The Wrong Road to Freedom

A Book Review of The Road to Freedom: Economics and the Good Society, by Joseph E. Stiglitz

By David R. Henderson. 

"Introduction

Columbia University economics professor Joseph E. Stiglitz has recently published a book titled The Road to Freedom: Economics and the Good Society. In it, Stiglitz, who shared the 2001 Nobel Prize in economics with George Akerlof and Michael Spence, criticizes what he calls “neoliberalism” and singles out Milton Friedman and Friedrich Hayek as two prominent neoliberals.

Stiglitz argues that Friedman, Hayek, and others failed to recognize the importance of market failure and were too optimistic about how competitive an economy would be without government intervention. Whereas Friedman argued that economic freedom is a necessary, though not sufficient, condition for political freedom, Stiglitz turns the argument on its head. In his view, the kind of economic freedom that Friedman advocated would lead to less political freedom. Interestingly, though, Stiglitz himself advocates less freedom of speech for people with certain views and he claims that it was good for governments to have suppressed what he thinks of as misleading speech about the COVID-19 pandemic and masks.

Throughout the book, Stiglitz makes strong assertions with little or no evidence. Although the book is heavily footnoted, the footnotes are mainly to explain some of his ideas further or to reference other books or articles, disproportionately written by Stiglitz. There are few hard numbers, and he makes little attempt to cite writings by those he criticizes. He also shows a stunning ignorance of economic history and, in discussing price gouging, shows no awareness of the downside of price controls. His criticism of communism doesn’t even mention the millions of deaths it led to. At times, as when he discusses climate change, he is completely one-sided and seems completely unaware that he is. Moreover, Stiglitz is not shy about engaging in stunning personal attacks on Friedman and Hayek. The result is a book that preaches only to people who (1) already agree with him and (2) don’t need to see good evidence or arguments to support their views.

Neoliberalism and Trickle-Down Economics

In his Preface, Stiglitz defines neoliberalism as “the belief in unregulated, unfettered markets.” In a footnote he promises to provide a “more extensive definition” in the first chapter, but a careful reading of that chapter shows no such attempt.

Stiglitz, like many other critics of free-market economists, uses a term to describe them that almost none of them uses. The only economist I know who calls himself a neoliberal is EconLog co-blogger Scott Sumner. And the only evidence of Milton Friedman mentioning the word “neoliberal” was in a 1951 essay in a Norwegian magazine. Even there, Friedman didn’t claim the label for himself. In none of his subsequent non-academic writing—and I have read virtually all of it—did Friedman call himself a neoliberal.

Similarly, Stiglitz refers to people on the “Right” (he capitalizes the word) as advocates of “trickle-down economics.” They argue, he says, that “if we made the economic pie larger, all would eventually be better off.” (italics in original) Yet, I’ve never been able to find people on the “Right,” whether classical liberal, conservative, or libertarian, using the term “trickle-down economics” to refer to what they believe in. When someone uses terms to describe people’s beliefs, terms that those people never use to describe their own beliefs, we should be suspicious.

While we’re discussing it, though, it’s important to point out that the last two centuries of economic growth completely justify the idea that steady economic growth in a society does make virtually everyone better off. J. Bradford DeLong, an economist at the University of California, Berkeley—and certainly no one whom Stiglitz would regard as a “neoliberal”—beautifully documented that fact in a 2000 National Bureau of Economic Research study aptly titled “Cornucopia: The Pace of Economic Growth in the Twentieth Century.” This isn’t trickle-down economics; it’s gush-down economics.

Economic Concentration and the 19th Century Trusts

In criticizing Hayek and Friedman, Stiglitz claims that they thought that markets on their own would remain competitive without government intervention and forgot or ignored “the experiences of monopolization and concentration of economic power that led to competition laws” in the late 19th and early 20th century. There are two problems with this claim. First, both Hayek and Friedman did favor some version of antitrust. In his 1962 classic, Capitalism and Freedom, Friedman wrote, “The Sherman antitrust laws, with all their problems of detailed administration, have by their very existence fostered competition.” And in his 1979 volume 3 of his Law, Legislation, and Liberty, Hayek wrote that monopolists’ ability to price discriminate “ought to be curbed by appropriate rules of conduct” in cases where “market power consists in a power of preventing others from serving the customer better.” It’s not clear that Hayek had in mind antitrust statutes, He more likely was thinking of common law rules against monopolistic private-market actions. I don’t completely defend Friedman’s and Hayek’s views. I simply defend them from Stiglitz’s false charge.

Second and more important, Stiglitz shows his own ignorance of how competitive the “trusts” of the late 19th century were. In a pathbreaking study that Stiglitz doesn’t mention, economist Thomas DiLorenzo showed that in the six “trusts” he examined, between 1880 and 1890 real output increased by 175 percent at a time when the trusts were gaining market share and the economy’s overall output increased by only 24 percent. In his article, “The Origins of Antitrust: An Interest-Group Perspective,” published in the International Review of Law and Economics, DiLorenzo found that real prices in these industries were falling. Although the consumer price index fell 7 percent in that decade, the price of steel fell 53 percent, refined sugar 22 percent, lead 12 percent, and zinc 20 percent. The only price that fell less than 7 percent in the allegedly monopolized industries was that of coal.

What about oil, which was produced by that famous trust, Standard Oil of New Jersey? In his 1987 book, A Theory of Efficient Cooperation and Competition, Lester Telser, a University of Chicago economist, noted that during that same decade (1880-1890), the output of petroleum products rose 393 by percent and the price fell 61 percent. The only conclusion consistent with those facts are these two sentences from Telser: “The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices.” But you won’t find any mention of this in Stiglitz’s book.

Stiglitz’s Personal Attacks

While we’re on the issue of false, or at least specious, charges, it’s worth pointing out Stiglitz’s personal attacks on Friedman and Hayek. In his Chapter One, Stiglitz writes, “Friedman and Hayek, like many other conservatives, have an unfailingly dismal view of human nature. It may have been because of deep introspection that they arrived at their extreme views about individual selfishness, which they the generalized to everyone.” I can’t speak for Hayek. I spent about a week at a conference with him in June 1975 and didn’t get to know him well, but I certainly didn’t observe an obviously selfish person. The main thing I observed was his utter delight in finding young economists who were more free-market-oriented than he was.

I did know Milton Friedman well, though, having interacted with him on numerous occasions between 1970 and the early 2000s. What I observed was a man with a large generosity of spirit. That simply doesn’t fit Stiglitz’s image of someone generalizing from his own selfishness to that of people in general.

On a related note, Stiglitz accuses Friedman of having been “a key adviser to the notorious Chilean military dictator Augusto Pinochet.” This claim has been refuted countless times. Friedman himself noted—and no one contradicted his claim—that Friedman spent about 45 minutes talking to Pinochet. Does that constitute key advice? And what is one to say about Stiglitz’s own close consulting relationship with Venezuelan strongman Hugo Chavez?

Price Gouging

One thing that tends to separate economists from non-economists is the economists’ understanding of the positive effects of allowing so-called “price gouging.” For purposes of this discussion, I’ll define price gouging as raising a good’s price quickly and substantially when the demand for the good suddenly rises or the supply suddenly falls. A 2012 poll of prominent economists found that only 8 percent agreed or strongly agreed with the idea of passing a law preventing price gouging during “a severe weather event or emergency” while 51 percent disagreed or strongly disagreed.[1] Weighted by confidence in their views, the results were even more lopsided. Only 7 precent agreed or strongly agreed while 77 percent disagreed or strongly disagreed.

Why do so many economists think that allowing price gouging is a good idea? For three main reasons. First, even if higher prices don’t elicit higher output, they do cause the suddenly scarcer good to be sold to those who value it most. We measure value by willingness to pay. That may sound problematic, but it’s not always true that the wealthier people are the ones who are willing to pay more. During a hurricane, for example, although the wealthier person will certainly get plywood to cover up the windows of his mansion, the person who lives in a trailer might outbid the wealthier person for plywood for his trailer so that the wealthier person doesn’t get the plywood for his tool shed.

Second, if suppliers know that they can raise prices when there’s a sudden increase in demand or decrease in supply, they are more likely to stockpile goods than if they know they won’t be able to raise prices.

Third, outside suppliers, if they can charge unusually high prices, will be motivated to ship goods into the area where there is a sudden scarcity. There are actual cases of lumber sellers in Georgia getting ready to ship lumber to Florida if they’re assured of being able to get high prices.

Where does Stiglitz stand? He’s in the 7 or 8 percent. In addressing the issue of umbrella prices during rainstorms, he advocates a “simple coercive rule—no price gouging when it rains.” His argument for that rule is that it will cause people not to invest in information about the weather. He thinks that’s good. But he doesn’t even bother addressing the issues I discussed above: the allocation of a given number of umbrellas, the incentive to stockpile, and the shipment of umbrellas from other areas. (This last, admittedly, is probably not important for sudden rainstorms.)

Climate Change

Stiglitz calls climate change “an existential threat.” He writes:

Climate change is about more than the heating of the planet a few degrees; it is about the increase in extreme weather events. More droughts, more floods, more hurricanes, more extreme heat and more extreme cold spells, rising sea levels and increasing ocean acidity, and all the dire consequences that will ensue, from dying seas to forest fires to the loss of life and property.

Such strong empirical claims cry out for strong empirical support. Stiglitz gives none. Yet physicist Steven Koonin, in his 2021 book, Unsettled: What Climate Science Tells Us, What it Doesn’t, and Why it Matters, presents solid data, much of it from the federal government’s National Climate Assessment that undercuts claims like those quoted above. I discuss a number of these in my 2022 review of Unsettled.[2]

COVID, Masks, Censorship, and Communism

This same confidence without evidence infuses Stiglitz’s discussion of the efficacy of wearing masks during COVID. He claims that “[S]cientists found that, holding all else constant, masking and social distancing make a difference.” The good news is that he footnotes this claim; the bad news is that the footnote doesn’t give evidence for the claim.

More ominously, Stiglitz comes out strongly for censoring people whose views on COVID differ from his. He writes:

When individuals believe wrong information—when there is a demonstrable inability of many to identify laws and false information—there may have to be restrictions on its dissemination. We did that during the pandemic; it would have been foolish—socially harmful—if we had not.

That raises other issues. People acting on Marxist ideas, which were clearly wrong, put into power governments into power that murdered tens of millions of people. Would Stiglitz have censored Karl Marx?

I would bet that he would answer “No” and that part of the reason is that he doesn’t feel strongly about Communism. Here’s his summary statement about the downsides of Communism:

Communism succeeded in generating greater equality and more security in material goods but failed on other counts, including low economic growth, an absence of freedom in all dimensions, a concentration of power, and a greater inequality in standards of living than Communist rulers would admit.

Put aside the fact that there were great inequalities under Communism. As my co-authors and I pointed out in our article “The Hidden Inequality in Socialism,” Leonid Brezhnev, general secretary of the Soviet Communist Party and president of the USSR, “had Rolls Royce, Mercedes, Cadillac, Lincoln Continental, Monte Carlo, Matra, and Lancia Beta automobiles.”[3] Much more important, what’s missing? How about Joseph Stalin’s purposeful starving of millions of Ukrainians in the early 1930s. Has Stiglitz, a smart man, never heard of the Holodomor?

Getting Coase Wrong

One of the major players among free-market economists in the last century was the late Ronald Coase, who was even a player into the 21st century. Coase famously established that lighthouses in Britain, which so many economists—famously including Stiglitz’s own teacher, Paul Samuelson—assumed had to be provided by government, were actually provided privately. Coase never argued, though, that private producers could feasibly provide all public goods. Yet in a table summarizing various “neoliberal” views, Stiglitz writes, “[The] Coase theorem says that market will efficiently solve public goods problems.” Has he read Coase?

Is there anything to like?

There are so many other parts of the book to criticize. They include Stiglitz’s idea that the U.S. economy has deindustrialized—it hasn’t; an attack on Republicans for gerrymandering even though Democrats do so also; and a criticism of the idea of letting people sell their body parts in which he forgets to argue why they shouldn’t be so allowed. That is by far from a complete list of remaining weaknesses in the book.

I’ve been more critical of Stiglitz’s book than I normally am of other books by economists who are left of center. That raises a question: is there anything valuable in his book? Yes. There are two main things.

First, on immigration, Stiglitz criticizes the media for showing “waves of refugees trying to cross the border.” He claims that this occurs “relatively rarely.” I’m not sure he’s right. But I do agree that the showings on media probably exaggerate the problem. Even on immigration, though, Stiglitz misses an opportunity to make a bigger point. He writes:

The libertarian claims [about people deserving their incomes] are even weaker once we think about what their incomes would have been had they been born in a poor country, without the rule of law or the institutions, infrastructure, and human capital that make the economies of advanced countries work so well. It is not enough to have assets such as entrepreneurial talents. If you are born into the wrong environment, those assets mean nothing.

The way I’ve summed up that point in speaking to American audiences is to tell them that for most of them, the most valuable asset they have is their American citizenship.

But there’s a straightforward solution, one that many libertarians advocate but Stiglitz fails to: let more people immigrate. Throughout the book, Stiglitz expresses concern for people in poor countries. The quote above shows that he understands how to help millions of them. But he doesn’t bother to say so.

The other area in which he expresses some good thoughts is on trade policy. Stiglitz writes, “The US [government] talks about the international rule of law in trade, but nothing is done when Trump or Biden violate these rules, whether by imposing unjustified tariffs, by subsidizing its chip industry, or by passing Buy America provisions.”

But those are two rare points of light. Stiglitz’s book is, in short, full of important errors and deeply unsatisfying."

Samuel Gregg on the problems with The Road to Freedom by Joseph Stiglitz

See A Nobel Polemicist by Samuel Gregg.

"It’s not often that a distinguished scholar advises his listeners to be cautious before assigning excessive weight to his words. That, however, is precisely what the economist F. A. Hayek did in his speech at the 1974 Nobel Prize banquet.

“The Nobel Prize,” Hayek informed his audience, “confers on an individual an authority which in economics no man ought to possess.” He then added: “There is no reason why a man who has made a distinctive contribution to economic science should be omnicompetent on all problems of society—as the press tends to treat him till in the end he may himself be persuaded to believe.”

These words came to my mind recently while reading a new book by another Nobel Prize economist. In The Road to Freedom: Economics and the Good Society, Joseph E. Stiglitz, the 2001 Nobel Laureate and former World Bank chief economist, identifies Hayek and yet another Nobel economist, Milton Friedman, as the primary intellectual purveyors of neoliberal policies that, Stiglitz contends, have perverted the idea of freedom and generated deep inequalities and a host of injustices.

The word “neoliberal” has its own pedigree. Today, however, it functions as an epithet used by the Left—and now the New Right that populates many conservative institutions—to stigmatize people and ideas. The use of epithets is common in polemics, and polemics are not concerned with reasoned debate or discussion. Nor, despite protestations to the contrary, is Stiglitz’s book. From beginning to end, it trades in hyperbole.

The World According to Stiglitz

“Freedom,” Stiglitz states at the beginning “is in danger.” The global decline of liberty reflected in the rise of authoritarian regimes, he argues, has also manifested itself in liberal democratic societies. By Stiglitz’s account, this reflects failures in economic policies that mirror “the Right’s incorrect conception of freedom.”

“The Right” functions throughout this book as a catch-all phrase. It embraces groups like the Republican Party and as unlikely bedfellows as libertarians and Donald Trump. Important details, like Trump stating that he is “not a conservative” or the undeniable and deep split in the American conservative movement between economic nationalists and free marketers, are obscured by Stiglitz’s Manichean view of politics. Light is on the side of modern liberals, neo-Keynesians, and social democrats. Darkness envelops everything else.

Some of that darkness, according to Stiglitz, extends to the American Founding. He holds, for example, that “the freedom the country’s patriots championed was not freedom for all, but rather freedom for themselves.” Stiglitz points to the post-independence maintenance of the institution of slavery as proof for his claim that the Constitution was the product of “the people who wrote it (overwhelmingly, rich white men, many of them slaveholders).”

That assertion contradicts the evidence meticulously assembled by historians like Forrest McDonald in his We The People: The Economic Origins of the Constitution. This showed, contra Charles A. Beard and his disciples, that most of those rich white men who drafted the Constitution actually supported constitutional measures that did not serve their personal interests. Nor does Stiglitz grasp that the seeds of slavery’s downfall in America were laid by the Founding’s promise of “liberty and justice for all.” Absent that inner and, for the time, radical logic, it is harder to understand why furious disputations of slavery’s basic legitimacy increasingly characterized American political discourse from the 1770s onwards.

But the more immediate culprits for the miseries inflicted by neoliberalism, Stiglitz argues, are free market economists like Hayek and Friedman. Freedom, he says, depends upon rules and regulations that preserve some degree of equality, promote social justice, and reflect the reality of trade-offs in life. Such things have no place, Stiglitz maintains, in Hayek and Friedman’s free-market nirvana. In Stiglitz’s world, they “were the most notable mid-twentieth defenders of unfettered capitalism,” and, as “the intellectual handmaidens of capitalists,” led “a pack of conservative economists who have tried to preempt meaningful discussions by the very vocabulary they use.” Their understanding of “free markets,” Stiglitz believes, views “rules and regulation” as resulting in “unfree markets” and thus vast inefficiencies.

Myths and Markets

At this point, I wondered how much Stiglitz has actually read of Hayek and Friedman. I know of no text where they called for rule-free and regulation-free markets. Significantly, there is just one reference in Stiglitz’s footnotes to something authored by Hayek.

Yet one need only open books like The Constitution of Liberty to find Hayek, for example, pointing out that “a functioning market economy presupposes certain activities on the part of the state.” In The Road to Serfdom, Hayek even says that the “wooden insistence on … the principles of laissez-faire” did immense harm to the market liberal cause. So much, then, for unfettered markets.

More generally, anyone who has read the corpus of Hayek’s work knows that he wrote extensively about the laws and legislation best fitted for societies that take justice and rule of law seriously. That is the whole point of Hayek’s mammoth Law, Legislation, and Liberty. Stiglitz himself concedes that books like The Road to Serfdom show that Hayek was “aware of externalities” and “the need for government intervention when there are externalities.” But how can Stiglitz square this concession with his declarations that Hayek was committed to “unfettered markets”? The answer is: he can’t.

In fact, the debate between free marketers and interventionists is not about whether there should be regulation. The argument is really about what is the best way to regulate markets.

Is it through a combination of macroeconomic policies, specific interventions into particular economic sectors, the application of wide-ranging regulatory codes to economic transactions, and ongoing wealth redistributions through large welfare states and progressive taxation? Or: are markets better regulated through protections of property rights, adherence to rule of law, contract enforcement, commonsense health and safety regulations, a basic safety net, stable money, and the dynamic competition that promotes consumer sovereignty over and against vested interests like established businesses and their political allies? This is a key dispute between dirigistes like Stiglitz and those who believe in markets, and Stiglitz’s presentation of the latter’s position is a caricature.

This, however, is dwarfed by Stiglitz’s astonishing claim that the “free and unfettered markets advocated by Hayek and Friedman and so many on the Right have set us on the road of fascism.” I find it hard to believe that Stiglitz does not know that fascist regimes have historically been characterized by widespread regulation, endless interventionism, and corporatism: in short, the opposite of free market economies.

Like many of his fellow-travelers on the Left and the New Right, Stiglitz doesn’t believe that we can trust ordinary people operating within a context of rule of law.

As the German market liberal economist Wilhelm Röpke demonstrated in his 1934 Economica article “Fascist Economics,” the economies of actual fascist regimes like Mussolini’s Italy were distinguished by a “monopolistic-interventionist system” enforced by armies of uniformed bureaucrats. Stiglitz, however, claims that the economic conditions preceding regimes like Nazi Germany were characterized by too little intervention.

In fact, the economic history of Imperial Germany and Weimar Germany is far more complicated. Imperial Germany was, after all, the birthplace of the modern welfare state. By the 1890s, key sectors of the German economy had become highly cartelized. Tariffs were also used to try and protect particular industries like agriculture from foreign competition. During World War I, that same economy was subject to massive planning. As for Weimar Germany, Part 2, Section V of its Constitution contained fourteen articles that identified many economic rights that no one would describe as reflecting a classical liberal view of life. Many such rights were given subsequent expression in policies ranging from expansions of social security to legislating worker co-determination arrangements.

To be sure, some German conservatives and liberals tried limiting the scope of these measures. Nonetheless, “unfettered markets” never reigned in Germany between 1870 and 1933. The truth is simply far more complex than the portrait painted by Stiglitz.

Old Left Meets New Right

What, then, does Stiglitz want to substitute in neoliberalism’s place? Here, Stiglitz is unambiguous. He wants “something along the lines of a rejuvenated European social democracy or a new American Progressive Capitalism, a twenty-first-century version of social democracy or of the Scandinavian welfare state.” When we look, however, at Stiglitz’s preferred measures, they are hard to distinguish from Old Left propositions.

Stiglitz’s long list of “Progressive capitalism policies” includes the following: “regulation,” “corrective taxation,” “government investment,” “industrial policies,” “financial regulations, both macro . . . and micro,” “public investments,” “disclosure requirements,” “regulations (consumer, financial, labor),” “liability laws making firms accountable,” “social insurance/protection,” “safety net programs,” “unemployment insurance,” “retirement programs,” “health insurance,” “income contingent loans,” “small business loans,” “green bank financing,” “antitrust policies” that “restrict mergers,” “abusive practices restrictions,” “minimum wages,” “supportive labor legislation,” “redistribution through taxes,” and “public expenditure programs” on things like education and health care. All these measures are to be overlaid by fiscal and monetary policies designed to address macroeconomic fluctuations.

Three ironies should be noted here. First, the US economy already has almost all of these things, albeit to varying degrees. American economic life is littered with the big government programs bequeathed by progressives, New Dealers, and Great Society advocates, not to mention the entrenched bureaucracies that administer them. Stiglitz may want greater government resourcing and deeper legal codification of these policies. Convinced interventionists generally do not believe that we can have enough of such things. America is, however, far closer to Stiglitz’s progressive capitalist model than he admits.

A second irony concerns Stiglitz’s repeated insistence that he wants a more decentralized economy. All the policies listed above, however, necessitate a large government constantly intervening in the economy and crowding out the civil society associations that Stiglitz claims to value.

The third irony is that many of Stiglitz’s progressive capitalism proposals mirror those of prominent New Right thinkers. Not only do they support many of the same policies; but they also echo Stiglitz’s anti-neoliberal rhetoric and critical view of Hayek and Friedman. Therein lies a fracture that increasingly characterizes American politics: one in which Stiglitz’s Old Left economic preferences line up with those of some on the Right against whom his book inveighs.

Freedom and Hubris

Notwithstanding these problems with Stiglitz’s book, there is one point where I agree with him. Liberty is in a fragile state. The real debate is about the nature of the threats.

Central to Stiglitz’s progressive capitalism is what he calls “its focus on equality, social justice, and democracy.” These are all understood by Stiglitz in unambiguously social democratic terms. Taken together, he believes, they give people the freedom to realize their potential.

The difficulty is that social democracy invariably undermines freedom in important ways. Markets don’t facilitate intergenerational welfare-dependency; extensive welfare programs do. Social democracy also creates an enormous power differential between ordinary citizens and those technocrats who administer a plethora of state programs and regulations. And if there is anything that we have learned from the relentless growth of the administrative, regulatory, and welfare state in America, it is that such agencies are remarkably resistant to the demands of democratic accountability and transparency.

Likewise, social democracy’s redistributionist conception of social justice steadily corrodes some of freedom’s surest safeguards, most notably private property. Just as significantly, it damages the rule of law. As Hayek observed in The Road to Serfdom, “To produce the same result for different people, it is necessary to treat them differently.” If you use the state to pursue substantial equality, you inevitably compromise rule of law because governments seeking to achieve substantive equality necessarily forgo their position of impartiality towards all citizens.

Above all, social democrats have often undermined the means by which societies cultivate the moral habits needed to sustain what John Adams called “virtuous liberty.” Throughout his book, Stiglitz regularly refers to the importance of habits like honesty, trust, and other-regarding behavior for social cooperation. He is right to do so. But social democrats have traditionally looked to government to shape the social order—not civil society. The associated growth of state power and bureaucratization of society subverts the rich ecology of families and bottom-up communities and associations in which such habits are best taught and internalized.

Therein lies the deeper problem with Stiglitz’s book. Like many of his fellow-travelers on the Left and the New Right, Stiglitz doesn’t believe that we can trust ordinary people operating within a context of rule of law, constitutionally limited government, proven norms, and a rich civil society to make their own decisions as they see fit. For, notwithstanding Stiglitz’s desire to carve out a new road to freedom, the political agenda underlying this book is not one of renewal or rejuvenation. Instead, it reflects an old-fashioned Keynesian faith in the state: one that has always ill-fitted the American experiment in liberty of which Stiglitz is plainly skeptical.

Yes, free people will make errors. But their mistakes will not be as devastating to society as those made by dirigistes, ranging from Keynes to Stiglitz, who believe that they can re-engineer a better world from the top down and want the power to do so. Nor are such “men of system,” as Adam Smith called them, inclined to admit the failure of their ideas and policies, let alone correct them. Therein lies the eternal significance of Hayek’s warning about the temptations associated with accolades, even for truly outstanding work. They are the road to hubris, and the consequences for liberty and justice of a lack of humility are invariably dire."

Beijing Urges Rural Officials to Hire Humans—Not Machines

With migrant workers’ opportunities dwindling, authorities are pressing local officials to find more for them to do, even if some of the work is inefficient

By Stella Yifan Xie of The WSJ. Excerpts:

"China’s top economic agency recently called on local governments to find more work for rural laborers, such as widening roads and digging canals—even if the tasks could more efficiently be done by machines. 

“If it’s possible to use human labor, do not use machines, and mobilize local residents to do the jobs,” said a directive released by China’s National Development and Reform Commission last month

The decree, which updated guidelines for a government rural relief program called Yi Gong Dai Zhen, or “work as relief,” reflects Beijing’s concerns that migrant laborers are running out of opportunities as China’s economy evolves.

The country’s nearly 300 million migrant workers used to be able to find employment easily on construction sites or in factories as China industrialized. Many jobs have disappeared, however, as China’s economy becomes more service-oriented, with more need for baristas or bank employees."

Reminds me of this story about Milton Friedman:

"While traveling by car during one of his many overseas travels, Professor Milton Friedman spotted scores of road builders moving earth with shovels instead of modern machinery. When he asked why powerful equipment wasn’t used instead of so many laborers, his host told him it was to keep employment high in the construction industry. If they used tractors or modern road building equipment, fewer people would have jobs was his host’s logic.

“Then instead of shovels, why don’t you give them spoons and create even more jobs?” Friedman inquired."

From Mark Perry.

‘Free Market’ Review: The Olympians v. Laissez-Faire

Jacob Soll’s account of economic history casts Friedman and Hayek as fantasists

By Barton Swaim. He reviews the book Free Market: The History of an Idea by Jacob Soll. Excerpts:

"Why does a scholar in 2022 feel he has to expend so much energy on disparaging free-market economists of the last century? Look around—the American political system isn’t exactly dominated by laissez-faire dogma. Hayek and Friedman made their reputations by debunking the central tenets of Keynesianism, and yet Keynesianism now reigns supreme. The preponderance of the Democratic Party now favors assorted forms of social democracy, half the Republican Party wants the government to play a larger role in economic life, and hardly anyone in Washington raises principled objections to colossal debt-financed spending bills or the latest expansion of welfare-state largess. The bailouts of 2008 and ’09 were bipartisan. 

Our world, let us say, is not the consequence of undue deference to Friedrich Hayek and Milton Friedman. 

Here Mr. Soll plays a rhetorical game I must reluctantly call disingenuous. Consider this sentence: “The simple fact is that [Friedman’s] ideal free-market vision for America never came to pass,” he writes. Never came to pass? That’s a clever way to sidestep the obvious reality that the preponderance of U.S. policy makers rejected Friedman’s “ideal free-market vision” and that our current spate of economic pathologies are therefore not the outgrowth of free-market philosophy."

"he has to pretend that the free marketeers have basically run the show for the past 70 years. Friedman’s “orthodox free-market discourse still prevails in the boardrooms of most leading corporations,” he writes. The word “discourse” may save the statement from outright falsehood, but the next sentence’s claim—that “Friedman’s orthodoxy remains the credo of the US Chamber of Commerce”—is both untrue and, in a way, magnificent."

"Mr. Soll examines Sir Thomas Smith’s “A Discourse on the Common Weal of This Realm,” for example, a pamphlet published in 1549 to protest Parliament’s appropriation of common agricultural land. Smith, Mr. Soll tells us, argued that “the state must help and even ‘force’ urban industry to develop with ‘rewardes’ and with the ‘paine’ of regulation.” But the word “paine” in that work refers to the governmental enclosures themselves, not to governmental coercion in the cause of economic development, and there is nothing about the state using “force” on urban industry. 

In fact, in the passage Mr. Soll cites to support his claim that Smith advocated governmental coercion, the “Discourse” contends that the government ought to “let [farmers] haue more proffitt by [the plough] then they haue, and libertie to sell it at all times, and to all places, as frely as men maie doe theire other things.” Mr. Soll’s source says the opposite of what he asserts it says.

The book’s hero is Jean-Baptiste Colbert (1619-83), chief adviser to Louis XIV, the Sun King. Colbert is mainly remembered as the progenitor of mercantilism, the theory that the pathway to economic vitality lies in ensuring through protectionism that exports exceed imports, but Mr. Soll argues, with some apparent justification, that Colbert’s true legacy is as Europe’s first important proponent of nationwide industrial policy. The French monarchy, Colbert realized, had powers to centralize industry that England, its wealthier enemy, lacked. Accordingly he set about subsidizing companies, incentivizing foreign engineers to immigrate and build canals, supporting the ship-building sector, and so on. Did it work? “Statistics show” that it did, according to Mr. Soll, but his own analysis leaves me in some doubt. “Colbert’s economic projects were not all explosively successful,” he concedes, “and English growth was far superior. Still, if England led in coal, metal, cotton, and ship production, France led in the powerful industries Colbert developed, from the all-important wool industry to canvas, lace and Lyonnais silks.” I’m no specialist in economic history, but that sounds to me like Colbert’s industrial strategy was a bust—England in the 1670s and ’80s became an economic powerhouse and war machine while France got really good at making silk and lace. 

Mr. Soll seems to love robust industrial policy except when he doesn’t. In his caricature of “The Road to Serfdom,” Hayek’s 1944 argument that incremental deprivations of economic liberty would lead eventually to tyranny and totalitarianism, Mr. Soll notes that “Hayek chose to forget that Hitler could neither have taken nor held power without the concerted support of German capitalists, who saw fascism as an attractive answer to trade unions, communism, and even social democracy.” For “capitalists,” read: corporate recipients of subsidies and official favoritism."

"Fair-minded critics of Hayek, of which Mr. Soll is not one, might reasonably point out that the great Austrian economist’s strictures on central planning, for all their brilliance, leave no room for any overarching metaphysics or morality. In a 1966 essay, for example, he contended that it is “meaningless to describe the manner in which the market distributes the good things of this world among particular people as just or unjust. . . . No test or criteria have been found or can be found by which such rules of ‘social justice’ can be assessed” because such rules “would have to be determined by the arbitrary will of the holders of power.”"

"Mr. Soll, meanwhile, albeit without intending it, reminds us why we are so ill-advised to allow a class of imperious planners to redistribute wealth and rearrange economies. He exhibits no misgivings about Colbert’s “brilliant and ruthless chief of police” cracking down on the “illegal circulation of foreign printed cloth.” He praises the 20th-century British leftist Joan Robinson, allowing only that she “remains an enigma” for her support of Mao Zedong’s murderous Cultural Revolution. Most astonishing of all, Mr. Soll refers to the French Revolution as “that great state intervention against an abusive, archaic society.” Given the choice between free-market philosophy bereft of the transcendent and centralizers armed with the guillotine, I’ll take the free market—every time."

Related posts (Other reviews that show some major problems with Soll's book) :

Shoddy Historical Revisionism of Adam Smith (Mark Koyoma reviews Jacob Soll’s Free Market: The History of an Idea)

‘Free Market’ Review: The Olympians v. Laissez-Faire: Jacob Soll’s account of economic history casts Friedman and Hayek as fantasists 

Jacob Soll's "free market"

Jerry Z. Muller on Soll & Adam Smith

See also this review in The NY Times by Justin Fox: How We’ve Come to Genuflect to the ‘Free Market’: Jacob Soll’s ambitious history takes us from Cicero to Milton Friedman, but is hobbled by questionable assertions.

Milton Friedman's Macroeconomic Legacy, 6/27

By Arnold Kling.

"Noah Smith writes,

macroeconomics is an incredibly hard thing to get right. It’s very hard to empirically test any of the theories — at best you can make policy, and wait for history to happen, and then observe whether you kinda-sorta got it right. So how are Milton Friedman’s macroeconomic ideas holding up now? The post below explores this question.

I recently wrote a Bloomberg View post about consumption Euler equations, and how these are increasingly being targeted as a broken piece of macroeconomics. I traced the idea back to Milton Friedman and the Permanent Income Hypothesis, and Bloomberg decided (wisely) to go with Friedman for the headline. "Economists Give Up on Milton Friedman's Biggest Idea" is probably going to get orders of magnitude more clicks than "Economists Search for Replacement for Infinitely Lived Perfectly Far-Sighted Model of Consumption Smoothing".

The headline may have been better for clicks, but it is quite misleading. It is particularly misleading to call it Friedman’s “biggest idea.”

I think that the way Smith goes about doing his evaluation of Friedman is quite wrong. But rather than get into why I disagree, let me proceed to do the evaluation my way.

There is a joke among macroeconomists that students cannot look at last year’s exam to prepare for this year’s. The professors always ask the same questions, but they change the answers. So “incredibly hard thing to get right” is an understatement. I do not want to compare Friedman’s views to what Noah Smith or someone else would say now. I want to compare them to what economists believed then, meaning 1967, prior to Friedman’s address to the American Economic Association.

Back then, monetarism had about the same status as astrology. Robert Solow could quip, “Everything reminds Milton of the money supply. Everything reminds me of sex, but at least I keep it out of my papers.”

As of 1967, Friedman was one of a small set of economists who paid attention to the growth rate of the money supply. By 1980, more economists were paying attention to it. But that has not lasted. All macroeconomists pay attention to the Fed, but only a small set pay attention to the growth rate of the money supply. Most of them pay attention to interest rates. Those of you familiar with Scott Sumner know that he scorns the focus on interest rates and instead urges paying attention to forecasts of nominal GDP or nominal income.

Back then, the Phillips Curve was thought to present policy makers with a “menu” of choices for inflation and unemployment. If they chose to aim for a low value for unemployment, the result would be a high value for inflation, and vice-versa.

Back then, “fine tuning” was thought possible. Economists believed that their advice, if followed by policy makers, could eliminate recessions. The advice would focus on fiscal policy, meaning changes in government spending and taxes deliberately undertaken to manage “aggregate demand.”

Milton Friedman’s project was to undermine the theories that supported policy discretion. He had several objections.

First, regarding the idea of using temporary tax cuts to spur the economy, he proposed the Permanent Income Hypothesis. He never said that all consumers optimize their spending patterns using stochastic calculus—the Euler Equation was an element of the technically elegant but utterly stupid consensus that emerged in the decades after Friedman roiled the profession. It was part of Olivier Blanchard’s survey that infamously concluded that “the state of macroeconomics is good” .

Friedman merely claimed that the propensity to consume out of a temporary tax cut would be lower than the propensity to consume out of a permanent tax cut. If so, then temporary tax cuts might not be very stimulative when enacted. Instead, much of the tax cut would be saved, and it might be spent in later years, even after the economy had recovered. If you want evidence that Friedman was roughly correct, all you have to do is notice that economists believe that consumers have savings left over from the COVID relief checks, and that this is now fueling inflation. I cannot think of any economist who disagrees with the view that spending out of temporary tax cuts is likely to be less than spending out of permanent tax cuts.

Second, regarding the use of discretionary policy, Friedman worried about “long and variable lags” between the attempt to steer the economy and the impact of policy. You might initiate a policy to fight a recession this year, but the impact could show up two years later, when the expansionary policy was no longer appropriate. James Tobin, who disagreed with Friedman, nevertheless eloquently described Friedman’s view that a discretionary regime would be “like an amateur shower tuner, alternately being scalded and chilled.” In response to this, economists proceeded to devote considerable attention to the challenge of ensuring that policy was countercyclical instead of reinforcing the cycle. Recall that in the Obama years, Larry Summers tried, not very successfully, to guide policy with the mantra that stimulus should be “timely, targeted, and temporary.”

Many economists came to support Friedman’s view, which is that rules would work better than discretion. Ben Bernanke threw out the rules playbook when the Financial Crisis hit in 2008. Many economists have subsequently praised him. They also praised the response by Congress and the Fed to COVID. By the time we are finished dealing with our current inflation, economists may rediscover the case for rules.

Third, regarding using the Phillips Curve as a “menu,” Friedman was particularly devastating. He asserted that there was a “natural rate of unemployment” to which the economy gravitates. He claimed that trying to maintain unemployment below that rate would lead not to a one-time increase in inflation, but to an accelerating rate of inflation. According to the state of thinking in 1967, stagflation was impossible. Friedman warned that it was possible, and in the 1970s stagflation is what we got.

My views

I think that macroeconomics, as conventionally practiced, is very nearly hopeless. I do not think that it helps much to think in terms of a “representative household” or “representative firm.” You fool yourself if you think of the economy as one giant GDP factory. You fool yourself by thinking that “spending creates jobs, and jobs create spending.” In fact, jobs are created when entrepreneurs discover sustainable patterns of specialization and trade. Hence my book, Specialization and Trade.

Once you get rid of the “representative agent” mindset, it is easier to understand how government deficits create a false sense of wealth. The person lending to the government (by investing in government bonds) is not the same as the person receiving payments from the government. The lender thinks: I have less cash on hand today, but I will get it back next year, so I am approximately where I was before. The recipient thinks: I have more money now! Perceived wealth goes up, because there is no offsetting person who thinks: I am poorer now, because the government has borrowed money and will soon tax me to get it back.

In the “representative agent” model, you are the only person in the economy. The government borrows from you to write you a check. It is obvious to you that this does not make you wealthier. If only we lived in that simple world, government deficits would not appear to be a free lunch, and politicians would have less incentive to run deficits.

I also do not subscribe to any linear models of inflation. Inflation is not proportional to money growth. It is not inversely related to the unemployment rate.

I think of inflation as having two possible regimes. In one regime, it is low and stable. In the other regime, it is high and variable. It takes a lot of effort to destabilize the dollar. Once it is destabilized, it takes a lot of effort to stabilize it again.

The excessive spending on the Vietnam War and President Johnson’s domestic programs made our gold peg unsustainable. Then President Nixon ended the gold peg and administered the adverse supply shock of wage and price controls. Those policies helped set the stage for the inflationary breakout of the 1970s.

The process of unwinding inflation was long and difficult. In the early 1980s, interest rates were very high, disrupting major sectors of the economy.

More recently, Presidents Bush and Obama ran large deficits. To be honest, I thought that was enough to destabilize the dollar. I was wrong then.

Under President Trump, the response to COVID was to run record deficits, creating more paper wealth even as production and distribution were being curtailed by people avoiding workplaces, mostly by choice but sometimes by government edict. President Biden wanted to run even more deficits. Only Senator Manchin stood in the way of the wildest spending proposals. After more than a decade of fiscal profligacy, the vast creation of phony paper wealth finally reached the point where inflation could no longer be contained. We have to pray that getting things back under control will not be as arduous a process as it was in the early 1980s.

What I believe today certainly does not resemble what economists believed in 1967. But I am no disciple of Milton Friedman, either. I do not think that the Fed can follow a money growth rule, because it is too deeply committed to propping up the market for government debt. And even if it were to follow a money growth rule, I think that would do little to mitigate the inflationary impulse of government deficits of the past dozen years."

Cancel Milton Friedman, and Inflation Is What You Get

The word ‘money’ doesn’t even appear in President Biden’s plan to whip inflation

Letter to WSJ.

"The lead paragraph of President Biden’s op-ed “My Plan for Fighting Inflation” (May 31) asserts that the global economy faces an inflation problem exacerbated by Vladimir Putin’s war in Ukraine, high oil prices and supply-chain problems. This line of argument shows why the president’s team and the experts at the Federal Reserve were unable to anticipate the inflation conundrum that their economic missteps have forced us into. It also shows why the president’s plan will likely fail to allow us to exit inflation with a smooth landing.

We don’t have a global inflation problem. Inflations are always and everywhere a monetary phenomenon spawned by the creation of excess money by local central banks. China, Japan and Switzerland also face elevated oil prices, supply-chain problems and fallout from the war in Ukraine, but their annual inflation rates are 2.1%, 2.5% and 2.5%, respectively. They have avoided the ravages of inflation because their central banks haven’t produced excessive quantities of money.

Adherence to the tenets of monetarism is nowhere to be found in the Biden White House or the Fed. Chairman Jerome Powell has stressed that we had to “unlearn” monetarism. It looks like Mr. Biden was an attentive student. The word “money” doesn’t even appear in his plan to whip inflation. As he said in 2020, “Milton Friedman isn’t running the show anymore.” As long as Friedman and monetarism remain canceled, the White House and the Fed will be grasping for straws.

Prof. Steve Hanke and John Greenwood

Johns Hopkins University

Baltimore and London"

Smearing Milton Friedman, Excusing the Teachers Union

Nancy MacLean misconstrues the history of school choice in Virginia

Letter to The WSJ.

"In her Nov. 19 letter, Nancy MacLean accuses me of ignoring the substance of her research findings, which purport to implicate Milton Friedman in a collusive partnership with segregationists to advance the cause of school vouchers. It’s a brazen charge, considering that Prof. MacLean ignores clear evidence that Friedman not only supported racial integration, but saw vouchers as an essential tool to achieve that end.

Rather than engage the economist at his word, Ms. MacLean imputes opportunistic motives to the date of Friedman’s 1955 article on the economic theory of school choice—one year after Brown v. Board of Education. Yet Friedman’s papers at the Hoover Institution confirm that he drafted his paper before the Brown ruling. The timing came about from an ordinary lag in academic publishing, not the conspiratorial designs that Ms. MacLean imagines.

Curiously, Ms. MacLean’s argument becomes inattentive to dates when it suits her case. Her argument repeatedly conflates Virginia’s 1959 tuition grant program with the arch-segregationist “Massive Resistance” laws of 1956-57 that it displaced. This allows her to obfuscate the evidence I present in my op-ed (“School Choice’s Antiracist History,” Oct. 19), which illustrates how the Virginia Education Association (VEA) allied with segregationists to attack school vouchers after the courts struck down the Massive Resistance statutes in January 1959. Like Friedman, the Virginia teachers union recognized that vouchers would expedite the integration of schools. While Friedman considered this a desirable outcome, the antivoucher activists warned it would lead to the “negro engulfment” of the public schools. 

Confronted with this evidence, Ms. MacLean elsewhere makes excuses for the VEA: “To save the schools for future generations, some advocates appealed to that racism in their arguments.” She evidently believes these actions were necessary to “stem the revenue drain” from public schools under a voucher system, “not to protect segregation per se.” This attempt to rationalize the teachers union’s collusion with segregationists is deeply ironic, given that it is the same charge she falsely makes against Friedman. Apparently, segregationist political collusion is acceptable to Ms. MacLean, provided that it services her own anti-voucher beliefs.

Phillip W. Magness

American Institute for Economic Research

Great Barrington, Mass."

 

 

Milton Friedman has become underrated, but is being vindicated

By Tyler Cowen.

"That is the topic of my latest Bloomberg column, here is one excerpt of some super-simple (but neglected) arguments:

Education is another area where Friedman’s ideas seem newly relevant. Friedman was a strong supporter of school choice, but over time the movement stalled, as a variety of studies showed scholastic gains from school-voucher programs that were either modest, zero or negative. Advocates for school choice then moved on to the argument that vouchers allow parents to choose the kind of education they want for their children, whether or not test scores go up. That argument, too, went nowhere.

Then came the pandemic, when millions of American parents encountered a public school system that didn’t seem to care too much about educating their children. Schools stayed closed or offered inferior remote instruction, and generally followed their own bureaucratic imperatives. All of a sudden, home schooling, charter schools, private schools, micro-schools — in short, an entire host of “school choice” alternatives — rose in popularity. It remains to be seen how much those trends will stick, but Friedman may yet win this intellectual battle, at least partially.

And it’s not just the bureaucracy, it’s what’s taught in the classroom. Consider critical race theory and other instructional practices affiliated with wokeism. Whatever your views on this movement, it seems clear that it provokes strong and perhaps irresolvable differences among parents, teachers and administrators. Within a single public school district, those matters will probably never be settled to everyone’s satisfaction. Rather than pursuing a polarizing “fight to the death,” perhaps all sides can see that the case for school choice is stronger and more compelling than they had thought.

There are periodic attempts to knock Milton Friedman off his pedestal. For the most part, however, his legacy remains strong.

And who was the guy who predicted the recent problems with the FDA?"

Happy 109th birthday to Dr. Milton Friedman!

From Mark J. Perry.

"An important event takes place tomorrow that is recognized annually on CD. Every year on July 31 we celebrate the birthday of Milton Friedman — he was born on that day in 1912 and would have been 109 years old this year. Unfortunately, Milton died on November 16, 2006, when he was 94 years old. In an editorial in the Wall Street Journal following Professor Friedman’s death, they reported his loss with the same tribute Milton used when Ronald Reagan died, saying “few people in human history have contributed more to the achievement of human freedom.” In honor of his legacy and birthday this week, here are 20 of my favorite Milton Friedman quotes, along with a bonus video and some special birthday graphics:

1. There is nothing as permanent as a temporary government program.

2. Many well-meaning people favor legal minimum-wage rates in the mistaken belief that they help the poor. These people confuse wage rates with wage income. It has always been a mystery to me to understand why a youngster is better off unemployed at $15 an hour than employed at $7.25 (updated). The rise in the legal minimum-wage rate is a monument to the power of superficial thinking.

3. First of all, the government doesn’t have any responsibility to the poor. People have responsibility. This building doesn’t have responsibility. You and I have responsibility. People have responsibility. Second, the question is how can we as people exercise our responsibility to our fellow-man most effectively? That’s the problem. So far as poverty is concerned, there has never been a more effective machine for eliminating poverty than the free enterprise system and the free market. The period in which you had the greatest improvement in the lot of the ordinary man was the period of the 19^th and early 20^th century.

4. In the international trade area, the language is almost always about how we must export, and what’s really good is an industry that produces exports, and if we buy from abroad and import, that’s bad. But surely that’s upside-down. What we send abroad, we can’t eat, we can’t wear, we can’t use for our houses. On the other hand, the goods and services we import, they provide us with TV sets we can watch, with automobiles we can drive, with all sorts of nice things for us to use.

When people talk about a favorable balance of trade, what is that term taken to mean? It’s taken to mean that we export more than we import. But from the point of view of our economic well-being and our standard of living, that’s an unfavorable balance. That means we’re sending out more goods and getting fewer in return. Each of you in your private household would know better than that. You don’t regard it as a favorable balance when you have to send out more goods to get less coming in. It’s favorable when you can get more by sending out less.

5. There is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

6. I’m in favor of legalizing drugs. According to my values system, if people want to kill themselves, they have every right to do so. Most of the harm that comes from drugs is because they are illegal.

7. Nobody spends somebody else’s money as carefully as he spends his own. Nobody uses somebody else’s resources as carefully as he uses his own. So if you want efficiency and effectiveness, if you want knowledge to be properly utilized, you have to do it through the means of private property.

8. The government solution to a problem is usually as bad as the problem.

9. The Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.

10. The high rate of unemployment among teenagers, and especially black teenagers is both a scandal and a serious source of social unrest. Yet it is largely a result of minimum wage laws. We regard the minimum wage law as one of the most, if not the most, anti-black laws on the statute books.

11. Industrial progress, mechanical improvement, all of the great wonders of the modern era have meant relatively little to the wealthy. The rich in Ancient Greece would have benefited hardly at all from modern plumbing: running servants replaced running water. Television and radio? The patricians of Rome could enjoy the leading musicians and actors in their home, could have the leading actors as domestic retainers. Ready-to-wear clothing, supermarkets — all these and many other modern developments would have added little to their life. The great achievements of Western capitalism have redounded primarily to the benefit of the ordinary person. These achievements have made available to the masses conveniences and amenities that were previously the exclusive prerogative of the rich and powerful.

12. President Kennedy said, “Ask not what your country can do for you — ask what you can do for your country.”… Neither half of that statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. “What your country can do for you” implies that the government is the patron, the citizen the ward. “What you can do for your country” assumes that the government is the master, and the citizen the servant.

13. If you look at the drug war from a purely economic point of view, the role of the government is to protect the drug cartel. That’s literally true.

14. “Fair” is in the eye of the beholder; “free” is the verdict of the market. The word “free” is used three times in the Declaration of Independence and once in the First Amendment to the Constitution, along with “freedom.” The word “fair” is not used in either of our founding documents.

15. What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want. At the bottom of many criticisms of the market economy is really a lack of belief in freedom itself.

16. The great achievements of civilization have not come from government bureaus. Einstein didn’t construct his theory under order from a bureaucrat. Henry Ford didn’t revolutionize the automobile industry that way. In the only cases in which the masses have escaped from grinding poverty, the only cases in recorded history are where they’ve had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that, so that the record of history is absolutely crystal clear: that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.

17. The problem of social organization is how to set up an arrangement under which greed will do the least harm; capitalism is that kind of a system.

18. With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.

19. If you and your fellow citizens continue on moving more and more in the direction of socialism, not only inspired through your drug prohibition but through your socialization of schools, the socialization of medicine, the regulation of industry, I see for my granddaughter the equivalent of Soviet communism three years ago. (Note: This was from a 1991 interview with Milton Friedman.)

20. The government has no more right to tell me what goes into my mouth [including illegal drugs] than it has to tell me what comes out of my mouth.

Happy Birthday Milton Friedman!

Bonus 1 (video below): In his 1979 appearance on the Phil Donahue Show, Milton Friedman demonstrates his quick wit and intellect when he schools Donahue on greed, self-interest, and the superiority of the free enterprise system over socialism.

Bonus 2: You’ll find a great collection here of more than 30 Milton Friedman videos (the “Milton Friedman Speaks” lectures) on a variety of topics including “What is America?”, “Is Capitalism Humane?”, free trade, energy policy, the role of government in a free society, education and vouchers, the rights of workers, consumer protection, equality and freedom, and the future of our society.

Bonus 3: Hosted by the Hoover Institution, the Collected Works of Milton Friedman website contains more than 1,500 digital items by and about economist, Nobel Prize winner, and Hoover fellow Milton Friedman. The site features hundreds of Friedman’s articles, op-eds, speeches, lectures, television appearances, and more.

Bonus 4: Below are some graphics created by graphic designer Olivier Ballou to honor Friedman’s birthday:

"

Friedman's smashing success

By Scott Sumner.

"In the late 1940s, Milton Friedman was considered an important economist who had made significant technical contributions. At the beginning of the 1950s, however, he moved away from Keynesian economics and as a result was increasingly viewed as a bit of a nut. Two decades later, however, Friedman had become far and away the most important macroeconomist in the world. Much of the ongoing macro debate revolved around economists addressing Friedman’s ideas, pro or con. How did this happen?

Edward Nelson’s outstanding two volume study of Friedman provides the most complete answer that I have seen. During the 1960s, Friedman rejected 4 key tenets of Keynesian economics. And within less than a decade, all four of his critiques were shown to be correct. As a result, Keynesian economics absorbed much of monetarism, and this led to the creation of a new macroeconomic framework called New Keynesianism. Keep in mind that when I talk about “Keynesians”, I am not describing the views of J.M. Keynes or the views of modern Keynesians, I am describing the views of many of the most prominent Keynesian economists during the 1960s. (Samuelson, Tobin, Modigliani, Solow, Heller, etc.)

Here are the four Keynesian ideas that Friedman rejected:

1. Nominal interest rates are the correct indicator of the stance of monetary policy.  The Fisher effect is not an important factor in the US.

2. Fiscal austerity (higher taxes) is the best way to reduce excessive aggregate demand.

3. There is a stable (negative) relationship between inflation and unemployment (the “Phillips Curve”).

4. Modern economies face an increasing problem of cost/push inflation, and hence wage/price controls are often the best way to control inflation.

Let’s take these one at a time.

In the mid-1960s, Friedman argued that nominal interest rates were rising because of increasing inflation expectations. Nelson points out that Keynesians like James Tobin rejected this claim (vol. 2, p. 113.) By the 1970s, inflation and nominal interest rates had increased much further, and there was almost universal agreement that Friedman was right and Tobin was wrong. Nominal interest rates are not a good indicator of the stance of monetary policy.

Thus the Keynesians were saying that if you want tight money to reduce inflation, you need high interest rates. Friedman basically said no, high interest rates are not the solution; you need to reduce growth in the money supply. By the late 1960s, the US had both high interest rates and a fast growing money supply, and inflation kept rising. It turned out that Friedman was right.

But Keynesians did not draw the correct inferences from this episode. Rather they decided that monetary policy must not be very effective, and instead advocated higher taxes as a way to reduce inflation (the MMT approach.) In 1968, LBJ raised income taxes so high that the US budget went into surplus, but inflation continued to increase.

Friedman had two reasons for doubting the efficacy of higher taxes. First, his permanent income theory suggested that temporary tax changes would be offset by changes in private saving, leaving aggregate demand almost unaffected. More importantly, he saw that a tax increase could only slow inflation by reducing velocity, which would have only a one-time effect. Even if velocity fell one or two percent, the contractionary effects (on M*V) would soon be overwhelmed by increasingly rapid growth in the money supply.

Thus Keynesians assumed that tax increases could slow inflation, while Friedman said no, you need to reduce the growth rate of the money supply.

When the tax increases failed to slow inflation, Keynesians began to focus on the Phillips curve, which suggested that there was an inverse relationship between inflation and unemployment. A policy of higher inflation would lead to lower unemployment, and vice versa. Friedman said this was wrong, as workers would eventually catch on to changes in the rate of inflation and demand compensating changes in nominal wage rates. In the long run, unemployment would return to the natural rate, regardless of the trend rate of inflation.  By 1970, we had high inflation and high unemployment, which showed that Friedman was right.  (Note that this was three years before the first oil shock.)

Thus the Keynesians thought that high unemployment was the solution to inflation.  Friedman said no, you need to reduce the growth rate of the money supply.

When the high unemployment of 1970 did not work, Keynesian economists blamed inflation on “cost-push factors”, such as monopoly power or strong labor unions.  They supported wage/price controls, which President Nixon implemented in August 1971.  After a brief decline in inflation, the problem got much worse during the mid and late-1970s.  Friedman saw that while wage/price controls might lead to a one-time drop in the price level of a few percentage points, as long as the money supply was growing rapidly, any gains from wage/price controls would be soon overwhelmed by a rising money supply.

Thus Keynesians said that the solution for high inflation is wage-price controls, whereas Friedman said no, these controls will not work; you need to reduce the growth rate of the money supply.  See a pattern here?

In the early 1980s, the Fed finally began reducing the growth rate of the money supply, and inflation fell sharply.

Why isn’t the amazing success of Friedman’s ideas better understood?  It’s partly because his preferred policy target—stable growth in a monetary aggregate such as M2—was not adopted due to concerns about unstable velocity.   Even Friedman eventually accepted inflation targeting as a reasonable alternative.  And the other four ideas discussed above all got incorporated in 1990s-era New Keynesianism.  NKs accepted the importance of the Fisher effect, switching their focus from nominal to real interest rates.  They accepted that monetary policy is the appropriate tool to control inflation, not fiscal policy.  They accepted Friedman’s Natural Rate Hypothesis, the idea that higher inflation will not permanently reduce unemployment.  And they accepted that a contractionary monetary policy, not wage/price controls, is the solution to inflation.

In one important respect, Friedman’s achievement is even more amazing than what I have outline here.  In all four cases, Friedman’s claims were made at a time when they looked wrong.  The Fisher effect had not been a very important factor in the setting of US interest rates when inflation expectation were near zero, including the period when the price of gold was pegged at $20.67/oz (1879-1933).  And during 1934-68, when gold was $35/oz, inflation expectation were generally pretty low (even as actual inflation bounced around unpredictably.)  During the early to mid-1960s, inflation expectations were probably not much more than 1%.  The Fisher effect became a major factor after Friedman began warning about the issue.  Similarly, in the mid-1960s it was widely believed that tax changes had a big impact on aggregate demand, as the Kennedy tax cuts of 1964 were followed by a strong economy (albeit perhaps for supply-side reasons.)  Keynesians were genuinely surprised when the big tax increase of 1968 failed to slow inflation.  When Friedman gave famous AEA Presidential address outlining the Natural Rate Hypothesis in late 1967, a stable Phillips curve seemed quite plausible, indeed the 1960s fit the model better than almost any other decade.  It was in the 1970s that the relationship completely broke down.  And the Nixon wage/price controls seemed to work at first; it was only a few years later that they began to fall apart.  Thus in all four cases Friedman rejected the orthodox view at a time when the orthodox approach seemed to be working fine, and in all four cases his views were eventually vindicated.

Milton Friedman’s achievements in the late 1960s and early 1970s were truly amazing, and deserve to be better known.

In a subsequent post, I’ll try to explain how Friedman was able to see the flaws in mainstream Keynesianism before most other economists.  Why was his model better?  We’ll see that all four of his successful critiques have something in common."

Zachary D. Carter's Hatchet Job on Milton Friedman

By David Henderson.

"The new consensus on Friedman’s work among economists has essentially reversed Summers’s verdict from 2006. “Almost nothing remains of his intellectual legacy,” according to Columbia University economist Jeffrey Sachs. “It has proven to be a disastrous misdirection for the world’s economies.”

This is from Zachary D. Carter, “The End of Friedmanomics,” The New Republic, June 17, 2021.

The  article makes a case against Friedman’s contributions and his character.

This won’t be a comprehensive treatment of Carter’s case, but I do want to point out some major errors and a major misunderstanding of Friedman–who he was and how his mind worked.

Carter writes:

When he at last won his Ph.D. from Columbia in 1946, Friedman shipped out to Chicago to join a fringe right-wing intellectual movement calling itself “neoliberalism.” Despite their chosen moniker, the neoliberals loathed the politics of the New Deal, seeking instead to revive the most conservative strands of Enlightenment-era economic thought, so-called classical liberalism, for the twenty-first century.

Twice in that paragraph Carter claims that the people at Chicago called themselves neoliberals. I’m guessing that I’ve read way more of Frank Knight, way more of Milton Friedman, and more of Henry Simons than Carter has and I don’t recall any of them ever claiming that they were neoliberals. What I do recall is Friedman and others frequently identifying themselves as “classical liberals.”

Carter doesn’t do nuance. So, for example, when he wants to point out how Friedman thought a free market would deal with racism and discrimination, he writes:

Friedman wrote: “The man who objects to buying from or working alongside a Negro, for example, thereby limits his range of choice. He will generally have to pay a higher price for what he buys or receive a lower return for his work. Or, put the other way, those of us who regard color of skin or religion as irrelevant can buy some things more cheaply as a result.” The relentless logic of the market would drive such inefficiency from public life.

Notice that Carter’s summing up Friedman’s thinking in the last sentence of the above gets it wrong. Friedman was not so naive as to believe that the free market would drive out racist discrimination. What he maintained, Gary Becker maintained, and many economists maintain is that the free market would make those who acted on their racist beliefs pay a price and that this price would limit, but not eliminate, racism.

I got the sense that Carter is not very familiar with economic thinking, whether of Friedman or of economists in general. This came across in the following passage:

But it was a 1946 pamphlet on housing policy co-written with fellow Chicagoan George Stigler that transformed Friedman from an obscure ex-bureaucrat into an academic sensation. Titled “Roofs or Ceilings? The Current Housing Problem,” Friedman and Stigler’s paper argued that California’s rent regulations ultimately ended up raising the price of housing, hurting the very low-income people politicians sought to help. The argument was simple: By artificially depressing the price of housing, regulators deprived potential homebuilders of an incentive—higher profits—to build more homes, which would in time bring down housing costs.

The blunt unsophistication of the pamphlet was an intellectual call to arms. Friedman and Stigler weren’t really writing about housing at all—they were writing about economics itself, calling for a return to the simple nineteenth-century analyses that Friedman would later credit for producing the “free market” and “the greatest expansion of human freedom the world had ever seen.” The reaction was furious. Writing in The Washington Post, economist Robert Bangs decried the “drivel” in Friedman’s “insidious little pamphlet,” and denounced him for publishing it through a “propaganda front for reactionary interests” (which was true—“Roofs or Ceilings?” was released by the Foundation for Economic Education, one of a handful of specialty right-wing organizations that sprang up in the postwar world aiming to unwind the New Deal).

Ignore his implicit claim that the comment of one economist named Robert Bangs is a sufficient statistic for knowing that “The reaction was furious.” (If he wants “furious,” he should have seen Ayn Rand’s reaction.) The two key things to focus on are his claim that the pamphlet was unsophisticated and that it “wasn’t about housing at all.”

His claim about lack of sophistication caused me to reread the article/pamphlet. I recommend that you do too. You can download it here. It turns out to be quite sophisticated. I think Carter conflates clear writing with lack of sophistication.

And in rereading it after all these years, I concluded that it really is about housing. If Carter meant to say that once one accepts their reasoning, one can easily conclude that absence of price controls more generally is a good idea, then he would be right. But Carter doesn’t make clear whether he means that or something else.

It’s also interesting that Carter would highlight this article. If you ask an economist who doesn’t live in a rent-controlled apartment whether he favors rent controls, the probability that he will say no and that he will make arguments very similar to those of Friedman and Stigler exceeds 0.9. That’s why I say that I’m not sure Carter understands how economists think.

He certainly doesn’t understand how Friedman thought. In discussing Friedman’s contributions to macroeconomics and monetary economics, Carter writes:

Constructing a 93-year account of fluctuations in the money supply is a curious endeavor to assume for its own sake. But of course Friedman had an intellectual motivation, which he detailed in a famous 1967 speech before the American Economic Association: He hoped to dethrone the ghost of John Maynard Keynes.

Maybe, but unlikely. Friedman really did pursue truth and the facts wherever they led. In my review of his and Rose Friedman’s autobiography, Two Lucky People, I wrote:

Even more strikingly, Milton doesn’t talk much about how his views evolved during graduate school or after he completed his Ph.D. Yet evolve they did. Most notably, his views on the causes of inflation changed dramatically. The Milton Friedman that most of us know about is the one who said, in a famous 1968 debate with Keynesian economist Walter Heller, “the state of the budget by itself has no significant effect on…inflation” and who wrote in 1963, “Inflation is always and everywhere a monetary phenomenon.” By contrast, here’s what Friedman says about testimony he gave as a Treasury economist in 1942: “The most striking feature of this [testimony] is how thoroughly Keynesian it is. I did not even mention `money’ or `monetary policy’! The only `methods of avoiding inflation’ I mentioned in addition to taxation were `price control and rationing, control of consumers’ credit, reduction in governmental spending, and war bond campaigns.'”

What happened between 1942 and the early 1950s that changed Friedman’s mind? Maybe the explanation is simply that he gathered data that persuaded him of the power of monetary policy. But in most intellectual autobiographies I have read, there’s one event, piece of evidence, story, conversation, or argument that starts the process of change. Friedman mentions no such epiphany.

A few months after that review appeared in Reason, I ran into Milton at a Hoover dinner. After the quick niceties, he said, “I know that that disappointed you, but my change in views was so gradual that I can’t point to anything like a ‘Saul on the road to Damascus’ epiphany. Sorry.”

What can I say? I believe him. Which means I can’t believe Carter. In Carter’s view, Friedman is a schemer who has a political goal and does his intellectual work to achieve that goal. I think the opposite is closer to the truth. Friedman pursued knowledge and that knowledge led him to political goals that differed a lot from those he started with.

Elsewhere in his long piece, Carter errs badly in seeing Friedman’s advocacy of school vouchers as a way of responding to the Supreme Court’s finding in Brown v. Board of Education. Historian Phil Magness of the American Institute of Economic Research has unearthed a letter by Friedman that completely undercuts Carter’s claim and has sent a request for a correction to the editor(s) of The New Republic. But I don’t want to steal Phil’s thunder and I don’t have permission to quote it here.

Now back to Carter’s quote from economist Jeffrey Sachs, with which I opened in this post. I have no reason to think that Carter misquoted Sachs and so I can’t say that he erred. What I do know is that Sachs erred badly. Co-blogger Scott Sumner has done some very nice blog posts recently (here and here) showing just how intact Friedman’s contributions to macro and monetary theory have been."