Fri, May 11, 2012 - Page 9 News List

The Friedmans’ world did not become reality

Milton and Rose Friedman’s case for small-government libertarianism would be hard to make today, because the world did not change — or stay the same — in the way that they thought it was going to

By J. Bradford DeLong

On my desk right now are reporter Timothy Noah’s new book, The Great Divergence: America’s Growing Inequality Crisis and What We Can Do about It, and Milton and Rose Friedman’s classic, Free to Choose: A Personal Statement. Considering them together, my overwhelming thought is that the Friedmans would find their task of justifying and advocating small-government libertarianism much harder today than they did in 1979.

Back then, the Friedmans made three powerful factual claims about how the world works — claims that seemed true or maybe true, or at least arguably true at the time, but that now seem to be pretty clearly false. Their case for small-government libertarianism rested largely on those claims and has now largely crumbled, because the world, it turned out, disagreed with them about how it works.

The first claim was that macroeconomic distress is caused by the government, not by the unstable private market, or, rather, that the form of macroeconomic regulation required to produce economic stability is straightforward and easily achieved.

The Friedmans almost always made the claim in its first form: They said that the government had “caused” the Great Depression. However, when you dug into their argument, it turned out that what they really meant was the second: Whenever private-market instability threatened to cause a depression, the government could avert it or produce a rapid recovery simply by purchasing enough bonds for cash to flood the economy with liquidity.

In other words, the strategic government intervention needed to ensure macroeconomic stability was not only straightforward, but also minimal: The authorities need only manage a steady rate of money-supply growth. The aggressive and comprehensive intervention that Keynesians claimed was needed to manage aggregate demand, and that Minskyites claimed was needed to manage financial risk, was entirely unwarranted.

Real libertarians never bought the Friedmans’ claim that they were advocating a free-market, “neutral” monetary regime: Ludwig von Mises famously called Milton Friedman and his monetarist followers a bunch of socialists. However, whatever its packaging, the belief that macroeconomic stability requires only minimal government intervention is simply wrong. In the US, Federal Reserve Chairman Ben Bernanke has executed the Friedmanite playbook flawlessly in the current downturn and it has not been enough to preserve or rapidly restore full employment.

The second claim was that externalities were relatively small, or at least that they were better dealt with through contract and tort law than through government regulation, because the disadvantages of government regulation outweighed the harm done by those externalities that the legal system could not properly address. Here, too, reality does not seem to have endorsed Free to Choose. In the US, this is most apparent in changing attitudes toward medical-malpractice lawsuits, with libertarians no longer viewing the court system as the preferred arena to deal with medical risk and error.

The third, and most important, claim is the subject of Noah’s The Great Divergence. In 1979, the Friedmans could confidently claim that, in the absence of government-mandated discrimination (for example, the South’s segregationist Jim Crow laws), the market economy would produce a sufficiently egalitarian distribution of income. After all, it had appeared to do so — at least for those who did not suffer from legal discrimination or its legacies — for the entire post-World War II era.

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