John Cochrane has a new post up in which he discusses the historical importance of Milton Friedman's book Free to Choose (a book I have never read. The first half of the post is a discussion of the difference between negative and positive rights, with which I largely (but not completely) agree. But the second half consists of a reading of events since 1980 with which I take a number of exceptions:
Here are a few "freedom, democracy and prosperity" events...since 1980:
- The Reagan and Thatcher revolutions, including deregulation, tax reform, victory over inflation and inauguration of a 20-year economic boom.
- A billion Chinese released from abject poverty. (Hint to China: read Capitalism and Freedom next.)
- A billion Indians, also starting to join the modern world, having begun to overturn their Keynesian / English-socialist model.
- We won the cold war. East and West Germany reunited. Eastern Europe freed.
- The number of democracies, for example as scored by Polity, doubled since 1980. Many in Latin America and Africa too.1980...was an end to US and UK inflation -- the result of mindless "stimulus" -- and the end of widespread acceptance of simpleminded Keynesian economics. It was the end of a brief interlude of unquestioning belief in the power of the Federal Government to solve all problems. It was the end of stagnation in the US and UK.
1980 was an inflection point for the advance of freedom, not its end! Yes, some of the Friedmans' dark worries did not pan out. Why not? Because people read the book! The Friedmans were fighting against the "tide of history." And turned it back....
We have a long way to go, and we've been heading backwards in the last few years, on all indices of economic and political freedom. Our 30 years of liberalizations may indeed now be coming to an end. The economic and political ills of the 1970s seem to be returning.
This appears to me to be a very standard intellectual Republican narrative of recent history; if you surveyed registered Republicans with postgraduate degrees, and then took an average of their responses, it seems like you might get something like this. Now, standard narratives are not necessarily wrong. But this narrative happens to be one about which my feelings are quite mixed.
I agree with a number of Cochrane's points. I agree about China. I basically agree about India (though where did Keynes support a "license raj"??). I agree about the Cold War and the spread of democracy. I agree about inflation. None of these positive developments should be forgotten or ignored.
But there are some points with which I strongly disagree. Let me address these:
1. " was the end of stagnation in the US and UK." What? Really?? What about the Bush years? You know, the 8 years when the inflation-adjusted stock market did worse than in the 1970s, income stagnated, and GDP growth underperformed past booms, all despite massive tax cuts and substantial deregulation?
2. "The economic and political ills of the 1970s seem to be returning." Really? Inflation?? No. I know there are some people who believe that a fiscally induced hyperinflation is just around the corner, but that is pure speculation...
3. "US and UK inflation -- the result of mindless "stimulus"" Really?? But budget deficits were low in the 1970s, and only exploded in the Reagan years (and again in the Bush years). And most economists believe that the 70s inflation was caused by loose monetary policy (and possibly oil shocks), not by fiscal policy.
Basically, in 2000, this Republican narrative was looking pretty good - though not entirely thanks to Republicans. Bill Clinton seemed to have proven that market liberalism did not require exploding deficits and exploding inequality (the ills of the Reagan years) in order to create prosperity. But then came the Bush years, and America doubled down on the Milton Friedman program with more tax cuts, more deregulation, more privatization. And income stagnated, stocks stagnated, and growth was lackluster, while debt and inequality resumed the explosive growth of the Reagan years. By the eve of the financial crisis, the Republican narrative was looking pretty shopworn.
I did not live through the 70s (and was a little kid in the 80s). My generation has seen all of the results of the Milton Friedman revolution, both good and bad. But we missed the revolution itself. The sense of idealism, promise, and heroism that some older intellectuals seem to feel when they recall that revolution is just a little alien to me. I like to think that this makes my generation a little more dispassionate when it comes to evaluating how it all turned out.
How can he claim credit for China and India?!ReplyDelete
And I am not even talking about IMF and 1997.
I'm not sure what to make of Cochrane's data-free polemic, and I am a bit older and was voting in the 1980s.ReplyDelete
I don't think it was a narrative (a.k.a. "fairy tale") that took hold until the tech boom of the 1990s because there was a lot of de-industrialization going on in the 1980s, and it seems that if you worked in the industrial sector, you were probably seeing something quite different than say somebody in the financial sector.
Speaking as somebody who does remember the good and all the bad of the 1970s, there seems to have been a lot of data-free revisionism going on in this so-called narrative since about the early-to-mid 1990s, and I must admit that I bought into the whole Yergin/Fama view for a time myself.
If the last two crises and over a decade of contradictory economic data don't convince somebody to abandon this "narrative" and search for better answers, then I don't know what it takes to awaken their inquisitiveness.
I had to read "Free to Choose" when I took an undergrad course from Dr. Israel Kirzner (aka "The world's leading authority on Mises.")ReplyDelete
My basic take was that there were a lot of great ideas and great points. Points so widely believed now that they seem almost comical to make. They're nearly "self-evident" at this point. It's hard to imagine a world that didn't find some of those ideas on markets, etc. as completely obvious. Like you, I wasn't born early enough to witness the "revolution" (b. 1979), so maybe I just missed all the magic. In short, none of the "good" stuff really struck me as brilliant. It was almost just "common sense." But, maybe that's just a testament to how much has changed.
On the other hand, parts of the book (and lectures based on the book), especially when viewed through the Austrian lens of Dr. Kirzner struck me as outrageously hyperbolic and pushed good ideas too far.
In all honesty, my memories of that book and the lectures associated with it are jumbled with those on Hayek's The Road to Serfdom, and it's probably the latter that I'm really recalling.
What I remember walking away with is that yes, the price mechanism, free markets, etc. are neat and really do do a good job of conveying a lot of information, help manage issues of scarcity efficiently, etc. But somehow that got twisted into this weird logic where all possible market failures were simply assumed away and any role for intervention was thus killed entirely, reducing all forms of intervention to acts of economic terrorism.
I also remember outlandish lectures that attempted to "prove" that even a benevolent "regulation" like requiring cars to have seatbelts was an attack on the freedom of consumers and would undoubtedly take us down a path directly towards communism. (The alternative was to show that if cars without seatbelts did indeed kill people, consumers would choose not to buy them, and thus the market would solve the issue). This was also applied to gov't testing of the safety of food, drugs, etc.
It was basically, an argument of, "sure, people may die, but after they do, the market will fix it so more don't!" (that was more from the Road to Serfdom lectures though.)
All in all, I left the course thinking that great ideas had been perverted into becoming utterly rigid religious beliefs that denied the existence of all real world examples of where the required assumptions didn't hold. I left the class thinking, "these guys are completely nuts and completely blind to the complexities of the real world."
It seriously struck me as no different from a religious cult where every word was gospel and faith trumped empirical evidence.
I fought Dr. Kirzner tooth and nail in that class. I can't recall the name of my report on "Free To Choose" except for the fact that it was a play on the Henry Ford quote that the Model T came in every color you wanted as long as you wanted black (ie, something like, "Free to Choose, as long as you choose Libertarianism.") But, to Dr. Kirzner's credit, he not only gave me one of the few A's in the class, but even wrote one of my letters of recommendation for grad school. I always respected him for giving me credit for strong arguments and beliefs even when they were diametrically opposed to his own.
Unless I'm reading something wildly wrong, I believe that Cochrane said that the 1980's were the end of "inflation", not "stagnation"...ReplyDelete
You are indeed missing the key line. Check the end of the first paragraph after Cochrane's bullet-point list.
Here's a powerful graph from Ezra Klein that certainly goes against Cochrane's narrative:ReplyDelete
And I'll just add that people who take seriously externalities, including enormous positional ones (Frank's, "The Darwin Economy"!), asymetric information, etc. don't generally favor communism. We happily encourage the transitions in China and India, which are still nowhere near your libertarian vision (and the vast majoritie's nightmare if they fully knew what it meant).
One of the key sleights of hand in Cochrane's and other conservative commentators homages to Friedman is the idea that there is such a thing as a free market. Markets are always embedded in legal, social, political and cultural frameworks. And how the rules of these frameworks are written, enforced and interpreted helps skew the flow of valued resources towards some and away from others. Moreover, as Hacker and Pierson point out in their great book, "Winner Take All Politics", the rules guiding markets are affected both by actual rule making and "drift"; that is, vested interests prevent rules from being made that are detrimental. Drift, time and ideology all help hide the rules and normalize the power relations, but they are there. So when Cochrane (and Friedman) talk about the wonders of a "free" market, they are really talking about a market constructed to benefit capital at the expense of the middle class. A market, for example, where it is fine for banks to conglomerate into powerful behemoths, but where workers coming together to unionize is a "market inefficiency."ReplyDelete
The period from the end of WWII to the beginning of the 1970s was a period during which the growth of the U.S. economy's potential output was unusually high. The period from the late 1970s to the early 1990s was a period during which the growth in the U.S. economy's potential output was unusually low. Growth theorists saw the slowdown in the rate of growth as a puzzle to be explained. Growth speeded up again in the 1990s, but not to the prewar level. Therefore the freshwater people are living in an alternate reality, not in the real world. The stagnation in actual output in the 1970 was the result of two adverse supply shocks, not expansionary fiscal policy. The end of these supply shocks were what made it possible to bring inflation under control with tight monetary policy.ReplyDelete
In real world market economies market power, externalities, asymetric information, and missing markets are the rule, not the exception. As a result, real world economies only have an invisible paw, andbnot an invisible hand.ReplyDelete
As a result, actual market economies do not work like the theory of perfect competition predicts. The theory of perfect competition is an intellectually interesting LIMITING CASE, and not a description of how actual market economies function. The blindness of the freshwater economists is that they suffer from perfect competition illusion, the baseless belief that actual market economies work approximately like the theory of perfect competition predicts.
Markets do work reasonably well a good deal of the time. If they did not economies beyond the most basic subsistence level could never have developed. But they work imperfectly and can go very badly off the rails from time to time. When that happens the visible hand of the government is needed to put market economy back on the tracks.
When I was an I-banker, I spent pretty much all my time working with huge moneybag guys looking for opportunities to eliminate competition from particular markets (i.e., consolidate businesses through roll-ups without triggering anti-trust investigations, after which the rolled-up conglomerate owners could shut down capacity and raise prices and/or extract bigger rents).ReplyDelete
Deregulation to us meant getting the feds to stop paying attention so markets could more easily be fixed. Strident dumbass idealogues like Cochrane were great liberators for this business model. They still are.
When facts and theory diverge, skeptics create a new theory while believers create new facts. These days, the left are skeptics and the right are believers. That hasn't always been the case, but it is now.ReplyDelete
Also, I get a kick out of Cochrane claiming credit for China, considering that China is heavily Keynesian (and also fairly mercantilistic). They don't bother with social safety nets, it's true, but they are much farther away from any libertarian ideal (even purely in economics) than they are from Keynesianism. Government interference in markets isn't exactly light there.ReplyDelete
The dirty secret of the 1980s was the rise of leverage.ReplyDelete
The Fed was fighting the baby boom's proclivity to borrow (and borrow it could as they began turning 30 en masse) but threw in the towel in 1983:
I can assure you that most of us who lived through the Goldwater-Regan-Bush years of Friedman idolatry knew the guy as quite the right wing looney. I was just a teenager but had read Keynes; and Friedman was o say can you say of Chapter 1. The tea party was out in force; and I can personally recall him supporting local religious groups to control school curricula.ReplyDelete
Sorry, there is another Friedman of a few very good papers; but get a long spoon before fishing the pond.
Having spent my 40s in the '80s, I don't remember any "sense of idealism, promise, and heroism."ReplyDelete
I remember ideology instead of idealism. In fact, I remember Republicans scoffing at idealism.
I remember triumphalism instead of promise. An owner (a very liberal Democrat) of a high-end women's clothing/accessories boutique in Alexandria VA told me at the time, "You can't believe how much money the Republicans taking over this town (DC) have and how freely they spend it!"
I remember "greed is good" rather than heroism.
I haven't read any of his books, so perhaps I shouldn't comment, but I've been curious that nobody has mentioned his involvement in post-Allende Chile.I know there are still right-wingers who think Pinochet was a great humanitarian, but that's not the opinion of most people who lived under his rule. On the other hand, Friedman earnestly supported him. I can only take from this that he loved the "free market" so much that he believed it sh0uld be defended by dictatorship and death squads. Post-Soviet Union Russia, too.ReplyDelete
Cochrane seems to be suggesting that the 1980s marked the end of stagnation in the US and the UK. Can I give a British perspective on this? Assuming there was some increase in the rate of growth and/or general prosperity in the UK in the 1980s (I don't know), could this have anything to do with the fact that during that period Britain became one of the largest oil producing countries in the world?ReplyDelete
In fairness, loose monetary policy can be classed as stimulus. The idea is that a recession is due to a lack of demand, which can be stimulated using either fiscal or monetary policy (or both). It's IS/LM economics. In the 70s, this was combined with a belief in a stable Phillips curve, so you could trade off higher inflation for lower unemployment.ReplyDelete
Friedman was very influential in showing the shortcomings of this approach. He popularized the idea that inflation could be controlled by monetary policy, and that attempts to reduce unemployment below the natural rate are futile.
As for Friedman's broader legacy, I think where he influenced policy (US, UK, China, Chile) he had a very positive effect, but Cochrane does go overboard on the successes. The fact is Friedman was only marginally influential, if it were up to him policy would have been more Ron Paul than Ronald Reagan. But I think a lot of people on the Left are in denial about how much worse things would have been in the US and UK if 1970s polices had continued. On the other hand, those on the Right tend to exaggerate the improvements and ignore the fact that most of the gains have gone to the rich (although I think the increase in inequality would have occurred anyway, being mostly due to globalization and technical change).
I have read both Prof. Friedman's and Prof. Hayek's books. Both are good. However there are many other similar books, i.e. philosophically-oriented, by notable economists that are equally good that present different perspectives on economics and society. Because their arguments do not lend support for the nonsense from many among the segment of USA population with the greatest wealth and highest income, those books and their arguments are ignored while Friedman's and Hayek's, or at least certain portions of them, are trumpeted continually in support of absurd arguments that favor grossly unequal distribution of income and low taxation of those with the highest income. They are used for the rankest propaganda purposes.ReplyDelete
Didn't Carter appoint Paul Volcker to the Fed?ReplyDelete
I read the book back in the eighties, as an European student. Friedman struck me as a conservative USA nationalist. Not as a libertarian or something like that. He wanted to go back, not ahead. Especially the implicit and explicit nationalism made it hard to swallow.ReplyDelete
Inflation peaked in 1982 so it couldn't have ended in 1980.ReplyDelete
If it had ended in 1980, that would mean that Jimmy Carter ended it.
Neither Thatcher nor Reagan did anything to end inflation, btw.
My god, cochrane is even more of an idiot than I thought he was.ReplyDelete
Krugman discusses this, when it was Fama's turn to have a fact-free post:ReplyDelete
This covers developed countries, but IIRC the USA fits this pattern.
Also, see http://krugman.blogs.nytimes.com/2011/07/30/the-corrosion-of-the-conservative-economic-mind/
One of the many facts which Cochrane is ignoring is that productivity growth rates remained depressed (again, in the USA) until the mid-1990's, long after the Friedmanite reforms have started (which would be ~1978). IIRC, both the decrease and increase in productivity growth rates were coincident with increases and decreases in the price of oil, but that never bothered Chicago Boyz.
"My god, cochrane is even more of an idiot than I thought he was."
He's not stupid - one doesn't get a tenured position in the Chicago B-School by being dumb. I suspect, however, that one also doesn't get it by being honest.
This, Cochrane's assertion about "Free to Choose" is about the dumbest analysis I've ever heard about historical events. Not only is he apparently a determined ideologue in Economics but obviously in his reading of history. The Cold War was won by a bipartisan practice of the Truman doctrine, nothing less.ReplyDelete
You can take Friedman's book on it's merits but it is mostly a libertarian tract as opposed to a triumphant call to history.
All that is necessary is to look at the Northern Western European democracies with there high level of regulation and use of taxes to provide social services as well as their pursuit of government industrial policies. Once compared it's easy to recognize the errors in thinking.
Oh, and let's not forget what a hash some of the aggressive free market thinking did in many South American countries and in post Communist Russia.
Just because Government sometimes overreach or have bad economic policies is not to say that all Government policy or intervention is bad. I could go on and on and on.
The 80's, when CIA and School of Americas backed goons could murder rape and torture South Americans with impunity. Some freedom.ReplyDelete
Friedman offered advise and praised Pinochet's economic policies - 'free' markets and jackboots. Of course Friedmans monetarism was a disaster and had to be reversed.
On the other hand was likely a great time for Cochrane.
Richard H. Serlin mentions "positional externalities". For those who don't know, those occur when bad outcomes come about because we consume things not because we want them, but because we want to show (to others or ourselves) that we can. Like keeping up with the family down the block with newer stuff.ReplyDelete
Of course these exist, but totalitarians like Richard think they can judge all our consumption, they then decide what is "positional", and tax the **** out of us in order to fix it, all while they set up a giant regulatory state (to fix other "externalities") which, coincidentally, they run.
That is, it's a fancy term misused to justify totalitarianism.
Richard, you want to sound smart, you only sound evil.
The acid test of this Republican narrative for me will be the progress of Chinese political liberalization.ReplyDelete
If Friedmanite Economic Determinism -- the proposition that economic freedom *causes* political freedom -- is true, the China will indeed liberalize.
I like to attribute this idea to Friedman because I think Milton and Rose Friedman were very influential in spreading the idea that "economic freedom is all you need". But Friedman's views were somewhat more nuanced. In this video (apparently from 2003):
Friedman is careful to say that economic freedom is a necessary but NOT sufficient condition for political freedom. But then moments later he starts encouraging the idea that China is going to be pushed to liberalize because of its economic reforms:
"I predict that china will move increasingly toward political freedom if it continues its successful movement for economic freedom ..."
I suspect listeners would tend to remember this prediction better than his careful logical formulation earlier on (necessary but not sufficient).
I can't see a single point in Cochrane I agree with. Others points have already been addressed above. Nobody "won" the cold war. It was a staggering waste of resources all around. The slightly neoliberal Gorbachev decided on negotiated settlement. Then he abolished the employment guarantee. Then, with some US help, a coup ended the regime, bringing back old style tyranny with new rhetoric. Thatcherism/Reaganism has done nothing good for democracy anywhere, and the only freedom gained is freedom to shop, if you afford it, becoming evermore less likely for most.ReplyDelete
With regard to positional externalities, what Cornell economist Robert Frank (and I) recommend are highly progressive taxation (like the rates we had in the 1950's and 60's) funding much greater public investment and insurance, not totalitarianism. Although to an extreme enough libertarian even one dollar of progressive taxation or spending on public goods, whether it's free schooling for children or basic medical research, is evil totalitarianism, or communism, or whatever. Anyway, for those of us who aren't extreme libertarians (thankfully almost everyone), Robert Frank has a very brief Washington Post op-ed that basically summarizes his new book, "The Darwin Economy". It's at:ReplyDelete
And if you want something more academic, from the American Economic Review, 2005, "Positional Externalities Cause Large and Preventable Welfare Losses.", at:
I should add that positional externalities are vastly more than just, you envy your neighbors car. They are profound and pervasive. They are how you feel about the quality of your car and house and..., the sense of wellbeing they give you, whether you are happy and enjoying life in your 1500 square home with linoleum, formica, and carpet in the 1960's when it was in the 70th percentile, or unhappy with the exact same kind of home in the teens, when it's in the 20th percentile. The goal in dealing with these zero-sum-game externalities is to maintain position/rank/prestige for its benefits, but make the cost of attaining a given position much cheaper societally (i.e. a 5 carrot diamond gives the same prestige as a 10 carrot used to due to progressive taxation making carrots more expensive; see this AER article: http://ideas.repec.org/a/aea/aecrev/v77y1987i1p186-91.html) .ReplyDelete
Anyone who's serious about economics should know about positional externalities, and a good quick way to start is Frank's op-ed I link to above.
"But budget deficits were low in the 1970s, and only exploded in the Reagan years (and again in the Bush years)."ReplyDelete
You would never know that from the rhetoric at the time. Even when deficits were at their low point (at least as a fraction of GDP) politicians were saying they were out of control!
And how do you square this narrative with the statements of people like Glenn Beck that even the America of the 1970s was still a country with freedom, and Obama has single-handedly turned us into a socialist hellhole? Or with people like Peggy Noonan who claim that the Democrats of the 1960s were worth voting for but not the ones now--as if the Democrats have become more socialist rather than more neoliberal over the years? Cochrane is comparatively more reality-based.ReplyDelete
Will someone please explain to me how a trillion dollar a year defense budget, year in year out, isn't a massive economic stimulus /economic distortion program? Im not asking that rhetorically, it must have massive and ongoing economic effects.ReplyDelete
Yes, it has been pretty obvious for a long time that for the U.S., military expenditure acts as an economic stimulator. Putting people to work shooting bullets in the air rather than digging ditches, so to say. If I'm not mistaken, the 1950's spawned Nicholas Kaldor's phrase, "military keynesianism," now sadly underused. Basically, despite its size (U.S. army/population is smaller than most other countries), the military has too many synergies with other sectors to be hugely distortive.ReplyDelete