Assignment for International Economic Relations lecture Topic:Milton Friedman as the criticised economic agitator which has chances to succeed In my opinion, things which are fascinating in the economy for people without more than average knowledge about this science are not elaborate models, taxation or tariff systems. Really captivating issue for ordinary man is a picture of economy as a metaphysical force which rules our lives. In this context it is a reasonable tool for explaining global processes.
Somehow, we should be a little skeptical, because it is quite dangerous to think that one and only impact on world society is supply and demand rule. In my essay I would like to focus on the understanding and the idea of world which Milton Friedman offered in the book „Free to Choose”. In the reality as he presented it there are two categories of action- according to “real economics” and against it. That real and good economics is a set of actions, but also lack of any action, which are undertaken for purely economical reasons.
One should emphasize that Friedman sees economics as overwhelming power which, in terms of the effectiveness and the profit, is the best solution. As an example he is points to ZSSR- an opposite of the model to free economics. In his view commonwealth with the planned economy would be in even worse condition if it weren’t for the elements of drawing aside from the Marxist ideology in the direction of the capitalism. American economist illustrates the way in which the system works by describing the situation of the Soviet citizen who is decides to break the principles of soviet economy.
He is handing the washing machine over to the national point of repair illegally. He is paying more, but repair is done without the queue and he has his working washing machine in the short time. What is more a mechanic from the national point of repair gets some additional earnings. Both benefit from that transaction, which is a pure example of capitalistic way of handling business , all that happening in the center of gravity of a planned economy. Friedman is also assigning a very important role to the price as the notifying, stimulating and regulating factor.
One should add typical Smith’s attitude to the role of the government presented in the epitaph for Hong Kong of the end of years 80′, written in the same spirit. My point is not to report Friedman’s ideas, as I think that what he presents to his readers is not only the image of economics. I can see it more as the program, desired state of affairs. In my mind a Nobel Prize winner in field of economics from the year 1976 is in a way reminding of Karol Marx. Despite the fact that the Communist Manifesto is from other times and presents the opposite ides, I could say it uses similar rhetoric.
As a matter of fact the American economist is scoring the program of the co-founder of the International Workingmen’s Association, as if he wanted to show that the capitalism won already as the best economic system, now is the time for it to become the leading ideology. Finding support in such attributes as the freedom, the equality in the access to goods explicitly in the context of the economic system is making the text of Friedman agitational. In the following part of the essay I will be trying to confront utilitarian (or even Utopian) vision of Friedman with views of other economic minds.
It is probably the best to argue against Milton Friedman’s theory by using the achievements of the school of John Maynard Keynes. It is obvious that the British scholar sees the role of the government and the state rather differently. Keynes wants administration to take care of citizens in the full-time manner, rather than only as a night watchman. However he agrees with the global scope of economics. According to him the domestic production depends on the world demand, and unemployment is an effect of the insufficient demand.
When comparing the two points of view I shall focus on the vivid aspects. There is a method of the psychoanalysis with the colloquial name „ dictator ”. The test examines 2 persons- one is assigned to be a dictator receives for example 100 dollars. He is supposed to share money with the second person, so that the other accepts the exchange. If the second person agrees on the division of money, the amounts are given to the participants. If the division won’t be accepted money is coming back to researchers.
It isn’t possible to negotiate and the second person knows what amount the dictator has at his disposal. Supposedly the situation is simple- the second person should agree to accept any amount the dictator offers, as it would always result in the intrinsic gain for him. Meanwhile, 69% of people for which the suggested amount stayed from 1 to 3. 7 dollar decided not to agree for the division. Dictators most often pay amounts between 28 and 44 dollars. It is one of many undoubted proofs for the fact that people do not always act reasonably and according to the spirit of economics.
Adam Smith wrote, that the exchange between sides based on the principle of the freedom would take place exclusively when both sides will recognize it as profitable. How can receiving 3 dollars for nothing not be recognized as profitable? It turns out that there is something else apart from the profit as understood by Friedman. In „Free is Choose” and „The Essence of Friedman„ is summoning the famous Leonard E. Read’s pencil, of which „ no man knows how to make a it”. Read is describing all stages of the coming into existence of the pencil, with a broad spectrum.
The pencil “is saying” that thanks to the function of price none of the buyer is interested in a aspect who is getting the graphite: believer of the Yahweh or the Allah and whether Americans or Japanese people cut the trees down. The whole matter is showing itself not to be so simple and that is why nobody is registering international price of pencils, and more a barrel of oil concerns us. Furthermore an example of the “dictator” shows that the point of reference is extremely important in making economic decisions.
Not to search far, let us take the example of the European Union, which ideology is more related to Keynes than Friedman. What I mean is the Union as the institution bristling with the customs, rates, and artificial subsidies of Community economies. After all opening to other markets, with cheap products (provided it is not dealing with the dumping) should benefit the EU. Isn’t it a fact that the more participants in the free global exchange, the more effective the economy is? We, Europeans prefer to pay extra for “our” grain, by subsidizing it, rather than allow for goods from Africa.
Maybe the explanation for this is the fact that we are aware that even tough the profit is less, it stays within European economy, and does not allow inhabitants of Africa to make comparatively higher profit. It is worthwhile to mention the opponent of classical economics and the self-regulation of the world market. Karl Polanyi regarded specific business activity and its rooting in the culture together with the historical moment and the social situation as the main factors influencing the shape of the economy(„ The Great Transformation ”).
According to Polanyi’ego economic transactions are not as much guided by receiving an economic or financial benefit as they are aimed at supporting and refreshing norms and social values. He found global markets moving on into the side of the laissez-faire, the main reason for the atomization of the society and the breakdown of social bonds. From the other side Peruvian economist Hernando de Soto is slightly narrowing the issues. He definitely rejects the argumentation of supporters of liberal economics, who claim that capitalism is not working in some countries (e. g.
South America) due to cultural differences. He regards these views as offensive and unconvincing. In his „ The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else ”, he highlights the inborn feature of entrepreneurship of inhabitants of countries which find it difficult to function as the free market economy. De Soto claims that the poor men of noncapitalistic world have significant amounts of the saving which are being estimated to account for as much as forty-fold the entire foreign help from 1945 to 2000 r. The Peruvian can see the problem in the lack transparency of these goods.
The wealth which people have from outside of the range of capitalism, is not circulating in the worlds economy. It is not possible to take a loan or to pawn the central mortgage with the help of these assets. For de Soto capital is not only a transparentness. The secret of Capital lies in abilities of people of capitalist systems which can see living their wealths which they can invest as a living capital. For them it works already on the principle of the unconditioned reflex, however the rest of the world is left with the dead capital and not being able to invest it. Here Hernando de Soto is seeking the cause of the poverty.
I will devote the last paragraph to the quite obvious accusation, that in the model of Friedman there is no such an instrument like social benefits. The government, which is not helping poor men to rise their quality of living and help become economically active or in more extreme cases giving them a chance to survive, seems worthless. Apart from that, words about equality of opportunities and of the access to goods, seem to be empty words in the context of a society diversified in terms of wealth from the assumption. It is not difficult to attack Milton Friedman and his views.
Equally easily like Karol Marks and his social and economic model . After all in the communism a logical cohesion and an adequacy in relation to reality were not the most important issue, its aim was to give an uncomplicated and interesting interpretation of world surrounding us. The same concerns the laissez-faire of Friedman. This gives the American economist greater chances of the success than the German a philosopher had. If to examine the criticism of de Soto, Keynes, Polanyi and socialists it it is possible enough to reach the conclusion that they criticize small shortcomings rather than serious professional errors.
Following Keynes thoughts, it is possible to say that there are other factors which influence human action then mere economics. However it is worth to remember the fact that at one time we didn’t know how to measure the social capital, social tensions, social inequality. Perhaps at one time in the future we will manage to measure even more intangible factors such as love, pain or the dislike. Then when they become measurable and countable, it will be possible to include them in the system of economic exchange, and to check whether being a “dictator” is still more profitable.
It is difficult to force people to retreat from global exchange, in favor to the local one which is fulfilling the social role, as Karl Polanyi wanted. As for de Soto, the poor of developing countries must learn the same lesson as the Americans in The Wild West did- the important of title deeds and the fact that they are liable to an exchange for other goods, that is in short transparency. There remain two questions: how to convince people for acting within the free economy, and how to solve a problem which the laissez-faire doesn’t predict?
First what is coming to my mind it is a Grameen Bank example. First bank in the world which opened to people without essential capital. The homeless, unescorted women, families in need could take the microcredit fitted to their needs. Everything acting as a bit as in the fairy tale- as people are rising their standard of living and Grameen notes considerable profits. What is more they already have their followers in major banks: Citigroup, Credit Suisse, Deutsche Bank, Morgan Stanley, Barclays, BNP Paribas.
Of course, just as in every other system there are already certain shortcoming, but one should remember that the project is young. One should appreciate the fact that it is satisfying social needs of the welfare state belongs, and it is not in opposition to the laissez-faire. And if the economic liberalism would be supposed to control entire world, it is in my opinion one of the best solutions we could offer yet. It is as if we corrected the shortcoming of the framework by using the tools that the framework gives us. Maciej Bialoruski, IS UW(International Economic Relations, Wed,16. 45)