Milton Friedman and his Errors

Milton Friedman, Banker’s Pet

by Gwydion M. Williams

“The wages of domestic servants have risen very greatly in recent years. Had there been a union of domestic servants, the increase would have come through the union, and would have been attributed to it.” (Capitalism and Freedom, by Milton Friedman, page 123. University of Chicago Press 1962)

That’s Friedman failing to do elementary economic analysis when it would tell him something he didn’t want to know about. Simple supply-and-demand is ignored. Large numbers of workers doing well-paid unionised work would mean that other workers had to be paid almost as well. Or else why should they stay?

The man’s also showing his roots, the discontent of a once-privileged stratum. During Classical Capitalism, the middle class defined itself by having at least one servant – a gigantic waste of resources, and oppressive for those who could get no better job. This was the ‘freedom’ as Friedman understood it, and it has since largely vanished. In his day, the middle class resenting the rising status of workers, and their own problem getting servants. Though they were materially better off, they no longer had the same social status. They embraced the new Counter-Culture Capitalism, with the same fondness as the owner of a pet boa-constrictor, and much the same results. The New Right gets called ‘conservative’, but it has been lousy at conserving anything.

I’ll detail later the central nonsense of Friedman’s analysis. He treats the economy as a set of disconnected households that trade, or refuse to trade, without ever being compelled to make a trade they don’t like. But households as units of production are found only where trade is marginal and agriculture dominant. They exist where capitalism is excluded by law, custom or sheer poverty.

Britain has a dwindling number of genuine unit-of-production households, mostly family farms, and less of them than when Thatcher came to power. Most of us depend on a complex economy which runs by a mix of state power and the power of a relatively small ‘overclass’. I define ‘overclass’ as people who have great economic influence, but not the automatic social leadership of a gentry or ruling class.

Economically, the overclass are people who have a million or more that they can freely invest. Definitions of wealth vary, and I’d prefer to define it in terms of money that rich people can move as they see fit without losing their home, pension or immediate livelihood. This definition is more restrictive than the richest 1%, those with at least half a million dollars, a group estimated at 37 million worldwide in the recent survey of global wealth. [D]

The New Right ‘revolution’ has seen power taken away from governments and passing to a very small group, maybe 20 million globally and less than a million in the UK. Ordinary households and even the moderately privileged have less security than they’d have had if Keynesianism had been patched up rather than overturned.

But only part of Keynesianism was overturned. Friedman’s arguments were welcome when he persuaded millions of ordinary people to demand policies that mostly benefit a small overclass. But when it came to actually managing the world’s core economic functions, his methods were briefly tried and then discarded as useless:

“Both the Fed and the Bank are pro-active and forward-looking: far from keeping the money supply steady and allowing the economy to self-stabilise, as Friedman argued it would, they pump more money into the economy when it looks peaky and withdraw it when it looks overcooked. The MPC mounted an elegant justification last week of why a quarter-point rise in interest rates would be just enough to hit Gordon Brown’s inflation target over the medium term. That seems to owe more to Keynesian fine-tuning than to Milton Friedman.” (Bankers respect Friedman but obey Keynes, [A])

“The answer, it was hoped, was Friedman’s monetarism – the targeting of some measure of the money supply. As chairman of the Federal Reserve, Paul Volcker tried that experiment in the US between 1979 and 1982. Margaret Thatcher’s government tried it in the UK between 1979 and the mid-1980s. In both cases inflation was crushed. But the relationship between money and nominal demand also crumbled. Keynesianism had, indeed, died. But so, too, did Friedman’s monetary rule.” (Keynes v Friedman: both can claim victory, [B])

“But Mr Friedman was always a polarising figure, in economics as well as in politics and his influence on monetary policy has waned in recent years. Almost all central banks have returned to setting interest rates to guide inflation rather than attempting to control the amount of money in an economy, as he had advocated.” [C]

1987 is not mention, though it was a key year. October 19th was ‘Black Monday’, a time of gigantic stock-market losses. It looked briefly like the start of another Great Slump, and if Friedman’s ideas had been followed rigorously, it might well have been just that. In fact the West ignored the ‘market signals’ and managed to spend its way out of trouble.

***

But surely the man was celebrated, a Nobel prize winner? That’s how they list him, certainly. But it’s a funny sort of Nobel Prize that he got awarded.

Back in the 1960s, one of the world’s oldest banks decided to award itself a very special birthday present. The five prizes set up under the will of Alfred Nobel had accumulated vast prestige, mostly due to the three science prizes, a recognised standard of global excellence. The literature prize gains some reflected glory, though hindsight has shown that it is no sound predictor of the world’s greatest writers: it spots some, misses many other. The Peace Prize is in the gift of the Norwegian parliament, which makes it a rather eccentric award. People think it a joke that Kissinger got it, but Adolph Hitler was short-listed after he and Chamberlain made peace at Munich.

In 1968, the Bank of Sweden celebrated its 300th anniversary by setting up a sixth prize. Its proper name is the Nobel Memorial Prize in Economic Sciences, and there was no clamour for it outside of the economists and their paymasters. Maths and astronomy would have been much better candidates, if serious thought was to be further rewarded. Someone should investigate the details and discover how academics were persuaded to give economists that was seen as thoroughly undeserved by most people outside of the worlds of finance and academic economics. Take note of the way that academics and in particular scientists are always in need of funding for their own projects, stuff that often brings enormous returns in the long run but offers no hope of profit in the short run.

Unlike the science prizes, you can win the Economics Pseudo-Nobel for theories which have failed to predict anything important. Even for theories that are visibly wrong. All that’s definitely known is that the Nobel prize authorities agreed to set up this new prize and put it on a level with the others. They also decided that no further prizes could be created.

The ploy worked. People became convinced that economics was a body of fixed and definite knowledge, a ‘dismal science’ but one which they had to respect. The Economics Pseudo-Nobel became part of the propaganda engine of the New Right.

You can call your cat a duck, but it still won’t take to water. Most of the New Right’s success has been at the level of ideas, aided by gigantic run-for-profit media empires. When it comes to practical achievements, the New Right have failed to create anything of substance in their quarter-century of domination. They had a unique opportunity to reshape Russia, but Russia was instead made poor and embittered. Russia now despises New Right ideas and Western ideas in general.

In the West, they promised ‘trickle-down’, a wave of general prosperity that would start with the rich but raise up everyone. It started with the rich, but it also stopped with the rich. The policy should be called ‘Feed The Rich’ and has failed to raise growth rates in Britain and the USA above the levels achieved in the Keynesian era (1950 to 1975). Their big success, from an Anglo viewpoint, has been in lowering most West European growth rates. Italy, France and West Germany did much better than the Anglosphere in the 1950-to-1975 era.

The New Right claim post-Mao China as one of their successes. They did indeed have some influence, not so much with the main changes as with secondary matters like the ending of free health and education services Mao had created. Deng turned them into fee-paying systems, a real burden for the poor. As the New Right weaken and lose prestige, China is going back to the older Welfarist pattern. (A richer China grapples with widening wealth gap, [E])

Was there any need for China to change so drastically in the 1980s? I got hold of a reference work called The World Economy: Historical Statistics, just to confirm my memories of strong growth under Mao much faster than the Republic of India in the same era. I discovered an additional overlooked fact – under the pro-Western Republic of China, absolutely nothing was achieved. From the overthrow of the Empire in 1912 to the Westernised Nationalist’s expulsion to Taiwan in 1949, the economy stagnated. There was a little modernisation in the coastal cities, but the vast agricultural hinterland was actually decaying and getting poorer.

China after Mao continued Mao’s policy of getting closer to the USA, a policy made necessary by the hostility that Khrushchev began and Brezhnev continued. This included copying some Western economic methods, but always with restrictions and state controls of the sort that the New Right condemn. China has so far kept an unconvertible currency, making it impossible for speculators to breeze in and out again with fancy loans of the sort that did immense damage to the ‘Tiger Economies’ in the 1990s.

China kicked out George Soros and his Institutes, a little before the Tiananmen crackdown of 1989. He responded by predicting economic disaster for the Chinese. China ignored him and prospered. Eastern Europe and Russia kept on listening to Soros and saw their economies sink well below late-Soviet levels.

Someone should plot data for growth against the degree to which the state does or does not follow the role laid out for it by Soros and characters like him, the ‘wunderkids’ of the New Right era. I’m confident they’d find that Soros does for developing economies, what AIDS does for general health.

People ought to have learn this lesson, but so far they have not. At least not in Britain an the USA, the ‘Anglosphere’ that currently dominates the world. The prestige of economics and its spurious maths has been inhibiting this. Characters like Milton Freedman, winner of the prize in 1976, when things seem to be going their way.

Anglos in the 1950s and 1960s knew that the Great Depression had been sparked by the Wall Street Crash. They knew that Roosevelt’s policies had cured it. This knowledge was systematically obscured by Friedman and similar people, singing a song in praise of money and ignoring the methods that had actually worked.

The 1960s were a period of rebellion, resulting in the successful ending of traditional Christian ideas of no sex outside of marriage and a lot of guilt and misery even within it. It was also a period of moral confusion: confident advocates of a new sexual order were a minority, and a lot of them found things going much further than they had expected. This was the framework in which it was possible to persuade people to abandon the highly successful Keynesian system. The process was most successful in the USA, where in incomes of the working mainstream have stagnated since the 1980s. Britons are not such dopes, but a lot of poor people have been hurt by the mean-spiritedness of the Thatcher years.

But what was the actual vision?

***

“In its simplest form, such a society consists of a number of independent households – a collection of Robinson Crusoes, as it were. Each household uses the resources it control to produce goods and services that it exchanges for goods and services produced by other households… Since the household always has the alternative of producing directly for itself, it need not enter into any exchange unless it benefits from it. Hence, no exchange will take place unless both parties do benefit from it. Cooperation is thereby achieved without coercion.” (Capitalism and Freedom, page 13)

It is rational to assume that people don’t need to eat, but just eat for pleasure as the mood takes them. That’s one assumption hidden with the ‘economic rationality’ of Friedman and the New Right. It certainly makes the maths simpler, just as urban transport planners could save a lot of time by assuming that commuters were actually pigeons who could fly between transport hubs and their place of work.

British industry was established in an era when people really could starve if they couldn’t get work, might be badly malnourished even if they had a job. That was how they were pushed into the factory system – in the abstract they could have refused the work, but in reality there was no other way to stay alive.

Even when people are not actually hungry, they still find themselves actually coerced by the power of those richer than themselves. You can quit your job, but what’s the point if other jobs are no better? In the Victorian era, Britain became wealthy but its poor people stayed poor. Only once ‘market freedoms’ were interfered with did worth start flowing to workers rather than the middle classes.

As I said earlier, ‘economic rationality’ is never allowed to invade things needed by the overclass – who are just a stratum and not solidly in control in the way older ruling classes were in control. The same is true of business and commerce, vast corporate structures that have grown and extended while ‘individualism’ has been the official ideology.

Real business and commerce is run on the assumption that people matter, or rather people matter if they are useful to that business. Social connections are at the core, and understood to be at least as important as profit and loss. If there were real-life individuals whose behaviour matched the ‘rational agents’ of economics, no one would want such a person working in their office. People are supposed to care and be part of the group.

The New Right view of capitalism has nothing in common with the actual behaviour of the people running the modern system that is classed as capitalist. Those people will also mostly support New Right notions, so long as it isn’t ‘in their backyard’. It’s as if they thought ‘these ideas are unquestionably true everywhere, apart from those areas where we are competent to judge and where we would lose our jobs, wealth and reputation if we did the wrong thing’. Doesn’t that seem suspicious?

***

Friedman was of course a libertarian, a new breed of right-winger. When the USA was losing faith in their Vietnam War, Friedman was able to score a point in a debate during the Vietnam War, by mentioning that he condemned “conscription to man the military services in peacetime” (Capitalism and Freedom, page viii and page 26.)

Was the USA really peace during the Vietnam War? It was only peace in a very technical sense, in that there had been no Congressional declaration of war. In the whole history of the USA there have been only eleven of these, from five separate wars. Six of the declarations of war were in World War Two, when however the USA was merely responding to a war that had already been declared on it. The USA chose to join World War One: the USA in World War Two had to either fight or let foreign foes kick them around.

On many other occasions, the United States has engaged in extended military engagements that, while not formally declared wars, were explicitly authorized by Congress. This includes their two ‘Barbary Wars’, their own Civil War, the Vietnam War, the invasion of Panama and the two wars against Iraq. The Korean War was something else again, not actually authorized by the U.S. Congress, because President Harry S. Truman cited authority under United Nations resolutions.

The US Constitution fails to say whether or not conscription is legal—perhaps because the British Empire had never tried it in North America. It was not attempted by the US in their War of Independence. It was advocated in 1812, when they attacked the British Empire in retaliation for British ships seizing sailors from US ships if they seemed to be British-born. Both sides used it in their Civil War, with the Confederacy moving first. It was used again in both World Wars and kept up in the era of the Cold War, when the USA did indeed need large numbers of troops to win world domination.

In Vietnam, US regulars were fighting Hanoi’s regular forces. The USA was also bombing three sovereign states: North Vietnam, Laos and Cambodia. Had a formal declaration of war been need to send draftees to Vietnam, I am sure Congress could have managed it quickly enough. It was also their own choice to invade Saddam’s Iraq without bothering to make it a formal war. The USA’s loss of confidence since the 1960s makes it impossible to re-apply the draft, even though it has never formally ended. Nowadays all troops are volunteers, but the Iraq War has made volunteering much less popular than it was when the army just sat in bases in friendly countries.

I’d have thought a sincere libertarian would deny a state the right to conscript free citizens for foreign wars. Logically they should be against conscription even in the face of an invasion. If a state does not have enough merit to get enough volunteers, or enough cash to pay them, then let it perish! If people think they’d do as well or better under the conquerors than under their existing rulers, why not respect that opinion?

That’s not what actual libertarians say, of course; at least none that I’ve come across. It is one of many indicators that their doctrines are a sham, a line of patter rather than a deep belief. When it comes to the crunch, they are perfectly well aware that individual existence is dependent on a pre-existing social order, and that their version is rather fragile. What they can’t do is integrate this knowledge into their normal line of patter, the doctrines they claim to be fundamental.

In World War Two, there was some unwillingness to extend the war to Europe. Congress declared war on Japan on the 8th December, having been attacked at Pearl Harbour on the 7th. This did not necessarily mean war with Nazi Germany, and in fact it was Hitler and Mussolini who chose to declare war on the USA on the 11th. They played right into Roosevelt’s hands, and he was quite happy to show his satisfaction:

“Rapid and united effort by all of the peoples of the world who are determined to remain free will insure a world victory of the forces of justice and of righteousness over the forces of savagery and of barbarism. Italy also has declared war against the United States.” (US Declaration of War against Germany, [F])

Congress was much more muted. There had been widespread sympathy for fascism until fascism insisted on being the USA’s foe. This would force the USA to distance itself from a great deal of shared ideology, including racism. Of course anti-black discrimination was not formally banned until the 1960s, and continues covertly down to the present day. Back in 1941, they may have foreseen this and certainly don’t sound at all enthusiastic about the future that Hitler was forcing them into:

“Whereas the Government of Germany has formally declared war against the government and the people of the United States of America:

“Therefore, be it Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, that the state of war between the United States and the Government of Germany which has thus been thrust upon the United States is hereby formally declared; and the President is hereby authorized and directed to employ the entire naval and military forces of the government to carry on war against the Government of Germany; and to bring the conflict to a successful termination.” (Ibid.)

Friedman credits Europe with the creation of capitalism and freedom, ignoring how both had been failing in the 1930s. Looking back to earlier centuries, Friedman doesn’t try to explain why a fortunate occurrence of freedom in parts of Europe should also require conquest of the rest of the world. Conquest that up until the 1940s was generally understood to be permanent subjection of lesser breeds by the superior white race. Hitler chose to shove the USA into an alliance with the Soviet Union, supposing that Germany was strong enough to beat both. Roosevelt was happy to play the same game, having taken the USA some way towards socialism and seeking to go further. The result was a highly successful system that came to be called Keynesian.

The Keynesian system that Friedman despises coincides with a massive spread of US values into many countries that had previously seen the US as something vulgar and unwanted. In the 1950s, the ruling class in Britain and many other countries still saw the US as something vulgar, but also necessary to save them from the much more alien system of the Soviet Union. There was also some real popular enthusiasm for US ideas, things that have now been so thoroughly incorporated that people forget where they came from. No one says ‘Mid-Atlantic’ because most of Western Europe has absorbed Mid-Atlantic values. The US meantime has gone off in its own direction, become dominated by the ‘New Backwoodsmen’ of the Republican Party reshaped by Goldwater, Nixon and Reagan.

The Keynesian era was also the only time that Western allowed non-white countries to rise to their own level. The main break-down of internal inequalities. The systems that Friedman praises has conspicuously failed to achieve this, both before Keynesianism and afterwards.

The collapse of the Soviet system – which was probably inevitable after their blunders in the 1950s and 1960s – gave a unique opportunity to a Western system that knew what it was about. It has in fact ended with most Russians rejecting and despising Western values. With China increasingly sure it was right not to listen. The only success has been the absorption of Eastern Europe into the European Union, where ‘Old Europe’ had hung on to most of its Keynesian achievements. It has anyway been far messier than it should have been, with an avoidable civil war in Yugoslavia.

There’s more to say, but this article is already long. I’ll deal with other matters next month, including the odd fact that the USA’s New Right would have extremely few thinkers without its Jewish thinkers. And this despite most US Jews remaining in their traditional Democratic and Liberal-Left alignment.

 

References

[A] [http://business.guardian.co.uk/story/0,,1952114,00.html], Guardian, November 20, 2006

[B] [http://www.ft.com/cms/s/48d6ff46-7994-11db-90a6-0000779e2340.html], Financial Times November 21 2006

[C] [http://www.ft.com/cms/s/035bedca-75e1-11db-aea1-0000779e2340.html]

[D] [http://www.wider.unu.edu/]

[E] [http://english.peopledaily.com.cn/200612/18/eng20061218_333648.html]

[F] [http://www.law.ou.edu/ushistory/germwar.shtml]

First published in Labour & Trade Union Review, some time in 2007

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