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.

6 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.

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?

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.

bi -- International Journal of Inactivism 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/

bi -- International Journal of Inactivism 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/

bi -- International Journal of Inactivism 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