war being a cakewalk that would be over in a few weeks. All the lessons of history are lost on these fools. Nobody in either mainstream party dared call the Iraq war the disaster that it was until Donald Trump came along, and that’s saying something.

    So what happens when the PTB have to decide whether to abandon the American empire project and accept a multipolar world (or a new master) or fight to keep America at the top of the pile? If their. Something tells me they won’t accept defeat and move on Ike the Brits did or Russia. If their mindset is anything like today’s leaders they will go down like Hitler in his bunker in 1945 raving about imminent victory and commanding phantom divisions. What did Hitler do when he finally realized his empire was finished and so was he? He turned his fury on every German who was still alive and said the German people are losers and deserved nothing less than complete destruction. (At least that’s now he was portrayed in the movie Downfall.)

    America’s elite with their belief in American exceptionalism and the “indespensible nation” are unlikely to go quietly or learn to share and play nicely with others.

  15. Paul Hirschman

    Karl Polani’s The Great Transformation still captures the pathos of a “self-regulated” market society as well as any book out there. The bottom line is that no one really wants to live by the anti-social dictates of the self-regulated market, but they demand that you do. Heads I win, tails you lose. Smart money is inside money–the very antithesis of rational calculating individuals with equal information and access.

    The only reason this nonsense persists is that we continue to fail to articulate an alternative. Even a flicker of truth–a la Sanders–scares the wits out of the crooks.

  16. John Wright

    I have posted before a link to an article on the Times editorial page:in the Observer from 2014

    http://observer.com/2014/02/the-tyranny-and-lethargy-of-the-times-editorial-page/

    This has this encouraging statement, encouraging because at least some Times staffers do not respect Friedman:

    “One current Times staffer told The Observer, “Tom Friedman is an embarrassment. I mean there are
    multiple blogs and Tumblrs and Twitter feeds that exist solely to make fun of his sort of blowhardy
    bullshit.” (Gawker has been particularly hard on Mr. Friedman, with Hamilton Nolan memorably
    skewering him in a column entitled “Tom Friedman Travels the World to Find Incredibly Uninteresting
    Platitudes,” as a “mustachioed soothsaying simpleton”; another column was titled “Tom Friedman
    Does Not Know What’s Happening Here,” and the @firetomfriedman Twitter account has more than
    1,800 followers.)”

    In my financial perspective, I pay 13 x $15 = $195/year for my digital times subscription.

    If Tom F has a salary + benefits of 600K, and the Times revenue (MRQ) = 373 million or 1.492 billion extrapolated over the year.

    My pro rata share of Tom Friedman’s salary is 600E3 * 195/1.492E9 = 7.84 cents per year.

    This is far exceeds any entertainment value Tom Friedman provides with his bloviation.

    I’ll probably quit the TImes after the election, in a very small attempt to “starve the beast”..

    Tom needs to show his followers how to re-invent himself, and the Times needs to lay him off to give him some first hand precariat experience.

  17. ewmayer

    o Friedman has written two columns advising Hillary Clinton to renounce her campaign promises and the Democratic Party’s platform and move to the right of the Republican Party on economic issues. — Hw can’t even wait 3 months for her to do precisely that? Anyway, the looter elite already view her – correctly – as a hardcore unrepentant neolibcon, so are surely ignoring any faux-lefty “messaging” by Team Hillary. Perhaps Friedman is hoping she’ll do the reveal ASAP not for the elite but in order skim off some portion of the GOP sub-elite, the 1-10%er “credentialed professional” class.

    o “open systems are always more flexible, resilient and propulsive” — as in, the proles need to be forced to leave themselves open to endless elite theft, while the thieves’ fortunes, even when they blow up the world, are rendered resilient by open-ended government backstops, the combination of which is guaranteed to propel the benighted non-web-people into perpetual debt slavery.

    The Party claimed, of course, to have liberated the proles from bondage. Before the Revolution they had been hideously oppressed by the capitalists, they had been starved and flogged, women had been forced to work in the coal mines (women still did work in the coal mines, as a matter of fact), children had been sold into the factories at the age of six. But simultaneously, true to the principles of doublethink, the Party taught that the proles were natural inferiors who must be kept in subjection, like animals, by the application of a few simple rules. In reality very little was known about the proles. It was not necessary to know much. So long as they continued to work and breed, their other activities were without importance. Left to themselves, like cattle turned loose upon the plains of Argentina, they had reverted to a style of life that appeared to be natural to them, a sort of ancestral pattern. They were born, they grew up in the gutters, they went to work at twelve, they passed through a brief blossoming period of beauty and sexual desire, they married at twenty, they were middle-aged at thirty, they died, for the most part, at sixty. Heavy physical work, the care of home and children, petty quarrels with neighbors, films, football, beer, and, above all, gambling filled up the horizon of their minds. To keep them in control was not difficult. A few agents of the Thought Police moved always among them, spreading false rumors and marking down and eliminating the few individuals who were judged capable of becoming dangerous; but no attempt was made to indoctrinate them with the ideology of the Party. It was not desirable that the proles should have strong political feelings. All that was required of them was a primitive patriotism which could be appealed to whenever it was necessary to make them accept longer working hours or shorter rations. And even when they became discontented, as they sometimes did, they could only focus it on petty specific grievances. The larger evils invariably escaped their notice.

    — George Orwell, 1984

  18. Sound of the Suburbs

    Markets have two modes of operation:

    1) Price discovery
    2) The bigger fool mode – riding bubbles for capital gains on rapidly appreciating assets

    Markets turn into crazy roller-coasters in mode 2, e.g. Tulip Mania, dot.com bubble, almost every housing market in the world.

    The Chinese are unaware of mode 1.

    I believe markets always reach stable equilibriums because I am an idiot.

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