I respect Dani’s essay re-evaluating Milton Friedman’s legacy but I’d like to comment on this specific Rodrik quote; Â “But Friedman also produced a less felicitous legacy. In his zeal to promote the power of markets, he drew too sharp a distinction between the market and the state. In effect, he presented government as the enemy of the market.”
When government “grows big”, too many strategic game theoretic issues arise as firms spend too much time lobbying for favors from government. I get grossed out when I hear that companies are moving their headquarters to Washington D.C. Â Â Is that a “productive place” to be headquartered?
Economists love our perfect competition model and wish that capitalism would reorganize itself such all firms and consumers are “small price takers”. Â The pricing mechanism sends signals of scarcity and self interested individuals and firms respond to these incentives. Â Â Government is not “small” and thus when it gets involved issues of “game theory” arise. Â There would be no “too big to fail” if government could commit to a rule of no bailouts of failed companies. Â Part of Friedman’s worldview was embracing “rules over discretion”. Â Â The “right companies” will grow big in competition but connected firms will be more likely to thrive when an active “big” government is calling the shots. Â Would these “big companies” then have “monopoly power”? Â No, as Microsoft and Detroit have both learned — you have to keep raising your game as new products will challenge your dominant market position.
Friedman believed in the power of competition in every market to protect us and to allow us to collectively achieve our diverse individual desires.Â Â Steve Jobs grew rich by dreaming up and designing great products. Â But, Steve Jobs is a pinch of a rarity. Â Around the world, many individuals grow rich because of their ties to politicians who can hand them a gold mine or other favors. Â This rent seeking has pernicious long run effects for growth. Â Without growth, there is no freedom for the 7 billion people on the planet.
Friedman did care about the poor. Â His support for the Negative Income Tax would have raised the poor’s standard of living without distorting the work incentive (the Earned Income Tax Credit is a cousin). Â Don’t call Friedman cruel and don’t call him naive!
I recognize that in the real world that government has substantial discretion over what it does. It doesn’t followÂ “rules” such as a 3% money supply growth rule. Bernanke has a lot of discretion!Â Â But, we don’t know what is the goal of government.Â What is this diverse organization trying to achieve, what discretion does it have? Who self selects to enter it and how are they incentivized to do their job while serving?Â Firms are much easier objects to understand. They seek to maximize profit.Â Â Very hard game theory issues arise when you don’t allow Milton Friedman’s vision to be reality.Â We don’t really understand how capitalism plays out when you have small firms and consumers and you have a resource rich government that can offer favors and regulatory protections toÂ a subset ofÂ favored firms and consumers.Â Â Â This is why the field of political economy isÂ such an exciting field today.Â