Guidance from Friedman’s “Capitalism and Freedom” (with commentary)

22 11 2012

In the preface to Milton & Rose Friedman’s book “Free to Choose” (Harcourt Brace, Jonanovich Publishers, 1980), reference is made to the Friedman’s earlier book “Capitalism and Freedom”.

Capitalism and Freedom examines “the role of competitive capitalism – the organization of the bulk of economic activity through private enterprise operating in a free market – as a system of economic freedom and a necessary condition for political freedom.” In the process, it defines the role that government should play in a free society.

“Our principles offer,” Capitalism and Freedom says, “no hard and fast line how far it is appropriate to use government to accomplish jointly what it is difficult or impossible for us to accomplish separately through strictly voluntary exchange.  In any particular case of proposed intervention, we must make up a balance sheet, listing separately the advantages and disadvantages.  Our principles tell us what items to put on one side and what items on the other and they give us some basis for attaching importance to different items.”

The Friedman’s are being diplomatic and circumspect in providing such advice – calling on people to look carefully at both the costs and benefits of government involvement in the functions of resource allocation markets.

In recent years rapid expansion in U.S. government regulatory oversight and in some cases inhibiting interference with the functions of free market resource allocation has occurred in a number of sectors of the U.S. economy, such as the healthcare system, energy production, automobile production, and the financial / futures industries.  Furthermore, proposed increases in regulation of agricultural production systems and consumer’s food and dietary choices are also being considered by U.S. government agencies.

As governmental dictates interfere with free market resource allocation, history shows that poorer U.S. economic performance, fewer and poorer employment opportunities, and a lower economic standard of living are the near assured end result.  Governments – no matter their good intentions to correct economic and social wrongs – do a poor job of allocating scarce economic resources in comparison to free markets.

As we go through the works of Milton Friedman, Thomas Sowell, Friedrich Hayek, and other free market-oriented economists on this blog, the economic damage to efficient allocation of economic resources by over-regulating government actions will be a primary topic of analysis and discussion.

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Of “loose money and credit generated by the Fed”

25 11 2008

Jeffrey A. Tucker, editor of Mises.org (http://mises.org/) has written an article titled “Business Cycles, Not Our Fault”  In this article, Tucker argues that the real cause of the current calamity in the U.S financial system is “loose money and credit generated by the Fed”.  It is an interestingly relevant and thought provoking article.  Some relevant exerpts are presented below.  The full article can be found at the following web address: http://mises.org/story/3226 

“Business Cycles, Not Our Fault”

By Jeffrey A. Tucker, November 21, 2008

“We are told that the economy has tanked because foreigners invested too much in the US, that foreigners saved too much money, that we all lived beyond our means, that greedy capitalists fed our materialist instincts until we popped, or any combination of the above. Or maybe business cycles are just like weather, cold one season and hot the next. Regardless, it is the government that must come to the rescue with the usual combination of cockamamie schemes.”

“Discovering the Austrian business cycle theory, then, is a revelation, because through it, you learn how the whole business traces to loose money and credit generated by the Fed. The money is pumped into the capital-goods fashion of the day, in this case housing. The whole sector becomes overbuilt and unsustainable and it turns, tanking many other affected sectors. The only answer to the problem is not more of the poison that caused the problem but a real liquidation.”

 

Source: Welker’s Wikinomics website (www.welkerswikinomics.com)

“Lord Lionel Robbins wrote in 1934. His book called The Great Depression, ….. (in it he) presents the Austrian theory in a very precise way, and documents how the Fed and the Bank of England inflated the money supply and loosened credit in the latter half of the 1920s, leading to the bust. His is a cautious treatise in some way.”

“After all, he was blaming the central bank — not exactly a position that was politically wise — and we aren’t just talking about the equivalent of a blogger today. He was Lionel Robbins, the most influential economist in Britain until Lord Keynes stole the show with his whiz-bang policy ideas. And why? Robbins counseled letting the bad investments wash out of the system. Keynes thought you could use the state to rev the bad back to life.”

“The Theory of Money and Credit” by Ludwig von Mises (First edition, 1912)

“As another example, and really the definitive one, Ludwig von Mises himself was writing all throughout the late twenties and early thirties about the business cycle. He nails it all in essay after essay: the credit expansion, the malinvestment, the folly of counter-cyclical policy, the dangers of protectionism and reflation, and so much more. These essays could all be written today, and what is also impressive is Mises’s focus on theory. He never makes empirical claims that aren’t backed up by an attempt to explain the theoretical apparatus behind the analysis.”

 Economist Ludwig von Mises (1881-1973)

“All of this leads up to Rothbard’s America’s Great Depression, the book that is often cited as the one to show that the episode was caused not by the market but by the central bank. It is getting all new attention today. But if you follow his citations, they lead right back to Garrett, Robbins, and Mises — three of the observers of the time who saw precisely what was happening. They had to be ignored by the New Dealers, for they utterly demolish the case for stabilization policy.”

 

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For other information on economics that is running counter to the present stream of thought in regards to appropriate and needed government policy actions in response to current economic crises around the world, I encourage you to visit website for “The Ludwig von Mises Institute” (http://mises.org/).

Have a great Thanksgiving Holiday!  Here is an appropriate economic cartoon for your holiday meditations.

 

 

 

 

 

 

 

 

Source: Economist Stefan Karlsson’s Blog (here)

Mount Kilimanjaro, Tanzania, African Continent (19,340 feet in elevation)





Economist Greg Mankiw re: Proposed Fiscal Stimulus: $280,000 per job

24 11 2008

Congratulations and thanks to Harvard Economist Greg Mankiw for his recognition of the cost per job for the proposed fiscal stimulus package of President Elect Barack Obama.  Following is the web address for the article….

http://gregmankiw.blogspot.com/2008/11/280000-per-job.html

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Monday, November 24, 2008

$280,000 per job

The Washington Post reports:

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years….Obama has set a goal of creating or preserving 2.5 million jobs by 2011.

 

Let me amplify the last point with a rough back-of-the-envelope calculation. The average weekly earnings of production and nonsupervisory workers is about $600, or about $60,000 over a two-year period. Granted, labor income is only about two-thirds of national income, and we have to add a few supervisors into the mix. So let’s say each job created means $100,000 of extra national income. If we are generating $100,000 of income with $280,000 of government spending, the multiplier is only 100/280, or 0.36. By contrast, traditional Keynesian models suggest a multiplier closer to 2.0.

Dividing one number by the other, that works out to $280,000 per job.
What is going on here? Logically, it must be one of three possibilities:
1. The fiscal stimulus is going to be much smaller than is being reported.
2. The new administration is setting a low bar for itself when it comes to job creation.
3. The Obama team believes in very small fiscal policy multipliers.

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Greg Mankiw’s Blog address is http://gregmankiw.blogspot.com/