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December 2006   
F E A T U R E S

Interview: Flying High
The Australian international Pilots Association has rejoined the ACTU and president Ian Woods is taking it into new airspace.

Unions: TUF on Toll
As transport giant Toll expands across the region, unions are working together to boost their bargaining power, writes Jackie Woods.

Industrial: Forward to the Past
Anti-union building laws draw their inspiration from a century ago, writes Neale Towart

Economics: Debt and the Economy
Household debt is at record levels. Interest rates are rising. Production of real things is not increasing. The military generates most demand. How long can it go on?

Obituary: The Charlatanry of Milton Friedman
Evan Jones busts some myths about the grand-daddy of free market economics

Environment: Low Voltage
Nuclear Power and Prime Ministerial Pronouncements are seriously short of a few volts, writes Neale Towart

Legal: The Fair Deal
Anthony Forsyth proposes a social partnership agenda for Australia

Review: A Little History
The Little History of Australian Unionism is exactly that; fifteen thousand words on the topic, writes Rowan Cahill.

C O L U M N S

The Soapbox
Address to the Nation
ACTU secretary Greg Combet's speech to the National Day of Action

Parliament
The Westie Wing
Ian West recalls a time when the earth was flat, unions ran the country and Honest John Howard was the workers’ best friend.

Health
Sick System
Punitive IR laws and a commercially-driven workers compensation scheme are conspiring to bully injured workers, writes Dr Con Costa.

E D I T O R I A L

Seven Year Itch
For the past seven years, over 335 issues, Workers Online has been chronicling events in the labour movement and passing our judgments on all things union.

N E W S

 Global Campaign for Jailed Iranian Union Leader

 Bully Tactics Can’t Dull Protests

 Which Bank Slashes Work Rights?

 Sunday’s The Day For Future Rallies

 Carmel Saves Job, Loses Bonus

 Case Dismissed: No Justice in WorkChoices

 China (S)trains Procurement Policy

 Contracts Out on Sole Traders

 Car Companies Do The Dirty

 Historic Case Restores Security

 Final Hurdle for Medibank Sell-Off

L E T T E R S
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Obituary

The Charlatanry of Milton Friedman


Evan Jones busts some myths about the grand-daddy of free market economics

Milton Friedman, the free-market guru, has died aged 94. The hoopla is reminiscent of that following the death of Ronald Reagan. Both Reagan and Friedman apparently brought down the Soviet Union single-handedly!

Friedman's is not a simple story. His intellectual life developed in two distinct genres, fostered by two Professors at his undergraduate Rutgers University. Along one strand, Friedman served an apprenticeship at the National Bureau of Economic Research where he developed skills in empirical and statistical research. His PhD at Columbia University, with which the NBER was associated, was in this field. The NBER was established after World War I from within the American reformist 'Institutionalist' school, essentially to understand and hopefully control the business cycle (it has long since been taken over by the mainstream). Friedman's potential future down this path was as a nondescript technician. It was this path that led to Friedman's macro-econometric model-building and his development of monetarism.

The other Friedman was that of an adherent of the orthodox Neoclassical school, fueled by his Master's degree at the University of Chicago in the early 1930s. He appears to have then been completely unmoved by the Depression engulfing his country, unlike his contemporary J. K. Galbraith whose life was transformed thereafter. The Neoclassical orthodoxy became the centerpiece of his teaching at Chicago where he returned permanently in 1946 until his retirement in 1977. Not so much a theorist as an expositor. Friedman's introductory lectures were eventually published as Price Theory: a Provisional Text in 1962.

This is simple simon stuff. And also hocus pocus. The germ of realism in the construction of Neoclassical microeconomics in the late 19th Century has been cemented into a giant edifice of fairy tales. A lot of people who teach the stuff do it as a game. But Friedman apparently believed in its relevance. His passion and his urbanity added to his appeal as a teacher.

Friedman personally contributed to the spread of banality in economic understanding, a little known dimension of his influence. Exhibit A is Gary Becker, who had this to say when awarded the Swedish Central Bank 'Nobel' Economics Prize in 1992 (Friedman was awarded it in 1976):

My first encounter in 1951 with Milton Friedman's course on microeconomics renewed my excitement about economics. He emphasized that economic theory was not a game played by clever academicians, but was a powerful tool to analyze the real world. His course was filled with insights both into the structure of economic theory and its application to practical and significant questions. That course and subsequent contacts with Friedman had a profound effect on the direction taken by my research.

Becker is reputedly the most cited economist since citations have been monitored. Becker led the charge into 'human capital theory' which trivialises how wages and conditions in the workplace are determined. He has also led the charge to cultural imperialism of the economist's mindset - the rational person's approach to marriage, crime, life after death, etc. Rampant inanity.

It's difficult to understand how anyone can associate Neoclassical economics with relevance, but the longevity and dominance of the school in the English-language economics syllabus indicates a pervasive attraction to simple, seemingly elegant stories. Friedman as storyteller fits right in. Friedman's fame is partly due to this strange beast which is a discipline rooted in claptrap. There is a social psychological dimension here that deserves examination in its own right.

But outsiders know of Friedman as free-market ideologue and as the father of monetarism.

Friedman's development as an ideologue is murky. His major ideological work, Capitalism and Freedom, appeared belatedly in 1962, product of a series of visiting lectures. His polemical tour de force, Free to Choose, appeared in 1980, byproduct of a television series (in turn a reaction to Galbraith's more nuanced television series, The Age of Uncertainty). Although Friedman was an initial member of the reactionary Mount Pelerin Society at its birth in 1947, he has a low profile. The luminary Friedrich von Hayek moved to the University of Chicago in 1951 for a decade, but the connection does not appear to have been close.

Friedman appears to have more influenced by his contemporaries at Chicago, particularly George Stigler and probably his brother-in-law Aaron Director, as well as by his wife and collaborator Rose. Stigler is a key figure, being more adept at playing with orthodox price theory, but also aggressively conscious of the ideological role of Neoclassical economics (essentially via obfuscation). Unlike von Hayek as grand philosopher, Friedman had a simple story and he was sticking to it.

Although Friedman had moved to Chicago he was invited to renew researching for the NBER, with emphasis on the role of money in the business cycle. From that point, Friedman and disciples worked for decades on macro-econometric models that were supposed to provide a rigorous edifice for a monetarist perspective - that inflation is the only macroeconomic problem demanding a policy solution, and that inflation is only a monetary problem. Inflation is by definition caused by excess money supply, and the money supply is the government's business. Excess money supply, and the inevitable inflation, is the fault of government. End of story.

A rigorous edifice was of course never established, because econometric modeling inevitably involves crude stylised assumptions and the use of measurable proxies for unquantifiable entities. And a definitive proof of causation (money supply drives inflation) is out of the question. So monetarist prescriptions were called into service in Australia, the USA and the UK on grounds of politics and prejudice rather than on merit.

University of Massachusetts economist Richard Wolff wrote an excellent piece of lateral thinking in 2003 called 'The Critique of Economic Policy' (http://www.paecon.net/PAEReview/issue22/Wolff22.htm). He noted:

The great practical importance of policy is to shape events by restricting the public discourse about what steps are appropriate to deal with problems. ... Economic policies have little relevance to actual solutions. Policies are relevant to controlling how people think about and act on problems. That control function emerges from the limits on what is considered as policy, limits accepted and enforced by the 'experts'.

Monetarism is the perfect reflection of this technician-driven agenda, almost pythonesque in its simultaneous appropriation of righteousness yet defiance of intelligence. Within a decade, monetarist prescriptions and their attendant explanations had been quietly shelved by the monetary establishments in the countries that had adopted it. The authorities couldn't decide conclusively on what measure of 'money' (and how many near-money assets) to monitor, nor could they control the level once chosen.

There is no close relationship between a nation's money supply growth and its inflation rate. Richard Du Boff (ZNet, 20th November http://www.zmag.org/content/showarticle.cfm?SectionID=10&ItemID=11445) highlights the divergent paths of money supply and inflation in the US since the late 1970s. Michael Stewart's demolition of the Thatcher era in Keynes in the 1990s: a return to economic sanity provides a summary of the marked divergence between monetarist prescriptions and outcomes in 1980s Britain. The crude posited nexus omits the potential substantial impact of trade-related price changes; it also omits the dialectical surge of both money supply and inflation attendant on interest rate hikes that accompany attempts to restrict money supply growth. The disruptive surge of capital into the dollar and the pound were not part of the model.

Curious, however, that the monetary establishments and their supporters in academia were sufficiently sensitive to Friedman's guru status as to leave his reputation intact while his child was allowed to sink into oblivion. Inflation remained as the number one macroeconomic priority, but to be addressed by non-Monetarist means. Die-hard Monetarists (centred on the St Louis Federal Reserve Bank) remain unrepentant, claiming that Friedman's prescriptions had never been properly applied; more pragmatic technocrats claimed that Friedman's anti-inflation goal had been achieved regardless of means.

Friedman's real post-Monetarist legacy, however, is an anti-intellectual one - the authorities and their supportive academics have completely lost interest in understanding inflation, the supposed number one enemy of a healthy economy.

The other complete absence of interest is in the casualties. In October 1979 US Federal Reserve Chairman Paul Volcker established a mechanism to tightly control total member bank reserves (the Fed is the ultimate 'borrowing window' for the banking system). The strangulation forced up borrowing rates which spread rapidly through the economy (and then internationally) with disastrous effects. The details are outlined in William Greider's mammoth 1987 Secrets of the Temple. Similarly, in late 1979 Margaret Thatcher's Chancellor Nigel Lawson oversaw a monetary and fiscal repression of Britain that laid waste to its manufacturing sector and the industrial heartland, from which it has never fully recovered. The Thatcher/Major era culminated in Britain's 1990-93 recession, the worst recession in the industrialised world (except for Canada's Volcker-induced recession in the early 1980s) since World War II. In 1989 Australia, Treasurer Paul Keating, at the behest of his advisers, further tightened the monetary screws, ushering in 'the recession we had to have' with parlous effects on businesses, employment and farmers.

The two strands of Friedman's intellectual life - Neoclassical microeconomics and Monetarist macroeconomics - have a common thread. A rudimentary intelligence of the modern capitalist economy is nowhere to be seen. In its place is the fairy tale clockwork simple market economy. When Galbraith died in April, after reading the obituaries critical of his contribution it struck me (slow learner!) how consistently the intellectual mainstream had managed to avoid constructing a skeletal framework representing the essence of their beloved system. Their system is a black box, conjuring up only the ghost in the machine - the elusive 'free market'.

At the macroeconomic level, Friedman resuscitated and reinforced an old simplicity that the real economy exists independently of money. The line: money lubricates the real economy but it is essentially external. There is no conception of the organic fusion of money in the system. Double the money supply, double the inflation, he says. Explanations of how additional money was to be injected into the system were glib (dropped from helicopters?).

At the micro level, the joint stock corporation is the elephant in the room. For Friedman, the giant corporation comes and go, like the corner store, as eddies in the stiff wind blown by consumer sovereignty. (Ironically, the Friedman obituary in the Financial Times was paired with an advertisement from longstanding number one corporate Exxon Mobil, fatuously claiming green credentials.) This ideological obliteration of big business has been the stock in trade of the Chicago School since 1945, with dramatic success. It goes without saying that the Chicago School has also obliterated the structural subordination of labour in the employment contract (unions as contra-market evils).

Friedman also made a rare philosophical intervention that complemented his economics. In 1953, Friedman published a long essay titled 'The Methodology of Positive Economics', given canonical status by an unphilosophically minded profession. Friedman's was a belated intervention into a longstanding methodological debate, behind which was the fundamental worth of the dominant Neoclassical paradigm. Friedman argued that the realism of a theory's underlying axioms is irrelevant; rather the test of a theory's merits is in its predictions. Friedman drew false parallels with the natural sciences (not the first), for which axioms might necessarily be speculative fictions and for which predictions were testable.

In the direct line of fire was the key assumption of 'perfect competition'. This is the granddaddy of tangibly unrealistic assumptions. The merits of its use have nothing to do with explanatory fecundity. Perfect competition delivers a brilliant double whammy - analytical simplicity for the ivory-tower mathematicians (all agents are price takers so there are no complicated mutual dependencies), and ideological purity. Power is obliterated from the system at the stroke of a philosophical pen.

What then constitutes Friedman's tool kit? At the micro level, a fairy story of a simple ideally functioning market mechanism. The business firm per se is a black box, being at the mercy of overwhelming market imperatives. The system itself, merely a collection of individual markets, is a black box of black boxes.

Malfunctions of necessity have to come from 'outside' the system - from governments, unions, etc. At the macro level, the ideological significance of the posited money/real separation is that any malfunction can be externalised, this time onto the monetary sphere and onto the monetary authorities. The 'real' economy works perfectly if left to itself. Friedman made a rare excursion into history in his monetary studies, but his history was sterilised around money, without context; and without context, his analysis of money itself, his so-called specialty, is distorted.

The micro and macro components of Friedman's tool kit combine to externalise all potential malfunctions. There is no social dimension, no political dimension. Friedman's attentions are directed to the so-called external enemies of the ideal system.

From this analytical vacuum, Friedman, with a simple one-size-fits-all principle and the gift of the gab, was launched onto front stage as master ideologue. For Friedman, 'the great argument for the market is its tolerance of diversity; its ability to utilize a wide range of special knowledge and capacity'. The kernel of truth in the proposition gets magnified into a dogma.

As a philosophical libertarian, Friedman was at least consistent on some moral issues - he opposed the then proscription of drugs and prostitution, and supported free speech (even to communists!). He also opposed the Vietnam-era military draft (claiming some credit for its abolition under Nixon). But the character of the US armed forces is testament to his blinkers. He declined to inquire as to why the US would require such a gargantuan standing army, and to the structures of inequality by which a 'volunteer' enlisted force of such magnitude could be contrived.

Friedman was a long-time opponent of the licensing of professional practitioners, the incomes of medical practitioners being the subject of his first publication. He saw licensing as a restraint of trade, inhibiting innovation and consumer choice. Medical services are seen as just another product. The issue and the mentality are pertinent to current Australian politics, as professional practice formally became subject to National Competition Policy following the 1993 Hilmer Report. Undoubtedly the doctors' associations have abused their power, but this writer belongs to the old school that sees licensing (and the attendant training) as a necessity. Friedman puts his faith in information flow (reputation) and, ultimately, individual court litigation, but neither of these mediums function effectively to guarantee appropriate or quality services.

Friedman claimed to be both a libertarian and a 19th Century Classical Liberal, not the same animals. A true libertarian would have drawn on anarchist inspiration, but the anarchists are strangely absent from his pantheon. Friedman's stance is rooted in an abstraction - economic liberty plus the constable - rather than flesh and blood 19th Century Classical Liberals. Friedman goes on about the dispersion of political power which can only be guaranteed by 'the market'. But the Real McCoy 19th Century Liberals, generally anti-democratic, sought the possession of selective political power as a vehicle for selective economic power. They made their peace with the Old Regimes. As the Canadian political scientist Robert Cox has emphasised (and myriad historians have demonstrated in detail), the 19th Century Liberal State was neither weak nor pluralist. The rise of Chartism, socialism and unionism in the early nineteenth Century was driven by the hypocrisy of Classical Liberal 'liberty'.

The last one hundred and fifty years has seen the dialectical evolution of capitalism and the state, highlighting that the Classical Liberal state in practice was a transitory phenomenon. In their best-seller, Free to Choose, Milton and Rose Friedman claim that both the Democratic and the Republic Parties had adopted the program of the marginal Socialist Party of America. Having no understanding of the dynamics, they resort to farce. They claim that the Socialist Party's strongholds were in colleges and universities, from which privileged positions a pernicious propaganda perverted general public opinion, and the rot set in with the New Deal. The last one hundred and fifty years all seem to have been a terrible mistake (all, that is, except for the rise and entrenchment of the large corporation).

The casualties of Friedman-inspired economic repression in the first world have been completely obliterated from the public record - no existence, no acknowledgement. Some pundits, vaguely admitting a downside, claim that the (generic) 'pain' was worth it because the economies had been cleansed of their inflationary pressures. But those that suffered the pain were not asked their opinions. More than a decade after these repressions, the vanquished individuals and the social costs have been written out of history.

Fortunately, the casualties of Pinochet, because more chilling, remain in the public eye. Friedman did not mastermind the Chicago School's involvement in Pinochet's bloodbath and mass impoverishment, but he actively condoned and participated in its attempted legitimisation. With impeccable timing, Greg Grandin has recently published Empire's Workshop, and an excerpt on Friedman and the Chicago Boys in Chile appeared on Counterpunch on 17 November as a fitting obituary.

Chile was Friedman's laboratory experiment for the establishment of his grand abstraction via shock therapy, with the vehicle a bloodthirsty military dictator. To quote Grandin (http://www.counterpunch.org/grandin11172006.html)

quoting Friedman:

... the military junta offered "more room for individual initiative and for a private sphere of life" and thus a greater "chance of a return to a democratic society." ... Chile's present difficulties, [Friedman] argued, "were due almost entirely to the forty-year trend toward collectivism, socialism and the welfare state . . . a course that would lead to coercion rather than freedom."

Here is Friedman self-immolating on the pyre of hypocrisy. Here is Friedman's principle of the interlocking of political and economic liberty exposed as a fraud. Friedman's economic liberty turned out to be that associated with the elite beneficiaries of authoritarian monopoly capitalism.

Friedman's death moved Neo-Con David Frum to reproduce in the National Review a 1998 review of the Friedmans' Two Lucky People. To quote Frum quoting Friedman:

Accused of giving advice to the Chilean government, he replied that he had not in fact done so, but anyway, "despite my sharp disagreement with the authoritarian political system in place in Chile, I do not regard it as evil for an economist to render technical economic advice to the Chilean government to help end the plague of inflation, any more than I would regard it as evil for a physician to give technical medical advice to the Chilean government to help end a medical plague."

Not merely a hypocrite but a liar as well.

Milton Friedman spent his twenty post-retirement years as resident ideologue at the corporate-funded Hoover Institution - a functionary for corporate capital and American imperialism. There is such a thing as a free lunch after all.


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