Dani Rodrik on Milton Friedman’s magical thinking

A beautiful essay. Here’s the “nut graf”:

Markets are the essence of a market economy in the same sense that lemons are the essence of lemonade. Pure lemon juice is barely drinkable. To make good lemonade, you need to mix it with water and sugar. Of course, if you put too much water in the mix, you ruin the lemonade, just as too much government meddling can make markets dysfunctional. The trick is not to discard the water and the sugar, but to get the proportions right.

I read Capitalism and Freedom when I was about sixteen and couldn’t believe how stupid it was. I reread it again a few years ago and was astonished at how little the old man had learned in forty years. As a technical economist, Friedman made major contributions, and as a policy analyst he had some excellent ideas along with some silly ones. But as a social theorist he was neither especially intelligent nor intellectually honest.

Here’s a sample. Karl Marx pointed out that capital in the form of factories and machines is itself the product of prior labor, and (somewhat fancifully to my mind) contrasted the “living labor” of human beings with the inanimate (“dead”) labor embodied in the machine. That allowed him to write the following gorgeous piece of social satire (produced at a period when limiting the hours of child labor to sixty per week was considered a dangerously radical proposal):

The capitalist has bought the labour-power at its day-rate. To him its use-value belongs during one working-day. He has thus acquired the right to make the labourer work for him during one day. But, what is a working-day?

At all events, less than a natural day. By how much? The capitalist has his own views of … the necessary limit of the working-day. As capitalist, he is only capital personified. His soul is the soul of capital. But capital has one single life impulse, the tendency to create value and surplus-value, to make its constant factor, the means of production, absorb the greatest possible amount of surplus-labour.

Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.

Only a first-rate mind could have produced that passage. And only a third-rate mind, consumed with envy and ideological hatred, could have produced this nonsensical commentary

Marx argued that labor was exploited. Why? Because labor produced the whole of the product but got only part of it; the rest is Marx’s “surplus value.” Even if the statements of fact implicit in this assertion were accepted, the value judgment follows only if one accepts the capitalist ethic. Labor is “exploited” only if labor is entitled to what it produces. If one accepts instead the socialist premise, “to each according to his need- from each according to his ability” – whatever that may mean – it is necessary to compare what labor produces, not with what it gets but with its “ability”, and to compare what labor gets, not with what it produces but with its “need.”

Of course, the Marxist argument is invalid on other grounds as well. There is, first, the confusion between the total product of all co-operating resources and the amount added to product – in the economist’s jargon, marginal product. Even more striking, there is an unstated change in the meaning of “labor” in passing from the premise to the conclusion. Marx recognized the role of capital in producing the product but regarded capital as embodied labor. Hence, written out in full, the premises of the Marxist syllogism would run: “Present and past labor produce the whole of the product. Present labor gets only part of the product.” The logical conclusion is presumably “Past labor is exploited,” and the inference for action is that past labor should get more of the product, though it is by no means clear how, unless it be in elegant tombstones.

Hard to tell whether Friedman was really literal-minded enough to misunderstand Marx’s point so thoroughly, or whether he was only pretending to be obtuse to take polemical advantage of a writer his audience was certain not to have read. But it’s easy to tell that Friedman was, by profession, a peddler of claptrap.

Comments

  1. Andrew Sabl says

    Actually, Mark, at least Friedman’s first point seems impeccable: there is no logical relationship between an economy that gives everything to the (able-bodied? working-age?) producers and one that gives everything to the needy (which in practice overlaps with producers but very far from perfectly). Marx got around this through the minor premise that the (tiny) bourgeoisie is enriching only itself to the disadvantage of both, but in a modern society and economy the difference between the needy and the productive becomes both obvious and a real political dilemma for people on the Left. Gerry Cohen in *If You’re Such an Egalitarian, How Come You’re so Rich?” (which carries no water for capitalism) goes through this with great clarity.

    • Quercus says

      Hey, I’m interested in exactly how obvious the difference between the needy and productive is in our modern society (and why it’s so much more obvious now than in pre-modern societies?). I’ll grant you a competent bridge welder is pretty clearly productive, and a street beggar or trust-fund yachter is pretty clearly unproductive, but can you help me with the right category for, say, the guy writing software for banks to maximize overdraft fees, a lobbyist for a defense contractor, a professional poker player, an astrophysics grad student, or a stay-at-home father?

  2. Anderson says

    Is it clear in Friedman’s book that he’s commenting on that passage of Marx? Because the Marx and Friedman quotes in this post don’t seem to have much to do with each other.

  3. Sean says

    To Andrew: “To each according to his need” should not be confused with the idea of the “needy.” While there’s certainly a tension between the proletariat and the lumpenproletariat (which is not what Marx is describing in his famous line – product is simply redistributed among the producers), that tension is exacerbated most in a welfare state economy and could be severely diminished in a democratic socialist economy.

  4. says

    I disagree with Marx, but he was on to something here. Capital isn’t embodied labor. Rather, it’s that labor *is* capital. By far the greatest asset that your average 20-45 year old worker has is his time. He invests that time by selling it to someone in the form of labor. He is allowing the owner to benefit from that time.

    In exchange, the worker receives two things. The first, represented in his wages, is an immediate payment for that investment, reducing the balance owed to him. However, contrary to most of the theory I’ve seen, it does not eliminate that balance. What is left is the investment that the worker has made in the specific and non-transferable skills that he has acquired. Those carry a substantial value if the worker continues to labor for the same employer. Further, beyond the skills he has acquired, each year that passes means that he is less able to find a new job if he needs to; just ask anyone in their 40s or 50s who has been laid off in this recession. These investments experience severe loss if he loses his job, whether it is because the company has failed or it has decided to move into a different sort of work.. This is no different than what a bond or equity holder experiences in the case of failure.

    Labor is capital. However, non-labor capital is substantially favored under the law. Equity capital receives control of corporate decisions. Debt capital stands at the front of the line when it comes to liquidation. Labor capital gets neither benefit.

  5. says

    J. Michael…On your last point, whether labor capital has any “ownership benefit” or call on corporate assets, depends on the deal that’s made between the worker and the owners. Clearly, in bankruptcy, we are all going to stand in line behind the debt owners, (although at least workers’ earned compensation is usually protected first). That position emanates from debtholders conceding the upside in case of success – all they get is their money back plus interest, but that’s the deal they make. The upside belongs to the equity holders. The assumption (in error, I believe) among Marx and his followers is that the worker can not negotiate a call in equity. This may be the case but is not necessarily so. It depends largely on how skilled and specialized the work is that the employee performs. For example, clearly athletes and entertainers, whose services are uniquely in demand, have found it comparatively easy to negotiate significant equity packages. So have star CEO’s (whether or not you think they are worth it is another story). But there are many other ways for this to come about. If I use my capital to purchase a bar tomorrow, lacking many of the skills I need to properly run the business, my smartest course would be to find a manager/bartender to help me and provide some of his compensation through an ownership stake over time – sweat equity if you will.

    Overall, I think your comment is on the money, unlike Mark’s which strikes me as absurd. I especially like your acute observation that the value of worker investment in his own skills is subject to change over time. Comparing a philosopher (Marx) to an economist (Friedman), as if they were both apples seems to me to be a futile exercise. As far as Mark’s comparison goes, it represents only his political leanings, there is no rationality in his judgment. So one like me may have sympathy for Marx’s philosophical views about the state of 19th century man while finding his “economic” analysis irrelevant at best, mistaken at worst. I can understand the left’s view that whatever the usefulness of Friedman’s economic perceptions, they find his insensitivity to worker alienation (to use a Marxian term) appalling. That’s what makes horse races.

    The wonder of capitalism, seriously misjudged by Marx and his followers, is that there is such flexibility within the system (due to the fungibility and real value attaching to money in advanced societies). When that currency value breaks down, as in hyperinflation and other chaotic environments, there can be no real capitalism.

    • says

      although at least workers’ earned compensation is usually protected first

      In my personal experience of working for an employer that went bankrupt, this is not true. We stood behind all of the debt holders even for wages for time already worked. I was fortunate both in that I’d gone to part time a few months before *and* being on vacation the week bankruptcy notices were nailed to the door, which was the first any of the employees had heard of impending financial troubles. A couple of friends of mine had a horrible time getting by with the sudden disappearance of four weeks of wages.

      It didn’t help my mood that I was also an equity investor and that the majority owner had never let us know of the problems, either. Over the previous two years, when 90% of the equity disappeared, he had never sent us the form that would have let us claim the capital loss. Not that the authorities cared enough to do anything about that particular violation of the law.

      • says

        There’s also the matter of pension obligations, which are also earned compensation, but so badly protected under standard bankruptcy law that the federal government had to step in and build an entirely separate structure to protect even part of them.

        What always fascinates me about this kind of discussion is the way that unalloyed capitalists seem to have taken Marx as an operating manual rather than a critique. The major difference between Marx’s “soul of capital” and Romney’s “corporations are people too” is that the latter thinks the prevalence of immensely rich, potentially immortal sociopaths is a feature rather than a bug.

    • Mark Kleiman says

      Redwave, if you really think I’m politically closer to Karl Marx than to Milton Friedman, then the distance from consensus reality of the rest of your opinions makes a certain amount of sense. My deepest objection to Friedman, other than the pervasive intellectual dishonesty of his polemical works, was his willingness to embrace the tactics of tyranny in support of his preferred economic nostrums. On that point, he and Marx were as one.

  6. kevo says

    Merely witnessing history over the course of my lifetime, I have seen with great consternation Milton’s theories being loved by many a late 20th century dictator! Control of the flow of capital is important to many a friendly fascist – and the not so friendly ones, too!

    Milton’s theories were very valuable to leaders of banana republics where labor is seen not as a cost, but as an issue of ownership! I’m sure the Koch Bros., well immersed in the theories of Milty, would jump at the opportunity to own their labor force rather than having to pay it subpar wages!

    • says

      Kevo, seems to me your speculation about what Milton’s theories might or might not have inspired can’t hold a candle to the number of people slaughtered in Karl Marx’s name during the 20th century, reaching well into eight figures, if not nine!

      • kevo says

        Redwave72 – I think the name under which millions were slaughtered was not Marx, but rather, Stalin! Karl was merely a beer-drinking youth in Germany who authored a critique to the early stages of capitalism – dead and dust by the time Lenin, Trotsky and Stalin came to power in Russia at the height of its WWI collapse.

        Milty was phoned and consulted by dictators and their reps for the better part of 30 years. No, Redwave72, don’t loose the focus of the post!

      • ChristianPinko says

        That Marx’s theories have had evil influence does not change the fact that other tyrants have employed Friedman’s ideas to justify rapacious behavior; nor does it change the fact that at present, extreme conservatism is much more of a danger than socialism.

        • Wonks Anonymous says

          The dictator Friedman is most often tarred by association with is Pinochet. Hayek was actually a bigger supporter of the general*, but oddly enough he doesn’t receive much flack. The regime was already murdering people and mismanaging the economy before Friedman had any role. He was invited to give a talk at a university and gave much the same talk he gave in China and Yugoslavia. He spent, I believe, about 45 minutes talking to Pinochet, who by that time had acknowledged that he and the other military officers did not know how to conduct proper economic policy. In a way this parallels the “Spanish miracle” in which falangists were pushed out in favor of technocrats associated with Opus Dei, although that took longer to occur.
          Was there some other dictator you were thinking of?

          * http://johnquiggin.com/2006/11/23/friedman-and-hayek/

  7. Wonks Anonymous says

    Rodrik has written defenses of industrial policy elsewhere, but he doesn’t really do much of that in the linked piece. He says Chinese workers in pencil factories are better off because the government made wood artificially cheap, subsidized exports, and intervened in currency markets. And Milton Friedman would have opposed those policies, but pointing out that they benefit some set of producers would not have been much of an answer to his objection. Rodrik needs to argue that the benefits to the pencil factory workers outweigh the costs to the rest of China. Defenders of TARP, for instance, argue that the loans have been repaid and the government/taxpayers made money on the deal. That’s the kind of math Rodrik needs to do for his argument. Like I said, he’s likely done some of that elsewhere, but he doesn’t do it here.

  8. says

    What I have found most troubling with Friedman and other apologists for capitalism is the degree to which their unabashed position rests upon the explicit ignorance of other forms of capital, namely human and social. They assume a sort of universal human efficacy in which neither human or social capital are forms of capital that enable social leveraging. Instead of reckoning with what sociology, economics, psychology, anthropology, neuroscience tells us about all the many factors that either limit or promote our capacity for self-efficacy, they prefer to ignore or diminish it, preferring instead to invent fantastic notions about human resiliency. Thus, the minimum wage worker who sews our clothes, bags our groceries, cleans our toilets, cooks our fries, and staffs our daycare is not there because of a lack of human and social capital, and thus exploited, but instead someone who has chosen their own lot in life, causality be damned.

  9. bobbyp says

    For example, clearly athletes and entertainers, whose services are uniquely in demand, have found it comparatively easy to negotiate significant equity packages.

    You gotta’ be kidding. How big of an equity stake in the Yankees does Jeeter have? This assertion is so bone dead wrong to refute it would be a waste of time.

  10. bobbyp says

    So when do mere workers get to realize the wonders of accelerated depreciation on our investment in ‘human capital’? Or special tax treatment for ‘capital gains’?

  11. bobbyp says

    He spent, I believe, about 45 minutes talking to Pinochet, who by that time had acknowledged that he and the other military officers did not know how to conduct proper economic policy.

    That must explain why Friedman coined the term “Chilean miracle”, eh?

    • Wonks Anonymous says

      I hadn’t been aware he coined the term, but it wouldn’t be surprising. I mentioned that there are parallels to the “Spanish miracle”, which isn’t mentioned as much nowadays perhaps because it seems less significant relative to some other economic “miracles”. I don’t know when the term was coined either, but the fairly smooth transition to democracy also seems similar. The difference is that Franco had to die first, whereas Pinochet stepped down after an electoral defeat. That’s at least one good deed you can give Pinochet credit for!

      The recent economic performance of Chile has been impressive (it joined the OECD), but when Pinochet was still in power it had some severe problems sometimes attributed to monetary policy. Its subsequent performance is sometimes attributed to the institutions he put in place, but he also left in place many instituted by Allende and those could be given credit as well.

  12. bah says

    what do you illiterates have to say about steve jobs? capitalist pig with a bad attitude?
    you fellows have no place for entrepreneurship.epic fail

    • says

      I would say that he was a great man, buoyed by great privilege. From wikipedia:
      “[... biological child of graduate students...] Jobs was adopted by the family of Paul Jobs and Clara Jobs (née Hagopian) who moved to Mountain View, California when he was five years old.[1][2] Paul and Clara later adopted a daughter, Patti. Paul Jobs, a machinist for a company that made lasers, taught his son rudimentary electronics and how to work with his hands.[1] His adoptive mother was an accountant.[16] Asked in a 1995 interview what he wanted to pass on to his children, Jobs replied, “Just to try to be as good a father to them as my father was to me. I think about that every day of my life.” … Jobs went to Homestead High.Homestead High School had played a role in the development of Silicon Valley. During the late 1960s and 1970s, the school was a haven for students interested in electronics and the emerging computer age. The school’s electronics class is considered as seminal as Frederick Terman’s program at Stanford University.[7]”

      If you take a look at this map, it is but one of multiple high-performing schools in wealthy silicon valley. http://schoolperformancemaps.com/ca/#37.3086,-122.0891,12,1
      Blue = Highest ranking possible, and generally found in exclusive, affluent neighborhoods. Red = Lowest performing schools, generally found in ghettos, near airports, etc.

      This tells me Jobs was raised with high levels of human and social capital. There are occasionally those who achieve some success with little of either. But they are the exception to the rule. Frequently, they have indeed had some determining form of capital that gave them their leverage.

      What this means for capitalism is that because these forms of capital will always be unevenly distributed, a society committed to fairness and equality must take an interventionist role, and provide support for citizens who grow up with without it. We’re no where near finding the policy answers to doing this; the breakdown in family structure, generational poverty, and geographic isolation/concentration is a massive dilemma. But there are interventions proven to work, although they cost money and must be funded adequately.

  13. Barry says

    “Hayek was actually a bigger supporter of the general*, but oddly enough he doesn’t receive much flack. ”

    Because few people know about him, or care.

    • Wonks Anonymous says

      They’re both economic Nobelists, but I would say Friedman is more well known and respected among economists (who cares about Hayekian capital theory anymore?). I don’t know if that’s the case among the general public. Glenn Beck had been promoting “The Road to Serfdom” (a book that actually comes out in favor of government provision of health care, so he probably didn’t read it), Russ Roberts made those rap videos and the “Keynes vs Hayek” theme has gotten plenty of play elsewhere. I myself am more into pop-hayekianism a la Timothy B. Lee than anything he himself wrote, with “The Use of Knowledge in Society” becoming a more salient text in the internet era. I suppose it’s odd that few have made any connection between “The Denationalization of Currency” and bitcoin though.

  14. Barry says

    bah says:

    “what do you illiterates have to say about steve jobs? capitalist pig with a bad attitude?
    you fellows have no place for entrepreneurship.epic fail”

    Wow, it’s a right-winger with logically void and insulting arguments! Run for your lives, fellow comsymp liberals!

  15. pmp says

    If this blog post had not been written with such derisiveness and dismissiveness, it might have been more convincing or at least intriguing to someone who was agnostic or even positively disposed to Friedman.

    Heck, if Professor Kleiman assumed a different tone, he might have even gotten a response from Milton Friedman’s son David, who is an Economics professor at Santa Clara University and an excellent blogger to boot.

    I think it’s only fair to call this blog post a complete disappointment. At least the blogging medium will allow Professor Kleiman to try to do better in the future.

      • pmp says

        I suppose it’s “You can have more interesting conversations (and better interlocutors) if you can learn to disagree without being disagreeable.

        • Morzer says

          pmp, perhaps you should try practicing what you preach? You seem far less reasonable and interested in facts than the blog entry which so agitates you. You express intemperate objections to the views advanced here – but never bother to explain why we should take your objections seriously.

  16. says

    Karl Marx argued that revolution was impossible in a society that lived on the family farm. He believed that urbanization and industrialization were both requirements for a Communist revolution. In the 1920s, half of all Americans lived on a farm. Family farms that remained free of debt, enjoyed full-employment during the 1930s. Those that used debt to expand, were destroyed.

    The Federal Reserve Bank is a Marxist and Fascist institution. It creates the debt necessary to enslave a Republic, and the politics that are required to increase our indebtedness. Whether this country spends money on social programs (Socialism), or military expansion (Fascism), we end up borrowing money from the Federal Reserve. As an added bonus, the privately owned corporation also charges us interest to use its Federal Reserve Notes as our currency!

  17. says

    Friedman was a bad exegete of Marx. So what? He’s hardly alone, and no one ever claimed he was important because of his interpretation of Uncle Karl’s prose.

    Friedman was making a perfectly correct argument against a broadly-held version of the labor theory of value, which is that profits are unfair because labor creates all wealth. Marx didn’t actually believe that version, but the version he did believe is also wrong.