Tuesday, November 28, 2006

Posner on Friedman, Libertarianism, Dogmatism

I've been meaning to blog this for the past week, but better late than never, I guess. Over on the Becker-Posner blog, Richard Posner has a nice comment on Milton Friedman's passing. In it he discusses Friedman's influence and liberal economics, and takes a position I find myself largely in agreement with. Frieman's greatest contribution, Posner says, was to hammer home the point that, in general, people are better at representing their own interests than third parties (i.e. the government) are. But, Posner argues, there are exceptions to this general rule (and Posner gives an example of one), and Friedman failed to recognize them. Friedman's market efficiency advocacy became a dogma in which he was too deeply personally invested.

Additionally, Posner takes issue with Friedman's theory (shared with Friedrich Hayek) about the correlation between economic and political freedom. He looks at China and India as counterexamples running in opposite directions (and also mentions European social democracies).

I tend to share Posner's caution with respect to market dogmatism. I feel the need every now and again to point out that this is not necessarily the same as being a market skeptic. Posner certainly is not a market skeptic; he's a legal pioneer precisely for his tendency to bring economic arguments into legal analysis. I'll take this opportunity to duck behind his cover to note that I am a great fan of distributed solutions to many problems, and markets are a wonderful form of distributive problem-solving. But I tend to doubt that there are any one-size-fits-all solutions to human social problems, and dogmatism for any particular solution will sometimes run amiss.

1 comment:

Henry said...

I just wanted to post a quick comment. I really should'nt spend much time on this stuff until finals are over. I'll just sort of snag bits of the Posner post and comment on them.

"he argued that the way to test a theory was not by assessing the realism of its assumptions, but by assessing the accuracy of its predictions."
-- Regarding Friedman

I disagree with Friedman. As I made clear in my social science post I don't believe that empirical evidence is of any use in varifying or contradicting social science theories. Whenever the economy moves people from every camp of economic theory find some way of argueing that this validates their theory. Or when crime goes up or down people from every camp of criminological thought claim that this justifies their theories. I could post on this day in and day out forever. But I won't. I'll just rest on my social science post. It's easy find all sorts of correlations. There are an infinite number of theories that could explain any social science data set. But true causation is impossible to demonstrate. Hence validation is unattainable.

"Economics makes heavy use of unrealistic assumptions, primarily concerning rationality"

Yeah. Of course. Totally. My experience in actual economics classes has totally born out my assertion (in the SS post) that these rationality assumptions are all about modeling. Actors need to optimize consistent utility functions. Game player have to choose rational outcomes. Essentially, if you want to create mathematical models of economic interactions you need to have mathematical models of human behavior. These will always be totally flawed. And so will the economics that comes from them. As I said in the SSP, the fundamental unit of the social sciences is the human being and its way more complicated than we cam handle.

"yet the predictions generated by models based on those assumptions are often accurate."

When I pull predictions of tommorow's weather out of a hat they are often accurate.

"I think his belief in the superior efficiency of free markets to government as a means of resource allocation, though fruitful and largely correct, was embraced by him as an article of faith and not merely as a hypothesis."

I think this criticism refers to Friedman's stance of confidence rather than tentative empiracism. I think that this sort of point ignores the legitimate weighting of a priori reasoning and intuition in the analysis of complex systems. That is Posners sees Friedman's confidence in the power of free markets as being not completely justified by hard empirical evidence and hence a product of blind faith. I think that there may be other useful sources of truth that we have to allow as weighty. Especially in areas of extreme complexity where empirical certainty is, I think, a mirage.

"I think he considered it almost a personal affront that the Scandinavian nations, particularly Sweden, could achieve and maintain very high levels of economic output despite very high rates of taxation, an enormous public sector, and extensive wealth redistribution resulting in much greater economic equality than in the United States. I don't think his analytic apparatus could explain such an anomaly."

I think 'very high' in this context is unclear. How do we know that Sweden's output wouldn't be a whole lot higher if it did'nt have the policies it does? We don't. I could say, 'hey stop looking at the exception'. Check out France, Israel,India, China, Russia, North Korea, etc. But I won't. We can't learn anything definite from those examples. False empirical certainty (FEC).

"I also think that Friedman, again more as a matter of faith than of science, exaggerated the correlation between economic and political freedom."

I'm pretty sure that I believe that there is a strong correlation between political and economic freedom, but the discussion that follows the above sentence makes me wonder what political freedom is. Is there a different between economic freedom and political freedom? Is democracy political freedom? If so is political freedom worth anything? Imagine that you were locked into a box and passed a litter of water and a cup of rice everyday. Now someone passes you a slip of paper asking if you would prefer grits to rice, that would be democracy. If you were stranded on an island with a big mean guy with a gun who made you swear an oath of fealty but then never interacted with you again, that would be a dictatorship. Democracy, dictatorship, whats the big deal? Is there anything substantial to political freedom? I would far rather be under an absolute dictatorship which only has authority over a tiny portion of my life than live in a democracy where the government has the power to control my every waking hour. If the government decides how, where, and when I work (and hence where I live and who I interact with)where and when I vacation, what media gets created, and when and if I get to consume it (i.e if I have little economic freedom) what good is political freedom to me? I think there might only be one kind of freedom. I might say that politics governs the realm of action in which I am not free, and economics governs that realm of action in which I am free. In fact, one might say, that political freedom is the freedom to have some input into the process of determining what freedoms you will give up (I'm not even going to bother to go back and check to see if I'm contradicting myself at this point, this is a stream of conciousness post, and I seem to be coming across some interesting ideas). So, in the state of nature ;), all freedom is economic freedom, because none have been given up. But as freedoms are forsaken and given to the state, politics emerges (the negotiation of non-freedom). At the instant that free man enters into politics he is at the zenith of his power. Each step along the way from freedom to non-freedom his 'political freedom' diminishes in stride with his 'economic freedom'. If he gives up his freedom to bear arms then he also gives up one of his strongest bargaining chips in the negotiation of politics. If he gives up his freedom to associate with others in whatever manner he chooses he again diminishes his political freedom at the same time. The same goes for his release of his freedom to live by the labor of his own hand, to educate his own children, control his own property, to seek his own justice, etc. As his dependency upon the state grows, his power to resist the state shrinks. Thus as his economic freedom is diminished so is his political freedom. Miraculously my ramblings have actually come full cirlce and adressed the issue at hand. Moving on...

"A country can be highly productive though it has an authoritarian political system, as in China, or democratic and impoverished, as was true for the first half century or so of India's democracy and remains true to a considerable extent, since India remains extremely poor though it has a large and thriving middle class--an expanding island in the sea of misery. "

Let me catch my breath (as I stop laughing).

To say that economic freedom begets political freedom (here I will talk about political freedom as democracy although in the context of the preceding section democracy does not guarantee any great amount of power over freedomes relinquished) does not mean that the the two must, everywhere and always, be found together. It is just a tendency. In fact I would say that the general state of the world today is one where political freedom is gradually diminishing as it follows economics freedom (with a very substantial lag) downward. The point being that we find wide spread 'political freedom' acompanying generally weak economic freedom. This is not a contradiction of the principle that political freedom tends to follow economics freedom any more than birds and skyscrapers are contradictions of the law of gravity, or bargains are a contradiction of the principle of market efficiency.

India and China! I make every effort to avoid real world examples like China and India because I don't want to commit the sin of FEC but I might as well talk about them while we are on the subject. Look at China. They adopted ultra-controling dictatorial policies and drove their country into starvation then they loosened up their control, allowed their people a little freedom, and BANG! they experience the biggest economic expansion in modern history. So this is a great example of the power of freedom and markets. True they haven't granted their people much more 'political freedom' (and those are the scariest of scare quotes; as I decided above, I'm pretty sure that political freedom is directly proportional to economic freedom) but I think that a clash between the party and the people will not be far behind (because economics freedom is political freedom; I'm really starting to like that idea). The more prosperity people gain, the more individual power they will accumulate, and the harder it will be for the government to control them. I predict (though if I should turn out to be right that would prove nothing FEC) that we will either see the Chinese government becoming more open and democratic, or that they will clamp down on the freedoms they have granted in order to retain control. I have believed for some time that the outcome of this choice will have a huge impact in defining the world of the twenty-first century.

As for India, everyone knows that India had extremely socialist (virtually communist) and protectionist policies during the most of their independence in the twentieth century. Their poverty is the product of these policies (or so I would suppose, FEC). I think that they have been loosening up, to their benefit. If they hadn't I don't think that their democracy would have survived for too long.

I guess the point is that the link between political freedom and economics freedom is a driving force. Just because I can throw a rock into the air doesn't mean I can thusly overthrow the law of gravity. It is merely a force. It takes time to act. The rock will come down if you only wait a little while. In the course of history and politics a little while can be decades or even centuries.

"The Road to Serfdom flunks the test of accuracy of prediction!"

FEC (and in any case I think that its arguments are in line with history far more often than not, although even if I argued that convincingly that would just be FEC too).

Hmmm... Not as short as I would have liked. Gotta go.