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.

Is "free market" economics even based on economics?

The NY Times is out with a stunning article today on how the government of Malawi defied the experts and came up with an anti-poverty program that works. It's stunning because the solution was so simple -- the government of Malawi simply subsidized fertilizer so that farmers would have higher yields for their crops. In 2005, almost 5 million of Malawi's 13 million people needed emergency food aid. This year, Malawi is a net food EXPORTER selling corn to the World Food Program and the United Nations.

The truth is that every major industrialized nation subsidizes their farmers (and those farmers in turn go out and buy seed and fertilizer with the money). But for decades U.S. and British development "experts" advising African nations AGAINST subsidizing agriculture.

"In the 1980s and again in the 1990s, the World Bank pushed Malawi to eliminate fertilizer subsidies entirely."

The U.S. (University-of-Chicago-Milton-Friedman-inspired) "logic" was that government intervention would interfere with free market solutions to the problem. The reality was that this theory caused millions of actual human beings to starve to death.

Malawi's paid $74 million to subsidize fertilizer this year but it returned an estimated $120 million to $140 million in crops produced -- that's a pretty good return on investment. Simple freakin economics -- but a strategy the World Bank and IMF opposed for years.

So here's my question: was University of Chicago free market economics ever actually based on economics? Yeah, I know there were probably equations involved showing how it'll all work out and calculus was probably used and fancy graphs were produced. But WHEN IT NEVER ACTUALLY WORKS OUT THAT WAY IN THE REAL WORLD what are we to make of it? Are we just supposed to shrug our shoulders and say, "stuff happens" or is something more sinister going on here? Because when you look at it, white male 1st world insistence on pulling oneself up by one's bootstraps and hatred of dependency -- looks a lot more like personal preference (or religious doctrine or eugenics or racism) and a lot less like economics. The 1st world has been telling poor brown people in the 3rd world that they are lazy for centuries. Slave owners tried to justify slavery as being good for the slave because it would instill a Protestant work ethic in ("otherwise lazy") people. Same thing with colonialism. Now with neocolonialism we are seeing the same goddamn argument -- isn't it about time we all called BS on this tool for exploitation?

Let me put it a different way: When Nazis put signs over the gates of concentration camps that read, "Work Shall Set You Free" nobody actually saw the concentration camps as job training programs to instill discipline. Non-insane people recognized it as a sickening symptom of a pathological culture. So when the World Bank tells (actually, forces) starving nations NOT to subsidize agriculture -- even when it's been shown to work -- do we see that as simply economists who know best, or do we see it as pathological, cruel, and even criminal? If the World Bank recommends policies that cause millions of people to starve isn't that in fact, a crime against humanity? One day will we have war crimes trials where we put World Bank, IMF, and WTO officials on trial for the crime of genocide?

So for ignoring the experts and feeding his people, we name Malawi's President, Bingu wa Mutharika, the RFK Action Front Person of the Week!

Update:

In the comments, Beth wisely notes that this is really a riff on themes brought up by Naomi Klein in her book Shock Doctrine which I wrote about (here) and (here). If you have a chance, do check out the book.

'Milton Friedman wants you to be his bitch'

When the Hubble Space Telescope was first launched there was a flaw in the big mirror in the telescope and so for a few years all the photos came back blurry. So NASA sent a repair mission and they corrected the mirror and suddenly the pictures came back crystal clear.

That's how I felt reading Naomi Klein's new book Shock Doctrine: The Rise of Disaster Capitalism. For decades the mainstream media (and academia too) have presented us with a blurry picture about what is happening in the world. I'll give you an example: in 1973 Augusto Pinochet, with backing from the CIA, launched a military coup in Chile. Next thing you know Milton Friedman flew down to meet with Pinochet and Chile implemented a massive privatization plan. The New York Times, Washington Post and other traditional media reported on these two events (bloody coup and new economic program) as if they were unrelated events--as if we were all just supposed to scratch our heads and say, 'oh what a coinkydink.'

Naomi Klein's book fixes the flawed mirror presented by corporatist media and presents a picture that is crystal clear. Her argument goes something like this:

In the 1930s, 40s, and 50s, United States economic policy was guided by the theories of John Maynard Keynes (as implemented by Franklin Delano Roosevelt). Keynes believed in a mixed economy--namely that some form of regulation and public services were required to mitigate the adverse effects of capitalism. Keynesianism led to the creation of the American middle class, the end of the Great Depression, victory in World War II, the GI bill, the Marshall Plan (that rebuilt Europe after the war), and the largest sustained economic expansion in history.

But in the 1950s, Milton Friedman, building on the theories of Adam Smith, became influential in the economics department at the University of Chicago. Friedman and his followers distrusted Keynesianism and advocated a new form of laissez-faire capitalism with no government regulation, no environmental regulation, privatization of all government services (including social security), and unfettered free trade (no protection for domestic industries).

The Ford Foundation and the CIA were so enamored of Friedman's theories that they started a program to bring leading economists from Latin America to study with Friedman at the University of Chicago. At one point 1/3 of all the students in the University of Chicago economics department were there as a result of this program.

The problem was, Friedman's economic theories were (and are) incredibly unpopular. Any time democratic societies got a say in whether or not they wanted to implement Friedman style privatization programs, they invariably voted them down (because, in general, people don't like losing their jobs and starving to death in the name of some macroeconomic theory).

That would ordinarily be the end of the story--bad theory, unpopular, consistently voted down in democratic societies, the end.

But unfortunately, that's not the way the world (or the U.S. government) works. Instead, the CIA figured out that Friedman's economic program could be implemented, under the cover of darkness, if a shock to the system could be introduce first. So in 1973 the CIA backed a coup against the democratically elected government of Salvador Allende. As everyone from union leaders to folk singers were being tortured and executed in the former soccer stadium, Pinochet and his University of Chicago-trained economic advisers, implemented Friedman's economic theories in Chile. Similar shocks followed in Bolivia, Argentina, Brazil, Ecuador, and Uruguay.

Then the CIA figured out that it wasn't just military coups that could apply the literal and figurative shocks to a country--hyperinflation, natural disasters (hurricanes, tsunamis, earthquakes), and foreign debt would also do. Furthermore, the Internal Monetary Fund and the World Bank were used to implement these shocks--by tying any loans to the requirement that governments privatize their industries and completely open their borders to multinational corporations. So over the next several decades Milton Friedman-designed economic programs were implemented (without democratic consent) in Poland, South Africa, Russia, Thailand, Indonesia, Sri Lanka, China, Iraq, and New Orleans. The architects of the Iraq War (Cheney, Rumsfeld, and Bremer) were all followers of Milton Friedman. (I imagine Bush would have been too if he had ever opened a book or gone to class.)

For some time now, I've been curious to figure out what the relationship is between violence and wealth. Apparently, Naomi Klein was curious about that too. She writes,

"Is neoliberalism [aka Milton Friedman University of Chicago style economics] an inherently violent ideology, and is there something about its goals that demands this cycle of brutal political cleansing, followed by human rights cleanup operations?" (p. 126)

Klein's 466-page, meticulously-researched answer is, YES IT IS.

A couple other things become clear to me as a result of reading Shock Doctrine:

1.) There is no such thing as "U.S. foreign policy" or the "U.S. military." Rather, U.S. foreign policy is designed and written by multinational corporations and the U.S. military is just a private army working at the behest of multinational corporations. Furthermore, the CIA is simply a private paramilitary army/death squad working at the behest of multinational corporations.

2.) In many ways, progressives of the world have been focused on the wrong enemy for 50 years. We've focused on racism and war and the environment. But these are all products of bad economics. It all starts and ends with the economics. Fix the economic system, and lots of the other problems start to dissolve too. For Klein, a simple return to Keynesian economics would probably bring stability, democracy, and the revitalization of the middle class.

I'll leave you with another couple quotes from the book:

"Despite the mystique that surrounds it, and the understandable impulse to treat it as aberrant behavior beyond politics, torture is not particularly complicated or mysterious. A tool of the crudest kind of coercion, it crops up with great predictability whenever a local despot or a foreign occupier lacks the consent needed to rule: Marcos in the Philippines, the shah in Iran, Saddam in Iraq, the French in Algeria, the Israelis in the occupied territories, the U.S. in Iraq and Afghanistan. The list could stretch on and on. The widespread abuse of prisoners is a virtually foolproof indication that politicians are trying to impose a system--whether political, religious or economic--that is rejected by large numbers of the people they are ruling. Just as ecologists define ecosystems by the presence of certain 'indicator species' of plants and birds, torture is an indicator species of a regime that is engaged in a deeply anti-democratic project, even if that regime happens to have come to power through elections." (p. 125)

"Everywhere the Chicago School crusade has triumphed, it has created a permanent underclass of between 25 and 60 percent of the population. It is always a form of war." (p. 405)

Shock Doctrine is a revelation.

You can see a short film by Alfonso Cuaron about Shock Doctrine (here).