Sunday, September 23, 2012

Myth of the Free Market II: Milton Friedman Bamboozles the US

In a previous post, I noted that Milton Friedman re-labeled laissez faire economics, which advocates permitting big business monopolies, as "Free Market Economics." He thus somehow turned a defense of big business into a claim of protecting individual liberty.

His basic ploy was to slide between two views: 1.) the idea of an ideally competitive market, which has never existed, but can serve individuals efficiently in classical theory, and 2.) the view that any efforts by government that affect the market do more harm than good.

Paul Krugman, in a fascinating in-depth evaluation of Friedman's legacy, describes, so to speak, three Friedmans. The first was an innovative thinker who predicted the possibility of stagflation, and deserved his Nobel Prize.

The second Friedman was the inventor of 'monetarism,' the idea that a steady increase in the money by the Fed was much better than Fed responding to events. Krugman thinks that the economic analysis behind monetarism was in fact flawed and even dishonest. But in any case, the idea was tried from 1979 for three years and resulted in so much unemployment that it was officially abandoned, and not tried since.

The third Friedman was the promoter of laissez faire ideas, under the 'free market' brand he invented. For Friedman, every government intervention should be replaced by a market solution. In some cases Friedman had clever ideas like buying and selling pollution rights. But in all cases the market was better than the government. Krugman points out that "Friedman's laissez-faire absolutism contributed of an intellectual climate in which faith in markets and disdain for government often trumps the evidence."

It is the 'trumping of evidence' that is the core of the intellectual dishonesty on the right. Two of the examples that Krugman gives are particularly telling. One is "Conservatives continue to insist that the free market is the answer to the health care crisis in the teeth of overwhelming evidence to the contrary." The other is the great benefits of deregulation. Krugman, writing in 2007, cites the disasters involving California and Enron that came out of deregulation of the energy market. Of course, in another year he could point to the financial collapse.

What is particularly devastating against Friedman's free-market absolutism is Joseph Stiglitz's work. Stiglitz won the Nobel Prize in Economics by showing that when imperfect information is present, which it always is, markets are not efficient as Friedman claimed. Stiglitz explains: "The theories that I (and others) helped develop explained why unfettered markets often not only do not lead to social justice, but do not even produce efficient outcomes. Interestingly, there has been no intellectual challenge to the refutation of Adam Smith's invisible hand: individuals and firms, in the pursuit of their self-interest, are not necessarily, or in general, led as if by an invisible hand, to economic efficiency."

Stiglitz writes in his brilliant book The Price of Inequality, "I remember long discussions with [Friedman] on the consequences of imperfect information or incomplete risk markets; my own work and that of numerous colleagues had shown that in these conditions, markets typically didn't work well. Friedman simply couldn't or wouldn't grasp these results. He couldn't refute them. He simply knew that they had to be wrong. He, and other free-market economists, had two other replies: even if the theoretical results were true, they were 'curiosities,' exceptions that proved the rule; and even if the problems were pervasive, one couldn't rely on government to fix them."

To sum up, the myth of superiority of the superiority of 'free market' solutions is now contradicted by both evidence and uncontroverted theory. The superiority of solutions that avoid a government role is simply a myth, an emperor with no clothes. The question now is whether the emperor will be elected on Nov. 6.

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