The Economy

So I have one avid reader of my blog and we banter back and forth about economic policy and the like. This reader works for a division of the Obama organization and is a very provocative thinker and writer. There's actually a lot more I could say but that's just to let you, the reader, get an idea of where these ideas come from. My commentary is the italicized portion of this two part email:

I now read the Freakonomics blog are least once a week . . . Today I read something that was reflected in my own life last week, and that I had actually consciously thought about at the time:

"If you're looking for a silver lining in this bad economy and especially in a dismal Christmas retail season, you can at least console yourself with the thought that there will be less deadweight loss this year than in past Christmases — that is, less inefficiency generated by people spending money to buy things for other people who value the gifts at significantly less than they cost."

There was a LOT less gift-giving going on at my household, and in the end I think we were all better for it. But while in the short term we learn a lot, in the long term we learn nothing, so I don't expect this to last for too many more Christmases.

Doesn’t it suck how fickle Americans are? As soon as gas prices go down we revert back to our old ways (not as much this time... but we're all broke). I’m an idealist though, I think this current economic downturn will affect the spending habits of American’s for decades to come. How much? I have no idea… but I think the "cool" factor of blowing money will decrease and remain lower than it was before.

Also, I suspect this was the article you referenced the other night, on the Chicago school's response to the current financial crisis:

When passing judgment on Friedmanism itself, to me it ultimately comes down to which of the following is true:

"'Chicago' stands for a belief in the efficacy of the free market as a means of organizing resources, for skepticism about government intervention into economic affairs," [Freidman] said.


[Friedman and Friedrich Hayek] viewed rising government power as a step toward left-wing totalitarianism and wanted to stop it, says Philip Mirowski, a University of Notre Dame economist.

From what I’ve read it was the first. I’m not sure he really had a political agenda. That may be a crazy claim; I know almost nothing about politics. However, I do know that Friedman would give his advice to anyone who would listen and one of those who listened was China. After his visited China: Econ talk laden primer:
Better article about his second visit: The country started the slow process of privatization after his visit and talks, or at least in my romantic view of the world Friedman was the catalyst for that. And that’s 1/3 of the world’s population. He may be partially responsible for the greatest reduction of poverty in history. Anyways, he also influenced Estonia and he advocated getting rid of passports and legalizing marijuana. Not really a typical conservative agenda. His ideas do seem to fit with the more antifederalist nature of the republican party (historically, not now), but I've always thought of that ideaology to be part of a more classicaly liberal stance. He just seemed to love freedom (that sounds lamer than I mean for it to be). The mistrust of the government stems from the fact that, historically speaking, as freedom increases so does GDP and ultimately quality of life. To illustrate his all over the place stance on politics (taken from his Wikipedia page): In an in-person interview with both his wife and him in that same month, he said that he opposed the U.S. invasion of Iraq: "What's really killed the Republican Party isn't spending, it's Iraq. As it happens, I was opposed to going into Iraq from the beginning. I think it was a mistake, for the simple reason that I do not believe the United States of America ought to be involved in aggression." It’s really a shame that super conservative people have jumped all over Friedman’s ideas because they tarnish them in doing so. It’s like Marx. Marx was a great writer and for saw many of the unwanted byproducts of capitalism. Is he to blame for the suffering of millions under botched communist rule? I would argue no. The people who pushed for the implementation of communism used it as a device to control an ill prepared peasant society. The Soviets followed very little of Marx’s “idea of communism” (he was very vague as to what communism entailed). Regardless of how right or wrong Marx's idea's were his name got attached to one of the greater tragedies in history. Back to Friedman; if the conservatives are all about Friedman then why isn’t government spending lower, why aren’t taxes lower, why is border security beefing up, why is marijuana still unregulated, and why is government getting bigger? Friedman advocated freedom and a less powerful government, not a conservative agenda that takes freedom from it citizens (last 8 years).

Is it purely academic, or is there a political (ideological) component to it? Probably it's moot at this point, because Friedmanism has been used as the academic foundation for political ideology for decades now. But it points to what I see as the inherent danger of academia (and I believe I've mentioned this before) -- they don't place with live bullets.

The thing about Friedman is that more than any other person his ideas were implemented, and as far as I know most of them have been quite successful. He fixed China’s double digit inflation, his book Free to Choose was read and put into use in Estonia making it the most successful former Soviet satellite country, and then there was Chile (from Wikipedia, I know I know)…

“Naomi Klein, in her 2007 book The Shock Doctrine, went further than Letelier to argue that repression was necessary to implement Chicago School economic policies in Chile" .[41] Friedman encapsulated his philosophy in a lecture at La Universidad Católica de Chile, saying: "free markets would undermine political centralization and political control."[42] According to his critics, Friedman did not criticize Pinochet's dictatorship at the time, nor the assassinations, illegal imprisonments, torture, or other atrocities that were well-known by then.[43] Later, in Free to Choose, he said the following: "Chile is not a politically free system and I do not condone the political system ... the conditions of the people in the past few years has been getting better and not worse. They would be still better to get rid of the junta and to be able to have a free democratic system."[44] When he went to receive his Nobel prize in Stockholm, he was met by demonstrations. In an interview on the PBS program Commanding Heights in 2000, Friedman attributed these demonstrations by opponents he recognized from earlier occasions to communists seeking to discredit anyone with even the slightest connection to Pinochet — such as himself — adding that "there was no doubt that there was a concerted effort to tar and feather me".[45] Friedman defended his role in Chile on the grounds that, in his opinion, the move towards open market policies not only improved the economic situation in Chile but also contributed to the softening of Pinochet's rule and to the eventual transition to a democratic government in 1990. That idea followed from Capitalism and Freedom, in which he declared that economic freedom is not only desirable in itself but is also a necessary condition for political freedom. He stressed that the lectures he gave in Chile were the same lectures he later gave in China and other socialist states.[46] In the 2000 PBS documentary The Commanding Heights, Friedman continued to claim that criticism over his role in Chile missed his main point that freer markets led to freer people, and that Chile's unfree economy had led to the military government. Friedman argued that the economic liberalization he advocated led to the end of military rule and a free Chile.[45]”

Although on the other hand there was a lot of deregulation that has led to our current mess. Keep in mind however that the last 25+ years has been referred to as "the great moderation" (as in a less volatile business cycle punctuated by fewer and less severe recessions). I don't know, there's a lot to say here. I'm not fully aware of what programs were carried out in Friedman's name.

Is the stock market evil?

That's a question I keep coming back to lately, although "evil" isn't really the right word. Maybe "unhealthy" is a better choice.

One of the things I've been considering is the difference in priorities between public and private companies, and the way they approach short and long-term decision making. I think there's definitely something there, although I'm willing to allow for the possibility that I'm romanticizing privately owned businesses.

The first thing that comes to my mind is that privately owned businesses can’t be scaled up like corporations can. It can go both ways good or bad, but it does exist. Examples would include In and Out Burger and my Dad’s business. Also, private companies tend to be entrenched in nepotism which multiple studies have shown decreases overall company performance. Although I guess it isn't shocking that inheritance often has little to do with ability...

I'm thinking an alternative (and perhaps better) construction is this:

Whom should a company value more:

a) its employees
b) its stockholders

The problem with valuing “a” over “b” is that without the shareholders the employees don’t have a company to work for because no capital was invested. Of course this is a chicken or the egg problem. I’ve always thought of it like this; initially, think about the early days of the industrial revolution, employers are going to treat their employees badly because they can. At the time the government was on the side of big business because that’s who had the money and you know, politics and all that stuff. Then Henry Ford came along (and he wasn’t a great person in many regards and this is probably romanticizing the idea) and said… “shit, if I pay my employees more, then maybe they can afford the cars they make.” And over the next few decades the power shifted towards employees and now… the employees in the American auto industry are helping to choke their employer. There is a balance to be struck and finding it is hard. If your employees get paid too much and are treated too nicely it makes the widget you produce more expensive and less competitive. Competitors flood the market and you're out of business. So the answer isn’t “a” or “b”. The answer is, employees and employers would ideally work together in as transparent a manner as possible to make the company viable while providing the employees with the maximum amount of whatever it is they want. So maybe stockholders should stand for something other than profit? I know there are investment groups that only invest in companies that uphold certain standards for a variety of measures; environment, charity, etc. I know the Methodist Church has a retirement fund for it’s ministers worth several billion dollars that it only invests in companies that operate according to it’s standards. What we're talking about here is essentially a shift in cultural thought. Americans, really the world, has to start valuing something other than money in return for their investments. This won't be easy. Ha, like Winston Churchill said, "You can always count on the Americans to do the right thing... After they've tried everything else."

In practice the answer is clearly "b", and I would argue that therein lies much of the blame for the current gap in income (wealth) distribution. When you have a system in which business decisions are made with regard to the wealthy (stockholders) over the not-so-wealthy (workers) the outcome is really no mystery.

Although I've never actually viewed gross imbalances in income distribution as a failure of capitalism -- I always kind of thought that was the point.

The point of capitalism is to provide maximum incentive to its participants. But like they say, wealthy is making more than your brother in law. Here’s my rant. The problem with letting the government run things is that it’s a relatively small circle of people with a limited view of the market as a whole. Small numbers of people can more easily become corrupted. The current problem stems from the fact that a large number of people became essentially corrupt or really just greedy. They knew what they were doing. The problem is that when things are going wrong people look around to their peers to see if anyone else is alarmed. If everything seems okay then they calm down and go back to business as usual. Our financial system has become quite complex and if you don’t understand its workings you’re not going to be able to see what's wrong. So even if you can diagnose the problem, you then have to be able to divorce yourself from the bystander effect ( and be the whistle blower. In the end not enough people fit that criteria (everyone always looks at me sideways when I say my degrees are psych and econ but they’re the same thing, one just has the added dimension of money thrown in). Capitalism will show triumphs and errors in human judgment. The role of the government should be to learn from our mistakes and minimize them in the future. We’re going to fail our way to perfection or destruction and people will be hurt along the way. Economics just keeps score and makes rear-looking reccomendations.