Monday, December 14, 2009

"The End of the Age of Friedman" (Brad DeLong, with a few thoughts adapted from Karl Polanyi)

Well, let's hope that title is right. This piece was written in March 2008 (originally, it would seem, for the Taipei Times), but it's still not entirely clear whether the obituary it pronounced was premature--which means the argument here is still very timely.

Over the last several years, my wise and learned friend Brad DeLong, in his intertwined roles as proudly territorial neoclassical economist and omnicompetent public intellectual, has taken to delivering harsh anathemas in all directions. (That denunciatory tone seems to be mostly explained by his increasing exasperation with the dishonesty, hypocrisy, criminality, and general idiocy that has pervaded so much of our political life and public discourse during the decade now drawing to a close--and I can sympathize with that.) But this assessment of Milton Friedman and his legacies is not just searching and sophisticated, despite its brevity, but is also exceedingly calm, fair-minded, and balanced in tone.

I would say that it's balanced almost to a fault. DeLong concludes this piece by saying:
While movement in Friedman's direction was by and large positive over the past generation, the gains to be had from further movement in that direction are far less certain.
I think the first half of that sentence is much too sympathetic, and the substantive judgment it conveys seems to me highly dubious. But be that as it may...

Brad DeLong's respectful and informed engagement with Friedman's perspective makes his ultimate critique of Friedmanism all the more damaging. And DeLong also recognizes, in a way unusual among economists of any stripe, that one especially valuable place to look for theoretical correctives to Friedmanite market fundamentalism--to "build up a counterbalancing set of principles"--is in the thought of Karl Polanyi:
[...] I say yes in part to the "Age of Friedman" proposition, because only Friedman's set of principles self-confidently proposed both to explain the world and to tell us how to change it.

Still, I would build up a counterbalancing set of principles, because I believe that Friedman's principles do not, ultimately, deliver what they promise.

My principles would start from the observation that market economies and free and democratic societies are built on a very old foundation of human sociability, communication and interdependence. That foundation had a hard enough time functioning when human societies had 60 members -- eight orders of magnitude less than today's 6 billion.

So my principles would then be developed from Karl Polanyi's old observation that the logic of market exchange puts considerable pressure on that underlying foundation. The market for labor compels people to move to where they earn the most, at the price of potentially creating strangers in strange lands. The market for consumer goods makes human status rankings the result of market forces rather than social norms and views about justice.

This critique of the market is, of course, one-sided. [....] Market arrangements have a larger meritocratic component than the alternatives, and they encourage positive-sum entrepreneurship, making it easier to do well by doing good.

Nevertheless, the distribution of economic welfare produced by the market economy does not fit anyone's conception of the just or the best. Rightly or wrongly, we have more confidence in the correctness and appropriateness of political decisions made by democratically elected representatives than of decisions implicitly made as the unanticipated consequences of market processes. [JW: Obviously, that depends on who "we" are. Count me in.]

We also believe that government should play a powerful role in managing the market to avoid large depressions, redistributing income to produce higher social welfare, and preventing pointless industrial structuring produced by the fads and fashions that sweep the minds of financiers.

Indeed, there is a conservative argument for social-democratic principles. Post-World War II social democracy produced the wealthiest and most just societies the world has ever seen. You can complain that redistribution and industrial policy were economically inefficient, but not that they were unpopular. It seems a safe bet that the stable politics of the post-war era owe a great deal to the coexistence of rapidly growing, dynamic market economies and social-democratic policies. [....]
And so on. But read the whole thing (below).

(Also, it's never too late to read and ponder Karl Polanyi's great and indispensable book, The Great Transformation.)

--Jeff Weintraub
==============================
Brad DeLong's Semi-Daily Journal
March 8, 2008
J. Bradford DeLong: The End of the Age of Friedman

J. Bradford DeLong:  Harvard professor Dani Rodrik -- perhaps the finest political economist of my generation -- recently said on his blog that a colleague has been declaring the past three decades "the Age of Milton Friedman."

According to this view, the coming to power of former US president Ronald Reagan, former British prime minister Margaret Thatcher and former Chinese leader Deng Xiaoping led to an enormous upward leap in human liberty and prosperity. I say yes -- and no -- to this proposition.

Friedman adhered throughout his life to five basic principles: strongly anti-inflationary monetary policy; a government that understood that it was the people's agent and not a dispenser of favors and benefits; a government that kept its nose out of people's economic business; a government that kept its nose out of people's private lives; and an enthusiastic and optimistic belief in what free discussion and political democracy could do to convince people to adopt principles one through four.

[JW: That fifth point is correct to a degree, but one has to add a caveat. Friedman was certainly not hostile to democracy, but both his writings and his record make it clear that his commitment to political democracy was more lukewarm and contingent than his commitment to those first four principles.] [Update here]

Measured against these principles, Reagan failed on numbers two and four and adopted the first one only by default -- former Federal Reserve chairman Paul Volcker's anti-inflation policy in the 1980s dismayed many of Reagan's close aides. Thatcher failed on number four.

And Deng, while a vast improvement over his predecessors -- former Soviet leaders Vladimir Lenin, Joseph Stalin, Nikita Khrushchev and former Chinese leader Mao Zedong -- failed on all five, with the possible exception of number three. We do not know what Deng's desired set of economic arrangements for a system of "socialism with Chinese characteristics" was, and, in all likelihood, he did not know, either.

But I say yes in part to the "Age of Friedman" proposition, because only Friedman's set of principles self-confidently proposed both to explain the world and to tell us how to change it.

Still, I would build up a counterbalancing set of principles, because I believe that Friedman's principles do not, ultimately, deliver what they promise.

My principles would start from the observation that market economies and free and democratic societies are built on a very old foundation of human sociability, communication and interdependence. That foundation had a hard enough time functioning when human societies had 60 members -- eight orders of magnitude less than today's 6 billion.

So my principles would then be developed from Karl Polanyi's old observation that the logic of market exchange puts considerable pressure on that underlying foundation. The market for labor compels people to move to where they earn the most, at the price of potentially creating strangers in strange lands. The market for consumer goods makes human status rankings the result of market forces rather than social norms and views about justice.

This critique of the market is, of course, one-sided. After all, other arrangements for allocating labor appear to involve more domination and alienation than the labor market, which offers opportunities, not constraints.

Similarly, "social norms" and "views about distributive justice" usually turn out to favor whomever has the biggest spear or can convince others that obedience to the powerful is obedience to God. Market arrangements have a larger meritocratic component than the alternatives, and they encourage positive-sum entrepreneurship, making it easier to do well by doing good.

Nevertheless, the distribution of economic welfare produced by the market economy does not fit anyone's conception of the just or the best. Rightly or wrongly, we have more confidence in the correctness and appropriateness of political decisions made by democratically elected representatives than of decisions implicitly made as the unanticipated consequences of market processes.

We also believe that government should play a powerful role in managing the market to avoid large depressions, redistributing income to produce higher social welfare, and preventing pointless industrial structuring produced by the fads and fashions that sweep the minds of financiers.

Indeed, there is a conservative argument for social-democratic principles. Post-World War II social democracy produced the wealthiest and most just societies the world has ever seen. You can complain that redistribution and industrial policy were economically inefficient, but not that they were unpopular. It seems a safe bet that the stable politics of the post-war era owe a great deal to the coexistence of rapidly growing, dynamic market economies and social-democratic policies.

Friedman would say that, given the the world in 1975, a move in the direction of his principles was a big improvement. When I think of former US president Jimmy Carter's energy policy, Arthur Scargill at the head of the British mineworkers' union and Mao's Cultural Revolution, I have a hard time disagreeing with Friedman about the world in the mid-1970s.

But there I would draw the line: While movement in Friedman's direction was by and large positive over the past generation, the gains to be had from further movement in that direction are far less certain.

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