Some intervention needed in Milton Friedman's free-market theory

Next year will mark the 100th anniversary of Milton Friedman's birth, remembered as the visionary who provided the intellectual firepower for free-market enthusiasts during the second half of the century.

Next year will mark the 100th anniversary of Milton Friedman's birth. Friedman was one of the 20th century's leading economists, a Nobel Prize winner who made notable contributions to monetary policy and consumption theory.

But he will be remembered primarily as the visionary who provided the intellectual firepower for free-market enthusiasts during the second half of the century, and as the éminence grise behind the dramatic shift in the economic policies that took place after 1980.

At a time when scepticism about markets ran rampant, Friedman explained in clear, accessible language that private enterprise was the foundation of economic prosperity. All successful economies are built on thrift, hard work and individual initiative. He railed against government regulations that encumber entrepreneurship and restrict markets.

Inspired by Friedman's ideas, Ronald Reagan, Margaret Thatcher and many other government leaders began to dismantle government restrictions and regulations that had been built up over the preceding decades. But Friedman also produced a less felicitous legacy. In his zeal to promote the power of markets, he drew too sharp a distinction between the market and the state.

In effect, he presented government as the enemy of the market. He therefore blinded us to the evident reality that all successful economies are, in fact, mixed. Unfortunately, the world economy is still contending with that blindness in the aftermath of a financial crisis that resulted, in no small part, from letting financial markets run too free.

The image most people will retain of Friedman is the smiling, diminutive, unassuming professor holding up a pencil in front of the cameras in his landmark television series, Free to Choose, to illustrate the power of markets. It took thousands of people all over the world to make this pencil, Friedman said - to mine the graphite, cut the wood, assemble the components, and market the final product. No single central authority coordinated their actions. That feat was accomplished by free markets and the price system.

More than 30 years later, there is an interesting coda to the pencil story - which in fact was based on an article by the economist Leonard Read. Today, most of the world's pencils are produced in China - an economy that is a peculiar mix of private entrepreneurship and state direction. There are better sources of graphite in Mexico and South Korea. Forest reserves are more plentiful in Indonesia and Brazil. Germany and the US have better technology. China has lots of low-cost labour, but so do Bangladesh, Ethiopia, and many other populous, low-income countries.

But the present-day pencil story would be incomplete without citing China's state-owned firms, which made the initial investments in technology and labour training; lax forest management policies, which kept wood artificially cheap; generous export subsidies; and government intervention in currency markets, which gives Chinese producers a significant cost advantage. China's government has subsidised, protected and goaded its firms to ensure rapid industrialisation, thereby altering the global division of labour in its favour.

Given China's economic success, it is hard to deny the contribution made by the government's industrialisation policies.

Free-market enthusiasts' place in the history of economic thought will remain secure. But thinkers such as Friedman leave an ambiguous and puzzling legacy, because it is the interventionists who have succeeded in economic history, where it really matters.

Dani Rodrik, a professor of international political economy at Harvard University, is the author of The Globalization Paradox: Democracy and the Future of the World Economy.

* Project Syndicate

Published: October 17, 2011 04:00 AM

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