November 20, 2006
Friedman on IndiaEconomics
It should be no surprise to most here that I’m a strident fan of Milton Friedman and that his passing was quite a bit more than a garden variety celeb obit for me. While I’m a geek of rather high proportions, there are quite a few of us for whom the loss left an almost personal hollowness. 
“The current danger is that India will stretch into centuries what took other countries only decades” - Milton Friedman, 1963Because he called San Francisco home, I actually had the honor of seeing Uncle Milt speak in person about 2 years ago at a benefit gala for a thinktank I’m a contributor to.
And earlier this spring, I had another opportunity to see Milton & Rose Friedman in person at the unveiling of a PBS documentary on his life and times. At the time, I implored several friends to join me with the argument that “at 94, homey ain’t gonna be around too much longer - see him while you can.” Unfortunately, a bout of flu kept Friedman from joining us that evening (Rose did, however make it) and alas, my words were sadly prophetic.
Interestingly, at that event, Gary Becker was on tap for Milton & Rose’s intro. In nearly any other context, Becker’s own Nobel Prize would have garnered him a headline act. But given Friedman’s ginormous stature, Becker’s intro speech was instead somewhat rudely met with idle chatter from the back of the banquet hall. You’d think scoring a Nobel prize would earn a little more respect - apparently not so when you’re between an audience and the Friedman’s.
‘Tis the curse of the passage of a generation that we take for granted previous, hard fought accomplishments - both material and intellectual. In its extreme, we just assume that he world we see around us had to be rather than recgonize the role of volition, creativity, and intellectual accomplishment which enabled it to be.
In Friedman, India, and recent economic history, we see all this wrapped up in a neat tidy little package. So much that seems obvious now was contrarian then. And so many of the arguments we use to excuse and ignore the outcome of disastrous policy was plainly predicted and evident decades ago.
For the SM crew, one of the most striking and relevant pieces of Friedman’s massive body of work was an article written in 1963 after a series of official and not-so-official trips to India to gauge its economic climate [Friedman’s essay on India in 1963.pdf (66 KB) - thanks for the doc Prashant!]. The treatise is classic Friedman - simple, direct language that is both approachable by non-economists and simultaneously sophisticated & rigorous enough for the most seasoned policy makers. It’s ominous thesis, written all those years ago, is proof of the power of a few percentage points of compounded growth and a real world forecast of economic crisis -“India lacks none of the basic requisites for economic growth … comparable to that which occurred in Japan after the Meiji restoration” - Uncle Milt
Even at the officially estimated 1 1/2 percent per year growth in per capita output, it would take over a century of steady growth at that rate for India to reach the current level of per capita income in Japan, and well over three centuries to reach the current level of per capita income in the United States. The current danger is that India will stretch into centuries what took other countries decades.
Count Friedman as one of the fiercest opponents of the so-called Hindu Rate of Growth. In describing his hopes and dreams for the teeming throngs of Desi’s, Friedman had high expectations and decidedly first world aspirations for the subcontinent -
I am myself still persuaded, as I was in 1955, that India lacks none of the basic requisites for economic growth except a proper economic policy. I believe that drastic, but technically feasible, changes in economic policy-the substitution of a freely floating exchange rate for the present fixed rate and elimination of the exchange controls, import restrictions, and export subsidies designed to prop up the present rate; and a similar policy of substituting the free market for direct controls in the domestic economic scene-could release an enormous reservoir of energy and drive and produce a dramatic acceleration of economic growth in India comparable to that which occurred in Japan after the Meiji restoration.
The great untapped resource of technical and scientific knowledge available to India for the taking is the economic equivalent of the untapped continent available to the United States 150 years ago. - Friedman, 1955
The problem connecting this potential with reality, of course, was a disastrous intellectual climate which drove equally disastrous economic policy -
The remainder of his article is a series of examples of just how much entrepreneural energy was waiting to be unleashed and just how badly it was being held back by an intelligentsia obsessed with top down economic planning. For example, the following bit demonstrates the utter impotence of external policy tools like aid and directed investment in truly influencing growth rates -When India attained its independence, it was strongly socialist in its orientation, its intellectual atmosphere having been shaped largely by Harold Laski of the London School of Economics and his fellow Fabians. In the initial decade after independence, a series of left-wing advisers, including Oskar Lange and Michael Kalecki from Poland, and Nicholas Kaldorand John Strachey from Britain, visited India.
…The intellectual climate of opinion about economic policy is almost wholly adverse to any changes in the direction that seems to me required.There is a deadening uniformity of opinion in India, particularly among economists, about issues of economic policy. In talks to and with students and teachers of economics at a number of universities, personnel of the planning commission, economists in the civil service, financial journalists, and businessmen, I encountered again and again the same stereotyped responses expressed often in precisely the same words. It was as if they were repeating a catechism, learned by rote, and believed in as a matter of faith. And this was equally so when the responses were patently contradicted by empirical evidence as when they were supported by the evidence or at least not contradicted.
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Pacific Research Institute - Sept 2004: My glimpse of Milton & Rose Friedman in Real Life |
…the years after independence saw a great inflow of resources from abroad. External assistance during the decade spanning the first two Five Year Plans averaged about 11/2 per cent of national income, which means that it provided something like a fifth of net investment; and external assistance was disproportionately concentrated in the Second Five Year Plan period, when it amounted to about 2 1/2 per cent of national income or to over a fourth of net investment. On that score alone, growth should have accelerated during the Second Five Year Plan rather than apparently slowing down a bit.
Got that? It takes a serious economic basket case to take in twice as much money as last time around and convert it into roughly half the growth. Usually this sort of calculus is the domain of “diminishing marginal returns” for cutting edge development, not the deep “come from behind” that characterized India of the era. Or how about here, where Milton describes a supply chain disaster of Randian proportions -
Some of the entrepreneurs at Ludhiana estimated that an eighth to a quarter of their working time was being spent on either getting allocations or finding ways to acquire the materials they needed by more devious channels.
Presumably, the people’s representatives in charge of these “allocations” were there to ensure that higher, social justice needs were being met as material was directed towards the benefit of the broader community of stakeholders. At the minimum they were needed to protect India’s rich body of social tradition in the face of rapacious, Western capitalism. Or something like that. At least at first. Blech.
Reading the article it’s impressive to observe Friedman’s knowledge of and respect for the texture of India, the role of the diaspora & how it could shape it’s unique growth path forward. Here are a few excerpts from the nearly dozen snippets in the PDF -
The hope for India lies not in the exceptional Tatas or similar giants, but precisely in the hole-in-the-wall firms, in the small- and medium-size enterprisesWhat is the reason for the disappointingly slow rate of growth? One frequently heard explanation is that it reflects the social institutions of India, the nature of the Indian people, the climatic conditions in which they live. Religious taboos, the caste system, a fatalistic philosophy are said to imprison the society in a strait jacket of custom and tradition….These factors may have some relevance in explaining the present low level of income in India, but I believe they have almost none in explaining the low rate of growth.…[Post-Partition,] The Punjabis have doubled the average agricultural yield in the area in which they resettled, and have besides been among the most enterprising, active, and dynamic business groups in India. The Bengali have had great difficulties in resettling, many of them are still in government resettlement camps some 15 years after partition, and they have been a drain on the country rather than a source of growth.
…One reason why westerners so often feel that enterprise and entrepreneurial capacity is lacking in India is because they look at India with expectations derived from the advanced countries of the West. They think in terms of the large, modern corporations, of General Motors, General Electric, and other industrial giants. But it was not firms like this that produced the Industrial revolution; they are, if anything, its end products. The hope for India lies not in the exceptional Tatas or similar giants, but precisely in the hole-in-the-wall firms, in the small- and medium-size enterprises, in Ludhiana, not Jamshedpur; in the millions of small entrepreneurs who line the streets of every city with their sometimes minuscule shops and workshops.
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Moreso than his Nobel-prize winning papers, “Capitalism And Freedom” is widely considered Friedman’s Magnum Opus |
The Achilles heel of the Indian economy at the moment is the artificial and unrealistic exchange rate… It will, I fear, take a major political or economic crisis to produce a substantial change in the course on which India is now set in economic policy, and I am not at all optimistic that such a crisis if it occurs, will produce a shift toward greater freedom rather than toward greater authoritarianism.
For privileged folks today, it’s actually sorta hard to envision just how real the forces of authoritarianism were back in the day. Just imagine if India’s currency crisis had hit, not in 1991 but instead a decade prior — before the fall of the Berlin Wall & with it, much of the Soviet intellectual ediface. The answer to the crisis could have just as easily been more government to save us rather than less… For contemporaries of Friedman’s work, memories of the role of economic crises leading to Nazi Germany, the Soviet Union, Red China, and to a lesser extent authoritarian Chile, Argentina, Bolivia, and so on burned fresh.
Thankfully, history rolled a different way and Uncle Milt was able to watch, approvingly, as the economic reforms of ‘91 were enacted. In a new forward written in 2000 he had the following to say -
I have been in India only once since our 1963 trip. That was in 1979 when we filmed briefly in India in connection with our television programme ‘Free to Choose’. Nevertheless, I have tried to follow from a distance the economic developments within India. I continue to be impressed by India’s enormous potential and depressed by the contrast between that potential and the minimal progress that has been achieved in the forty-five years since I was first in India. The latest decade shows more signs of change. India may finally be on the way to realizing its potential. If so, it will be a blessing for the people of India and for the world as a whole.
I leave you with the following video that’s been widely circulated on the blogosphere since Uncle Milt’s death. Depending on your proclivities, it either has everything or nothing to do with India. Either way, it’s a highly entertaining and educational experience & a tribute to a man of great ideas -
vinod on November 20, 2006 04:51 PM in Economics, History · T·r·a·c·k·b·a·c·k address · Direct link · Email post
Great man indeed, but I do feel the shortcomings of his ideas are largely ignored and can be dangerous.
Friedman also wrote about India's own economic dissenter Dr BR Shenoy whom he met in the 50s. Dr.Shenoy is known to have said that if economic activity was to be licensed, these licenses would have to be sold to the highest bidder. Other notable critics of India's muddled economic thinking of those wasted decades were Dr.John Mathai who turned his back on Nehru following the constitution of the Planning Commission; and the peerless C. Rajagopalachari aka Rajaji - a very observant Hindu - the irony - Hindu rate of growth indeed! Rajaji coined the term license-permit-quota raj. Minoo Masani a founder of the Swatantra Party later turned a bitter critic of India's economic policies. The great man's birth centanary went by ignored by most excepting Jerry Rao.
Friedman of course was given to making big errors. His own theories of monetarism lie discarded and discredited after they proved disastrous in the 70s. Despite all he has written (not much above the level of poorly reasoned rhetoric) Keynes remains more relevant than ever and Keynesianism runs the world's economy. Economic liberty sans political liberty also gave us the Nazis and Fascists; banana republics; Marcos, and a host of other tyrannies.
While the toffs may want to let the invisible hand work (Buffet calls it an invisible kick in the shins!) successful economies the world over have realised that we need action in the here and now; for in hte long term we are all dead!
"Free to Choose" completely changed my entire perspective on economics when I read in 2003. More than his free market ideas and his work on monetary policy, I think his greatest contribution was in the area of individual freedom. Things that we take for granted today like the volunteer army was just a dream before Milton Friedman contributed to the removal of the draft. I think Milton has said that the removal of the draft was the most important thing he had ever worked on. I agree.
Well written post. Here's another quip ( excerpted from the WSJ );
James Galbraith, son of John Kenneth Galbraith, says at a lunch in Geneva in 1955, Indias statistician mentioned to his father that the Indian government had asked several economists, including Milton Friedman, to visit and comment on Indians next five-year plan. His father replied: Asking Milton Friedman to comment on a five year plan is like asking the pope to comment on the running of a birth control clinic. As a result, his father was invited instead. He later served as U.S. ambassador to India in the Kennedy administration.
Excellent post Vinod.
Had the Friedman (India) memo reccomendations been implemented, I could have been writing this comment from Delhi or Mumbai.
@sockrebel,
i think it is extremely simplistic to equate capitalism and privatization to making rich richer and poor poorer. while anyone will concede that unbridled capitalism can be bad, it is not honest to say that the socialist setup is better than the moderate capitalism that many countries---including the US---follow today.
i am not sure if you have lived in any diverse country that practises socialism---like in india of the past. in my opinion, socialism just descends into an elaborate scheme of dispensing benefits in such societies. of course, socialism is great if you are born into power or connections, like so many apologists for socialism usually are. if you are among the rest of the lot, moderated capitalism at least prevents you from being helpless.
Shiva - Reading your comment, I was reminded of a Minoo Masani anecdote, my father related to me recently.
Once during the question/answer session in the Indian Parliament, Masani made the following dig at Indira Gandhi's five year plans - "Mrs.Gandhi, why is that Indians are prosperous everywhere, except in your raj?"
Damn right, Comrade Sock. Pass the
bubblyvodka!@bytewords:
agreed. But Friedman's approach was definitely not of "moderated capitalism", but more toward the unbridled end
Thanks Vinod for writing a wonderful obituary. I have identified myself with his ideas for a long time. He was a voice of sanity in a world full of do-gooders with their hearts supposedly in the right place and brains inside their asses. He will be missed!
Regards,
Sock -
"Hollowness? I celebrated his death! His policy approaches were adopted by Ronald Reagan, Margaret Thatcher, and multinational institutions like the World Bank, IMF, and the WTO. It's his ideas of monetarism and strong advocacy of free market capitalism and privatization that are making the rich richer and poor poorer across the world!"
I beg you to prove your statement.
Until and unless somebody have had the taste of what socialism is all about in its pure form, he/she can not criticize Milton Friedman's ideas.
One example: In the India of 1970s, you had to wait for two years to get a goddamned scooter. Yes, you guys heard me right. I heard this story from my father. First, you had to approach the government to get a permission. The government determined whether you had legitimate reasons/background to buy a scooter. The processing of the papers for getting the permission would consume anywhere between six months to a year. After getting the permission, you had to apply to the crony-capitalist manufacturer to buy a scooter. The manufacturer of the scooter will deliver the abysmally low quality model in about another year or two.
I have no idea how India became like that: a nation that stifled creativity of its own people and promoted corruption because of licenses and permits. All this was done in the name of fighting poverty. We have come a long way from that and have a long way to go. One thing I hope for is that we never revert back to our socialist past.
Milton Friedman correctly analysed socialist policies did to the economics of a nation like India. His solutions might have been too harsh and can be debated upon but, at least, he understood the problems of India.
Regards,
Vinod, great post. Having made my own transition 2 years ago from public sector to private sector mental health work - and in the process, learning how to work better and more efficiently to serve the same folks, I'm even more of a fan of his ideas.
Milton = Banana
Friedman = Republic
South Asia was and is a land of peasants, minimum wage earning peasants. When peasants are led into revolution, they don't think about free market economy. What they want is a chance to feed their family and socialism speaks to that. Before anyone can jump at me, I have lived and experienced the first hand effects of socialism (what is it with prefixes to exisiting schools of thought that people bandy about - Moderate Capitalism, Enlightened Moderation, Gentle Sodomy) and it blows camel hair. If you have to wait 10 years for a phone, yeah sign me up mate. Sounds grrrreat!
On the other hand *Extreme* Capitalism as advocated by Free Market enthusisasts results in South America. When economies open up to the dictates of the market, one has to ensure a level playing field before doing so. Someone in Kent or Iowa has no stake in the vagaries of the Brahmaputra. This is good for you, the Friedmans say. More competition means lower prices for you the consumer. It does not apply to every commodity and in the long run capitalism/marketing is a two horse race.
How many newspaper, radio, soda, car companies does the US have? 2 or 3 big ones in each product? Every time a new field/opportunity emerges, people hail glorius capitalism and free market economy. It opens up oportunities and when the technology establishes itself, we are left with the we-treat-you-like-maggots-because-we-can consumer service of AT&T and MCI.
Can anyone share insights about SriLanka/Pak/Bangladesh? I seriously believe that the Socialist approach in India was the right way to establish basic infrastructure etc through state involvement. They should have abandoned that for an Enlightened Moderate Socialistic Free Market Economy in 1970.
Infinite monkeys on infinite typewriters in a finite period of time will most surely produce the entire work of Shakespeare. Quick somebody, get me a typewriter.
And what bird is that ?
Its ok, you could have used the C-word.
There is no proof for his statement.
Dismissing the failures of capitalism - (whatever that means) 1929 anyone? - blaming them on market imperfections etc., sounds very much like the hymns commie apologists sing in praise of the true communist society - and arguing that the Commie horrors of the East Bloc, West Bengal/Kerala, Maoist SE Asia etc., are not 100% communist. Capitalism and Communism are poorly articulated ideologies. While at least the latter is a recognised (even if terribly muddled) ism capitalism is simplistic catch phrase and best suited to politics by bumper sticker. Economics remains scientific as long as it doesn't descend into ideology and then there is nothing to separate it from junkscience. A unit of currency whether socialist or capitalist is pretty much the same.
"Economics remains scientific as long as it doesn't descend into ideology and then there is nothing to separate it from junkscience. A unit of currency whether socialist or capitalist is pretty much the same."
I worship the Linga.
"South Asia was and is a land of peasants, minimum wage earning peasants."
That, my friend, is a false statement. The correct statement would have been -
"South Asia, in the last three hundred years became a land of peasants, minimum wage earning peasants and if I would have my way, I will let it remain like that. The peasants are today's noble savages."
Regards,
Nice obituary, Vinod.
>>On the other hand *Extreme* Capitalism as advocated by Free Market enthusisasts results in South America
South America is a cesspool of socialists and populists - witness the recent election brouhaha in Mexico where the leftists lost.
M. Nam
South America is a cesspool of socialists and populists - witness the recent election brouhaha in Mexico where the leftists lost.
That is true. Chavez is running the Venezuelean oil company to the ground.
However, South America had its own share of hardline right wing army generals ruling from time to time who believed in Pax Gloria. They were equally damaging.
Lovely. Really lovely. Political analysis at its finest.
Kush writes:>>However, South America had its own share of hardline right wing army generals ruling from time to time who believed in Pax Gloria
Right Wing != Capitalist/Free Marketer.
Right wingers usually ask for more Government control over freedom of expression and thought - and left wingers ask for more Government control over the freedom of production and trade. Both are opposite sides of the same coin - neither is free-market friendly.
M. nam
>>South America is a cesspool of socialists and populists...
As continents go, it's beautiful - lot of unspoilt nature. Food is excellent. But once you leave the resorts and go into cities/towns, all bets are off. Crime is mind-boggling. Private enterprise severely hindered. Political cronyism is an art form. Innovation is non-existent. People are living off natural resources(oil/gas/timber) which is in abundance.
M. Nam
Right Wing != Capitalist/Free Marketer.
True.
But I think brown girl in the ring is referring to instances like this:
Sometimes, in countries, it is the ITT, Kennecott, British Imperial Oil is making all the shots.
I do believe in free market and competition, but local people have to be stake holders in the whole enterprise. I know it becomes tricky if let AT & T in India, how local stakeholder share one should impose, I have no clear answers. Sometimes, even within the countrymen it plays out ruthlessly like Nelson Rockeffer (Standard Oil days) crushing all the mom and pops during early days of oil industry (1800s - early 1900s) in US of A.
-----South America is a cesspool of socialists and populists - witness the recent election brouhaha in Mexico where the leftists lost.
True...now. Chavez wouldn't have stood a chance if the banana republics weren't created through US meddling and General and leaders educated in Friedmanism. All through the 60s, 70s and 80s, Capitalism or rather US based Capitalism (throw in the brits and french for good measure) ran amok. Visited Argentina and Brazil several times over the years, especially 80s. Very sorry state of affairs. People didn't have hope. The biggest difference I see is that people have hope in India. I don't know how short lived that will be.
friedman was a revolutionary in his time. however, friedman's works (i read free to choose in 1998) in a contemporary context simply do not address pragmatic solutions to the rapidly increasing wealth disparity. i wonder if friedman considered new trends in private-public partnerships near the end of his career, stuff like social entrepreneurship and CSR.
I'll help out a little here ===> Argentina
They followed every IMF and World Bank policy for restructering it's economy towards privatization. It failed miserably.
PS: You contribute to a think tank? *boggle*
Brown girl in the ring tralalalala - (nice handle. brought back memories of the blonde, the all one, whose poster witnessed many a private moment back when I was a pimple adorned teenager)
In order for "Friedmanism" to be succesful, honest motives are paramount.
p.s. the proof is in the halwa. witness the amazing miracle, his ideas unleashed on this land, where half the world would give an arm to immigrate. where some of the brightest indian minds have been coming since the mid 60s (many after having benefitted from world class education paid for by indian taxpayers), so that their progeny may grow up enjoying one of the best living standards mankind has ever seen.
Still, there is a sense in which free-market fundamentalists are right to hate Keynes. If your doctrine says that free markets, left to their own devices, produce the best of all possible worlds, and that government intervention in the economy always makes things worse, Keynes is your enemy. And he is an especially dangerous enemy because his ideas have been vindicated so thoroughly by experience. Paul Krugman.
Any historian of the aviation industry would agree with Krugman.
Vinod,
Thank you for the post. I now have a clearer picture of where you stand on social issues! So much of what you have said in the past make sense. I suspect you would have been one of those in India who would have been so happy to have the 'Friedmans' of the world exploit India to no end. Employers would dominate and then say this is what the people want! Wasn't it bad enough that the East India Company governed and exploited India for so long. This laissez faire mentality needs some form of checks and balances (e.g. trade-unions) to rein in man's natural tendency to be GREEDY! Where were you when Enron was finally exposed? Do you have any compassion for laborers at all? Is all that matters to you money and profit?
and therein lies the conundrum. It's hard to find an "honest" motive/confidence with all these examples and this. And those are just the scandals that have been revealed...
seeing this reminded me of climber Joe Simpson recalling what he thought were his final moments climbing a South American peak - "oh bloody hell...I'm going to die to Bony M."
---Honest motives are paramount---and there in lies the conundrum.
And what a conundrum it is. Anyone watch The Corporation? Some interesting points...
One solution fits all does not work. I find the recent (fairly) Grameen banks and social entrepreneurism that someone mentioned very heartening. I also have a deep rooted suspicion of people's motives especially corporations, be they state run or private. A state run enterprise should in theory be more scrupulous, since people vote the governemnt in power (in the case of India that is) but I have tasted the halwa and there is no proof to this. Everyone is corruptible. For some it's as plain as power and money, for others it is a good kulfi.
I will sell my newborn for a good kulfi, if only I could find a way to rationalize it. *It is really good for the newborn to be abandoned by its parents*
How do ppl post links? I just outed myself as not very blogalicious.
First make sure scripts are enabled (you should see 6 icons next to the "comments:" above the comments box. Then type in the text you want to be be the anchor for the link, then highlight it, click on the 2nd icon (earth with chainlink), paste the link, and voila.
East India Company? Are you kidding me? Everything the British did during its Empire and within its colonies was NOT free market economics. They used their advantage as colonial powers and took FREEDOM and CHOICE away from the INDIVIDUAL. Trade Unions are NOT anti-capitalist. It is by choice and participation that people who work project their voice to their employers. If they can negotiate a 'price' they'll work for and the employers are willing and able to pay it, good for the company. Now, Trade Unions employing tactics of thuggery and preventing others, who are willing to work in the same conditions for less IS NOT capitalistic. THAT is the natural check and balance on the Union itself (preventing it from completely cornering the labor market). Funny you should say the things you do, but Politician babus exploiting Indians by limiting their choices, individual creativity, and by corruption isn't all that bad. After all, letting people become rich or having the ability to make your own choices without paying penalty for industriousness is such a bad thing.
Friedman's ideas, fundamentally speaking, are sound and proven. Using the top X percent and the bottom Y percent to show disparity (gap between the richest and poorest) isn't an accurate metric for the world. Maybe among smaller more local groups it makes a difference, but on a macroscopic level, it holds less water. Today, the world has the largest middle class (and growing with India/China). Some poor still remain poor, but is that reason good enough to keep others, who given the choice of freer markets, could do better for themselves and their families?
Very few socialist setups have managed to function harmoniously. The reason being those areas aren't all that diverse or populous to begin with and mostly well educated to boot(aka homogeneous). The more diverse/larger the society, the harder it is to build consensus, therefore more strong arm tactics ensue (Socialist dictatorships/strong government control) to keep all in 'line'.
Everything in this world needs checks and balances. Picking apart the idea - capitalism, by using more exceptions to the cause doesn't show its grand failure. (Enron, as everyone would have it, committed crimes but they also got punished for it too. The company went down the tube and the owners are being jailed. Actions and consequences for said actions need to be paid). IMF and the World Bank CAN make bad decisions. Is that the fault of Capitalism or the people who think they hard the right approach and screwed it up? After all, we're all human and bound to make bad CHOICES. The substrate of fundamental capitalistic approach empowering the individual has done FAR more good than bad. I'm positive many a examples of how bad free market approaches are will be thrown at me, but was it really the system or the people (as an extension, governments) making bad decisions?
I find it quite interesting to see how many are quick to point out the insidious 'greedy' nature of capitalism, yet participate in a forum and domain that exemplifies the very nature of such markets - the internet.
Friedman saw things for what they were and are, far better than any in his generation.
I'm going to interject for a moment here, since I'm not hearing / reading anything new.
Socialism and capitalism are not the only two options. Economics is an ocean, not a railway line. It would be nice to hear someone think creatively instead of lining up on two sides of the same damn trenches and pick up their awesome new Garands and affix bayonets.
There are so many kinds of economies that you just have no idea. Yeah, ok, so gift-economies may not be for everyone, but there are so many places to borrow ideas from. This is getting away from Milt and his demise (and the people who mourn or celebrate it), but it is also getting at the heart of what I think Friedman believed: take what works, put it to work with a vengeance. Ditch the other stuff, regardless of how sentimental you might feel towards it. Let the market work its will, let it evolve, don't meddle needlessly.
In some ways, he was too laissez-faire for my tastes. Sometimes bad things happen when no one's at the wheel. But his ideas on monetary supply and monetary policy were revolutionary (if totally common sense in hindsight, but then, the best ideas usually are). He's partly how we got here, for better or worse.
Read up on "participatory economics" if you get a chance. Or read some Kim Stanley Robinson. When you can involve social justice, ecological sustainability, and dissociate it from the political process (or combine it in such a way that valuation does not skew public policy, per capitalism / democracy), then you're onto something good.
Free markets work only if the information freely distributed and available to all segments of the society. Illiteracy, corrupt infrastructure bodies, not-freely elected local governments (such as panchayats etc), caste system had stranglehold on how things are done. If India was fully free market society only sub groups (read high caste, middle & upper class, urban) would have improved their lot (buy scooters whenever they wanted) where as the rural, lower castes etc would have suffered.
But having said that the Nehruvian (read Fabian) policies were allowed to continue beyond their utility. As it happens so often in India, people implemented them and continued them without questioning until there was a crisis in 91.
But history rolled that way not because of chance but the Indian society was setup that way. If Friedman had his way there wouldn't be free education by government, which in turn would not have produced enough economists (read Manmohan Singh), engineers (read no IITs and RECs) and so there wouldn't have been proper human resources to utilize the liberalization.
MF had some good ideas, some very good ideas and some horrible, horrible ideas wrt India.
Good post, Vinod. India finally seems to be on the right track, but with the likes of 1%-interest-rate-Alan dot-com-to-real-estate Greenspan and helicopter-Ben no-M3-data-for-you Bernanke controlling monetary policy and with politicians from both parties competing with each other in fiscal liberalism, isn't Friedman largely irrelevant here in US?
Friedman used to think that attempts by governments to end recessions through loose monetary policies - as exemplified by Greenspan in 2001 - are likely to cause more harm than good. It's possible that he will be vindicated, but with over two billion people supplying cheap goods and cheap services, Fed may be able to get away with a goldilock economy -- high-to-moderate GDP growth, low unemployment, low CPI/PPI, low interest rates (inflation expectation) -- for far longer than Friedman would have anticipated.
Keynes seems to rule at least as long as the growth in money supply and inflation do not show up in prices and is instead beautifully hidden in the explosion of derivate trades, hedge funds, commodities and China's foreign reserve which touched the trillion dollar mark last week. But questions galore. Isn't this shift in inflation contributing to increasing Gini coefficient and will eventually prove socially unsustainable? What happens if/when Chinese and Japenese central banks think that they have enough treasuries and mortgage securities and start diversifying into Euro and dollar or if/when oil profits from middle east do not get routed to S&P 500 and start to get invested locally? How 'free' are they to make those calls? What gives in first - dollar/long-term interest rates or neither?
It is fascinating to watch from the sidelines. :)
Can't type. derivate=derivative, Euro and dollar=Euro and gold
Jeeze, you can always tell an economist by how quickly he or she puts me to sleep.
GujuDude, I would agree with your point that currently the world has a bigger middle class than it ever has in the past. But it also has a bigger population than it ever has in the past. Statistically, and proportionally, are there more people in the middle class than ever before?
Another question: do we have more, less, or about the same amount of choice as previous generations?
A better question: are we happier for it?
One need only look at Estonia's remarkable growth under Matt Lauer, who at the age of 32 became prime minister of Estonia and made absolutely astounding changes and advancements in the country's economy. With no advanced background in economics, he implemented many of the priniciples and ideas espoused by Friedman in "Free to Choose," which was incidentally the only book on economics he'd ever read prior to becoming prime minister.
The results speak for themselves: Inflation in Estonia has dropped below 3 percent, unemployment has plunged below 6 percent, and foreign investment has poured in. Estonia has enjoyed the greatest growth in real per-capita income of any of the former Soviet states. Today the country is a member of NATO, the European Union, and the World Trade Organization.
Here are some select quotes from former Prime Minister Lauer about Friedman, who was the Cato Institute's 2006 winner of the Milton Friedman Award for Advancing Liberty:
"The first time I heard the name Milton Friedman, it was in propaganda newsletters that said there is one very bad and very dangerous economist, and his name is Milton Friedman. I was quite sure, when he is so dangerous for the Communists to be telling me this, he must be a good man."
"Free to Choose was one of the first Western books translated into Estonian at the end of the 1980s. That is how I had the chance to look at these ideas, which, when they were introduced in Estonia, looked quite crazy to many Western people but which to me looked quite logical, I must say."
"I had read only one book on economics . Milton Friedman's Free to Choose. I was so ignorant at the time that I thought that what Friedman wrote about the benefits of privatization, the flat tax and the abolition of all customs rights, was the result of economic reforms that had been put into practice in the West. It seemed common sense to me and, as I thought it had already been done everywhere, I simply introduced it in Estonia, despite warnings from Estonian economists that it could not be done. They said it was as impossible as walking on water. We did it: we just walked on the water because we did not know that it was impossible."
Stellar piece, Vinod. See you at Thanksgiving.
GujuDude,
You cannot let corporations dictate all the terms in a free market economy. A corporations bottom line will always be profit at the expense of all else. There is nothing wrong with making a profit, but excessive profit (e.g. oil companies) has to be kept in check. By whom? That is up for debate. If not trade unions or the government who would you suggest?
I only mentioned the East India Co. as an example of what can happen when profiteers go unchecked for so long. This company may not have existed in a free market economy, but this is how some companies who do can behave.
I do not mean to imply that capitalism is a failure or bad ideology. I think capitalism is good policy. I only disagree with some of Friedman's views. He talked about intentions. I wonder if his 'intentions' were to do away with anything (regulations, social programs, laws) that prevented company owners, investers, etc. from exploiting people (namely workers) and the environment for maximum profit!
It is not capitalism that is greedy it is man and his abuse of capitalism that makes him greedy.
I would like to mention that I am sorry he has died. May Friedman rest in peace.
The problem with most systems is that they eventually lead to a rigid class structure and capitalism does not promise to be any different if left unchecked. People with power and money always find a way to keep it and pass it on to their progeny.
Warren Buffet sets an example by donating his wealth but the message that came with it was largely lost.
Matt Lauer. The Today Show has had such a monumental impact on Baltic economies that Latvia just elected Katie Couric as the new head of their central bank and brothers Bryant and Greg Kaczyński are now president and prime minister of Poland, respectively..
Uncle Milt looks desi in that top picture...
42, circus in jungle says
If Friedman had his way there wouldn't be free education by government, which in turn would not have produced enough economists (read Manmohan Singh), engineers (read no IITs and RECs) and so there wouldn't have been proper human resources to utilize the liberalization.
Yes, the IITs/ RECs have had some benefits for India. But were they the best use of the Indian taxpayers money? As Friedman said, there's no such thing as a 'free lunch'. In my opinion, if the government had lef higher ed to to the private sector, and focused on primary health and education, India would have been much better off.
http://www.deeshaa.org/who-actually-paid-for-my-education/
MF had some good ideas, some very good ideas and some horrible, horrible ideas wrt India.
And pray, tell... what exactly are these 'horrible' ideas that you speak of?
In the India of 1970s, you had to wait for two years to get a goddamned scooter. Yes, you guys heard me right. I heard this story from my father. First, you had to approach the government to get a permission. The government determined whether you had legitimate reasons/background to buy a scooter. The processing of the papers for getting the permission would consume anywhere between six months to a year.
Can you cite a source for the above? Seems kinda silly to me.
ANNA - Uncle Milt looks desi in every picture. In that particular photo, I'm thinking "Yash Chopra" - anyone second that?
To the people who wrote that they celebrated his death and popped champagne, you are disgusting excuses for human beings. You probably have no clue that Friedman was against the draft and continuation of Vietnam, or that he has been an impassioned critic of the War on Drugs and its effect on minority communities. Judging a man by his idea, and then relishing in his death becuase you disagree with those ideas is pathetic.
Some quick observations that amount to an appeal for greater rigour:
To Anindo:
Could you care to explain why you think South Asia was not a "land of minimum-wage-earning peasants" prior to 300 years ago ?
To Anindo (again!):
I grew up in India in the mid-70's. In my opinion, your father is exaggerating the darkness that prevailed in India during those years. What you describe was perhaps the case with trying to get a telephone connection (from the state-owned provider) - but the issue there was not of excessive red-tapism or corruption, but because not sufficiently many handsets were being made at the few plants, which were plagued by labour unrest (which is, arguably, a different sort of corruption). I appreciate the point you are making, but your own point is ill-served by the above sorts of anecdotal reporting.
To Santhosh V.
Maat Laar's regard for Milton Friedman borders on the hagiographic, so it is not clear how your quote contributes to a critical appreciation of Friedman. I take particular issue with the citation of Estonia's implementation of the flat tax as an example of the sophistication of Friedman's ideas. Estonia is a relatively homogeneous society - economically and otherwise - and a flat tax is not particularly damaging to it. But, one would be well advised to consider that a majority of policy-oriented economists regard the flat tax as a concept that is damaging to any economically heterogeneous society that values a state with welfarist tendencies.
To GujuDude:
Obnoxious rhetorical strategy! It is an interesting exercise in counterfactuals to wonder whether the Internet would have existed if there were no capitalism. To me, it's not an open and shut case. Besides: are you telling people that they must feel guilty for using the Internet to point out the insidious qualities of capitalism???
I don't understand economics particularly well, but it seems pretty clear to me that at least in India's case, Friedman was right.
Brown Girl in the ring (#17),
I seriously believe that the Socialist approach in India was the right way to establish basic infrastructure etc through state involvement.
But the state started doing everything and that is precisely why it couldn't invest in infrastructure to the extent it should have. Industries where the private sector would have done extremely well were killed with draconian policies. MRTP, import substitution, FERA etc etc.
Amfd and GB, I'm not sure about having to obtain govt permission, but it the picture that Anindo paints is not all that far fetched. Even until the early eighties, one had to wait six months to get a Bajaj scooter. Bajaj pretty much had a monopoly.
While we can and should debate Friedman's legacy, please lets not publish any fairy tales about the indian economy in the 70s. A more appalling scenario based on political corruption and disrespect for ordinary citizens can maybe only be found in the soviet union and the most backward of its satelites.
Here are just a few situations I personally witnessed:
(1) A shoe manufacturer in calcutta sets up manufacturing in excess of its "quota". A business rival complains.
The shoe manufacturer is forced to shut down the new factory, fire people and reduce the number of shoes it manufacturers!
(2) The indian govt. (federal) owned and created a milk supply business, a bakery and a hotel chain during this period. The only goal here was to ensure availability of jobs for politically connected people. AND ALL THIS WHILE REFUSING TO CREATE SCHOOLS, ROADS OR MAKE ANY PUBLIC HEALTH IMPROVEMENTS !
Yeah, this is all "anecdotal" - doesnt make it any less real - but anyway, here is a more broader analysis of the dire period of indian history, a period from which the indian nation hasnt yet recovered.
Take a look at the Center For Civil Society website.
Adding a few data points to the general success of socialism/communism in the indian context.
Even now all the toppers / high performers from West Bengal move out of the state in search of greener pastures. The Sachar commission on situation of minorities (read Muslim) paint an unflattering picture of the state. That basically becomes almost axiomatic, once you factor in the fact that Muslims tend to be more entreprenueral (sp?) and tend to go toward small businesses, (tailoring and such like) and it is precisely this segment that has been hit the hardest by socialism. Of course, now that all the party cadres and their cousins have their real estate development business the policy might improve a bit, but it is more likely that we will drift toward crony-capitalism, which in spite of its name is no capitalism.
Re: Real Estate Devt business: The party thought that this was the cheap way to reward the cadre in the nineties, given that the state govt was already running on massive debt and was getting harder to sanction state govt jobs for the faithful, and in any case, everyone figured out over the eighties that you had to be cpim member to get a job, so everyone did so, and their was this massive liability on the parties hands in the nineties. Of course the effect was a spate of building collapses around the city; and stealing of prime agricultural / fishing land in the suburbs/sunderbans area + poaching and such like. We are doing far better than Bangladesh, which have killed all their tiger population and come by to the Indian side to poach and run guns etc.
Aside: Rest of bengal, if you are not a cpim member, you face problems in your day to day life, barring exceptions like the 1999 assembly elections. In the sunderbans you drift out to the Bay of Bengals, making some fish very happy. We visited a small "model" village there, it was remarkable in not having a single grafitti. It was a one-party rule, really.
I am surprised that there has been so many criticism of Friedman. He might have made a few mistakes (monetary policy) but developing countries are better off following his recommended policies than any sort of socialism/third way policies. Wealth inequalities do occur (for example, look at China, where its southeastern side is richer than its interior) and disparities between groups are growing, primarily the groups that take advantage of globalization and those that do not, but overall, it is better for some people to be wealthier and richer than for everyone to be kept artifically poor by social policies.
The best policies that work for the poor are the ones that make sure they can compete in the global market like better education (public schools are woefully lacking) and less market controls. It is easier to deal with monopolies than it is to deal with absolute poverty.
Imagine the emotive power of the socialist line of thought, that even with the heart-rending examples of the havoc socialism and top-down economic planning has wreaked on India, desis still sing hosannas for socialism and froth in the mouth at rapacious capitalism. If I call it a madness, would I be far off?
The world needs more Friedmans.
/sad
Did anyone say Internet (www) and free market in the same breath? Looks like we need another history lesson.
GB: I grew up in India in the mid-70's. In my opinion, your father is exaggerating the darkness that prevailed in India during those years. What you describe was perhaps the case with trying to get a telephone connection (from the state-owned provider) - but the issue there was not of excessive red-tapism or corruption, but because not sufficiently many handsets were being made at the few plants, which were plagued by labour unrest (which is, arguably, a different sort of corruption). I appreciate the point you are making, but your own point is ill-served by the above sorts of anecdotal reporting.
Actually, Anindo is correct. One had wait for 1 year (or more) to get a scooter. You got it earlier if you paid in dollars. So there was a rush of folks trying to convince their US based relatives to send them dollars!! [Seriously!].
Having stood in grocery (ration) queues for hours to get adulterated rice, kerosense and dal, I am glad that India has semi-liberalised. I wish it would go the whole hog though. The small business sector is not yet free.
7times6
You have raised a great point - the emotional power of "socialist" hypocrisy that somehow fits well with some aspects of indian politics and culture.
Even after all this suffering, the thuggish indira gandhi's astonishing machinations, the daily torture of indian citizens at the hands of their goverment, still many of our educated people continue to regurgitate these formulas.
So instead of saying: it is a disgrace that we dont have every indian child in school, it is a disgrace that shop owners and small vendors dont get support from the goverment, that young indians cannot get decent paying jobs, we have the spectacle of politicians handing out TVs and scholarships and rice to selected people while at the same time refusing to invest in infrastructure and education. And our educated folk continue to believe that this is a good way going and forward!! Why, because it is "socialist" and so must be OK...
So true, Qizman
Anyone who sings paens to the (semi) socialist way of lifestyle, did not live in india.
or, if she/he did, likely belonged to the priveleged class, who could buy everything "imported".
I was in India in the 80's and that sounds like a nominal waiting period for the time. You had to wait up to 10 years to get a phone (if you were not a government employee). For a gas connection the waiting period was about 3-5 years. If you wanted cement to build a home, getting a permit for that could take a year or two, but most people got around it by bribing the right people.
SM Intern : Sorry about the multiple posting, please ignore/delete
To Anindo (again!):
One example: In the India of 1970s, you had to wait for two years to get a goddamned scooter...
First, you had to approach the government to get a permission. The government determined whether
you had legitimate reasons/background to buy a scooter. The processing of the papers for getting
the permission would consume anywhere between six months to a year.
I grew up in India in the mid-70's. In my opinion, your father is exaggerating the darkness that prevailed in India during those years. What you describe was perhaps the case with trying to get a telephone connection (from the state-owned provider) - but the issue there was not of excessive red-tapism or corruption, but because not sufficiently many handsets were being made at the few plants, which were plagued by labour unrest (which is, arguably, a different sort of corruption). I appreciate the point you are making, but your own point is ill-served by the above sorts of anecdotal reporting.
You can dispute the veracity based on your experience. However, this is what I experienced in 70s India as part of a lower-middle class joint family with no influence (political/administrative) in a medium-sized town.
1. State run companies manufactured scooters (eg., Vijai from AP Scooters) with terrible quality. The other option was a private company (eg., Chetak from Bajaj Scooters) with much better reliability. Vijai could be delivered within 3 months in the colour of your choice however, the Chetak had a waiting list of 6 years if you picked it up from the dealer at the manufacturers price. There was also a shorter waiting time (2 years) for the Chetak if you were willing to fork over the equivalent dollar amount to the dealer which required RBI (Reserve Bank of India) approval. There was also an intermediate waiting time (3-4 years) if you worked in the Indian armed forces. You just let Bajaj know every time you were relocated.
In fact, you also got an armed services discount.
2. There was 2 year waiting time for any NEW cooking gas cylinder (LPG). A family is allowed only 1 replacement every month. Any replacement had to be ordered 2 weeks prior to delivery. A cylinder typically lasts 4 weeks with a reasonable amount of cooking. The alternative until you get allotted a NEW gas cylinder was kerosene.
Of course, kerosene was not available in the open market but only in "ration shops" and provided once a month.
3. The "free" education was a joke. My grandfather saved and paid for my education at a Jesuit school.
4. The "free" healthcare involved waiting the whole morning in line to be seen by the doctor. Of course, if you paid extra you got seen quicker.
Half your time is spent on finding who you could contact/grease to get something done for your business or your family.
So please spare me the "What they want is a chance to feed their family and socialism speaks to that" attitude.
Yes, of course. An important piece of history that we forget at our own peril. Rah rah uncle milt, unfettered capitalism and unfettered celebrity !
53.
According MF, even health care and education (from what I read/saw he didn't distinguish primary and higher) should be privatized. I agree with his basic principle that govt is inefficient in distributing the resources. The problem that I have is that people doesn't seem to recognize that neither free markets are efficient in *all* areas. MF wanted a pure free market economy which would have never worked in early independent India. I am not sure even now whether it will work.
Big surprise Indians glorifying Friedman, since captialism did work for you ABCDs at the "centre", but screwed and continues to screw those of left behind in the "periphery", I will refrain from jumping on your bandwagon.
Several people have corroborate the above. I will also have to say that the wait time for a scooter was atleast 1 year or more. Those who went to work in the Gulf, came back with foreign exchange and paid it go get a scooter earlier. What an utter waste of human potential.
I would like to refute that. I tend to be a supporter of socialist programs, and grew up in India in the 1980s. I'm not sure how you define "privileged" but my family was pretty solidly middle class with an annual income of around $2000-3000. We didn't have a car, a VCR, or fancy imported stuff. We did have a TV and a telephone which the majority of Indians did not have at the time, and I did go to a private school, which a lot of Indians do regardless of their social status. So I guess we were privileged compared to the majority of Indians but were not living a lifestyle of excess. However, I think free healthcare is better than no healthcare, free education, crappy though it may be, is better than no education, and having a completely free market economy is unrealistic in a country like India. What makes you think the US is succesful because we don't have a "semi-socialist" way of life? We do! We have free education and healthcare, interest free loans and Pell Grants for higher education, food stamps, and disability, and the US continues to be relatively economically successful. So why advocate taking those programs away from other countries?
Yes, we might have had to wait 2 years for a scooter, but compared to people who were living in slums and dying of dysentery we were relatively well off.
kali billi (47):
Yes, a corporation is beholden by its stockholders to its bottom line, but that bottom line is a sum of many factors. Furthemore, many of these factors aren't entirely under the corporation's control, so it's silly to suggest that we 'cannot let corporations dictate all the terms in a free market economy.' If that were possible, it wouldn't be a free market economy, by definition.
It's true that trade unions can impact one part of the bottom line, labour costs. The government can use its police power to either undergird or undermine specific people, companies, or industries. In a free market, customers can choose where to purchase goods and services. Also, giving individuals the freedom to innovate allows them to create new technologies and products to compete with established firms (see Google and Linux vs. Microsoft).
Finally, I disagree with this notion of `excessive profits'. Yes, Exxon-Mobil generated 10.49 billion USD in net income last quarter, but this is from 99.563 billion in revenue--a modest profit margin of 10.5%. On the other hand, Coca-Cola had a profit margin of 22.6% to generate 1.46 billion USD in profit. Microsoft boasted a 3.478 billion USD profit (about a third of Exxon's), but on revenue of only 10.811 billion USD, a profit margin of 32.2%. Google generated 733 million USD in profit from 2.69 billion USD in revenue, a 27.2% profit margin. What about the profiteers from PS3 sales? If you paid $600 for a PS3 and then sold it for $2000, you have a 70% profit margin. How is that for excessive profits?
The only problem with your comparison is that the East India Co. was a monopoly that was created by both the British and Mughal governments. In a free market, companies do not have the backing of the state's police power.
I think his intentions were clear: that allowing people to be free to choose and control how they earn and spend their money creates an economic system where all benefit.
Ultimately, it is not simply stock holders and corporate titans who choose the bottom line over other concerns. It is average people who make the same sorts of choices. Would most people pay extra to buy a sneaker that was manufactured in Cambodia where minimum wage and other labour laws exist? No, most people simply go for either the cheapest (probably manufactured in China or Vietnam where no such labour laws exist) or the most stylish. Are people willing to pay extra money to get their energy from renewable sources? No, they generally just go for the provider that offers the cheapest rate. To blaim enviornmental and social ills on corporations is misguided; the corporations merely reflect the choices and attitudes of the populace.
Again, I disagree. Man is (given to be) greedy--plain and simple. No economic system can change that. In the end, a free market will rein in the greedy by allowing competition to step in and offer an alternative. On the other hand, in a planned economy, once someone has the power of the state, a person's greed can do much more damage--and the little guy is stuck without a choice.
In the end, we should remember that Milton Friedman was not only a proponent of economic freedom, but of all individual freedom (some may argue there is no difference).
In the end, we should remember that Milton Friedman was not only a proponent of economic freedom, but of all individual freedom (some may argue there is no difference).
I think most rational people would agree that personal freedoms in an organized society have to be limited for the good of society. Otherwise we might as well abandon laws resort to vigilante justice. (As in "that brown gas station owner looks like Osama Bin Laden, let's shoot him with our muzzle loaders"). Which brings me to your other point
Blanket statements about the immutability of human nature are not convincing. You might as well argue that "Man" is given to being violent and we might as well abandon the laws of society and let the laws of the jungle decide who gets to be alpha wolf.desishiksa
... free healthcare is better than no healthcare, free education, crappy though it may be, is better than no education, and having a completely free market economy is unrealistic in a country like India. What makes you think the US is succesful because we don't have a "semi-socialist" way of life? We do! We have free education and healthcare, interest free loans and Pell Grants for higher education, food stamps, and disability, and the US continues to be relatively economically successful. So why advocate taking those programs away from other countries?
Yes, we might have had to wait 2 years for a scooter, but compared to people who were living in slums and dying of dysentery we were relatively well off.
There is no free lunch ;)
The point is slums and dysentry could have been markedly reduced by adopting a more liberal economy (without the licence-permit raj).
India could also retain it's democratic structure and still grow 5-8% over these five decades.
Amaun--
Are slums and dysentery markedly reduced now that India has a more liberal economy? Not a rhetorical question, I'm asking because I don't know, and if someone is going to answer yes, I'd like to see some statistics. Thank you.
For #78,
There are definately less percentage of population of India below poverty line today compared to the '70s. I dont think that anyone really wishes the "good old" days of licence raj back.