Friedman v Galbraith

2006 is coming to an end in a few days, and often at this time of year it is appropriate to remember those who passed away during that year.  The field of economics loss two of its most amazing intellectuals of the 20th century.  John Kenneth Galbraith passed away at the age of 97 in April, and Milton Friedman passed away at the age of 94 in November.  Both were able to write to a wide audience and also speak with authority on TV, radio and the public lecture hall.

However, we should never lose sight of the fact that Friedman was a scientific economist in a way that Galbraith never was, and that Galbraith was a political ideologue in a way that Friedman never was.  This important but subtle point is often missed.  If you look at the contrasting coverage in the NYT on their deaths, you can see that Galbraith is praised for holding up a mirror to society, while Friedman is described as a theorist.  This seems to imply that Galbraith captured reality, while Friedman captured the blackboard.  But nothing could be further from the truth.  Galbraith didn't hold a mirror up to society, but presented a distorted picture of reality that fit with warmed over theories from Marx, Veblen and Keynes.  Friedman, on the other hand, certainly was a theorist, but his lasting contribution was in the application of theory to make sense of the economic world around us and draw out the policy implications.  Works such as Capitalism and Freedom and Free to Choose are among the most insightful general reader books in economics one can find.  Are they perfect?  Of course not, no human work ever is. But they use the economic way of thinking in a rigorous way to inform the general reader about the way markets work and government fails to work.

We can perhaps excuse the NYT writers for making this mistake of confusing the contributions to Friedman and Galbraith.  But when an economist as accomplished as Joseph Stiglitz commits such a fundamental error, it is time we recognize just how deep the intellectual prejudices are against laissez-faire in our society.  Stiglitz has to engage in an act of amazing intellectual gymnastic to insist that Galbraith understood capitalism as lived not as theorized, and betrays his own intellectual blinders in the process.  This is a man deeply suspicious of free exchange, and greatly hopeful for the power of government to correct perceived social-ills. 

Stiglitz suffers from both what Fritz Machlup refers to as "misplaced concreteness" and what Tom DiLorenzo once refered to as the "oh, s**t theory of economic policy."  Machlup chided economist for confusing the model with reality, instead models are heuristics to help us think about reality.  They are necessary tools to thought and thus what we need to worry about is not abstraction per se, but adequate abstraction.  Thinking without theory is not possible. The choice is never between theory and no-theory, but between articulated and defended theory, and non-articulate and non-defended theory.  But we should never confuse theory with reality.  Stiglitz commits this fallacy all the time in his work on "market failure" (see for example his book Whither Socialism?).

This brings me to the very insightful observation of Thomas DiLorenzo.  Tom was my teacher and he was one of the most entertaining teachers I had (and I had some great teachers of economics in my education ---- Hans Sennholz, Kenneth Boulding, James Buchanan, Gordon Tullock, Bob Tollison, and Don Lavoie to name a few --- though I should say that Kevin Greir might technically be the best teacher I ever had in any subject).  Tom always peppered his lectures with economic history and economic policy discussions.  In a memorable lecture (at least memorable to me), he said that the problem with a lot of economists is that they have an "oh, s**t theory of economic policy."  They look on their blackboard, they look at the world, and they say "oh, s**t" and then they devise policy so as to make the world conform to the blackboard.  DiLorenzo said, why don't they ever think about changing the blackboard to conform to the world?  This was extremely insightful because the "s**t" in the world that was causing problems were things like firms, advertising, strategic pricing practices, etc.

The great "oh, s**t" theorist of the last 40 years is Joe Stiglitz, and this op-ed on Galbraith simply reinforces the point.

Comments

[jim casey]

Peter - when you win a Nobel for improving our understanding of human behavior and how institutions play an important role in our everyday lives - let me know.

[Matt C]

Peter- I think you are right on in your post. It is amazing that Stiglitz doesn't understand how the Fed did harm the country and continues to do so. It is also amazing that he rationalizes that it is capitalism that creates pollution. Even Ben Franklin understood that exhaust off a fire is wasted energy. It wasn't because of government that companies have "cleaned up" their act, it was because they were loosing potential energy. The least exhaust you lose the more energy you have been able to consume. Automobiles are good examples. They use less gas, produce less exhaust, but they produce more power. This wasn't done because of government edict, but because it was what the consumer wanted.

He states, "Unfettered markets often produce too much of some things, such as pollution, and too little of other things, such as basic research. As Bruce Greenwald and I have shown, whenever information is imperfect - that is, always - markets are inefficient; hence the need for government action."

Information is imperfect and that's exactly why the government needs to stay away! Government interference with the market process disrupts and distorts the problem. It is amazing that Stiglitz ignores countries like Ireland, India and China who have liberalized their economic regulations and have flurished. According to Stiglitz there should be excesses that are piling up throughout these countries and no one to buy them, the countries should be doing worse, not better. But that's not the case, it's the exact opposite.

On a personal note, if an economist like Stiglitz and those who signed the minimum wage letter can win a Nobel...no offense to Hayek...but, I am not sure I would want to be a part of that "fraternity".

[Sleeper]

There are some amazing statements in Professor Stiglitz’ Christian Science Monitor article. For example, he refers to Galbraith’s “early research.” In reality, Galbraith did little research to support his views of the industrial state; this was one of the main points of criticism of his work made in the past by mainstream economists, including nominally sympathetic Robert Solow.

In his article, Stiglitz implies that Friedman’s “focus on the failures of the Federal Reserve” has equal weight to Galbraith’s focus on “speculative greed” in his “research” on the Great Depression. Comparing Galbraith’s book “The Great Crash” to the Friedman & Schwartz 1963 opus is, with all due respect, laughable. David Warsh made a similar error in a TV interview a few weeks ago, saying that Friedman and Galbraith were “opposite bookends” of the profession. But Warsh is a journalist, not a Nobel-winner.

Current economic opinion is reflected in our principles textbooks—most of the best-sellers mention in the main text (i.e., outside the obligatory section on the discussion of monetarism) that one of the major causes of the Great Depression was mistaken monetary tightening by the Federal Reserve. It is hard to understand why Professor Stiglitz is endorsing Galbraith’s view which is so contrary to what appears to be the consensus in the profession now.

Could Bryan Caplan’s idea about “rational irrationality” apply to prominent economists? As I understand it, Caplan’s idea is that when the cost of holding an irrational idea is low, an otherwise intelligent person will turn off his critical faculties and believe whatever makes him feel best, or what makes people like him more. Right now, the neoclassical paradigm is not doing well in the world—the Washington Consensus is on the retreat in Latin America and “liberalism” is dead in Central Europe. President Bush is widely unpopular, and he is a member of the political party usually associated with market solutions, which just got “thumped.” Perhaps, for prominent economists who need more love, the price elasticity of irrationality is very high right now?

[Swimmy]

I'm just an undergrad and am unfamiliar with the technical details of the work that won Stiglitz his Nobel prize, but the more I read his popular articles, the more I'm convinced he's a very, very bad economist.

In this article alone, he implies that markets always fail and that governments only sometimes fail. I'm willing to accept the conclusion that both fail often, but I can't imagine a world in which market failures in general do more harm.

[John S.]

By the way, the picture is a fake one. :)