Saturday, January 27, 2007

Krugman on Milton Friedman's free marketeering

[From The New York Review Of Books article, Who Was Milton Friedman?, by Paul Krugman.]

Consider first the macroeconomic performance of the US economy. We have data on the real income—that is, income adjusted for inflation—of American families from 1947 to 2005. During the first half of that fifty-eight-year stretch, from 1947 to 1976, Milton Friedman was a voice crying in the wilderness, his ideas ignored by policymakers. But the economy, for all the inefficiencies he decried, delivered dramatic improvements in the standard of living of most Americans: median real income more than doubled. By contrast, the period since 1976 has been one of increasing acceptance of Friedman's ideas; although there remained plenty of government intervention for him to complain about, there was no question that free-market policies became much more widespread. Yet gains in living standards hav been far less robust than they were during the previous period: median real income was only about 23 percent higher in 2005 than in 1976

Part of the reason the second postwar generation didn't do as well as the first was a slower overall rate of economic growth—a fact that may come as a surprise to those who assume that the trend toward free markets has yielded big economic dividends. But another important reason for the lag in most families' living standards was a spectacular increase in economic inequality: during the first postwar generation income growth was broadly spread across the population, but since the late 1970s median income, the income of the typical family, has risen only about a third as fast as average income, which includes the soaring incomes of a small minority at the top.

This raises an interesting point. Milton Friedman often assured audiences that no special institutions, like minimum wages and unions, were needed to ensure that workers would share in the benefits of economic growth. In 1976 he told Newsweek readers that tales of the evil done by the robber barons were pure myth:

"There is probably no other period in history, in this or any other country, in which the ordinary man had as large an increase in his standard of living as in the period between the Civil War and the First World War, when unrestrained individualism was most rugged."

(What about the remarkable thirty-year stretch after World War II, which encompassed much of Friedman's own career?) Yet in the decades that followed that pronouncement, as the minimum wage was allowed to fall behind inflation and unions largely disappeared as an important factor in the private sector, working Americans saw their fortunes lag behind growth in the economy as a whole. Was Friedman too sanguine about the generosity of the invisible hand?

To be fair, there are many factors affecting both economic growth and the distribution of income, so we can't blame Friedmanite policies for all disappointments. Still, given the common assumption that the turn toward free-market policies did great things for the US economy and the living standards of ordinary Americans, it's striking how little support one can find for that proposition in the data.

14 comments:

Mark Plus said...

The libertarian gripes in the 1950's and 1960's about the level of government regulation of the U.S. economy sound especially odd from hindsight, give the nostalgia for that era's rapid and widely shared economic growth. Jeez, what more did Friedman, Rand, von Mises et al. want out of life?

Regarding the wonders of the nearly laissez faire economy around the beginning of the 20th Century, I've noticed from reading about American labor history that the people who produced basic goods like coal and garments often went cold and nearly naked themselves because their own wages didn't go far enough to buy the coal or cheap clothes they created on the job. We seem to have returned towards a situation like that with the growth of the low-wage service economy, where Wal-Mart employees can't afford a lot of the things they sell in their own stores.

John said...

Several points: Krugman considers median income to be tantamount to standard of living -- which is absurd. He undoubtedly omits non-monetary compensation or benefits(such as health insurance) when calculating income, and there is, of course, the fascinating question as to whether you can actually "measure" wages (http://szabo.best.vwh.net/measuringvalue.html) -- but his most egregious error is that he fails to recognize the degree to which the redistributivist impluse, manifesting itself in increasingly byzantine labor regulations has contributed to the "decline." What "turn toward free-market policies" does Krugman refer to? The FLSA hasn't gone anywhere. Although, it now enjoys the company of Title VII (1964), ERISA (1974), PDA (1978), ADA (1990), and the FLMA (1993).

Mike Huben said...

John, don't you think that Friedman (who used the term standard of living) and Krugman use rpetty much the same measurement? Just what DID Friedman use as his measure?

As for "increasingly byzantine labor relations" contributing to decline, what measure do you have of "byzantinity" and why do you think it even corellates with what measure of decline?

John said...

I am not an authority on Freidman, but he certainly runs in the tradition of subjective value theorists - so I think one would be hard pressed to find anything he wrote which would tie living standards to some objective measurement. Inflation-adjusted wages are far less important to judging quality of life than the actual life that can be purchased with those wages which, again, is a subjective determination that probably makes it impossible to know for certain whether wages are flat, rising or falling.

As to your second question, "byzantine" is really an incomplete word. The larger point is that regulation of the workforce imposes costs on employers that are (to the extent that they can be) passed on to employees in the form of wage reductions. Krugman is simply wrong if his position is that regulation of labor markets has decreased in the last 30 years. To the contrary.

If he was intellectually honest, he would recognize the very wage stagnation he laments as the obvious consequence of an increasingly regulated labor market, and then defend it as a more efficient and justifiable allocation of resources. You can't have your cake and eat it to -- even if that is the operating assumption of sophomores like Krugman when he chooses to donn his "economist" hat.

Mike Huben said...

So John, if Friedman was not using some measurement, was he then simply bullshitting?

As for your explanation of wage stagnation, I'll let libertarian economist Bryan Caplan describe it: "An economist who attributes hyper-inflations to radically and continuing
declines in the demand for money contradicts no economic theory. He is
however still a bad economist, because he analysis of which factors are
quantitatively significant is so far off."

If you'd like to show how your favorite factor is quantitatively significant compared to other plausible candidates, feel free.

John said...
This comment has been removed by the author.
John said...

Forgive the prior deletion. html illiterate here.

Mike, I never said Friedman didn't apply "some measurement." I simply stated that he applied no "objective measurement." Like most who adhere to subjective theories of value, Friedman likely tied his conception of "living standards" to collective preference satisfaction - largely a function of social access to the technological advancements that have dramatically improved quality of life.

As to your obvious point about the difference between correlation and causation when it comes to "wage stagnation," gold star for you. Krugman only pretends to be gracious in conceeding the obvious point that "many factors" affect economic growth and income distribution. Duh. At the same time, "many factors" affect inflation adjusted wages. Yet, Krugman had just finished attributing stagnating wage rates to one principal factor: the march of "free market policies" that Friedman himself said didn't exist. As funny as it is, I'll chalk up as bad luck your too-clever-by-half decision to invoke Bryan Caplan during a discussion that began with a favorable posting of Krugman's editorial; but hey, those are the occupational hazards of selectively invoking someone else's princples.

As to the question of how labor regulations measure up to "other factors" in impacting inflation-adjusted wages, that is (quite obviously) a perfectly legitimate but complex empirical question that largely depends on both the breadth of scope of factors considered and those elements that comprise "quantitative-ness." Suffice it to say, labor regulations are both increasingly burdensome and occupy a position relative to wage rates where the causal link between the two is quite small.

dave meleney said...

Mike:

Krugman's thesis that the period of Friedman's greatest notoriety and fame should (if his theories are correct) correlate with a period of great prosperity for the nation beginning to embrace his ideas. Do you really buy that?

Wouldn't Milton simply point out that it takes time, even under his favorite scenario, for ideas to become policy. And that government spending and regulation were much larger, not smaller... during the years Professor Krugman is considering?

marxbites said...

Big words, grand ideas & econo-jibberish.

Let's look at the isssue this way, (for it poops all over Krugmanite statists like a race horse):

Which country's people's today enjoy the highest standards of living?

The N Koreans or the S Koreans, and why?

What country's economys are growing fastest?

Those with nanny state Govts or those that have embraced low taxes and free trade as in the New Europe, or Taiwan for instance?

Seems to me one need know little else - that under unobtrusive Govts the people happily prosper, and that under obtrusive Govts the people are just plain robbed,
disincentivised and miserable.

Govts are by definition the antithesis of freedom as the founders well knew but which Americans have been purposely made to forget. Govt's role when limited under an unbreached contract with the people's consent, is but the guarantor of our rights, especially our economic rights.

The progressive era constitutional corruptions via judicial fiat are exactly what has allowed congress to spend on everything not "general", like welfare for votes and wars for profit, such that we no longer have "by the consent of the governed" but a govt operated as a full time campaign for reelections. With the Fed as their grand enabler.

Dave and John get what Mike won't.

BTW - Do you think if horses could dance there'd be more horse balls???

bi said...

"Seems to me one need know little else [...]"

In other words, let's select the facts that are in our favour, and throw out all other facts. North Korea and South Korea are valid examples. 1947--1976 US and 1976--2005 US are not. Why? Because.

"Govts are by definition the antithesis of freedom as the founders well knew but which Americans have been purposely made to forget."

This statement is totally independent of fact. That much should be obvious when one reads what the Founding Fathers actually wrote, instead of merely using them as rhetorical devices.

-- bi, http://zompower.tk/

marxbites said...

bi:

Well then you must be able to point out to me the scads of Govts more onerous than ours who's people flourish better than we, right?

Have at it champ, knock yourself out!

bi said...

As I pointed out above, there's already an example right inside Huben's post. And again, regarding your remarks on the Founding Fathers: here's a quote right from one of the Founding Fathers:

"Nothing is more certain than the indispensable necessity of government, and it is equally undeniable, that whenever and however it is instituted, the people must cede to it some of their natural rights in order to vest it with requisite powers." -- John Jay

I'm not going to waste any more time to "point out" stuff to you, since it's clear your response to any contrary evidence is just "nyah nyah nyah!".

-- bi, http://zompower.tk/

marxbites said...

What a cop out - I knew you couldn't name any.

BTW pard, Jay was a wealthy merchant Federalist, that is to say he was in abject opposition to Jefferson, a real states rights federalist vs a Nationalist which the "Federalists" really were.

And so we see that the Democrats cast off their most precious limited fedl gov Jefferson by trading him in for the smarmy statism of Hamilton and Marx. Today's Reps being more Hamiltonian and the Dems being more Marxist, which is why they both suck eggs.

Also, at 54, having been a longhaired child of the sixties, I've been left, then right in the 80's having learned the Laffer curve, but under GHWB, began to question the validity of both parties, and have come to the conclusion after 100's of hours of studying our history and economics that both parties are mere puppets that endevour to grow the Govt that benefits them at taxpayer expense.

It is pure fact that Int'l bankers have always been behind taking over our currency - the proponents of Hamilton's bank. They have financed Kings and govts into debt servitude until they control a nation's currency. The Czar sided with Lincoln against England or France's aiding the South declaring if they did it would be taken as an act of war. The Czars too resisted Int'l bankers, but lost when they sent Trotsky from America w/$10K to overthrow him. They financed France and England (Waterloo) at the same time as well as Stalin, and Hitler. For these bankers by the late 1800's controlled almost every single multi-national corporation.

That's why Ford recieved a medal from Hitler, and GWB's family too traded with the enemy in the 30's.

In fact in the early 30's, FDR, Stalin, Hitler, Churchill and Mussolini were a regular mutual admiration society as proven by there own words, commiserating with each others woes in the world wide banker created depression.

bi said...

"BTW pard, Jay was a wealthy merchant Federalist, that is to say he was in abject opposition to Jefferson [...]"

Oh great, first you talk about the Founding Fathers, then when I mention Jay you shift your goalposts and say he's not a "true" Founding Father or something. So did I cop out when I said (rightly) you ignore any inconvenient facts? Huben's page also has non-libertarian quotes from Jefferson himself, by the way.

-- bi, zompower.tk