Streetwise Professor

December 9, 2020

Martin Takes Another Tilt at Milton, and Face Plants Yet Again

Filed under: Economics,Politics,Regulation — cpirrong @ 6:28 pm

Martin Wolf has waddled into the lists again to take another tilt at Milton Friedman. Since Milton is alas not with us to accept the challenge (luckily for Martin) I will again try to serve as his trusty second and defend his honor.

I will start at the end:

There are many arguments to be had over how corporations should change. But the biggest issue by far is how to create good rules of the game on competition, labour, the environment, taxation and so forth. Friedman assumed either that none of this mattered or that a working democracy would survive prolonged attack by people who thought as he did. Neither assumption proved correct. The challenge is to create good rules of the game, via politics. Today, we cannot.

This is a lie and a slander–in particular the italicized part. To start with. Friedman’s social responsibility piece was an oped, not a weighty tome or even an academic journal article. (I snorted when some idiot in Bloomberg referred to it as Friedman’s magnus opus. Er, no, that would be A Monetary History of the United States or A Theory of the Consumption Function. But this illustrates the level of intellect of those challenging Friedman’s article.). As a result, it was not a comprehensive analysis. It focused on a basic premise and argued that premise within the constraints of the form, which are severe. So many of the criticisms are bashing straw men–issues that Friedman could not address except tersely, if at all.

With regards to the lie and the slander, this relates to my criticism of one of Wolf’s earlier sorties. Specifically, Friedman “assumed” nothing of the sort. If you look at his broader body of work–something that Wolf betrays absolutely no sign of doing–you will know that his main objection to government, big government in particular, and government regulation is that legislatures, the executive, and regulators would be influenced and corrupted by the regulated, and by corporations in particular. This is why he argued vociferously against big government and against most government regulation: the power thus accrued would be manipulated by private interests, most notably corporations.

Friedman’s solution was to reduce the stakes in the game by reducing the power of government and relying on competition in the marketplace. Again, Friedman was an advocate of free markets, not of corporations, and he opposed regulation primarily because it allowed corporations to undermine markets.

One particular illustration of this relates to an issue that Wolf raises: market power. Along with Stigler, Friedman argued that government regulation was frequently, and indeed overwhelmingly, antithetical to competition and supported market power.

With respect to creating “good rules of the game,” Friedman also argued that giving government more power was inimical to the creation of good rules.

That is, Wolf is arguing that we have a political problem–which was exactly Friedman’s point throughout the 1950s-1980s. You may disagree with Friedman on these issues. But you cannot–as Wolf slanderously states–say that he did not think about them seriously, or that he assumed them away. Might I suggest that Marty read, oh, Capitalism and Freedom? Or is an oped all he can handle? Maybe there’s a market for Milton Friedman for Dummies.

Now to the beginning. Wolf quotes Luigi Zingales, the Director of the Stigler Center. (George is probably spinning in his grave.)

In an excellent concluding article, Luigi Zingales, who promoted the debate, tries to give a balanced assessment. Yet, in my view, his analysis is devastating. He asks a simple question: “Under what conditions is it socially efficient for managers to focus only on maximising shareholder value?”

His answer is threefold: “First, companies should operate in a competitive environment, which I will define as firms being both price- and rule-takers. Second, there should not be externalities (or the government should be able to address perfectly these externalities through regulation and taxation). Third, contracts are complete, in the sense that we can specify in a contract all relevant contingencies at no cost.”

Needless to say, none of these conditions holds. Indeed, the existence of the corporation shows that they do not hold. 

This is nonsense on stilts, and represents a return of the hoary Nirvana Fallacy that another late, great economist, Harold Demsetz, pointed out over 50 years ago. Yes, the conditions of the First and Second Welfare Theorems don’t hold. Who knew? That says jack about what are the best arrangements for our fallen world. That requires a comprehensive comparative institutional analysis, an analysis that is conspicuously lacking in the debate over Friedman’s article.

So what does Wolf say corporations should do (or not do)? Here’s a list:

My contribution to the ebook emphasises this last point by asking what a good “game” would look like. “It is one,” I argue, “in which companies would not promote junk science on climate and the environment; it is one in which companies would not kill hundreds of thousands of people, by promoting addiction to opiates; it is one in which companies would not lobby for tax systems that let them park vast proportions of their profits in tax havens; it is one in which the financial sector would not lobby for the inadequate capitalisation that causes huge crises; it is one in which copyright would not be extended and extended and extended; it is one in which companies would not seek to neuter an effective competition policy; it is one in which companies would not lobby hard against efforts to limit the adverse social consequences of precarious work; and so on and so forth.”

Let me give a pithier version: “Be good.”

As public policy advice, this ranks right up there with Mr. Mackey:

Completely absent from Wolf’s articles on Friedman is any discussion of how to implement the incentives to “be good” (by Wolf’s lights), or how corporations will acquire the information to know how to be good.

Incentives and information are the foundational concepts of modern economics. It’s beyond bizarre that the FT’s “Chief Economics Commentator” couldn’t be bothered even to mention them.

Wolf’s article is a sermon, not an economic analysis, or even a pedestrian analysis of an economics issue. The world is fallen, and you sinners must repent, and promise never to sin again! Well, as a song I like (and no it’s not autobiographical!) says, “I used to pray every night for God to wash away my sins, but I just get up and do ’em all over again.”

You can have a serious discussion about Milton Friedman’s slender piece, especially within the context of his much broader work. But the jeremiads directed against it by Wolf and others are not serious. They are intellectually vapid, and devoid of any meaningful policy prescriptions.

Hell, maybe Stigler was wrong–at least about Martin Wolf. Maybe he can’t win an argument with Milton, even when Milton isn’t around.

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  1. The world needs “Friedman for Dummies”! While the dummies won’t thank you, the rest of us will.

    Comment by Highgamma — December 9, 2020 @ 8:00 pm

  2. ‘Yes, the conditions of the First and Second Welfare Theorems don’t hold. Who knew?’


    Marty’s reasoning has never recovered since the financial crisis undermined his worldview. Trump’s election was the icing on the cake – I experienced significant schadenfreude in watching the FT clique have a very public nervous breakdown over what they saw as the end of the world.

    Many people, for whatever reason, just don’t know when it is time to go, and end up getting yanked unceremoniously from the stage. As a person who used to read his weekly column religiously, I hope that Wolf soon realises that the footlights are dimming and that last round of applause was a polite ‘thankyou’ one.

    Comment by Ex-Global Super-Regulator on Lunch Break — December 9, 2020 @ 8:21 pm

  3. All of the IPCC consensus position on climate is junk science on climate and the environment.

    It’s not only that regulators get corrupted by the regulated. It’s also that centralized regulatory power gets captured by ideologues, and used to impose political will.

    The history of the EPA amply demonstrates that circumstance. The UN is so-captured, and is relentlessly angling for its own promotion into unelected world governor.

    Corporations are just organized groups of people; as are governments. Even in a society that enforces contracts, some corporations will cheat to gain competitive advantage.

    Following the adage that bad money drives good money out of circulations, cheating corporations will drive contractually honest corporations out of business by way of the competitive advantage provided by their occult dishonest practices.

    So the question I’ve been leading to is: how is corporate dishonesty controlled? How to make cheating too expensive?

    Citizens in a free society are nevertheless held to a standard of law; one that approximates seeking to require civil behavior.

    Should there be an analogous approach to corporate civil behavior? A free market but laws against taking dishonest competitive advantage, tailored to the enterprise?

    For example, why not make laws against dumping waste but no laws regulating how corporations achieve the amelioration?

    Let corporations decide methodology for themselves. Law requires the desired outcome only, ‘rendered harmless.’ Competition will encourage corporations find the most efficient means. (The same idea says that airlines, not the TSA, should be in charge of their own on-board safety.)

    In my experience in university labs, it’s always the detailed regulations specifying how to handle each and every bit of waste that causes problems. If regs were restricted to, ‘make it harmless’ and ‘harmless = these conditions’ with penalties for objective failure, life would be much easier.

    Corporations are legal individuals. Why not treat them that way in law? Enforce outcome, not method.

    Comment by Pat Frank — December 10, 2020 @ 12:50 pm

  4. Alas, as he has got older M.W. hasn’t got wiser and more nuanced. He’s simply misused his position as a commentator to push for all the woke ideas he thinks everyone should adopt.
    When he moved beyond careful analysis and commentary, though I still read the FT, I stopped reading him. Why? Because he would inevitably rant on about some pet project of his.
    To give an example: Brexit. In his opinion, 100% catastrophe. No willingness to look at the other side, to take a nuanced position and to inform his readers. In any sane organisation, he’d be given his retirement notice and asked to cultivate his bees in his garden and not inflict them on subscribers.
    While I have no definite data on this, but I wonder how well the FT is doing as it increasingly peddles woke ideas and fails to uphold rigorous debate and analysis.
    There was a fine letter to the FT, which give them their due, they published, which took M.W. to task for his narrow, preachy view and lack of analysis as he opined about decisions made about Covid-19. (Article is: “What can the world learn from Covid”)

    Comment by Peter Moles — December 11, 2020 @ 5:20 am

  5. I loved Elon Musk’s insights in this video. I know you are no fan of Musk. Shorting his TSLA stock has been difficult! But, what he says about running a business is Friedman like.

    Comment by Jeffrey Carter — December 11, 2020 @ 11:44 am

  6. @Ex-Global Super-Regulator on Lunch Break. Glad that someone gets the joke!

    Comment by cpirrong — December 11, 2020 @ 1:58 pm

  7. We used to take the FT on Saturdays. To start with it was excellent – the Personal Finance section taught me a lot (not difficult – I had paid no attention until I was nearly forty), the Arts section was superb, and the business/economics coverage was interesting.

    Then the latter went off – too much leftie politics intruded. The Personal Finance writing came to seem repetitive – how could it not, there are only a few lessons to teach? But the deal-breaker was the Arts section – its standard suddenly plummeted. Perhaps an effect of Leftism too. Anyway we cancelled our delivery. Nowadays I never see it.

    If there is a must-read in the British papers nowadays it is the Daily Mail. Gawd save us all!

    Comment by dearieme — December 11, 2020 @ 4:58 pm

  8. @Ex Many people, for whatever reason, just don’t know when it is time to go, and end up getting yanked unceremoniously from the stage Ain’t that the truth? Some people just hang on and on and on, rinsing their support for all its worth, when the writing has been on the wall for weeks.

    @deari – The Times is pretty good, as is the Grauniad if you can stomach their politics. Everything else is chip-wrapping-in-waiting.

    Comment by David Mercer — December 12, 2020 @ 5:43 am

  9. Excellent post Prof, thank you.

    I am reevaluating who I listen to on the markets, Grant’s Interest Rate Observer is one of them, they are solidly Pro Wolf and hide bad thinking behind an intellectual veneer.

    Go Army, Beat Navy.

    Comment by Joe Walker — December 12, 2020 @ 9:54 am

  10. @David:

    ‘Ain’t that the truth? Some people just hang on and on and on, rinsing their support for all its worth, when the writing has been on the wall for weeks.’

    I agree. It really is way past time that he and Kamala conceded.

    But seriously: By hanging on, I think Trump is doing the Republic an enormous favour. By hanging on, and allowing/encouraging his supporters to pursue in the media and in the courts what is obvious, blatant, shabby, systemic and systematic electoral fraud, Trump is exposing the lack of integrity and the extent of corruption and rigging in the electoral system, the corruption among both sides of politics (it is very clear now who the RINOs are, for example), the extent of compromise and agency problems in the bureaucracy (where the f*** are Bill Barr, the DoJ and the FBI???), and the bias of the corporate media and their uselessness as a source of information.

    An unexpected (and bittersweet) benefit is his revealing how compromised the judiciary is, all the way to the Supreme Court.

    By refusing to concede, and pushing the issue, he is bringing the scum and scurf that exist in the Republic’s institutions – both the parasites and their schemes – to the surface. It’s horrible to watch – the Supreme Court’s decision yesterday was depressing – and I’m not even a Yank! But he is doing a public service, and I think a lot of the American people have taken notice. What they will do with this information I don’t know, but even from thousands of kilometres away my blood is boiling, and my blood has a lot higher boiling point than that of most Americans.

    The only bigger and better thing he could do would be, as he has threatened, to ‘declassify it all’ – all the secrets that the Establishment wants to keep hidden from the American people and the world. I suspect the truth would put some people in hospital, the shock would be so great. But it would reveal the extent and depth of the multinational criminal enterprise that the Wall St-Washington nexus has become.

    ‘Let all the poisons that lurk in the mud hatch out.’

    You must understand that he is now at serious risk of what one commentator called ‘being Romanoved’. He had the temerity to beat the Establishment at their own game, not once but twice, to stand up to them and to threaten to expose them and their crimes. These are people who are used to getting their own way by whatever means necessary, including by removing threats quickly and efficiently. I think that, by now, both ‘sides’ are terrified of what will happen to them if the other re-takes power. By conceding, Trump simply makes himself an easy target for his enemies’ predation. In that case, why not use the time, the power and the information that he has to seek to secure another four years, and/or to eliminate, cripple, warn off, or cut a deal with those who pursue him?

    As the Prof has said, I think more than once: this is ‘war to the knife’. Trump cannot simply walk away into the sunset, they won’t let him. He is using every weapon in his armoury and tool in his kit to wring out a conclusion that will be favourable to him and his family, and also to the Republic. Absolutely gripping stuff.

    Maybe you should re-visit your schoolboy copy of King Lear?

    Comment by Ex-Global Super-Regulator on Lunch Break — December 12, 2020 @ 4:45 pm

  11. @Ex Well I guess that’s one interpretation, if you’re literally miles down the rabbit hole.

    On the judiciary theme, does it not strike you as somewhat odd that Trump should seek preemptive pardons for members of family and inner circle? Why would he do this (leaving aside the huge issue of motive – what skeletons are they hiding?)? It does suggest that he believes the US justice system isn’t that broken or corrupt.

    Incidentally I did warn on this blog not to put too much faith in Barr. Despite appearances he’s no fool and can sense which way the wind is blowing (rats and a rapidly sinking ship come to mind).

    As for: “He is using every weapon in his armoury and tool in his kit to wring out a conclusion that will be favourable to him and his family, and also to the Republic”, he honestly couldn’t give a flying f*ck about the Republic nor his family. This is all about him and his oh-so fragile self image. He knows there’s a realistic prospect he’s going to be financially ruined by this, and may well serve jail time. He absolutely has that hunted look about him.

    Comment by David Mercer — December 13, 2020 @ 6:11 am

  12. I’m with ex. Release the info, from the JFK assassination onwards. Pardon Assange, and the other two leakers whose names escape me – one now in Moscow, the other a sex-changer in jail. Let it all out.

    Comment by dearieme — December 13, 2020 @ 12:35 pm

  13. Assange may have been in on setting up Trump, way to early to tell, we just don’t know yet, but we will know soon I bet.

    When Hollywood makes a movie about Assange it’s safe to say the truth lies somewhere else.

    Comment by Joe Walker — December 13, 2020 @ 6:02 pm

  14. appoint a special prosecutor now for the Biden Family. Have him shake hands with Sleepy Joe, Mrs Biden, and lil’ Hunter when he shows up at the White House after the inauguration

    Comment by Jeffrey Carter — December 14, 2020 @ 8:15 pm

  15. @Pat Frank: “Enforce outcome, not method.” Unfortunately, modern America seems keen on doing neither…

    @Super-Regulator: “all the secrets that the Establishment wants to keep hidden from the American people”. I’d say you’re assuming an entirely unjustified level of ability from recent American governments…

    @dearieme: Does the US not have a Freedom of Information act?

    Comment by HibernoFrog — December 15, 2020 @ 3:35 am

  16. I think you will like this.

    Comment by Sotosy1 — December 27, 2020 @ 10:57 pm

  17. @Jeff. I agree. Elon is winning some strange new respect, at least sometimes, although like you I remain not a fan overall.

    Comment by cpirrong — January 16, 2021 @ 11:23 am

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