I do not see that you have an argument disproving Friedman but rather one of applying your ideas to make your own case with Friedman simply a backdrop. 

It would be so much more enlightening if you would just state your own argument, and why you could dismiss the corruption factor(s++) as insignificant.

El problema ahora es ya no la produccion impresionante... las loas  a la produccion en tanto se tenia una vision de "progreso por acumulacion" y de intervencion para apalancar la capacidad tecnologica de una produccion que se avisioraba infinita y por lo mismo super atenta a las necesidades humanas... en ese momento se trataba de no mas de 4'000.000.000 de personas.

Hoy sabemos como producir muy eficientemente pero no pdemos mantener una produccion para 7'000.000.000 de personas... se debe poder ser capaz de racionalizar la produccion, no se puede seguir viviendo en un mundo en el que parecia que habia espacio de sobra y recursos no infinitos pero si suficientes, es decir se debe integrar la capacidad de produccion  con el manejo de los estados y los ciudadanos.

It is a very nive historical overview of the contributions and controversies Mr. Friedman has left behind.

But possibly the most important fact of the article is that he made his contributions 20-30 years ago, when free market economy was the best option for humanity.

Unfortunately today we do not take into account that evolution does not stop. The system, network of humanity has changed, and while previously as a loose system, with open unexploited markets, available cheap or almost free workforce, abundant natural resources and hungry strong buying potential it was perfect for the profit hungry, no constraint, free market economy, suddenly the same approach has become destructive.

The general public taking to the streets world wide already feels it and it will not take long until the continuing tremendous losses through stock market and industry and market closures will force even the political and financial elite to start thinking how we need to change.

Today in a global, completely interconnected and interdependent world and economy only a mutually responsible, continously cooperating economic system can survive based on equal distribution.

The world around has changed completely, we have to move on too.

@mholzman - No one is denying that corruption is a danger. BUT, CLEARLY, as Dani points out, ALL successful development stories have had significant government intervention - particularly in the initial stages. Its just facts that Korea, Japan and now China have had strong industrial policies to get where they are today. It's just blowing smoke to suggest otherwise. This doesn't mean that it works always and everywhere under any circumstances. But what it does suggest is that countries need to get a system where such industrial policies can be effective. You don't just leave it up to the market... you'll end up with an African despotic otherwise. To deny the central role of government in a matter as crucial as economic development is just evil - pure and simple. It matters that much. And libertarians who postulate that free and unfettered markets will always ensure the best results are living in a philosophical dreamland. It has terrible results on the world's poor when these philosophical musings are projected onto the real world. Friedman, Hayek, Rand.. these were simply monsters and enemies of poor and indigent.

Excellent article. Though there are more examples.

We don't even need to look to China to see how much we need the government. If we look at Europe it is clear that the societies who perform the better are the nordic societies and also France, Holland or Germany where the government is the key investor and taxes are high. Strong investment in education and infrastructures and a huge creator of jobs.

Compare it with the less spending governments in South Europe where taxes are lower but unequality is higher and there is not enough balancing from the public. Free market only helps the ones who are at the top of the pyramide.

And what about the US? Ths US employs millions in the public sector directly and indirectly trough the military industry. Without it unemployment would have been too high for decades. The government has always been there. The problem is that following liberralism it has served the interests of the richer 1% (banks and big corporations, like the military) more than any other interests. Now it's time to regulate again what has been deregulated and to tax more the rich and maybe not only the rich, to create an stronger government able to correct unequalities, spend in education, in other words able to correct the problems of neoliberalism.

I stopped reading when I read the word "investment" to describe government spending. The use of that word confirms that the writer is a statist.

Milton Friedman's ideas still are the torchlight towards economic prosperity. His main argument was that government should not be protectionist as then the innovation is lost, which i think is true and applies even now.

Friedman did not take into account that Wall Street and Fed would play revolving doors and precipitate the current situation into a credit bubble.

The long term effects of China's state run enterprises with artificially low prices is yet to be seen.

same old same old, what a tired thought line in this article.  Blaming the financial crisis on friedmanite free-market economics is like throwing a wrench in a running machine and blaming the machine for seizing up.  The crisis was a three legged stool--and the wrenches were introduced by government: extended low-interest rate environment created by the central bank (regulation), Mark-to-market rules implemented after Enron and Worldcom (regulation), and the Community Reinvestment Act that incentivised lenders to lend to people who had no business buying a house (regulation).  

Rodrik is an UTTER fool. Friedman never denied an appropriate role for government. And China would have been 20 times richer today (and poverty entirely eliminated) had it followed Friedman’s (or Adam Smith’s) advice. That a few of its poor in a sheltered market have risen above the poverty line is a poor consolation to the millions of others crushed by the same statist system. China would have become 20 times richer had it followed Taiwan. Let no more be said of the fools who pretend to be “economists” today. (Sanjeev Sabhlok)

Hey Sanjeev, look at Russia after the fall of communism. After adopting the entire sweep of free market reforms they were plunged straight back into the third world. Of course under communism Russia was second world. Friedman-style reforms didn't much help there did they? China new that adopting such rapid market reforms would end in disaster as in Russia. And other thing, Adam Smith is in no way like Milton Friedman. Modern Smith followers have taken one phrase out of The Wealth of Nations and completed ignored the entirety of his work, which includes a book called The Theory of Moral Sentiments.

Switzerland doe not produce cacao from which you make choclate. Was the wise industrial policy of the Swiss Goverment that allowed Switzerland to become a World leader in the production of Choclate?

The markets failed not because of a lack of goverment intervention, but because of goverment intervention. Had it not been for the US Govt. backing of Freddie and Fannie, nobody would have had the courage to do what they did in the sub-prime mortgage market. 

What markets need is not regulation, but a system where the playing field is always level for everybody. It needs policing so that the rules are the same for everybody. Goldman Sachs was allowed to ge away with hell, as well as all of those cds market makers. They got away not because of a lack of regulation, but because there was a total lack of vigilance.

You should not use your anectodal evidence to hide the big failings created by goverments, because what we do not need are baron-bureaucrats who only serve oligarchic powers - that's what you have now...

Thank you for saying it so well. The problem is not Friedman but the inherent toxicity of pure ideology. China transformed itself because it chose to treat ideology as a practical tool. Had they been welded to Sovietism, they would have shared Cuba's fate. 

I grew up in India. Although Americans feel more comfortable dealing with China and buy tons of stuff from them, India too turned itself around by being pragmatic. 

The American Right's hardened ideology and unwillingness to negotiate is the most unfortunate thing to hit mankind, because of America's massive role in the world. And we can't blame it on Friedmania. It's root cause is the rise of infantile personalities in the world of business and politics - which cause the adult to lose interest.

Overall a very good commentary.  With respect to a couple of comments about the article:

1. The big financial firms knew that they would receive an implicit government guarantee because of the treatment of Fannie and Freddie?  Tell that to Lehman Bros.  The reason that the Bigs knew they would probably be bailed out was because of their size and interconnectedness, not because they had wandered into the business of financing residential housing.  e.g. AIG didn't have a large mortgage securities portfolio, it has derivative bets linked to those securities.  In the end, it was bailed out because of its systemic role.  If you want to fix the problem and remove government guarantees, then you have to regulate size and/or create a sufficiently large resolution fund (insurance) akin to the FDIC in order to insure against failure.  These represent market interventions, but they are necessary interventions if you are going to let financial firms get so big that they become systemically dangerous in the event of failure.  The failure of the Investment Banks would have produced a huge swath of collateral damage effectively punishing people who had no role in the operation of these Banks and who received no financial benefit from these firms.  As it stands, there still is quite a bit of collateral damage, because that's always what happens when an economy becomes overly reliant on the growth of its financial sector (see Ireland, Iceland, Portugal, and Spain recently, and the not too distant past Japan, Sweden, and of course presently the U.S.)

2. Public spending can never be an "investment".  This is a ludicrous howler.  An investment is a return on capital in excess of that initial expenditure (at least colloquially).  Things like the GI Bill and the Interstate Highway system represent massive investments in the U.S. economy that provided huge financial benefits.  Also, for all the talk about the industrial policy of other countries, look no further than the U.S.  In terms of the areospace industry and the nascent computer industry, the federal government was a huge purchaser and supporter of the development of these industries in the 1940s, 50s, 60s and beyond.  Especially in the context of WWII, the U.S. made massive investments in factories and plants that would later be put into the service of private capital.  Contra these examples, we could look at the "anti-statist" paradises like the Ivory Coast or Somalia.  I can guarantee you that neither of those countries have developed industrial policies.  However, they do have extremely low rates of taxation and tax collection.  They don't "waste" money investing in public infrastructure (although China is starting to do this for them in many developing economies as a way of gaining access to local resources).

@vivekjacob

The role of Freddie and Fannie in subprime mortgages is greatly exaggerated. Please talk to a former loan agent at Countrywide, for example. He will tell you that over 60% of subprime loans were not conforming loans having FHA approval, and that loan managers wanted to avoid FHA-approved loans because of lower commissions and more paperwork. 

Secondly, the governmant had nothing to do with packaging bad loans into collateralized instruments that received an AAA rating and were further used to back CD swaps. Wall Street and other investment bankers handled all of that. It was their young PhDs with zero life experience whose math models priced CDS premiums at ludicrous values - predicated on the unchallenged assumption of perpetually rising house prices, even though they had risen 8 times as fast as personal income in the last decade. 

It is political posturing by the tea partiers to blame the government for the private sector's stupidity, irresponsible policies and naked greed. It does not belong in this forum. There should be a sign in this bar: "Politicians Not Allowed".

@ sooku

a. Countrywide loan officers? Seriously? I don't think there are many people who are in jail who will admit that they are guilty. I think it is wrong to not prtesent empirical evidence, but simply resort to anectodal evidence from people who have no credibility in my eyes. 

b. The goverment has nothing to do with it? The goverment has a lot to do with it. They did not control anything. They failed in thier most importnat role - that of policing the system. 

Politicians should be barred? Yes! Beginning with the frands of Barney Frank.

@ sooku

You do not address the core of the debate.

"(...)Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance"

Friedman have always said that government should invest in infrastructure and externalities (the third parties problem). 
The most basic mistake regarding Friedman's ideas is to think he does not place any role for the government (or just the role of enforcing property rights and contracts).
It surprises me that a Harvard professor like Dani Rodrik could write something like that. That's one of the most parochial views of Friedman's work I've seen lately.

As far as empirical evidence associated with subprime goes, here's a good place to start:

http://research.stlouisfed.org/publications/review/06/01/ChomPennCross.pdf

sooku, gets this right.  Why would originators put such a heavy emphasis on moving borrowers into subprime?  Fees were a huge part of the equation.  All of the big players were chasing short-term profits in a system that they helped to build.

As far as the government role goes, yes, definitely the government played a role in creating the environment for the housing bubble.  But many of the changes in laws were a direct consequence of lobbying by the financial sector.  The government is a second-level actor in this process.  Financial services lobbyists are the primary driver of these changes with an assist from voter ignorance/indifference/lack of accountability for politicians who indulged the worst of the financial service sectors excess.  At a fundamental level if a person believes that regulators should work in the public interest, you have to look at the incentive structure that is in place.  In a system where regulators are grossly underpaid relative to their private sector counterparts, we encourage a revolving door between the public and private sector.  In terms of the politics, if a person believes that policy should be determined by the highest bids from the private sector, you get what we got (and what we have).  It is hard to see how any lasting change will be achieved without tackling the issue of how we finance our political campaigns.

Also, it is a mistaken assumption to believe that the principals of the big companies actually cared about the long-term well-being of their companies.  For people like Hank Greenberg and Angelo Mozillo, they were able to effectively loot a substantial amount of money out of their companies long before their companies encountered serious difficulties.  Hank Paulson was able to cash out $500 million in GS equity tax free when he took the Treasury job.  He might have felt an obligation to bailout the friends that he'd left behind, but in terms of the decision making, he'd already made his money.

Barney Frank is a favorite punching bag on the right, which is a little ironic.  Compared to other politicians who rigged rules and walked through the revolving door as lobbyists or as members of Board of Directors on large Financial Firms -- like Sen. Phil Gramm with his move to UBS -- Frank comes out smelling like roses.  Frank has not made millions in his time in Washington.  The Democratic Party as a whole has an issue in this area, but you can still find members who are willing to say no to the financial services lobby.  In the GOP, not so much these days.  That's a big part of the problem.  In 2010 when the GOP was uniformly opposing any attempts to re-regulate the financial sector, it was also receiving huge sums of money from the financial services lobby (both through campaigns and through 3rd party groups).  The message that the 2010 election sent to Washington and Wall Street was: We want to return the industry back to its practice in the middle part of this most recent decade.  Since getting into office, the GOP has uniformly attempted to undercut the already weak 2010 FinReg law.  If voters want representatives who are more responsive to the public interest than the financial services lobby, it's probably a good idea to vote out the ones who are the yes-man, while saying yes, to more aggressive regulators of the industry.  The 2010 election sent the exact opposite message.

@vivekjacob

Please see JPRVS' post for a discussion of the government's role. For better or worse, I have decided to not respond to your mocking tone, or to provide you with additional facts because your mind is already made up. Have a nice day :) 

Have you ever used a Chinese made pencil? No good: They break; the lead doesn't sharpen evenly with the splintery wood; the erasers go dry within days. (They suck, actually.) I recommend Papermate's Mirado classic 100% cedar pencils featuring the Pink Pearl eraser... Made in the USA.

Important is a converse relationsip between literacy levels and rate of liberalisation. The African experience has been rather disappointing due to failure by the IMF and WB to foresee structured inequalities brought about by the malleability of the proletariat by the quasi bourgeoises! there is also an interesting dilema when the State through patronage fails to secure property rights. In Africa, the elite manipulates the masses in choice and call it democracy!

Professor Friedman would argue that if the Chinese want to subsidize the production of penicls, and produce below the marginal cost of production, then we as consumers benefit at their cost. What's your problem with that?

@ sooku - my sincere appologies if you took offence, I was only trying to be tongue in cheek. sorry.

@ ah1734 - well said!!!

Haa haa, you can cite "good" government like Singapore also if you like. But there are a lot more "bad" government in this world!!

How often do we get good government? What are the odds? But we know that we spend our money better than others spending our money, right?

Be clear, Milton prefered small government, not no government.

Please consider these:

1) Is China better with more or less government?

2) Would China be even better with smaller government?

3) A priori, would expect a large government to be as good as China's or Singapore's? That is, given a choice, ex ante, would you prefer big or small government?

4) Wouldn't you agree that today's mess is largely due to Frannie and Freddie and the Fed blowing the bubbles? Aren't these guys part of government?

Quah, Chee Heong

@cheeheongquah well put.

To commit the mortal sin of thinking for myself, I think that the dichotomy between government and private sector enterprises is false, divisive and misleading. Both are forms of human organization that are capable of achieving goals, and both can even work together to accomplish unprecedented feats such as landing a man on the Moon or inventing an error-proof global communication system that can work during a nuclear war (the Internet). They can also wreck the economy if they work at cross-purposes: e.g. banks taking advantage of deregulation to speculate with the public's money.

Decisions driven solely by the highest profit margin benefit consumers according to their ability to pay. Those who lack sufficient resources are simply frozen out. That was fine in Adam Smith's surroundings, but not in a society founded upon egalitarian principles. Since serving marginal-income consumers is not profitable, the government has to serve them directly, or ensure that they have a minimum level of resources.

Secondly, the history of for-profit enterprises in Europe and America is full of runaway speculative binges that end in disaster, and in monopolization to the detriment of consumers. The government is the only agency with sufficient authority to impose principles of organization that prevent such destructive activities. The state also has an obvious role in law enforcement, defense, long-term planning and research. 

The fact that conomists refuse a common-sense approach in favor of warring camps that follow divergent fundamentalist gurus can only mean one thing - that economics is not a science; it is more like astrology: with random hits and many misses. That is why you have things like Greenspan fiddling like Nero while the mortgage industry burned like Rome -- and yet economists come out of the woodwork defending Friedman! Compare that with the Challenger disaster: Feynman demonstrated that brittle O-rings caused it, and no one cited Aristotle or Beethoven (!) to prove him wrong.

As an engineer-physicist, I cannot consider economics a science at all..

"But Friedman also produced a less felicitous legacy." Is this, Mr. Rodrick, the most timid form of Free Market apologetics? This whole essay reeks of a cultivated  bourgoise respectability, in which the corporate hetaera Milton Friedman is praised, but not too well, as we sit amid the ruin of the world economy, circa 2011. A direct result of the Free Market Delusion, i.e. the Financial Reform of 1999. One wonders at the cultivated political naivete that went in to the production of such an act of intellectual timidity and bad faith.

"Undoubtedly, most of the credit belongs to the initiative and hard work Chinese entrepreneurs and laborers." China is a slave labor camp, to not know that is an exercise in self-willed blindness or simply another act of your reliable bad faith.

The rise of Mr. Friedman on Public Television was a direct result of Right Wing pressure exerted on that entity to 'broaden the political character' of the most liberal of the 'Liberal Media'. One might ask, pointedly: Where were you?   

@StephenKMackSD

I know exactly how you feel .. why can't people see the obvious? Christian fundamentalists in America insist on wrecking everything. When they attack evolution, global warming, racial equality and gender rights, it affects only some people. But when they attack common-sense financial prudence and sabotage any serious attempt to pay off the national debt, potentially the entire world is at risk. They are no less dangerous than any terrorist.

It is a fact that state distort economic reality and take good money transforming it in bad money.

We can see it everyday. that is about economic intervention.

But at the level of politics, regulation and so on  it is even worst. Because regulations are statics and reality is dynamic, so creating more harm than good...

why is nowaday china always used as a case to show the success of government intervention? Even if China makes all pens for the world, it doesn't mean prosperity and well-being. China is very likely to be in a more prosperous state without all the terrible policy mistakes and misery during 30 years before 1978.

why is nowaday china always used as a case to show the success of government intervention? Even if China makes all pens for the world, it doesn't mean prosperity and well-being. China is very likely to be in a more prosperous state without all the terrible policy mistakes and misery during 30 years before 1978.

Now that the global economy has stopped working and is near collapse, most analysts are repeating the same refrain, one that is growing tired by the the second. The challenge is not to once again repeat what is wrong with the system but rather is how to enable the creation of wealth and growth while fairly distributing the dividens. I can hardly imagine anyone in the world now fighting the battle for mad markets but i find few willing to offer a new model.

I am glad that Mr. Rodrik can find one example of an industry that took off because of significant subsidies and government backing.  That example has happened hundreds of times across many countries and industries. 

What he doesn't mention is the limits and problems of government funded industries.  It appears that we quickly forgot all the major benefits that Western economies reaped from privatization of state-owned enterprises that had become too bloated and too expensive to taxpayers.  Deregulation of airlines has resulted in price competition that has caused the cost of a flight to plummet, benefiting customers and taxpayers.

There really are no true 'free market' economies because government is always involved in business, especially big business.  Mr. Rodrik is correct to point out that most of the great economies are mixed economies, but the degree of government influence in industry may be different at different stages of economic growth and also across cultures and other factors.  Friedman took such an extreme position because he wanted to move the thinking about economics, and it worked. 

It's always the same story: first, great minds like Adam Smith or Milton Friedman correctly explain intricate workings of economy. Then, recession happens (normal thing in a capitalism) or some crisis largely called by government intervention, like 2008 real estate / financial crisis. 
Then, third rate minds come out of woodwork thinking that recen trouble somehow undermine basic principles of economics or uncover some systemic and profound crisis of capitalism, and that governments somehow can do better. They write superficial articles like Rodrick or many emotional maniacs commenting below and denouncing economics and economy they do not actually understand. 
This happened in 1920s and 1930s, then with Keynes after WWII, and again now. 
No, new govt regulation will not be better than in the past, and it will fail as usual, and Friedman, Hayek and neoclassical economists will be proven correct again. Nothing new here.
In short: there is nothing new about recent crisis, short term like financial bubble in real estate - caused mainly bc of bad government regulation limiting individual's losses to mortgaged house, so millions of individuals in USA rationally speculated, Wall Street being merely an intermediary. The same bubble did not happen in Australia for instance due to more stringent lending practices and lack of bad regulation of this "stop loss" type there, like an irritated Australian economist pointed out to intellectualoids blathering about systemic crisis of capitalism.
Yes, actually working rule of law helps markets to operate, prof. Rodrik. Duh. Like that was ever denied. What a novel and profound insight, denying Milton Friedman somehow, notwithstanding that Friedman himself was heard frequently saying that. It's pretty obvious why: when bandits and extortionists ruin businesses and customers, it's irrational to invest, and when courts are corrupt or poorly managed or slow and incompetent (much more frequent problem than actual corruption), then you can't invest well either because some factor from building regulation to tariffs or subsidies to competitors will ruin your business again.
What's obvious is that interventionists and statists and those who hate capitalism are not writing in support of basic framework of laws. Other than that framework, the state cannot help - which is what frustrates enemies of free market and time and again they make the same tried & failed argument. 
No, intervention of the state will not work better now than it worked in the past. It's going to be a dismal failure. Clerks don't learn, bureaucrats don't learn, and more importantly, they have the same incentives as ever, and are in the very same position that Milton Friedman pointed out: benefitting third party (other than themselves) with money coming from another third party (taxpayers). So it's not going to work well to any extent. As usual. 
No, it was not state intervention that helped Japan and South Korea and China now. It was somewhat improved rule of law and political permission for investment and capitalist production. Correlation is not causation: those were basic conditions for investment (crime, property rights protection, political stability) that helped, not interventionism. Intervention correlated, not caused.
Intervention sucks: yes, China may create subsidized industries for some time. With subsidies, it's not difficult. Except a small problem: it's a systematic loss of capital and money for the country. Sure, subsidized companies and workers are happy. And country becomes poorer, not wealthier. Investment in China would have happened without state intervention anyway. And state owned companies are terrible at investment and productivity and innovation. Example: greatly touted fast rail in China is unused bc it's too expensive, and it's been engineered poorly, so now cracks appear in its concrete foundations. Politicians are happy, though. Everyone else - not so much. Exhibit 2: I bought some very cheap batteries made in China, largely bc I was curious why they were so cheap: they turned out to be atrociously bad. Probably a product of some subsidized or state owned enterprise. Exhibit 3: powerplant and railroads in China fight tooth and nail to preven coal washing in China, even though it would improve efficiency of electricity production and greatly diminished environment pollution. Why? No profit motive: they are state owned and therefore want as much coal to be burned as possible, not as little as possible! Exhibit 4: dismal failure of French govt to create alternative "Silicon Valley" as well as other govts trying to do the same. Exhibit 5: A380, a horrible waste of money and a threat to future of Airbus. Exhibit 5, America: Solyndra, crony capitalism, expensive and not very innovative technology and failed state intervention, caused in part by exhibit 6: Chinese subsidies to poor solar panels (about to expire when Chinese real estate bubble bursts, which will be soon). Exhibit 7, Japanese MITI: tried to prevent Sony from acquiring rights to use transistors, recommended to Japanese automakers to focus on Asia insted of US auto market (automakers fortunately for them did not listen), told NEC to forget digital electronics (NEC listened and as result Japan has lost and never recovered lead in telecommunications electronics over European and American companies), .... And so on, and on, and on. All of those are happily ignored by ignoramuses of the kind of prof. Rodrik, and then you advertise the same failed solution again. Soviet socialism, err, industrial policy, lives forever.
In time, all the new advertised state interventions and policies will fail horribly, after which Rodrik and his ilk will go back into woodwork again for some time. Nihil novi.
A much better treatment of current popularity of trade policies has been recently published in The Economist:
http://www.economist.com/node/16741043
They give some recomendations for how state policies might work, but I think that hell will freeze over before governments understand, let alone apply successfully those recommendations. Reasons are simple: people going into government jobs do not have good understanding of economy and business, otherwise they would have gone into business in first place, and more importantly, it all runs on politics, which pretty much makes it impossible for those interventions to be sane, sophisticated and well managed. They will run like Japan's  Fiscal Investment and Loan Program, which was supposed to be lending to busineses and instead became a piggy bank for corrupt Japanese politicians.
Soon it will be back to the most dismal, neoclassical, neoliberal economics again. Marx was right, about his theories and about state intervention: history repeats itself first as tragedy (Soviet state, Indian state socialism, all the nationalizing hellholes of Latin America borrowing money and pursuing big state projects), then as farce: Occupy Wallstreet, rise of trade and industrial policies. 
Reality? Much different. 
First, demographics. Banking is old people with money lending to young people with ideas and families. The world is awash in savings of older people, and not enough reasonable investment is found for those. Second, success disaster: development of new technologies leave people with obsolete skills and poor companies behind. No different from 19th century Industrial Revolution leaving behind those who were unable to adapt.
David Goldman, aka Spengler at Asia Times, is much better at explaining recent phenomenons than prof. Rodrik:

http://www.atimes.com/atimes/Global_Economy/MG15Dj01.html

http://www.atimes.com/atimes/Global_Economy/MH16Dj01.html

http://www.atimes.com/atimes/Global_Economy/MH23Dj04.html

http://www.atimes.com/atimes/Middle_East/MI20Ak01.html

There is no crisis of traditional economics: just repeat of some old stories which we have already forgotten. And no, no state policies will bail us out of consequences.





Libertarians and conservatives do not need to worry about repealing or abolishing free market and minimal state: "all" that will happen will be another repeat of 20th century story of wasting horrible amounts of money and some time.

It's always the same story: first, great minds like Adam Smith or Milton Friedman correctly explain intricate workings of economy. Then, recession happens (normal thing in a capitalism) or some crisis largely called by government intervention, like 2008 real estate / financial crisis. 

Then, third rate minds come out of woodwork thinking that recen trouble somehow undermine basic principles of economics or uncover some systemic and profound crisis of capitalism, and that governments somehow can do better. They write superficial articles like Rodrick or many emotional maniacs commenting below and denouncing economics and economy they do not actually understand. 

This happened in 1920s and 1930s, then with Keynes after WWII, and again now. 

No, new govt regulation will not be better than in the past, and it will fail as usual, and Friedman, Hayek and neoclassical economists will be proven correct again. Nothing new here.

In short: there is nothing new about recent crisis, short term like financial bubble in real estate - caused mainly bc of bad government regulation limiting individual's losses to mortgaged house, so millions of individuals in USA rationally speculated, Wall Street being merely an intermediary. The same bubble did not happen in Australia for instance due to more stringent lending practices and lack of bad regulation of this "stop loss" type there, like an irritated Australian economist pointed out to intellectualoids blathering about systemic crisis of capitalism.

Yes, actually working rule of law helps markets to operate, prof. Rodrik. Duh. Like that was ever denied. What a novel and profound insight, denying Milton Friedman somehow, notwithstanding that Friedman himself was heard frequently saying that. It's pretty obvious why: when bandits and extortionists ruin businesses and customers, it's irrational to invest, and when courts are corrupt or poorly managed or slow and incompetent (much more frequent problem than actual corruption), then you can't invest well either because some factor from building regulation to tariffs or subsidies to competitors will ruin your business again.

What's obvious is that interventionists and statists and those who hate capitalism are not writing in support of basic framework of laws. Other than that framework, the state cannot help - which is what frustrates enemies of free market and time and again they make the same tried & failed argument. 

No, intervention of the state will not work better now than it worked in the past. It's going to be a dismal failure. Clerks don't learn, bureaucrats don't learn, and more importantly, they have the same incentives as ever, and are in the very same position that Milton Friedman pointed out: benefitting third party (other than themselves) with money coming from another third party (taxpayers). So it's not going to work well to any extent. As usual. 
No, it was not state intervention that helped Japan and South Korea and China now. It was somewhat improved rule of law and political permission for investment and capitalist production. Correlation is not causation: those were basic conditions for investment (crime, property rights protection, political stability) that helped, not interventionism. Intervention correlated, not caused.

Intervention sucks: yes, China may create subsidized industries for some time. With subsidies, it's not difficult. Except a small problem: it's a systematic loss of capital and money for the country. Sure, subsidized companies and workers are happy. And country becomes poorer, not wealthier. Investment in China would have happened without state intervention anyway. And state owned companies are terrible at investment and productivity and innovation. Example: greatly touted fast rail in China is unused bc it's too expensive, and it's been engineered poorly, so now cracks appear in its concrete foundations. Politicians are happy, though. Everyone else - not so much. Exhibit 2: I bought some very cheap batteries made in China, largely bc I was curious why they were so cheap: they turned out to be atrociously bad. Probably a product of some subsidized or state owned enterprise. Exhibit 3: powerplant and railroads in China fight tooth and nail to preven coal washing in China, even though it would improve efficiency of electricity production and greatly diminished environment pollution. Why? No profit motive: they are state owned and therefore want as much coal to be burned as possible, not as little as possible! Exhibit 4: dismal failure of French govt to create alternative "Silicon Valley" as well as other govts trying to do the same. Exhibit 5: A380, a horrible waste of money and a threat to future of Airbus. Exhibit 5, America: Solyndra, crony capitalism, expensive and not very innovative technology and failed state intervention, caused in part by exhibit 6: Chinese subsidies to poor solar panels (about to expire when Chinese real estate bubble bursts, which will be soon). Exhibit 7, Japanese MITI: tried to prevent Sony from acquiring rights to use transistors, recommended to Japanese automakers to focus on Asia insted of US auto market (automakers fortunately for them did not listen), told NEC to forget digital electronics (NEC listened and as result Japan has lost and never recovered lead in telecommunications electronics over European and American companies), .... And so on, and on, and on. All of those are happily ignored by ignoramuses of the kind of prof. Rodrik, and then you advertise the same failed solution again. Soviet socialism, err, industrial policy, lives forever.

In time, all the new advertised state interventions and policies will fail horribly, after which Rodrik and his ilk will go back into woodwork again for some time. Nihil novi.

A much better treatment of current popularity of trade policies has been recently published in The Economist:

http://www.economist.com/node/16741043

They give some recomendations for how state policies might work, but I think that hell will freeze over before governments understand, let alone apply successfully those recommendations. Reasons are simple: people going into government jobs do not have good understanding of economy and business, otherwise they would have gone into business in first place, and more importantly, it all runs on politics, which pretty much makes it impossible for those interventions to be sane, sophisticated and well managed. They will run like Japan's  Fiscal Investment and Loan Program, which was supposed to be lending to busineses and instead became a piggy bank for corrupt Japanese politicians.

Soon it will be back to the most dismal, neoclassical, neoliberal economics again. Marx was right, about his theories and about state intervention: history repeats itself first as tragedy (Soviet state, Indian state socialism, all the nationalizing hellholes of Latin America borrowing money and pursuing big state projects), then as farce: Occupy Wallstreet, rise of trade and industrial policies. 

Reality? Much different. 

First, demographics. Banking is old people with money lending to young people with ideas and families. The world is awash in savings of older people, and not enough reasonable investment is found for those. Second, success disaster: development of new technologies leave people with obsolete skills and poor companies behind. No different from 19th century Industrial Revolution leaving behind those who were unable to adapt.
David Goldman, aka Spengler at Asia Times, is much better at explaining recent phenomenons than prof. Rodrik:

http://www.atimes.com/atimes/Global_Economy/MG15Dj01.html

http://www.atimes.com/atimes/Global_Economy/MH16Dj01.html

http://www.atimes.com/atimes/Global_Economy/MH23Dj04.html

http://www.atimes.com/atimes/Middle_East/MI20Ak01.html

There is no crisis of traditional economics: just repeat of some old stories which we have already forgotten. And no, no state policies will bail us out of consequences.

Libertarians and conservatives do not need to worry about repealing or abolishing free market and minimal state: "all" that will happen will be another repeat of 20th century story of wasting horrible amounts of money and some time.

euroquisling,

Thank you for sharing your opinions with we poor mortals who are basking in the afterglow of the collapse of the world economy of 2008. One can simply accept your basterdized Social Darwanism with a heavy garnish of provacative counterargument, with the good grace of intellectual inferiors as we peer up at the exaulted presence of one who has the answers. We can take comfort in the reality, as presented by you, of Adam Smith of The Wealth of Nations but shorn of the unnessary baggage of The Theory of Moral Sentiments and his great holistic project of The Science of Man. As for the greatness of Mr. Friedman,one need only look at his involvement with the Pinochet Junta, via The Chicago Boys, as exemplary of his utter lack of any semblance of ethical presence of mind: after all Economics is a part of Ethics, or is that a matter of your highly cultivated intellectual selectivity, not to speak of your apologetics for the documented malfesiance of The Free Market?    

1. Re Social Darwinism: first, apply your slurs to yourself. I have not advocated social darwinism, merely stated the facts about false arguments of Rodrik and his ilk; and no, unlike in the world of simpletons like you, reporting dismal facts does not necessarily require advocating them - which you mistakenly attribute to me.

2. Political Darwinism: when horrible government policies, like those Keynesian, statist and money wasting policies that nearly drowned Third World in debts, statists take a hike and disappear in the woods. And then then turn around and have the gall of accusing free marketeers of "social darwinism". How about actual, real social darwinism of Great Leap? The first wonderful industrial policy of the state?

Claim THAT as responsibility of your fellow travellers. How about it?

3. Pinochet and economics: well, human incentives work the same everywhere, no? And ater all, it was Pinochet, not Friedman, that has done the coup - or more correctly, prevented communist coup.

Regardless of who had power in Chile ultimately, Allende has left huge hyperinflation after him. Pinochet might have been a social democrat or a bunny rabbit, but Chile would still have this huge problem left.

4. The problem of Pinochet is not that he was unfair - he was not only justified, but REQUIRED to do what he did - but that leftist-infested world press has given him a bad name, while at the time whitewashing crimes like those of Fidel Castro or sandinistas in Nicaragua.

The problem with Pinochet is not that he shot some communists, but that he did not shoot enough of them; and instead of being open and proud about preventing Soviet-style and even Soviet-propped rule in his country by shooting communists, he apologized. Big mistake.

And no, it wasn't wonderful englightened socially just rule of Allende that triggered the coup. It was Soviet illegal transport of weapons to Allende paramilitary squads that triggered the decision. 

Instead of shooting mere 30,000 communists, Pinochet should have shot all of them and financed anticommunist guerillas across South America AND advertise the fact. Instead of apologizing for executing Spanish communist terrorists that aimed to demolish rule of law and democracy in Chile for purpose of establishing Soviet system, he should have demanded extraditing their supporters from Spain and other countries. And then he should have executed them.

Here's a text I wrote elsewhere summarizing Allende:

The story of Salvador Allende, to be repeated by his noble, socially-just followers:

1. Take over power by promising free goodies to everyone.

2. Spend like crazy using any money you can get your hands on: taxes, foreign currency reserves, bond sales, money borrowed abroad. While at it, screw the farming up and import food to make up for shortfalls, paying for imports with money borrowed or with limited foreign currency reserves accumulated by previous governments. The reserves are melting like a block of ice in hot sun, and the food that was supposed to come in from collective-run socially just farms that everyone surely just loves to work on somehow is not coming in. Strange. Must be the last vestiges of capitalist class consciousness. Since those will soon be eradicated, we just need to boldly press on. Money's no matter, soon we will be happy without it anyway.

Give another speech to workers how socialism has been scientifically proven, and how them being rational should immediately fulfill their work quotas. Expect them to follow the speech, since after all they understood what was communicated to them. When they do not fulfill their work quotas, blame CIA.

Publish the last minute news on origin of food shortages: CIA is dropping pests from airplanes onto the fields. That does it, America!

3. For the 1st year, enjoy effects of Keynesian-style spending showing up in GDP statistics. Gaa, how pleasant. Orgasm!

4. 2nd year: Resources that you taxed, begged, borrowed and stolen run out and there is nothing more to spend and production is diving. The workers would surely produce lots of free goodies by themselves since inside their minds they are actually good, warm, fuzzy progressives and collectivists and they would work like bees if only they were given the chance and were not stopped by the evil capitalists (and CIA)! Just a little bit effort more! Give them more chances! Oh the glorious future!

But the shortfall in production is still here, so as a temporary measure print money like newspapers and then wonder why 140% hyperinflation kicked in. Must be the plot of capitalists.

Also, blame CIA.

5. As society is massively breaking down and economy turning belly up, pretend it is not the case. Pretend that 100% of society supports you because you have sent out a few free medical buses. Well, a 100% of society supports you minus a handful of evil capitalists, that is. Pretend that it's not half the population of capital city that is out on strike against you, but only a decrepit icecream machine owner that happens to be a sexual pervert plus CIA agent that paid him with zoophiliac photos.

Naturally, blame CIA.

6. Squash the revolt of society, from truckers to dentists to engineers to students to family farm owners. Blame strikes on CIA. When nationalizing trucks of individual owners, blame them for being CIA stooges when they do not want to give their trucks away. Again, change subject away from nationalization to claim that their strike has been financed by CIA. Protect paramilitary squads taking over and robbing farms from legal consequences. Block execution of court orders. Fix prices below market levels, leading to shortages. Blame the shortages on speculators and sabotage (paid for by CIA). Also, blame the capitalists in USA for not subsidizing your glorious revolution. Blame CIA again on general principle of being nasty.

7. Pretend that the last working organization in the society, i.e. military, is conspiracy of neoliberals, even though its leader has been known to actually be completely agnostic when it comes to economic matters, theory or its application and has picked economic advisors by calling an American university selected in alphabetical order from the phone book (well they do know a thing or two about economy in USA, eh? Get me some geek. A.. B.. C.. Chicago.). Import illegally weapons for fellow paramilitaries, thus triggering military coup when military captures such a transport.

8. Shoot yourself in the head using Kalashnikov gifted to you by fellow believer from nearby island having the world's most advanced economy which produces only sugar cane.

9. Go to hell.

10. While in hell, write infinite number of times: "I am an idiot. I am an idiot. I am an idiot..."

11. When Belzebub has a coffee break, blame CIA.

euroquisling,

Thank you for your gracious reply. It only makes evident your Social Darwinist world view and the ersatz economics that issue from that thought array.

Thank you, StephenKMackSD, for proving you have reasoning and reading with comprehension ability of a turnip. You have completely failed to address any and all points I have raised and merely repeated your earlier baseless assertion like an automaton.

Third rate minds I say: like John K. Galbraith, always flashy, always out against "this awful narrowminded textbook conventional wisdom" and invariably proven wrong by experience. Textbook economics is textbook precisely because it is so often correct. Not always correct, there are still gray areas like business cycle. But anti-conventional wisdomers like Rodrik or Galbraith or you are time and again condemned by failures of your claims in real world to live on the fringes. Not that it deters you, of course.

euroquisling,

You are a Social Darwinist like Herbert Spencer and Milton Friedman because you exault the dog eat dog ethic, to put in its most vulgar terms, as the sine qua non of the human project, of human life.That in sum is your Economics with some convenient intellectual window dressing, as vapid as it stands. The Market or Free Market is a tool not an ethical system, but a modality of human action. It cannot supply the answers to all questions as posited by many false prophets. Economic life needs govenment regulation to spare the world of 1929 and 2008. We are living in the ruins of that Free Market and the mendacity and wholesale theivery of its practitioners. Friedman's legacy is that institutional theivery practiced under the guise of the Free Market, until the World Economy was bled dry. An impressive monument to his particular brand of the Dismal Science.

From the Land of the Turnips,

StephenKMackSD     

StephenKMackSD,

So darwinism is ok when its political, but not when its economic?  Self interest is ok as long as its not related to money or business?  

The concept of Free Market is indeed a tool OF an ethical system, that is the framework of individual responsibility and freedom of choice, together yielding "enlightened" self-interest which drives said tool.  While the Free Market does leverage some potentially attractive and useful traits of human character, it, like many other systems, fails to protect against each unattractive character present in some individuals.  However, the tool does contain in its purest form broad systemic protections against these failings, unless these safe-guards are gutted by unecessary and improper government regulation and intervention (i.e. incentives for sub-prime mortages purpetrated by congress in the CRA in the 90s and the subsequent bailouts provided as a CYA measure by crony politicians in 2008).  

Frankly, modern statists find it much more convenient to invoke Government Regulation as the tool of choice to solve the worlds ills, rather than to engage the deeper intellectual pursuit of improving the best economic tool ever created, the Free Market system.  For instance, at the root of each instance you mentioned, 1929 and 2008, lies the fractional reserve banking system.  Maybe we oughta delve into a constructive discussion of how we could revamp modern banking to eliminate the failings of the fractional reserve system.  (Or even engage on the ills of another form of Government Regulation that is the governmentally sanctioned Federal Reserve system).

Happy holidays.

jmitchell3,

Congatualtions on your bouquet of Randian and Friedmanite cliches. While one might just look at the Financial Reform of 1999 and the repeal of Glass-Steagall as the beginnig of the the Economic nightmare that we presently inhabit, for starters. The apotheosis of the Free Market Theology, because it is a belief system with its philosophcal root, such as it is, located in the vulgar Social Darwinism of the household gods of of the Friedman-Rand axis, and its addiction to words like 'statist' and 'freedom' fully located in the Orwellian definitional frame: make it almost impossible for we poor mortals to begin to understand the myriad complexities of Economic Theory and its ally Political Romanticism, but with the help of you and your economic gurus the new age should have dawned long ago. Quel surprise! The Age of Bandit Capital was the watershed of that Economic Reform and the the Lost Decade for the World Economy is in full swing. Congratulations on betting on the winner.

From the Land of the Turnips, Happy Holidays to you,

StephenKMackSD       

Well if they're cliche's from Rand or Friedman its good to know.  I've read precisely one book by Friedman, and not a single text by Rand.  Case in point, you view that removing regulation caused the problem, rather than the implementation of regulation such as the CRA from 77-99.  Go read this: http://en.wikipedia.org/wiki/Community_Reinvestment_Act This law basically incentivised lenders to lend to folks that couldn't afford the loans.  This, combined with low interest rates (set by the government i.e. the Fed) fed derivative creation to an unhealthy level.  Once the market for these derivatives began to deteriorate in 2007, the Mark-to-Market rules, created by Congress in response to the WorldCom and Enron failures, disallowed banks from writing down reasonable market values for their derivatives that could not be sold. Instead of recording on the books best-estimate values of these securities, banks wrote them off completely, which ended up de-capitalizing their reserves and causing massive failures.  These flawed mark-to-market rules were "modified" by FASB in April 2009 (http://reut.rs/lM0nrN), as urged by by Mr. Bernanke in March, 2009 (http://reut.rs/mAZZyD).  And a banking recovery ensued.  How's that for cliche?

And your belief in government and regulation isn't rooted in a belief system with a philosophical root?  Really?  So what's your definition of freedom?  Stalinist Russia?  Modern day Greece?  Communist China?  You don't own the word or its definition, nor will I allow you to redefine it or any other to fit your whims or viewpoints.  The words you've chosen to use in your posts have no common definition to serve as a starting point for an intelligent discussion; they are capitalised no doubt in a transparent attempt to add to them intellectual weight where none exists, and thus I gather that their definition and very creation are rooted in your own personal utopian worldview and are defined by you for your purposes and thus serve no practical function here.  However, if you would like to provide definitions for your terminology using commonly accepted english words, we can move forward a bit more.  For definitions of my own terminology, see the Cambridge English Dictionary: http://dictionary.cambridge.org

jmitchell3,

The Bloomberg Party Line. Government is the problem. Grover Norquist, Starve the Beast=solution. The March of Cliches is unending.

Good -bye

The post is written in very a good manner and it entails many useful information for me. I am happy to find your distinguished way of writing the post. Now you make it easy for me to understand and implement the concept. Thank you for the post.  chine production