The End of the Age of Friedman

BERKELEY – Harvard professor Dani Rodrik – perhaps the finest political economist of my generation – recently reported on his blog that a colleague has been declaring the past three decades “the Age of Milton Friedman.” According to this view, the coming to power of Ronald Reagan, Margaret Thatcher, and Deng Xiaoping led to an enormous upward leap in human liberty and prosperity. I say yes – and no – to this proposition.

Friedman adhered throughout his life to five basic principles:

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1. Strongly anti-inflationary monetary policy.

2. A government that understood that it was the people’s agent and not a dispenser of favors and benefits.

3. A government that kept its nose out of people’s economic business.

4. A government that kept its nose out of people’s private lives.

5. An enthusiastic and optimistic belief in what free discussion and political democracy could do to convince peoples to adopt principles (1) through (4).

Measured against these principles, Reagan failed on (2) and (4) and adopted (1) only by default – Paul Volcker’s anti-inflation policy in the 1980’s dismayed many of Reagan’s close aides. Thatcher failed on (4). And Deng – while a vast improvement over his predecessors Lenin, Stalin, Khrushchev, and Mao – failed on all five, with the possible exception of (3). We do not know what Deng’s desired set of economic arrangements for a system of “socialism with Chinese characteristics” was, and, in all likelihood, he did not know, either.

But I say yes in part to the “Age of Friedman” proposition, because only Friedman’s set of principles self-confidently proposed both to explain the world and to tell us how to change it. Still, I would build up a counterbalancing set of principles, because I believe that Friedman’s principles do not, ultimately, deliver what they promise.

My principles would start from the observation that market economies and free and democratic societies are built atop a very old foundation of human sociability, communication, and interdependence. That foundation had a hard enough time functioning when human societies had 60 members – eight orders of magnitude less than our current global society’s six billion.

So my principles would then be developed from Karl Polanyi’s old observation that the logic of market exchange puts considerable pressure on that underlying foundation. The market for labor compels people to move to where they can earn the most, at the price of potentially creating strangers in strange lands. The market for consumer goods makes human status rankings the product of responsiveness to market forces rather than the result of social norms and views about justice.

This critique of the market is, of course, one-sided. After all, other arrangements for allocating labor appear to involve more domination and alienation than the labor market, which offers people opportunities, not constraints. Similarly, “social norms” and “views about distributive justice” usually turn out to favor whomever has the biggest spear or can convince others that obedience to the powerful is obedience to God. Market arrangements have a larger meritocratic component than the alternatives, and they encourage positive-sum entrepreneurship, making it easier to do well by doing good.

Nevertheless, the distribution of economic welfare produced by the market economy does not fit anyone’s conception of the just or the best. Rightly or wrongly, we have more confidence in the correctness and appropriateness of political decisions made by democratically-elected representatives than of decisions implicitly made as the unanticipated consequences of market processes. We also believe that government should play a powerful role in managing the market to avoid large depressions, redistributing income to produce higher social welfare, and preventing pointless industrial structuring produced by the fads and fashions that sweep the minds of financiers.

Indeed, there is a conservative argument for social-democratic principles. Post-WWII social democracy produced the wealthiest and most just societies the world has ever seen. You can complain that redistribution and industrial policy were economically inefficient, but not that they were unpopular. It seems a safe bet that the stable politics of the post-WWII era owe a great deal to the coexistence of rapidly growing, dynamic market economies and social democratic policies.

Friedman would respond that, given the state of the world in 1975, a move in the direction of his principles was a big improvement. When I think of Jimmy Carter’s energy policy, Arthur Scargill at the head of the British mineworkers’ union, and Mao’s Cultural Revolution, I have a hard time disagreeing with Friedman about the world in the mid-1970’s. But there I would draw the line: while movement in Friedman’s direction was by and large positive over the past generation, the gains to be had from further movement in that direction are far less certain.

Read more from our "Milton Friedman at 100" Focal Point.