Wednesday, November 15, 2006

'Economic Liberalism at the Turn of the 21st Cent.'

This might be one of the most exciting book reviews I've ever read.

Published by EH.NET (November 2006)
Mark Wynne, Harvey Rosenblum and Robert Formaini, editors, _TheLegacy of Milton and Rose Friedman's Free to Choose: Economic Liberalism at the Turn of the Twenty-First Century_. Dallas: Federal Reserve Bank of Dallas, 2004. vii + 251 pp. $ (hardback), ISBN: Info:0-9763494-1-8
Reviewed for EH.NET by Ranald Taylor and Robert Leeson, Department ofEconomics, Murdoch University.
This book is a collection of papers presented at a conference held at the Federal Reserve Bank of Dallas in October 2003. It is a tribute to Milton and Rose Friedman's _Free to Choose_. The papers have a dominant theme: competitive markets can solve many of the problems associated with education, environmental degradation, taxation, cultural diversity, globalization, financial markets and monetary stability. The book is organized into six sessions, each devoted to particular issues which the Friedmans have raised in _Free to Choose_.
Session one sets the tone of the book by revisiting Milton Friedman's organizing argument: that competition ensures economic freedom and that the appropriate role of a government in a free society is toensure that competitive markets function freely. Eric Hanushek andPaul Peterson examine the coexistence of what they believe to be the declining state of the public school system in the U.S. and risingreal spending per pupil. Hanushek argues for a competitive market-based funding system in the form of vouchers. Resistance to vouchers, he believes, derives from an old ideology. Hanushek arguesthat it is easier to defeat communism than to overcome the education establishment's resistance to meaningful reform of the public school system.
Advocates of 'sustainable development' advocate changes in virtually every aspect of
consumption and production. In session two Terry Anderson and Laura Huggins argue that sustainable development theory is vague and "operationally vacuous" (p. 58).
They challenge the two fundamental pillars of sustainable development: 'running out' of resources will leave future generation with less, and market processes are the causes of these depletions. According to Anderson, Huggins and Richard Stroup, the over consumption of natural resources is primarily linked to ill-defined property rights rather than the operation of the market system.
Property rights, they argue, provide the structures that are necessary for development, innovation, conservation and the discovery of new resources. They maintain that countries with greater economic freedom and rule of law tend to have higher environmental standards than countries where the rule of law is weak.
One of the themes of _Free to Choose_ was that government has grown far beyond the size necessary for the protection of liberty.
In session three, William Niskanen constructs a model to estimate the optimal level of expenditure for government services relative to GDP. His estimate (10 percent of GDP) provides support for smaller governments. Liqun Liu, Andrew J. Rettenmaier and Thomas R. Savingargue that falling birth rates and rising life expectancy have made the current social security system unsustainable. Their analysis ofthe costs and benefits of a transition to a privately-funded system, suggests that during the transition period there would be a costinvolved in the form of lower consumption. However, in the longer term, they argue, the transition would make the country as a whole better off by enhancing the nation's capital stock.
In session four, Tyler Cowen deals with the implications of _Free to Choose_ for culture, diversity and aesthetics. Globalization and free trade benefit both cultural diversity and the creative arts, Cowan argues: periods of greater freedom in international trade tend to beperiods of greater cultural diversity and creativity.
Peter J. Boettke examines the impact of _Free to Choose_ on global movement toward free markets during the period from 1979 to 2003. During this period, communism collapsed in the Second World, theThird World began to reject development planning, and many First World countries reformed their welfare states. Boettke notes thatmuch post-communist privatization was inspired by Friedman's writings.
Gregory Chow uses the central themes of _Free to Choose_ to examinepost-1978 reforms in China, sensing progress in all areas. With reference to education, Chow claims that there is probably a greater degree of freedom of choice in education in China than the U.S. (heargues that about 40 percent of all spending on education in China comes from private sources compared to an average of 12 percent inthe OECD countries).
Session five has a topical immediacy given that the Grameen Bank andits founder, Muhammad Yunus, were jointly awarded the 2006 Nobel Peace Prize. Luigi Zingales argues that access to finance is crucial to promote competition and economic freedom. Zingales describes thefate of two Bangladeshi women (one with access to finance, the other without). The second found it extremely difficult to develop her stool making business; the first obtained a small loan from the Grameen Bank to acquire a Nokia cellular phone. The phone made a huge difference in her life and the lives of her fellow villagers by bringing information at low cost to farmers and tradesman. The phone reduced business costs facilitating profits about twice the average national monthly income.
Zingales argues that although financing is a risky and complexactivity, riddled with adverse selection and moral hazard, it is government intervention that is the main obstacle: "In spite of theenormous challenges intrinsic to the financing activity, human ingenuity, when allowed to work freely, is able to devise many mechanisms to enlarge access to finance. It cannot, however, overcome the power of the government, when this is determined to block finance. Unfortunately, governments are too often captured by rich incumbents, who stand to gain very little and risk a lot from the development of finance" (p. 188).
Allan H. Meltzer itemizes twenty-five specific policy proposals initiated by Milton Friedman (some of which have been adopted and many of which have not) to minimize government intervention. He looks at some of the successes (ending the military draft, floating the dollar, the abolition of interest rate ceiling on bank deposits) and some partial successes (lowering tariff barriers, deregulation various industries in the U.S., the introduction of a school voucher system in certain U.S. states).
Ben S. Bernanke examines eleven of Friedman's key monetarist propositions. According to Bernanke, Friedman's counter-revolution isstill very much alive: "one can check to see if an economy has a stable monetary background only by looking at
macroeconomic indicators such as nominal GDP growth and inflation. On this criterion it appears that modern central bankers have taken Milton Friedman's advice to heart" (p. 213).
The last session traces the relationship between economic freedom and growth performance. The Friedmans believe that economically free countries would grow more rapidly and achieve higher income levelsthan less free countries. To test their hypothesis, they saw the need to develop a scientific instrument that could be used to quantify the degree of economic freedom across a large number of countries. James Gwartney pioneered the construction of indexes to proxy economic freedom. Based on the Economic Freedom of the World (EFW) index (taking into account of private ownership, voluntary exchange,personal choice, and free entry into markets), Gwartney and Robert Lawson report that a one-unit increase in the EFW index enhancedgrowth by 0.71 percentage points over the period 1980-2000: "Friedman was right" (p. 232).

As a conclusion to the book, Raghuram G. Rajan offers somereflections on whether the free market tide may retreat (in LatinAmerica, for example). Rajan argues that the growing backlash againstpro-market reforms is driven by elites who tend to undermine equalityof opportunities by opposing widespread access to markets.
This is a fascinating book -- a must read for Friedman fans. One of Friedman's strengths was (and is) his intense curiosity about the strengths and weaknesses of the arguments and unexamined assumptions of his opponents. Some of those who have documented the progress of his ideas have been struck by the initial lack of reciprocity in this respect (in the early days his ideas were often dismissed as Chicagoeccentricity). Friedman was a dominant figure among the first generation of post-war libertarians: this salute by some of thesecond generation provides an insight into the dynamics of the ideas that he developed and propagated.
Ranald Taylor is the author of "Can Labour-Savings, Capital-IntensiveProduction Techniques Reduce Unemployment Rates in DevelopingCountries?" _Australian Journal of Labour Economics_ (2004). He is currently working on a project tracing the evolution of technological progress since Adam Smith.
Robert Leeson is the co-author (with W.J. Darity and W. Young) of_Economics, Economists and Expectations: From Microfoundations to Macroapplications_ (Routledge: 2004) and is currently editing Milton Friedman's _Collected Writings_.


happyjuggler0 said...

Milton Friedman has died. The world is a lesser place for his passing, but a profoundly better place as a result of his life's vocation and avocation.

The Financial Times Obituary is the best one I have read so far, but the day is young, at least here on the US pacific coast.

true dough said...

I don't know if I've ever felt so shocked about the death of a 'celebrity.' Friedman's work lured me to issues in economic policy that I had no real interest in beforehand.
The great thing is that he knew the influence he had on people around the world. Unlike other economists he lived to see several tributes in his honour. This must have been deeply satisfying to himself and those around him.

Had you not written I'd have gone to bed without knowing (Atlantic). Thank you.