The end of Friedmanomics?

Friedman's advisees

Zachary Carter, of Price of Peace fame (a good book that I recommend, btw), wrote an interesting piece on Milton Friedman's legacy, which I think is, as Hyman Minsky said of Joan Robinson's work, wrong in incisive ways. But even before we get to his main point, that the era of Friedmanomics is gone, it is worth thinking a bit about the way he approaches the history of ideas. This is clearly a moral tale for Carter, with good guys and bad guys. Gunfight at high noon. It is more about vision than analysis, in the terminology of Schumpeter.

He starts, like Nancy MacLean in her Democracy in Chains -- I discussed only tangentially

the issue here -- with Brown v. Board of Education, and Friedman's, rather than Buchanan's, insidious behavior favoring policies that allowed the persistence of segregation. He tells us that: "it is hard to believe Friedman was merely naïve and not breathtakingly cynical about these political judgments, particularly given the extreme rhetoric he used to attack anti-discrimination efforts." Yet, as he continues he seems to change his mind and argue that: "yet he appears to have genuinely believed what he said about markets eliminating racism." So it seems he was naïve after all, according to Carter.

Of course, to determine whether Friedman was cynical or naïve is a thankless task and somewhat besides the point. Friedman was analytically wrong. There is a reason Schumpeter's monumental book is A History of Economic Analysis, and not of economic ideology. And Carter argument is built on moral, ideological grounds. Friedman is the bad guy. He tells us that: "[t]he chief political disputes of the 1950s and 1960s, as today, really were about moral values, not technical predictions." Don't get me wrong, vision matters, and it's hard to disentangle from analysis, but it is clear that Friedman's views differed analytically from the ones discussed by the Keynesian disciples at Cambridge (less so in the case of some of the Neoclassical Synthesis Keynesians that came to accept Friedman's notion of a natural rate of unemployment by the late 1960s). But it is hard to say that Friedman was for segregation, when he explicitly says he was against, and Carter himself thinks that he might have been sincere about that. Other than finding archival material that shows that Friedman knew better we are left with conjecture and guess work.

The key analytical differences between Friedman and the more heterodox Keynesians I alluded above, were not so much in his classic book on monetary history with Anna Schwartz, cited by Carter, but in his AEA presidential address from 1968. The return of the natural rate was the foundation that allowed, once the political circumstances were ripe for the demise of the Golden Age, for the return of marginalist analysis. In a sense, the notion of a natural rate of unemployment went full circle and added to the Neoclassical Synthesis notion that Keynes was fundamentally about wage rigidities or other imperfections. Note that this happened after the capital debates, when the logical foundations of the neoclassical theory was in shambles. In favor of Friedman, I might add, he did write the analytical model down in the debate with his critics, in contrast with Hayek, that after abandoning economics in the 1940s dedicated himself to ideological discussions without any analysis. Vision without analysis as my good friend Fabio Freitas poignantly says.

Carter is on firmer ground when he argues that Friedman was not a classical liberal, and had little in common with Adam Smith, although Friedman himself might have thought so; understanding of history of ideas is sadly vey uncommon among economists. Carter tells us that: "Friedman preferred to be identified as either a 'neoliberal' or a 'classical liberal,' invoking the prestige of the great eighteenth- and nineteenth-century economists—while conveniently gliding past their often profound differences with his political project. (John Stuart Mill, for instance, identified as a 'socialist,' while Adam Smith supported a variety of incursions against laissez-faire in the name of the public interest)." The differences with Smith were not fundamentally political though, but analytical (Stuart Mill is a more complicated transition author). Markets did not produce efficient allocation of resources or full employment of labor for Smith, as in the Marshallian world of Friedman and the Chicago School.

At any rate, the notion that Friedmanomics (or Neoliberalism for that matter; on that here) is dead is at best an exaggeration. In part, the misdiagnosis results from Carter's view according to which: "Friedman’s major theoretical contribution to economics—the belief that prices rose or fell depending on the money supply— simply fell apart during the crash of 2008." That's definitely not the main lesson from Friedmanomics. The quantity theory was never particularly dominant. It was a return to the simple notions of marginalism, of the theory of value, that suggests that supply and demand produce optimal outcomes, that lead to full employment, and that can fix all sort of social maladies (including racism, as Carter notes correctly) that was central to Friedmanomics, and neoliberalism.

In other words, his main legacy was the idea that the market society is a panacea. That free markets are prerequisite for a democratic society (Hayek was more forceful in that argument, without even trying to provide the analytical foundations). Something used cynically to favor the interests of a narrow group by the politicians Friedman advised (the three on top, for example). And while it is true that the last financial crisis (the 2008 one) has led to a reassessment of the role of government, and more so with the pandemic, as I discussed here, the notion that Friedmanomics is gone is wishful thinking.

Even though the profession has abandoned Friedman's Marshallian version of marginalism, his notion that markets do produce optimal outcomes has received no serious challenge within academia, and, in policy circles, interventions follow a pragmatic notion that market imperfections are worse than government imperfections. But that could change rapidly, like Larry Summers support for expansionary fiscal policies. Friedmanomics will certainly make a come back.

Power and dominance in the Colonial and Post-colonial times

By Sunanda Sen (guest blogger)

The recent uprising and protests, in a large number of the White-settled countries in connection with the murder of an unarmed Black-American, George Floyd by a White policeman on duty in Minneapolis has re-opened pages of history relating to unequal power , with state- sanction of White supremacy over ‘others’ having a subordinate status. As history unfolds it, the over-powered included the slaves acquired from Africa, the indentured labour shipped from tropical Asia, while colonies like India providing the flow of unpaid ‘drain’ of surpluses from taxes collected within. The pattern of racial dominance seems to have continued , even today, in the incapacitated George Floyd’s choking to death.

One observes the vehement reactions to the murder on part of the present generation, both Whites and the non-Whites, mostly from Northern America and Britain. This comes not only with the claim that ‘Black Lives Matter’ but with questionings of repressive policies in the past, with oppression of the African slave community in US and elsewhere, and of labour from the tropics. The anger reflects itself in massive protests by the youth in different corners of USA as well as in Canada, followed by the overthrown statues in UK. The dismantling include the statue of Edward Colson in Bristol , the Deputy Governor of the then Royal African Company which had the monopoly in England, from 1662, of trade in precious metals and slaves along the west coast of Africa. Colson. organised transport of 84000 Africans to different parts of the world as slaves. Well- connected to the ruling elite including the Royalty, Colson made a fortune while leaving a mark in Bristol in terms of various buildings which continue to bear his name today.

Protests in England, spread beyond Bristol to Oxford and London, has not been just targeting the symbolic presence of the colonial era in statues of leading statesmen and wealthy traders of Britain in years of Britain’s global supremacy. The voices bring to the fore the need for a re-read of colonial history - the modality of the colonial past engineered by statesmen like Robert Clive, Cecil Rhodes and even Winston Churchill - rewarded for the successful handling of colonial matters. While this may mean further academic research on issues relating to Colonialism , the anti-racist messages, hopefully, will also help in arresting the adversities faced by sections of society identified as the ‘other’ by the White community.

Digging up the historical records of oppression, one recalls , in US, the African slaves in the background of the Civil War, and the Colonial past for the British Empire, details of which may help in excavating further details of the mode of persecution. One comes across the loot of the taxed revenue from Colonial India by Britain, the ruling nation , all in the pretext of meeting the so-called ‘Home charges ’ to meet overseas expenditure.As pointed by Indian nationalists like Dadabhai Naoroji the tribute paid could be characterized as a Drain of resources! One also needs to reckon ,in a similar context, the oligarchy between the Secretary of State for India in London and British silver merchants who collided to keep out Bombay silver traders and banker like Chunilal Saraya from silver trade as needed for coinage in India. Similar instances of coercion, malpractices and misappropriation abound in the history of British domination in Colonial India.

Parallel to the drain of resources which consisted of the unpaid transfers of revenue from colonial India, there ran a parallel drain from India, which was the flow of indentured labour. Those were shipped to the British owned plantation islands in Mauritius, Demerera ( now Guyana) and Jamaica , to work in sub-human conditions , and to fulfil the commercial interests of the British elite owning such estates. The flow was much needed in the plantations as slavery was banned all over the British Empire by an Act passed in the British Parliament in 1938. Incidentally, the legislation, advanced by the slavery abolition lobby in England, was also motivated by their interest in achieving efficiency by having a ‘ free market’ of labour . However, the abotion of slavery, followed by other forms of deploying labour, was far from delivering a free labour market. As for planters, the easiest way to keep the former slaves attached to the estates was to have them as apprentices over a short period. It was virtually a forced scheme of four to six years for the former slaves above age six and a half , thus in effect a form of compensation to the planters. Moreover, the emancipated slaves were forced to provide 40½ hours a week of unpaid labor to their former masters over the six years of apprenticeship. The scheme ended by 1838, largely with reluctance of ex-slaves to continue as plantation workers .

By this time indenturing of labour from India started almost immediately with a fresh stream of involuntary workforce procured from there. Given the arduousness of the work and the sub subsistence wages the planters were ready to pay, it soon became apparent that it was only those who were too poor to pay their own passage to the islands would accept such employment . Thus the planters' targeted the denser populations of Asia which included those in the poverty and famine-stricken India. “Importation of East Indian Coolies", as pointed out by the Royal Commission of Labor ( 1892), “did much to rescue the sugar industry from bankruptcy”.

Details are available on the miserable state those workers faced in the distant islands, having been recruited with no knowledge of the destination or the terms of the make-believe contract. On reaching the workplace, their movements were under strict control with penalties including the whipping by cat-o-nine tails to inflict severe punishments. On the whole, the flow of the recruited Indians as above signified a parallel process of drain from the subcontinent, of people often ‘ignorant’ of the destination or the life waiting there.

Voyages to carry labour were organised ,among others, by the well connected Liverpool merchant, John Gladstone, familiar with the earlier slave trade. Owning estates in plantations and a shipping company he was responsible for initiating shipments of indentured labour from India by using the contact of Gillanders, Arbuthnot and Company in India with a request for the “… supply of 100 young, active, able-bodied” laborers on contract for his estates.” That he was powerful enough to stall a temporary ban on such shipping was evident with his success in persuading Robert Peel. British administration was very much supportive of the indenturing project which helped both investments on those estates by rich people in London City and the mercantile trade in processing raw sugar from there.

Power, based on proximity to ruling authorities, has been responsible for using race as a tool for subordination. This is evident in the continuing pattern of oppression, from the colonial era down to the current episodes of brutality in the most advanced regions . Refusal and disapprovals, on part of the current generation, to accept the past, will hopefully help to shape a future which conforms to humanity.

Racism, the election and more

After writing on Venezuela last week, Trump suggested that the US might intervene there. And then the predictable happened, violence and death ensued... in the US. I don't have much to say about what happened in Charlottesville. It is worth noting that even though the city and the University of Virginia are relatively progressive places these days, they do have a long history that ties them to slavery and white supremacy (see this on NPR; h/t URPE blog).*

At any rate, it's not surprise that Trump didn't condemn his base (and yes the racist voted for him; but as I noticed before 1964 those votes went mostly to Democrats). He certainly is more explicit than previous Republicans going beyond racist dog whistle  politics. I would insist that racism is not the main reason why he won the election, and that a left wing populist right have won.

The topic is still relevant (even in the middle of the violence and crazy confrontation with North Korea; btw, this is a must read for those interested on the history of US-Korea relations), since the lessons of the defeat are important to preclude 8 years of this madness. So this piece in the NYTimes shows that Obama-Trump voters, meaning voted for Obama in 2012 and for Trump in 2016, are real.

As the authors says, echoing what I said here a while ago:

... the national vote doesn’t count, and Mrs. Clinton is not the president. She lost primarily because of the narrow but deep swing among white working-class voters who were overrepresented in decisive battleground states.

The interesting twist is that racism did play a role in the flip from Obama to Trump, at least more than I thought it did by looking at the Rust Belt alone. The piece says:

... racial resentment is the strongest predictor of the Obama-Trump vote in this survey data. White, working-class Obama voters with racially conservative views were very likely to flip to the Republicans.

Note that not all the 'rednecks' in the Rust Belt are racists though. There is an interesting piece on the redneck revolt here.

* It's also the home of the Virginia School, or the Public Choice School of Buchanan (briefly discussed here), that has been the subject of a new book that generated some controversy in economics circles. I'll have more to say about the book later, once I'm done reading it.