Saturday, December 12, 2009

How Wall Street killed Adam Smith and Milton Friedman

I was a political science major in college when the Berlin Wall fell. It was sort of hilarious because the political science professors, particularly foreign policy experts, just walked around in a daze. As they admitted in class, the standard textbooks on cold war foreign policy were now completely irrelevant. Everything we thought we knew about how the world worked changed in the space of about 6 months. Karl Marx who was already on life support before then, was now widely acknowledged to be officially dead.

But what I hadn't realized until just this morning, is that the collapse of the financial sector in 2008 killed Adam Smith and Milton Friedman. Their ideas should have been dead long ago but they kept hanging around because they provided the cover by which the powerful could continue to enrich themselves (at the expense of everybody else). But the collapse of the entire global financial system in 2008 and the fact that federal governments around the world had to come in and rescue the titans of finance with trillions of taxpayer dollars (and pounds and Euros and Deutsche Marks), definitively shows that Adam Smith and Milton Friedman were just shakedown artists. Rather than being an elegantly self regulating machine in tune with the deepest truths of the universe it turns out that our financial system in criminally corrupt and hopelessly unable to survive without massive government assistance.

And here's the craziest thing in all of this. The financial collapse of 2008, not only killed Smith and Friedman, but it also brought Marxist critiques of capitalism back to life. Well technically speaking, Marx was wrong and Nikolai Kondratiev was correct -- but the fundamental point of both men remains and has now been confirmed: an endless cycles of booms and busts are intrinsic to capitalism and capitalism is an inherently unsustainable system. Furthermore, it is only through a strong state regulatory system that the vicissitudes of capitalism can hope to be controlled.

Furthermore, as Ian Welsh has been pointing out for months, all that Geithner and Summers (and the entire Obama economic team) are doing is trying to re-inflate the housing and finance bubbles. Geithner and Summers thus pose a potentially catastrophic risk to the Democratic Party -- because if the re-inflated bubble bursts right before the 2010 midterm elections or the 2012 Presidential election, it opens up enormous space for a conservative populist candidate like Sarah Palin to run against the Obama economic record. As the one progressive on Obama's economic team, it sure would be nice if Jared Bernstein would start making a lot of noise right now. Furthermore, Obama needs to start listening more to Krugman and Reich and less to Geithner and Summers. Because at the end of the day, Geithner and Summers have a view of markets that is fundamentally incorrect, and basing policy on false assumptions about the way markets really work is a recipe for disaster.

In some ways then we live in a remarkable time with enormous political, economic, and even philosophical instability. Adam Smith and Milton Friedman are dead. And Marx and Kondratiev had prescient critiques of the problems of capitalism, but no solution for an alternative approach that is more sustainable. So for the time being the regulated capitalism of Keynes becomes the big winner. And maybe that's the best that we can do. But it seems to me that there is also a higher synthesis waiting to emerge from this whole crisis -- if we can just figure it out before the gaping abyss of uncertainty causes people to completely freak out.


Unknown said...

Adam Smith had some issues, but he's not the one note wonder moderns make him into. For example, he recognized the danger of monopolies and oligopolies and contrary to what many think, didn't believe in unregulated markets or that the invisible hand always produced good outcomes.

Friedman, otoh, I have almost nothing good to say about.

RFK Action Front said...

Hi Ian:

Thanks for your thoughtful comment. Too often in the popular debate (and I include myself in this critique), we deal with the caricature of these men or what they have come to represent rather than the actual writings themselves. So I appreciate your reframing the debate about Adam Smith. One of the things I really like about your blog, is that you read more original sources than most people. Thanks again for the comment and for all of your great thinking and writing.

RFK Action Front

Anonymous said...

Forget what you've heard, the American system is where it's at! Bring back Glass-Steagall and nationalize the FED into a 3rd National bank that issues long-term loans at simple 1-2% interest rates to rebuild the infrastructure of the United States. Put a 1% Wall Street Tax on all transactions, split the revenue created from that into state banks and treasuries and the federal treasury. Set up a 10% tariff to protect domestic re-industrialization. Here is the 5 point plan in full