Wednesday, April 29, 2009

It's been a bad year for those market fundamentalists still clinging to discredited tenets of classic 'Chicago school' economic theory

From Salon:

Don't blame Chicago! Pinning responsibility for our current economic woes on Milton Friedman is just so 1970s. Can't we just move on?

Andrew Leonard

Apr. 29, 2009 |

My attack on the "Chicago school's" responsibility for growing income inequality in the United States generated a strong pushback from the Economist magazine's FreeExchange blog.

The response has two parts: I'm wrong, and, anyway, the University of Chicago economics department is no longer defined by classic "Chicago school" philosophy, which I think we can all agree tends to elevate the wisdom of markets over that of government, and thus has consistently supported a less-regulation-is-more approach to economic policy-making.

I am perfectly prepared to believe that current University of Chicago economics students no longer are the true believers that their forebears were -- FreeExchange cites survey data indicating that "75 percent of them expressed at least mild support for the [Keynesian] theory's tenets (compared to 40 percent in 1985)." A majority also "expressed at least mild support for the notion that income distribution should be more equal." That's great. In the spirit of fair debate, I retract my opening sentence: "It's been a bad year for the University of Chicago's Economics Department."

I should have said, "It's been a bad year for those market fundamentalists still clinging to discredited tenets of classic 'Chicago school' economic theory." A little less catchy, but definitely more accurate.

But whether or not the current Chicago economics faculty and student body are unrepentant Chicago schoolers wasn't the real point of my post. The more serious accusation was that the direction in economic thought pioneered by Milton Friedman and enthusiastically adopted by Ronald Reagan and his Republican successors helped to get us where we are today -- in the worst economic contraction in 50 years, characterized by an increasing concentration of wealth in the top tiers of society.

FreeExchange pushes back there, as well:

That's a bit of stretch. As bad as things are at the moment, it seems a mite premature to write off policies in the 1980s as an abject failure. We have not lost 30 years of wealth, and living standards have increased for billions of people since the 1980s. Income inequality has increased, and that can be undesirable, but the welfare of many low-income people has dramatically improved.

Sure, billions of people around the world have enjoyed increased living standards, though I'd find it hard to argue that, say, China's mix of state control of the economy and capitalism resembles anything that a dyed-in-the-wool Chicago schooler would recommend. But it might be a little early to feel all that confident about arguing that "we have not lost 30 years of wealth." We've lost pretty close to ten years of wealth just in the last year, here in the U.S., and this recession (or depression) is far from being over.

But whether or not all the gains of the past 30 or 40 years are rolled back, I still think that it is pretty clear to most people that one of the central ideas at the heart of the Chicago school approach -- that markets are self-correcting and government should just get out of the way -- has been greatly discredited by the events of the past two years. And not just because of the financial crisis. A society in which income inequality keeps growing is an unhealthy society. The awarding of the John Bates Clark medal to Emmanuel Saez, who has done more than almost anyone to document that growing inequality, is an unmistakable sign that the economics profession is paying attention.

No one crusaded harder than Milton Friedman to reduce government's role in managing the economy. Anyone interested in these issues is highly encouraged to read a fascinating interview conducted with Friedman by Robert Kuttner in 2005, in which the two men engage in a lengthy and vigorous debate. It makes for especially great reading in the wake of the current crisis, and I sure would love to hear Friedman's analysis of current events in light of the new data. But one short exchange jumped out.

KUTTNER: Where do you think in the area of the honesty of financial markets themselves, markets are adequately self-policing, and where does the need for some kind of regulatory regime come in?

MF: Well I'm not sure that a regulatory regime should be the role of government. Government's job is to prevent fraud or theft. That's the real role of the government, in the financial market and everywhere else.

Friedman's views, both expressed directly by himself and through the bevy of economists nurtured under his tutelage at the University of Chicago, were extraordinarily influential at the highest levels of government. Current Chicago economics students may have a more nuanced view these days, but when one looks at current Republican politicians, Friedman's legacy lives on. Which is one clear reason why the GOP is in worse shape than it's been in decades.

-- Andrew Leonard"


Milton Friedman

Since I'm a follower of Milton Friedman and a Democrat, let me tell you what he would argue:

1) For Narrow/Limited Banking, as Nick Clegg of the Lib Dems currently is doing in the UK.

2) For a guaranteed income, the best means of having automatic stabilizers.

3) Either a lot more government in health care or a lot less. Here's where I agree and disagree with him: I'm for a lot more government role in health care because its the only real alternative to our awful hybrid system ( see the interview you referenced )

4) Quantitative Easing via Helicopter Money.

5) This from Brittan in the FT:

"Thinking about alternatives led me to re-read a 1948 paper by Milton Friedman entitled A Monetary and Fiscal Framework for Economic Stability, reprinted in Essays in Positive Economics (1953).

I found this early essay much more helpful than his better-known later proposal for a constant growth of the money supply. The 1948 paper contained four proposals:

First, a long-term policy of determining government expenditure on goods and services, either in money or real terms, entirely on the basis of the community’s desire and willingness to pay for such services.

Second, a predetermined programme of transfer payments for items such as pensions and unemployment pay. “Such payments will be high when unemployment is high and low when unemployment is low.”

Third, a progressive tax system primarily based on the personal income tax. The rates set should be sufficient to balance government spending at a hypothetical level of national income corresponding to “reasonably full employment at a predetermined price level”.

Fourth, budget deficits would be financed entirely by the creation of money by the Fed and surpluses used to retire money. This would best be accomplished by adopting the 100 per cent reserve proposal for banks, “thereby separating the depositary from the lending functions of the banking system”.

The first three proposals look at first sight like the “automatic stabilisers” that governments came to rely on as the main fiscal contribution to economic stability before the present emergency. But there is a crucial difference. In a recession, governments would not have to forecast the path of recovery, as the British government has done, or the timing of the return to budget balance. In a normal cycle, the return would be automatic. But, if forebodings of secular stagnation, with the desire to save at high employment levels exceeding investment opportunities, were fulfilled, then budgetary stimulants would continue as long as necessary."

6) The importance of separating Utopia ( Theory ) from the Real World ( Politics ).

7) My guess is that he would support anti-trust legislation.

By the way, the original Narrow Banking Proposal, put forward by Frank Knight and Henry Simons, was called the Chicago Proposal, I believe. It was also accepted by Irving Fisher and Friedman.

I realize that I have my own views about Friedman's views, but I'm happy to defend them.

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