Tuesday, February 06, 2007
Was Uncle Miltie Right About Everything?
Paul Krugman addresses the legacy of free-market guru Milton Friedman at the link below. Although Krugman admires Friedman tremendously, declaring him "possibly the most brilliant communicator of economic ideas to the general public that ever lived", he criticizes the absolutism of his beliefs in the benefits of free markets and the evils of government intervention. Worse yet, Friedman apparently allowed many of his ideas to be excessively simplified or misinterpreted.
Friedman believed that the only role government should play in the economy was to control the money supply. It should never fix minimum wages, create work projects to employ the unemployed, pass laws to abet union labor or engage in any sort of protectionism. Just modulate the money supply and a free market economy can take care of itself. He believed that The Great Depression could have been lessened or avoided altogether if the government had lent money to banks to prevent them from failing, which would have encouraged private citizens to continue to invest in banks, thereby allowing the banks themselves to keep lending money and for consumers to keep on spending. Fair enough, but Friedman also eventually suggested that the government had brought on The Great Depression by reducing the monetary base of the economy - which is defined as currency plus bank reserves. This, in turn, reduced the money supply - which is defined as currency plus bank deposits. In fact, the government did no such thing. The monetary base actually increased during The Great Depression, while the money supply decreased for reasons beyond government control - those bank failures which caused private citizens to lose their trust in the banking system. Nonetheless, the misconception that the government had actively caused The Great Depression prevailed, making the idea of government intervention anathema among the monetarists and their neoconservative allies. Although Friedman had not invented this misconception, his stake in the primacy of monetarism induced him to let it flourish. Friedman espoused a slow and steady growth in the money supply as a panacea for all economic ills. But recent history has demonstrated this notion as false. After monetarist policies came into effect at the end of the seventies, the United States suffered through a long series of recessions with high unemployment. Only the active intervention of Federal Reserve to cut interest rates kept the recession of 2001 from worsening dramatically. Clearly, just increasing the money supply - or, rather, just the monetary base - is not enough to keep the economy stable.
Other free market ideas espoused by Friedman have not fared so well either. Free market policies applied in Pinochet's Chile in 1973 proved successful, but similar policies applied in other Latin American nations have all resulted in dismal failure. One specific policy championed by Friedman - deregulation - has had a similarly uneven history. Deregulation works by increasing competition among suppliers, which ultimately improves efficiency and drives down prices. In fact, when the California electricity industry was deregulated in the late nineties, the suppliers colluded to create an artificial shortage that drove up prices, rather than reduced them. Those who would give free rein to "economic man" should never lose sight of the ingenuity of self-interest. Friedman's sanguine belief that free market economics would serve the ordinary citizen as well as any other system has also been proven utterly false. The hegemony of the "free market economy" has overseen the greatest widening in the gap between the rich and the rest of us since before The Great Depression.
As Krugman says, it is time to put aside the Frankenstein's monster of free market libertarianism that Friedman created, and revisit thinkers like John Maynard Keynes, who believed the benign intervention of a government on the behalf of its citizens is a successful ingredient in any national economy.
"Who Was Milton Friedman?" from The New York Review of Books
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