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Wednesday, October 12, 2011

Rodrik: Milton Friedman’s Magical Thinking

Dani Rodrik argues that Milton Friedman leaves "an ambiguous and puzzling legacy":

Milton Friedman’s Magical Thinking, by Dani Rodik, Commentary, Project Syndicate: Next year will mark the 100th anniversary of Milton Friedman’s birth. Friedman ... will be remembered primarily as the visionary who provided the intellectual firepower for free-market enthusiasts..., and as the éminence grise behind the dramatic shift in the economic policies that took place after 1980.
At a time when skepticism about markets ran rampant, Friedman explained in clear, accessible language that private enterprise is the foundation of economic prosperity. ... 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 the government restrictions and regulations that had been built up over the preceding decades. China moved away from central planning and allowed markets to flourish... Latin America sharply reduced its trade barriers and privatized its state-owned firms. When the Berlin Wall fell in 1990, there was no doubt as to which direction the former command economies would take: towards free markets.
But Friedman also produced a less felicitous legacy. ... 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...
The Friedmanite perspective greatly underestimates the institutional prerequisites of markets. Let the government simply enforce property rights and contracts, and – presto! – markets can work their magic. In fact,... markets ... are not self-creating, self-regulating, self-stabilizing, or self-legitimizing. Governments must invest in transport and communication networks; counteract asymmetric information, externalities, and unequal bargaining power; moderate financial panics and recessions; and respond to popular demands for safety nets and social insurance. ... [And] Given China’s economic success, it is hard to deny the contribution made by the government’s industrialization policies.
Free-market enthusiasts’ place in the history of economic thought will remain secure. But thinkers like Friedman leave an ambiguous and puzzling legacy, because it is the interventionists who have succeeded in economic history, where it really matters.

    Posted by on Wednesday, October 12, 2011 at 12:24 AM in Economics, Market Failure | Permalink  Comments (45)


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