"Tivo-ifies the web" Paul Kedrosky

Milton Friedman – the Bumbling Old Man That Killed the American Dream

The events of the last 6 months are more significant than 911 and will no doubt result in more suffering. They are partially a result of the ideas of the man whose choir performs the surreal song called ‘The Corporation’, in the first video. A more apt title might be American Requiem. Two other videos are more in depth pieces by Milton Friedman: on limited government and appearing on Icelandic State Television in 1984 (oh the irony).

The United States has recently had to nationalize the majority of mortgage lending and is in the process of nationalizing large sections of the banking industry which is now rated below Namibia. US treasuries are less credit worthy than the McDonalds hamburger chain’s, the stock market has had a worse week than during the crash that brought on the Great Depression, banks have completely stopped lending to other banks and ships are sitting in docks unable to sail without letters of credit. This cancer has spread, and with banks in many other countries being nationalized to avoid collapse, the IMF said today that we risk systemic global financial meltdown. And this is the sober world of finance.

The reason why this happened is not because of subprime mortgages, Collateralized Debt Obligations or Credit Default Swaps any more than the USSR fell apart because of Boris Spassky’s inferior chess strategy or a cunning plan by Ronald Reagan. Russia fell apart because of the increasingly powerful economic engine of the West and adherence to a flawed, extremist ideology.

The emergence of China’s economic leviathan is the root cause destabilizing effect that turns leveraged debt in the form of CDOs and CDSs into nation busters, but second component, the extremist ideology came from an unlikely source, a nice old man with patrician charm.

The nice old man was Milton Friedman, part of the Chicago School of economists who dreamed up monetarism, an extreme form of laisser-faire capitalist economics, not far removed from Social Darwinism. Economics is arguably not a science and I suspect that monetarism, when treated scientifically, reveals a scientific misunderstanding in its core premise, by thinking of the economy as a closed system rather than open one. I’ve outlined this hunch on my blog and I’d love if someone better qualified than me could someday prove it, however a formal proof of its fallacy is not required to identify its problems when adopted as ideology. Monetarism’s problems started when it morphed into a self-contradictory political ideology called Libertarianism which will be defined as the period from Reagan until Monday afternoon.

Political ideology is like diet, moderation and balance are good. You can’t have unregulated capitalism or people will make money out things like slave trading. Similarly you can’t have totalitarian socialism or you end up with everything run like the DMV, with unmotivated people doing things that people don’t want, slowly, and in drab environments.

On an ideological level, there is nothing consistently libertarian about flag waving Reaganite Republicans, or there wouldn’t be an American army or flag. There is also nothing intrinsically socialist about French left-bank intellectuals or there wouldn’t be any cafes or any music, after all, there is nothing more entrepreneurial than starting a band or opening a cafe. Both extremes are self contradictory, and the truth is somewhere in the middle, to paraphrase the architecture critic, Rayner Banham: politics is about creating a well tempered society.

Libertarianism is like Joseph Heller’s Catch 22, a form of political ideology where there is no polis, no society, to be political about. As with anything with a logical flaw, its adoption has ended up revealing that flaw. In this case, a Libertarian approach to capitalism, denying the existence of government, and therefore regulation, has ended up with the government owing much of the economy. This is a far, far worse outcome than if there had been well regulated capitalism in the first place.

business, FEBL

15 comments on “Milton Friedman – the Bumbling Old Man That Killed the American Dream

  1. Isn’t regulated economic policy what got us into this mess in the first place?
    Interest rate manipulation, note printing, legislative favors and loopholes, the creation of Fanny Mae and Freddie Mac, these are all democratically vetted actions of regulation. The U.S. is described as a “free market” economy by those who don’t know better or who are more concerned with ideas than reality. The centralized government involvement you seem to advocating for is what strikes me as the root cause of this mess. The solution then is to do what we have been doing but this time do it ‘well’?

  2. admin says:

    @ Justin. That seemingly educated people such as yourself can live through what has happened and still be in complete and total denial, means that libertarianism is being clung to out of belief rather than reason. In other words it has become a religion.

  3. Eric says:

    @admin: Where do you read on your economics? I’m always looking for better sources and I would like to know how you’ve linked the current financial situation with monetarism and China.

  4. Oliver says:

    @Eric. Paul Krugman and Joseph Stiglitz are a good start.

  5. admin says:

    @Eric In my very limited experience, its always been better to pick up a physics book.

    That being said, I have been recommended the following as economics reading that doesn’t ignore the current understanding of how systems work:

    Paul Omerod: Butterfly Economics

    Benhabib and Baumol: Chaos and Economics, the Journal of Economic Perspectives, 1989

    Arthur and Durlauf ed; “The Economy as an Evolving Complex System.”

    Evolving Institute Sciences Complexity Proceedings: http://www.amazon.com/Evolving-Institute-Sciences-Complexity-Proceedings/dp/0201156857

  6. Lloyd says:

    Before you write off “libertarianism” as the culprit in this mess, you should really try to educate yourself. Start here:


    What brought the world’s economy to the place it’s at now is not “an extreme form of laisser-faire capitalist economics,” but rather the Western iteration of the command economy. Libertarians have consistently ranted against fiat money, the fractional reserve system and the deliberate manipulation of “the economy” by the Fed.

    The other cause of the current woes is careless incompetence and outright fraud committed by people who knew — after the S&L and LTCM bailouts — that Uncle Sucker would rescue them. You call that capitalism. I call it crony socialism.

    If you think now that things will turn around with the governments in the US and elsewhere taking control of the banking system, you got another think coming.

    1. chuck says:

      The S&L's, the banks rivals, were set up to fail- post Nixon's forced resignation- and be eaten up by the big banks. They were not bailed out. They were taken over at pennies on the dollar by Chase, Citibank and the other big boys who run America.

      Sure it's crony capitialism, that's the only alternative to the New Deal, that was destroyed along with Nixon.

  7. Ben says:

    Dude, the link with China is totally spurious. The reason why the crisis has hit so hard and so deep is that it is a high level failure of our institutions. It’s internal affairs, the suspects are well known, and the crime is startlingly similar to the crimes that caused other bubbles and financial crises.

    I invoke Occams razor on your explanation. Even if you eliminate China, you have a vast morass of overleveraged banks searching for a bubble. You also have the fact that reckless investors and banks were able to find such a bubble right in the land of Apple Pie and Chevrolet. It will be to the eternal chagrin of the US that in the run up to the bubble it decided to go all Hud on the rest of the world, turn its back on international agreements and generally cause other countries to begin to question even its financial leadership. You don’t need any more than this to explain the current crisis.

    There’s really only one good reason to diagnose a cause for a problem: to help solve it. It’s true that everyone has gotten a little bit crazy with the acronyms recently, CDS, CDO, SIV, TARP, ABCPMMMF (I love that one!), and yes they are trying to confuse us, and yes Hank Paulson is extremely cozy with the Chinese (search for his recent Foreign Affairs article). But….but…the problem really did start here at home, and can be remedied with effective regulation that accurately targets the root cause: primarily overleveraging, excessive credit and overconfident risk managers.

    The analogy with the Soviets is good, but I’d put it like this: The Soviet system rotted from the inside, allowing the West to push it over fairly easily when the time came. We aren’t at 1989 yet, but the US is treading uncomfortably close to a future where it will share a similar fate, with Asia playing the role of vanquishing hero this time.

    1. chuck says:

      It sure looks like we are rotting from the inside to me.

  8. admin says:

    @Ben I’m not sure we are in disagreement, from your last paragraph.

    The US will do OK in the long run, if it nips ideological extremism such as libertarianism, in the bud. This should have been the only good thing to have come out of this fiasco, however, even from this comments thread, the prognosis does not look good. There are still people that will argue till they are blue in the face that this crash has nothing to do with attachment to peculiarly American (and to some extent British, through Thatcher) libertarian ideology.

    China is the big change to the global economy that fundamentally changed the eco-system. China’s growth was the dynamite, US debt the timer, and the sub-prime crash the fuse. China’s Treasury purchases (albeit smaller than Japan’s) mean that they will hurt themselves in the explosion, and look to better protect themselves in future.

  9. Brian says:

    I’m not sure which ideology you are claiming “Libertarians” espouse too, but “free market” Libertarians denounce the Chicago School, and generally follow the Austrian School of Economics (Menger, Mises, Hayek, Rothbard) You can read about it in Rothbard’s article (written in 1971) discussing the Chicago School and Milton Friedman’s views as being illogical and statist, here: http://www.lewrockwell.com/rothbard/rothbard43.html . You can find more of these such people at: http://www.mises.org
    The Austrian Business Cycle Theory, and Austrian Economists (e.g. Peter Schiff, Ron Paul) predicted the current economic collapse and the upcoming Depression complete with hyperinflation (Paul predicted it when Nixon took us off of Gold in 1971).

  10. admin says:

    @ Brian – you are absolutely right about Libertarians with a capital ‘L’ espousing the Austrian school over Chicago.

    The reason I was picking on Friedman was for historical reasons, having grown up at the beginning of this period under Thatcher and Reagan. Coverage in the UK press (where I no longer live) has dwelt on the subject of the death of monetarism and more generally, Thatcherism, the closest thing politically to libertarianism that has existed in Britain.

    With the direct nationalization of banks rather than Paulson’s sleight of hand, with debt being dressed up as equity, the end of this period is clearer there.

  11. Fix says:

    Care to read about Free Market Policy and Freedman’s Chicago school boys impact on the world? ‘The Shock Doctrine’ by Naomi Klein is the seminal study on this topic and our current situation.

  12. MonkeyMuffins says:

    Unfortunately, and tellingly, all of the ideologies and analyses comprising this thread are based on our cultural myth of infinite growth on a finite planet.

    Admin has it backwards, mainstream economics doesn’t assume a closed system but an open system. Modern economics believes in the myth of infinite substitution (when one resource becomes scarce or rendered too expensive, just “hot swap” with another one — we are soon going to learn how well this works with oil and water, to name but 2 peaking resources). Modern economics believes economies — and the number of human primates — can grow to infinity and beyond within a closed and limited biosphere. However, Admin is right in that this mythical, open system does exist in a theoretical closed system. Which is to say, mainstream economists’ open-system-theories exist in an alternate bubble of reality best exemplified by this laughably stupid quote:

    “The world can, in effect, get along without natural resources”
    - Robert Solow, Nobel Prize-winning US economist

    So much for the credibility of the Nobel Prize.

    On December 1st of this year, The New York Times’ DotEarth Blog — in a rare, fleeting moment of perceptive clarity — acknowledged the blatantly obvious:

    “Climate change is not the story of our time. Climate change is a subset of the story of our time, which is that we are coming of age on a finite planet and only just now recognizing that it is finite.” [tinyurl.com/5d3xzx]

    And, on December 16th, Peter G. Brown and Geoffrey Garver, authors of, Right Relationship: Building a Whole Earth Economy, expounded on this hidden-in-plain-sight reality [tinyurl.com/7j29l6]:

    “The ecological budget – on which all life, and consequently the human economy, depends – is already in dramatic deficit, and balancing it should be a high priority for nations around the world, even as the financial meltdown seizes headlines.

    “Why is this budget just as pressing as the fiscal budget? September 23, 2008, was Earth Overshoot Day [tinyurl.com/e9bbz]: when the human species used up what the Earth, fuelled by the sun, will make available in 2008 to provide for and clean up after us and the Earth’s millions of other species.

    “The period after that date represents the time in which the human population causes an ecological deficit, using up the Earth faster than it can regenerate. We have run this deficit since at least the 1980s, and every year Earth Overshoot Day comes earlier.

    “The story behind this moving date is one of a global environment that is rapidly losing its ability to support life: accelerating climate change, greater numbers of species and habitats in peril, fisheries in decline, the proliferation of ocean dead zones, declining fresh-water resources and more. Ecological overshoot is climate change on steroids. It is happening right now, and it is worse than we have imagined.”

    The problem is, of course, that there is no “we” as asserted by the Times. We do not realize that we live on a finite planet. It is this profound misunderstanding — coupled with healthy amounts of indifference, gluttony and greed — which essentially caused the current financial crisis (which is nothing compared to the coming “eco-crunch”: tinyurl.com/3ftjlu). Cornucopian mythology is in our blood. It is all around us morning to night, cradle to grave. It is an emergent property of our cultural way of being. To pierce the veil of this consensus trance is to fundamentally question who we are; a formidable, daunting and atypical discipline for any human being.

    We are not encouraged to understand (nurture), and we are not generally hardwired to fathom (nature), the detrimental and ecocidal consequences of our seemingly innocuous daily lives.

    Contrary to the wishful thinking of the Times (pun intended), we have precious little stomach for reality. Let alone the will or capacity to act on it.

    We live in a culture of make believe:

    “This country’s political and cultural institutions are not equipped to deal with this coming collapse, and there is very little chance that political organizing rooted in the necessary radical analysis, in the time available, can alter that to any significant degree. We are not prepared for the coming shift out of the current high-energy/high-technology phase, and nothing in recent institutional responses (or non-responses) to the clear signs of this suggests we will be prepared in time.”
    Robert Jensen, Real hope: Facing difficult truths about an uncertain future [tinyurl.com/7l6yhc]

    Additional Resources:

    (20 minute video and resource-rich website)
    [Yes, I know, her example of planned obsolescence is simplistic -- the CPU is not the only thing which changes: which is actually more proof, not less -- but the underlying concept and the overall example are 100 percent sound]

    The absurdity of endless economic growth

    Just what planet are economists on?

    An Overlooked Detail – Finite Resources Explain the Financial Crisis

    Postscript: When I was in high school, I was a devout Randroid. Then I grew up.

    And Admin is also right about the pseudo-scientific quality of economics. I think Hazel Henderson said it best:

    “The problem is, of course, that not only is economics bankrupt but it has always been nothing more than politics in disguise …economics is a form of brain damage.”

  13. psikeyhackr says:

    There have been 200,000,000+ cars in the United States since 1995. Americans took on a lot of debt to buy those cars and paid interest and insurance. But machines wear out and therefore they depreciate. But what do our economists say about all of that depreciation and how much was it?

    At $1,500 per car per year that is $300,000,000,000 per year. Our economists say nothing about it because they have DEFINED depreciation as applying to CAPITAL GOODS only. Cars purchased by consumers don’t qualify. This involves NDP, Net Domestic Product not GDP, Gross Domestic Product. Those consumer cars got added to GDP but never subtracted. And this happens in every country around the world.

    The laws of physics don’t care about economic systems or philosophies. But the machines all wear out regardless. Our economists are too dumb to figure out how physics applies to technological economies.


Comments are closed.