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Hatchet Job in New Republic

Friedmanomics is alive, and kicking

Friedman argued that the Great Depression was caused by the U.S. Fed’s failure to provide liquidity to banks. His advice was heeded in 2007–9. Photo: AP (New York, 1933).

Chicago economist Milton Friedman was very influential, and in the right direction...

Perhaps the most surprising comment in a hostile piece on Milton Friedman in the New Republic is by Columbia University economist Jeffrey Sachs. ‘Almost nothing remains of his intellectual legacy,’ he asserts. ‘It has proven to be a disastrous misdirection for the world’s economies.’ Sachs could not be more wrong. What was seen in the last quarter of the twentieth century was comprehensive and successful economic liberalisation in many countries under Friedman’s influence. Compare two dictatorships, Cuba and Chile. The Cuban government, under the spell of Marx, nationalised the whole economy of the island, introduced central planning and stifled the spirit of enterprise. The consequences of driving the country’s most productive people away were precisely those that Ayn Rand had predicted in a novel published in 1957, two years before the Cuban Revolution: Cuba became one of the poorest countries in Latin America. A visit to Havana is a doleful trip to the past. The Chilean government however followed policies designed by the Chilean students of Friedman and his colleague at the University of Chicago, Arnold Harberger: cut taxes, lower tariffs, reduce public spending, privatise, keep the money supply under control. As a result Chile advanced rapidly. She is now, despite some political difficulties, the most prosperous and dynamic country in Latin America. Moreover, unlike Cuba, dictatorship was replaced by democracy in a peaceful process.  

Both Chile and Cuba were ruled by dictators with blood on their hands. It is estimated that about 30,000 people lost their lives for political reasons under Castro in Cuba, and about 3,000 people under Pinochet in Chile. Of course this is inexcusable: even one political execution would be one too many. But what is remarkable is that dictators were not required to implement the comprehensive economic liberalisation which Friedman envisaged. Such liberalisation was accomplished under many different regimes, for example by a Conservative government in Great Britain and by Social Democrats in New Zealand. Perhaps one cannot make an omelette without breaking eggs, but one can liberalise an economy without destroying people. This was also demonstrated in the countries of Central and Eastern Europe which in the 1990s suddenly became normal countries again, after the fear and squalor of the communist era. Leszek Balcerowicz in Poland, Václav Klaus in the Czech Republic, Mart Laar in Estonia and many other leaders and policy makers moved quickly and decisively under Friedman’s influence to rebuild their societies in accordance with three main principles: free trade, private property, and limited government. Even in India and China there was some economic liberalisation, enabling hundreds of millions of people to leave poverty behind.

Apartheid: Restriction of Individual Choice

The author of the New Republic piece, Zachary D. Carter, begins his story by placing Friedman in South Africa where he was in 1976 lecturing on the merits of competitive capitalism. Carter does this for theatrical effect, because South Africa has a long and sad history of racial inequality. But unwittingly Carter is contributing to Friedman’s case for competitive capitalism. As Friedman’s good friend, the South African economist William H. Hutt, demonstrated, Apartheid was an attempt to replace individual choice by government intervention. In early twentieth century, the labour unions in South Africa and white supremecists (as we would call them today) entered an unholy alliance to limit competition coming from workers of colour, whether they were black, of Indian origin or of mixed race. There was a deep anti-capitalistic streak in Apartheid. In a free market, you are less interested in the colour of the baker’s skin than in the quality, and price, of the bread he produces. I was on a safari in South Africa in 1987, spending some time at the MalaMala Game Reserve where I talked to a lot of businessmen. They were all adamantly against Apartheid, not because they were humanitarians (although they sounded like nice and well-meaning people), but because it was bad for business. They were unable to utilise the full potential of their coloured customers and workforce. During my trip, I visited Pretoria where a girl showed me around. We passed a cinema. I asked whether cinemas were now segregated in the city. No, she replied, not any more. The owners had closed down their cinemas in protest against Apartheid until the government relented and allowed them to sell tickets to everybody regardless of race or colour. Again, it was probably less the love of mankind which motivated the cinema owners than the hope of gaining additional customers.

In South Africa everybody, except Friedman, Hutt and a few other classical liberals, ignored the real problem. It was not: Who should rule? It was rather how the rulers, whatever the colour of their skin, could do least harm. Two of my South African friends, Frances Kendall and Leon Louw, both influenced by Friedman, in 1986 wrote a perceptive book about a possible future for their country. They argued that there was a case for reparations to the black majority (and to the often-forgotten members of other races in this very diverse society). But such reparations should be financed by privatising government companies, and they should be used to provide more opportunities for members of groups previously oppressed. Kendall and Louw also rejected the idea that the oppression of the majority by the minority should be replaced by the oppression of the minority by the majority. What should be done in South Africa, they suggested, was to adopt the Swiss system of cantons: small, self-governing political units between which people could freely move. Then the possibility of one group oppressing another would at least be greatly reduced. Most individuals consider opportunities to better life for themselves and their families more important than to have somebody from their own group occupying the presidential palace. Unfortunately, however, Friedman’s ideas have not had the same impact in South Africa as in many other countries.

Response to the 2008 Crash: Friedman, Not Keynes

In his New Republic piece, Carter asserts that Friedmanomics, as he calls it, ‘fell apart during the crash of 2008’. I would argue quite the contrary. The 2008 financial crisis had two main causes, excessive credit creation by government on the one hand and the inability by financial markets to price risk, not least after the invention of various kinds of financial instruments, on the other hand. Interestingly, these two causes in many ways fit the analysis of business cycles presented by Austrian economists such as Ludwig von Mises and Friedrich A. von Hayek. But many economic commentators seem to overlook that the main response to the crisis was guided by Friedman rather than by John Maynard Keynes: it was not that government engaged in large-scale public works, as Keynes had advised in the 1930s, but rather that central banks provided generous liquidity to financial institutions. In his major work, A Monetary History of the United States, 1867–1960, co-authored with Anna J. Schwartz, Friedman had argued that a recession in 1929 had been turned into the World Depression by the failure of the U. S. Federal Reserve Board to provide sufficient liquidity to financial institutions. Instead of increasing the money supply, the Fed had allowed it to shrink with the consequences that many banks needlessly went under. In particular, the Fed had in late 1930 refused to rescue the Bank of the United States with dire consequences. Friedman and Schwartz suggested that a possible explanation was antisemitism: despite its name, this was a private bank, owned and managed by Jews.

Matters had then been made worse by the United States and other countries adopting protectionism. During the Great Depression, world trade collapsed. One of the many ironies of the age was that the very same United States which had sent a naval expedition to Japan in 1852, forcing her to open her borders to trade, in the 1930s imposed such tough trade barriers on Japan that some of her leaders felt that the only way to break out was through war.   

In 2007–9 central bankers were determined not to repeat past mistakes identified by Friedman and Schwartz: they provided as much liquidity to banks and other financial institutions as was deemed necessary (perhaps going too far), and policy makers were persuaded not to fall back on protectionism. The result was that a great depression was prevented, even if many problems certainly still persist. It is truly astonishing to witness left-wing intellectuals use the 2008 financial crisis as an argument against competitive capitalism. The excessive credit creation preceding the crisis was induced by government, by extending mortgages to people with no ability to repay and by forcing down interest rates for quite a while. This is an argument against government intervention, not for it. Moreover, the invention by banks and other financial institutions of several kinds of financial instruments was based on the dangerous principle that possible profits should be grabbed by the bankers, while losses could be passed on to the taxpayers. Although Friedman recognised the need to provide temporary liquidity to banks during a credit crunch, his emphasis on general rules rather than discretionary power is still highly relevant. Again, this is an argument against government intervention, not for it. (I discuss elsewhere an alternative to bank bailouts.)

Human Flourishing

I had the good fortune to know Friedman personally. He was as kind as he was intelligent. Carter’s piece in the New Republic is a hatchet job, not a portrait. But I would conclude these brief remarks by stressing that for Friedman individual freedom was not only desirable because competitive capitalism can deliver the goods, as it certainly does, but also because it is the only way in which man can enjoy and develop his or her personal capacities, talents and skills.

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