The 4 Ways to Spend Money by Milton Friedman

* This post is an updated English excerpt of Henrik Schmiegelow”s article “Seikai Keizai Kiki no Dasshutsu no Kagi wa Ajia to Oushu” , Chuokoron (Tokyo), Vol 124 N° 8, p. 152-161 (July 15, 2009)

There is global agreement on both the origin and the effects of today’s world economic crisis, the worst since the Great Depression of the 1930’s. There is, however, global disagreement about the proper solutions. The divergence between unanimity in problem analysis and dissension on policy response is alarming. It suggests inability or unwillingness to learn the lessons of economic history. While the monetary lesson of the Great Depression is well rehearsed (Fisher, 1933; Friedman and Schwartz, 1963; Bernanke, 2002), reluctance to learn the fiscal lesson of that case may be forgivable, since only a war, the Second World War, brought the US a full recovery through fiscal expansion. But policies disregarding an example as recent and telling as Japan’s lost decade in the 1990’s are precarious policies indeed.

I. American origins

The crisis originated in the US. As traced by Felix Salmon in Wired, an application of a standard mathematical formula, the Gaussian copula function, to mortgage default correlations was published in 2000 by a “quant” at JP Morgan Chas. It was severely flawed by an implicit assumption of a continued rise of real estate prices far beyond historical trends (available in Robert Shiller 2005). The assumption was derived from a flimsy record of less than a decade of available price statistics of credit default swaps (CDS), conveniently the period of the last real estate boom.  But it was transformed into a mathematical constant reducing, as if by alchemy, the probability of mortgage defaults. American banks used this magic formula enthusiastically to justify extravagant mortgage lending to low-income (“sub-prime”) homebuyers in the US. Sub-prime mortgages were “packaged” in small slices beyond recognition with prime mortgages in “asset-backed” securities (ABS). ABS were, in turn, repackaged in structured credit instruments called “collateralized debt obligations” (CDO), CDO further reused as building blocks in a higher structured credit architecture called “CDO squared”, and CDO squared in CDO cubed. These securities were rated AAA by the three American rating agencies, insured at low cost by CDS and sold globally to banks blindly trusting “financial innovation” from Wall Street. The result was a financial bubble in the US with pervasive global effects. CDS reached a volume of 60,000 bn US $. Whereas the Japanese bubble was induced from abroad, i.e. intense US pressure on Japan to simultaneously appreciate its currency and expand domestic demand according to the Plaza Agreement of 1985 (see H. and M Schmiegelow”Obei Ijoni Obeitekina Nihon Keizai”(More Western than the West: the Japanese Economy), Chuokoron Vol. 108, No.1 (January 1993), pp. 72-83, p.77), the US bubble was “home-made”.

The crisis erupted in 2007, when the first American sub-prime lenders defaulted, as sub-prime borrowers could not afford the rise from the initial “teasing” rate of 2 percent to the eventual contractual rate of 8 percent of the mortgage. A wave of foreclosures brought real estate prices down. ABS and related CDS became “toxic assets”.  The global financial bubble burst a year later, when the US Treasury and the Fed allowed Lehman Brothers to default, apparently as a warning to the banking sector against reckless risk taking. The action was reminiscent of President Hoover’s stand in triggering the Great Depression and Governor Mieno’s stern monetary move in bursting the Japanese bubble.

II.  Global effects

While the effects of the bursting of the Japanese bubble, though severe and prolonged for Japan, remained contained within the Japanese economy, the US sub-prime crisis caused a crisis of confidence in the global banking sector and hence a global economic meltdown. Uncertainty about the exposure of individual banks to toxic assets put credit markets in a state of freeze. European banks had massively participated in the frenzy of securitization of US mortgages. With the notable exception of Deutsche Bank, which like Goldman and Sachs had doubts about the assumed rise of real estate prices and hedged its bets while selling ABS to other institutional investors, scores of European banks including Germany’s leading real estate lender Hypo Real Estate and several public “Landesbanken” “followed the herd” in blind trust of “financial innovation”. When they noticed that the trust was unwarranted, they realized their exposure was out of proportion with their capital. Unable to put a value on toxic assets and, just like their Japanese colleagues in the 1990’s, not daring to proceed to write-downs for fear of being nationalized, they stopped lending and no longer assumed their function of financing the national economy. Hence even loans unrelated to toxic assets became non-performing and the hidden need of further write-downs grew as in a vicious circle. In a first attempt at quantifying necessary global write-downs in April, the IMF estimated 4.1 trillion $, with 2.7 trillion $ of bad loans and securities originating in the US and 1.12 trillion $ in Europe. Japan, whose banks, sobered by their own bubble experience, had hardly touched ABS, faced “only” 149 billion $.

Early hopes that the still thriving industrial sectors of exporting countries like China, Germany and Japan might remain unaffected by the collapse of the US financial sector quickly evaporated. On the contrary, they became the countries worst affected with declines in exports in the first months of 2009 in the ranges of 21,1% (Germany), 25,7 % (China) and 46 % (Japan). On July 8, 2009, the IMF predicted a deeper recession in Europe and Japan than in the US, with declines of GDP in 2009 of 2,6% in the US, 6,2% in Germany and 6,0% in Japan. For Keynesians, the reason was obvious: the hitherto most important sources of global demand, i.e. the Anglo-Saxon countries combining low savings and high consumption propensities with structural fiscal and external trade deficits, have suddenly disappeared from the international trade equation.

While the October 2009 Global Financial Stability Report of the IMF acknowledges a reduction of global losses by 600 billion to $3.4.trillion – largely due to rising securities values in mid 2009 -, it warns of further credit deterioration, as over half of potential write-down needs through end-2010, estimated at $1.5 trillion, has yet to be recognized. It emphasizes that banks need to crystallize losses through realistic assessment of asset values and that capital levels may need to rise further to rebuild lending capacity to finance recovery. The IMF urges banks to use the chance of extremely low interest rates, wide spreads and, hence high profitability, still prevailing in late 2009 for this purpose. It warns that such favorable conditions may not last, as public credit demand resulting from the massive programs of fiscal stimulus in all major economies might soon exert upward pressure on interest rates.

These figures underscore the urgency of adopting the right strategies to solve the crisis faster than in Japan’s lost decade, but with the strategic pragmatism that helped Japan to recover within 12 months in 2002/2003 ( Michèle Schmiegelow, “Senryakuteki puragumatisumu ni tachi kaere: Nihon keizai e no shohosen” (Recover Strategic Pragmatism: the Prescription for the Japanese Economy) Tokyo: Japan Center for Economic Research Bulletin, 1/10/2002, N°895, pp.4-10) . Unfortunately, so far, dogmatic dissension and, hence, cognitive confusion prevail. Sometimes, the disagreement appears to be between nations, such as between France and Germany or France and the UK, or groups of nations, such as the transatlantic divisions or those between the “Anglo-sphere” and the “rest of the world”, or the G7 and the G20. In fact, the most acrimonious debates are domestic ones, between monetarist and Keynesian economists everywhere, US Republicans and Democrats, Wall Street and “Main Street”, defenders of the Common Law or of Civil Law, advocates of laissez-faire and proponents of social protection.

In early 2009, the US had the initial advantage of a new administration with huge popular support, while Germany’s coalition government was compelled to focus on elections in September 2009. To the global media, Japan, France and the UK appeared much more eager for action than Germany.  But as attested by the IMF’s study The Size of Fiscal expansion: An Analysis of the Largest Countries, in February 2009  with one of the most generous social security systems of the world functioning as an “automatic stabilizer”, Germany was devoting 3.4 percent of GDP to fiscal stimulus, the third largest proportion of major economies after the US (4.8 percent) and China (4.4 percent), but before Japan (2.2 percent), the UK (1.5 percent) and France (1.3 percent).  In May 2009, Japan surged to the top with a supplementary budget adding 3 percent, bringing the sum of all fiscal stimulus programs combined to 5.2 percent.  And yet, just as in Japan’s lost decade, the debate about whether Keynesian stimuli provided so far were sufficient or not, goes back and forth. “Exit strategies” are intensely discussed, while most participants in these discussions, foremost among them Ben Bernanke, are convinced that it is far too early to apply them.

However, even though more fiscal stimulus may be needed to preempt a “double-dip” or even “triple dip” recession with intermittent short-lived recoveries, it will not address the roots of the sub-prime crisis. The crisis has rightly come to be called a “balance sheet recession” because of its origins in the balance sheets of the financial and household sectors, just like Japan’s debt deflation after the bursting of the Japanese bubble in 1991.  The term “balance sheet recession” was first coined for the Japanese recession of the 1990’s by the Head of Nomura Research Institute,  Richard Koo, (see his Balance Sheet Recession: Japan’s Struggle with Uncharted Economics and its Global Implications (2003)). Michael Spence, the former Dean of Stanford Business School whose work on information asymmetries was awarded the 2001 Nobel Price, has emphasized the tremendous depth and destructive power of the balance-sheet destruction characterizing the sub-prime crisis. “In the future”, he writes, “central banks and regulators will not be able to afford a narrow focus on (goods and services) inflation, growth, and employment (the real economy) while letting the balance-sheet side fend for itself. Somewhere in the system, accountability for stability and sustainability in terms of asset valuation, leverage, and balance sheets will need to be assigned and taken seriously”. Japan’s lost decade should serve as a warning of what happens as long as balance sheets are not taken seriously.

President Obama has not only great charisma, but also a vision of structural change in the US economy. As explained in his speech at Georgetown University on April 14,2009  that vision no longer relies on “voracious consumption”, “excessive debt”, and “reckless speculation”, but on savings, education, health care and investments in scientific, technological and ecological innovation. His combination of strategic vision and American philosophical pragmatism is unmistakably reminiscent of the strategic pragmatism that enabled Japan to emerge post-war as the second largest economy of the world .

Unfortunately, US Treasury Secretary Geithner’s efforts to stabilize the American banking system by public-private partnerships are perceived even in the political spectrum favorably inclined to the administration,such as Paul Krugman, as relying to a worrying extent on the very same financial sector whose collective cognitive failures are at the origin of the crisis. Neil Barofsky, the Special Inspector General of the Troubled Asset Relief Program (TARP) has warned that not enough has been done to guard against fraud in a program offering public money to private investors who buy toxic assets. Geithner’s programs cling to the assumption that financial markets know best how to find a price for toxic assets. They require banks holding such assets to sell them, which for fear of having to write down the realized losses after such sales, they are reluctant to do, the more so as Barofsky calls for supervised screening of each security. As neither prospective sellers nor prospective buyers have a clear idea about the value of the toxic assets, the process will be protracted. The “market” cannot clear, as its “sell side” (banks and brokers) and its “buy side” (pension funds, hedge funds, insurers) are fighting each other about who will “control” the regulators. Law suits between mortgage lenders and borrowers as well as sellers, buyers and insurers of mortgage-backed securities have just begun in the US and may take many years at huge legal cost. The world economy seems “hostage” of the outcome of these American lobbying campaigns and legal battles.

While some green shoots began sprouting in the real economy in May/June 2009 as depleted inventories were replenished, and commodities hoarded for a future recovery, banks in the US and Europe continue to fail in their essential economic function of financial intermediation. Instead of being liquidity providers, they have become liquidity users. The German legislation, adopted in May 2009, to allow each German bank to isolate toxic assets in a separate “bad bank” is a strategy of buying time until market dysfunction ends in the US.

The “stress tests” conducted by US regulators at the 19 top US banks were designed to offer a perspective of survival of those banks rather than to encourage the building of sound new banks ready to channel credit to a struggling economy. The projection of combined losses of  599 bn US $ over 2009 and 2010 announced on May 7,2009 did not lift the cognitive fog covering ABS. For “just in time” for the stress tests, on April 2,2009, the Financial Accounting Standards Board (FASB) had responded to pressure from the US Congress to change the accounting rules for banks. Rather than applying the “mark-to-market” rule that force them to report the losses on ABS, they were allowed to use “internal models” in view of “conditions indicating that markets were dysfunctional”. While American banks pressured Japan to impose mark-to-market accounting on Japanese banks burdened by nonperforming loans in 2002, they asked key members of the US Congress to pressure the FABS to exempt them from this very same rule in April 2009 (Wall Street Journal “US Congress helped banks defang key accounting rule”, June 4,2009).

This presages a replay of Japan’s decade of fruitless attempts at different fiscal and monetary crisis solutions without prior cleaning-up of the financial sector. Only in 2002, when the Koizumi government finally imposed complete rigorous write-downs of bad loans, Japan’s banks recovered the ability of financial intermediation in the economy. They began responding functionally to the Bank of Japan’s path-breaking policy of quantitative easing under Governor Fukui. In the third quarter of 2003, the success of these policies was demonstrated:  the Japanese economy bounced backed with an annualized growth rate of 6 percent. Of course, the upswing of the global economy at the time, and more particularly Chinese demand for Japanese exports did help. The Japanese case is a historical example to be remembered today.

III.  Japanese Lessons ?

The case suggests that two cognitive efforts must be undertaken, before new policies can be designed to put the global economy on the path to recovery:

- Finding a method of re-pricing the toxic assets for rapid write-downs

- Identifying new sources of global growth

1. Re-pricing toxic assets

At first sight, the Japanese case seems to indicate an effective solution to solve the balance sheet crisis. Only in October 2002, when Prime Minister Koizumi appointed the determined reformer Heizo Takenaka as Head of Japan’s Financial Services Agency, were the balance sheet problems of the financial sector seriously addressed. Takenaka enforced a fair value re-pricing of bank assets and rigorous write-downs of non-performing loans combined with recapitalization and restructuring of the banking sector. As mentioned above, only then did Japan’s banks recover the ability of financial intermediation in the economy.

During the preceding decade, Japanese banks had been protected, just as US banks today, against revealing the extent of their capital shortfall. Similarly, they became liquidity users rather than liquidity providers. And similarly they failed to recover the confidence essential for the functioning of financial markets.  When Takenaka finally imposed fair value re-pricing of bank assets and corresponding write-downs of bad loans in 2002, he did so in response to intense prodding by the US government and American banks. The immediate success of that strategic policy reversal perfectly vindicated the validity of the American arguments at that time.

And yet, as evidenced by the successful efforts of the American Bankers Association to secure exemptions from fair value accounting as long as “dysfunctional market conditions”, US banks are not ready to adopt the strategy recommended to the Japanese colleagues at the time. Arguably, the differences between the Japanese bubble of the late 1980’s and the sub-prime bubble of the mid 2000’s may explain some of the reluctance of US banks to heed their own advice of that time. Although both Japan’s debt deflation and the US sub-prime crisis are balance sheet crises, the differences are significant on at least two levels, the degree of securitization of the non-performing assets on the balance sheets and the doctrines on a government role in recapitalization and restructuring of the banking sector.

Although securitization of debt had made advances in Japan just as elsewhere, nothing comparable to the hypertrophied financial engineering of the US sub-prime bubble described above was present in the Japanese bubble of the 1980’s. Although massive and debilitating, Japan’s decade long debt deflation was still essentially a classic crisis of banks burdened by non-performing loans, more comparable in the nature of its balance sheet problems to the Swedish banking crisis of the early 1990’s than to the “toxic assets” crisis of financial engineering in the sub-prime case. Arguably, what distinguishes the sub-prime crisis is that it is also a cognitive crisis. It was a failure of “many bright people”, as certified to the Queen of England by the British Academy. Hence bankers may feel justified to plead that it is difficult to re-price the toxic assets on their books.

In a working paper of the Joint CRIDES/IRES/CECRI Working Paper Series on Institutional Competition between Common Law and Civil Law on contract modification as a solution to the subprime crisis,  we show how cognitive crises can be dealt with in contract law and hence in the assessment of the value of mortgage loans. US banks do not yet seem to be aware of that solution, however, and the point remains that the cognitive failure of financial engineering in the sub-prime crisis continues to be invoked to justify their reluctance to re-price their toxic assets.

While in 2002 US banks have wholeheartedly welcomed Heizo Takenaka’s vigorous enforcement of the strategic triad of write-downs, recapitalization and restructuring of the banking sector in Japan, they would certainly balk at a similar treatment to themselves by the US government. Although even the strongest US banks have gladly accepted short-term bail-outs, and many not so strong ones continue to depend on what George Soros calls “artificial life support”, and although there was significant prodding even from the Bush Administration in the Bank of America/Merrill Lynch merger, an all-out government-led restructuring of the banking sector would be rejected as not in keeping with free market rules and share-holder rights. In view of the large literature on the uniqueness of the relationship between government and business in Japan, the Takenaka strategy can easily be discarded as not applicable to the West. Timothy Geithner has a much more restrained view of government’s role in financial markets, and his view is shared by the “centrist” spectrum of the Democratic Party. Together with the Republican Party, this spectrum appears to command the inclination of a majority of the US Congress in this respect.

In the West, if everything else fails, the endgame will inevitably involve protracted legal battles. We believe that there is indeed a legal solution to the balance sheet crisis resulting from the sub-prime failure. In the working paper already cited, we argue that the earlier the legal dimension of failed sub-prime lending is recognized, the easier it will be to avoid the enormous cost of such an endgame.

2. Identifying new sources of global growth

If we take President Obama by his word, the American economy will no longer be consumer of last resort for the world economy.  Unlike Japan’s economy in 2003, the recovery of today’s world economy will not be assisted by some “external” source of demand. Private enterprises and public policy-makers everywhere in the world will have to look beyond demand-pull from abroad and organize Schumpeterian supply-push innovation that creates its own demand. This is the most promising form of strategic pragmatism in the economic field. Japan’s microelectronic revolution in the 1970’s and America’s software revolution in the 1980’s are the leading examples. Post-war Europe did not offer a technological revolution, but mustered strategic pragmatism for political innovation: the functional integration of Europe’s economy. Its success demonstrated that prosperity springs not only from Ricardian comparative advantage in international trade, but also from trade between industrial nations producing similar goods and services.

There is, however, one new source of demand to consider: the domestic demand of 3 bn people in Asia. Except for Japan and urban coastal China, it is not yet fully present in markets. But it just waits to be awakened by adequate policies of economic and social development as well as economic integration in Asia. Western China’s pent-up demand and the emerging Chinese legislation of a social security system on the Northern European pattern will unleash enormous domestic dynamics, offsetting some of the declining US demand for Chinese products. ASEAN+3 seems on course to organize proper flows from savings to investments in the Asian region (see our post “is Asia’s integration less functional than Europe’s,”). Thanks to such an “Asian solution” to the American sub-prime crisis, Europe’s functional experience may yet be tested on a global level.

E se lo dicono loro…

[Il capitalismo] non è un successo. Non è intelligente, non è bello, non è virtuoso, e non produce i beni necessari.

In breve, non ci piace, e stiamo cominciando a disprezzarlo. Ma quando ci chiediamo cosa mettere al suo posto restiamo estremamente perplessi.

John Maynard Keynes, principale economista del XX secolo

Pochi mercati potranno mai essere tanto competitivi quanto quelli che sono fioriti in Gran Bretagna nella prima metà del XIX secolo, quando i bambini crescevano deformi e si avviavano a una morte prematura nelle miniere e negli opifici nelle aree industriali dei Midlands occidentali.

E anche oggi esistono numerosi esempi che confermano come i mercati non abbiano alcuna tendenza a promuovere forme di eccellenza.

Non offrono alcuna resistenza alle forze che spingono l’umanità nel baratro della barbarie culturale e della perversione morale

Robert Solow, premio nobel per l’economia

L’unico risultato certo (della politica economica di Reagan basata sul libero mercato) è la ridistribuzione del reddito, della ricchezza e del potere, dai governi alle imprese private, dai lavoratori ai capitalisti e dai poveri ai ricchi.

James Tobin, premio nobel per l’economia

Il maggior problema che il nostro paese si trova ad affrontare è la creazione di due classi sociali, quelli che hanno molto e quelli che non hanno niente.

Il divario crescente tra i redditi delle persone più qualificate e di quelle meno qualificate, tra gli istruiti e gli ignoranti, è davvero un grave pericolo. Se questo divario continua ad allargarsi ci ritroveremo presto nei guai.

L’idea di avere una classe di persone che non comunica con i suoi vicini – proprio quei vicini che si assumono la responsabilità di soddisfare i suoi bisogni primari – è estremamente spiacevole e scoraggiante.

Così non si può andare avanti. Avremo una guerra civile.

La nostra società non può essere aperta e democratica se rimane divisa in due classi. Nel lungo periodo questo è veramente l’unico grave  pericolo.

Milton Friedman, premio nobel per l’economia

“So the question is, do corporate executives, provided they stay within the law, have responsibilities in their business activities other than to make as much money for their stockholders as possible? And my answer to that is, no they do not.”

~ Milton Friedman

Quinto capítulo de la serie televisiva dirigida por Milton Friedman, Libre para Elegir. En esta edición el autor explica las razones por las cuales  aun habiendo sido creados todos iguales somos diferentes en nuestras habilidades y características personales, y por qué es ético mantener estas diferencias.

liberalismoonline@gmail.com

A Lanny Ebenstein, che nel 2007 avrebbe mandato in stampa una delle sue prime biografie postume, Milton Friedman lo chiarì sin dalla prima conversazione che ebbero: “Quello che dico a una persona, lo dico a tutti”. E in effetti la vita dell’economista americano fu perlopiù un libro aperto, anche nei suoi aspetti privati, avventurosi ma non troppo per un paese dove quella del self-made man non è mai stata una specie rara. Gli stessi argomenti utilizzati per consigliare il presidente Ronald Reagan, Friedman li espose pubblicamente nelle sue tre visite nella Cina comunista; le stesse lezioni trasmesse ai tanti allievi incontrati nella carriera universitaria furono al centro dei dibattiti con Mises, Popper e Hayek nella Mont Pèlerin Society che gli stessi fondarono nel 1947. Si ripeteva spesso e volentieri Friedman, all’inizio incompreso, poi sempre più spesso celebrato, tanto che nella sua autobiografia del 1988 scrisse: io e mia moglie, Rose, oggi siamo “nella corrente principale di pensiero e non, come cinquant’anni fa, una minoranza derisa da tutti”. Una figura dunque, quella del luminare liberista scomparso nel 2006, da ricostruire innanzitutto attraverso i suoi interventi pubblici. E a maggior ragione acquista valore, perfino storiografico, la registrazione inedita che da qualche giorno l’Università di Chicago ha recuperato e messo a disposizione del pubblico.

Friedman parla per un’ora e venti minuti, durante un’assemblea gremita di studenti del suo ateneo, quello di Chicago, nel quale insegna dal 1946. D’altronde l’argomento trattato non è di quelli che si sarebbero affrontati durante una classica lezione d’economia: “Il capitalismo e gli ebrei”, così lo introduce la giovane voce che precede Friedman. E’ la stessa voce, subito prima, a ricordare come la data dell’incontro sia stata cambiata all’ultimo momento per via di un imprevisto: l’annuncio che Friedman, il 13 dicembre, dovrà essere in Svezia per ricevere il Premio Nobel per l’Economia. Fu insignito infatti, in quel dicembre 1976, “per i suoi risultati nel campo dell’analisi del consumo, della storia e della teoria monetaria, per la sua dimostrazione della complessità della politica di stabilizzazione”. Agli studenti riuniti attorno a lui, Friedman intende illustrare come si possano conciliare tra loro “due affermazioni, ciascuna delle quali, provo ad argomentare, sostenuta dall’evidenza. La prima proposizione è che ci sono poche persone al mondo che siano tanto debitrici alla libera impresa e al capitalismo concorrenziale quanto lo sono gli ebrei. La seconda proposizione è questa: ci sono pochi popoli al mondo che hanno fatto tanto quanto gli ebrei per minare le fondamenta intellettuali del capitalismo”. Quanto alla prima affermazione, l’economista di Chicago insiste su un punto: “L’essenza del capitalismo competitivo risiede nel fatto che questo si fonda sul mercato, e il mercato è neutrale, indifferente ai colori, indifferente alla religione e alla razza. Quando entri in un negozio per acquistare un filone di pane, non immagini nemmeno da dove venga la farina usata per impastarlo, se sia originaria di una fattoria di un bianco o di un nero, di un cinese o di un giapponese, di un ebreo o di un battista (sia esso ‘rinato’ o meno). Quindi il mercato è indifferente ai colori. Un monopolio invece, sia esso privato o governativo, non è indifferente ai colori, perché i monopolisti sono in una posizione tale da poter decidere da chi comprare o a chi vendere. Sono in grado dunque di esercitare un controllo basato su criteri diversi da quello della prestazione di mercato”. Gli esempi non mancano e Friedman inizia da alcune riflessioni svolte in occasione di un convegno al quale era stato invitato qualche anno prima a Montreal, e che aveva visto la partecipazione di dirigenti delle banche di tutto il mondo. “Ho fatto un rapido sondaggio, e di tutti i banchieri presenti in quella sede, circa l’uno per cento di essi erano ebrei. Questo è l’effetto del monopolio, e infatti in ogni paese l’attività bancaria è un monopolio”. Tra gli accademici e i ricercatori invitati nella stessa occasione per presentare ricerche sul mercato creditizio, circa il 25 per cento era costituito da ebrei. “In questo settore c’è invece competizione, perché [gli organizzatori] avevano scelto quelle che ritenevano le personalità più valide per tenere delle presentazioni. Ciò dimostra in modo molto chiaro la distinzione tra la competizione – nella quale la scelta dipende dalla performance – e il monopolio – dove invece è possibile usare criteri diversi dalla performance nel processo di selezione”. Falsa, dunque, la vulgata popolare per cui gli ebrei avrebbero un ruolo spropositato nell’élite dei banchieri: “Perché il settore in questione è un monopolio – spiega Friedman – per aprire una banca devi ottenere una concessione dallo stato e i colleghi banchieri devono in qualche modo garantire per te”. L’economista poi racconta un episodio che lui stesso, assieme alla collega Anna Schwartz, ha scoperto nel corso delle proprie ricerche sulla storia monetaria degli Stati Uniti, ovvero il fallimento di Bank of United States nel 1930, uno dei due soli istituti – in tutto lo stato di New York – che al tempo avesse proprietari di religione ebraica. La banca dovette chiudere i battenti l’11 dicembre 1930: “Fu il fallimento più grave sino a quel momento, e funzionò come un detonatore fondamentale per l’esplosione della cosiddetta Grande depressione”. Non fu la causa di tutto, tiene a precisare l’economista, ma è certo che da quel giorno prese il via la corsa agli sportelli che mise in ginocchio quasi tutti gli istituti di credito del paese. “Perché Bank of United States fallì? Non c’è dubbio, i documenti sono molto chiari: perché John P. Morgan era antisemita”. All’inizio del Novecento le presunte attività monopolistiche del finanziere erano finite sotto osservazione: prima di una commissione del Congresso guidata da un avvocato ebreo, poi di alcuni pamphlet polemici scritti da Louis Brandeis (che in seguito divenne il primo ebreo ad essere eletto giudice della Corte suprema). Così quando al figlio di John P. Morgan toccò accordarsi con la Fed di New York per salvare – diremmo oggi – la Bank of United States, come era già avvenuto in precedenza per altri istituti, John P. Morgan Jr. si rifiutò, spiegando a Charles Sumner Hamlin, membro della Fed: “La farò pagare a quegli ebrei per quello che fecero a mio padre”. Che la sclerotizzazione del libero mercato non favorisse gli ebrei, lo dimostra la storia di secoli di Diaspora, durante la quale essi “furono in grado di esistere soprattutto grazie a piccoli scampoli di mercato che continuarono a rimanere in piedi”. “Fecero molto bene soprattutto nel campo del commercio e della finanza internazionali, perché questi erano settori che i governi potevano controllare con maggiore difficoltà”. E’ sufficiente voltarsi indietro e notare come quelle “aree in cui gli ebrei hanno potuto prosperare relativamente”, coincidono con “quei paesi che hanno il livello maggiore di capitalismo competitivo”: l’Olanda del XVI e XVII secolo, il Regno Unito tra XVIII e inizio XX secolo, gli Stati Uniti. Poi un inciso: “Ora sto parlando degli ebrei, ma tutto quello che ho detto resta valido per qualsiasi minoranza impopolare. Vale per i neri tanto quanto per gli ebrei. Come questi ultimi hanno molto da guadagnare da una società fondata sulla competizione e la libera impresa, così è anche per i neri”.Eppure, nonostante “gli ebrei solo raramente [abbiano] beneficiato dell’intervento statale, mentre hanno prosperato, potendosi giovare della libertà – anche dal pregiudizio –, soltanto quando c’è stata una grande dose di libera impresa”, resta il fatto che gli stessi “si sono opposti regolarmente al capitalismo, facendo molto – almeno a livello ideologico – per minarne le fondamenta. Da Karl Marx a Leon Trotzky, dice Friedman, fino alla nostra versione contemporanea – Herbert Marcuse – gran parte della letteratura anticapitalista è riconducibile ad autori ebraici”. Le radici di questo filone particolare di anticapitalismo sono state già indagate, ammette il professore di Chicago, ma molte delle teorie esistenti non lo convincono. Lawrence Fuchs riconduce l’anticapitalismo di tanti autori ad alcuni valori specifici della religione e della cultura ebraica. Eppure “la religione e la cultura ebraica hanno 2.000 anni – nota Friedman – come è possibile che per 1.800 anni questi valori non abbiano generato una mentalità anticapitalista e negli ultimi 200 sì?”. Non solo; ci sono autori, come Werner Sombart, che sostengono esattamente l’opposto. Secondo Sombart, è proprio per ragioni culturali che gli ebrei avrebbero “sostenuto e difeso attraverso i secoli la causa della libertà individuale nell’attività economica contro la visione dominante dei tempi”. Un secondo punto di vista sostiene che tendenzialmente “gli intellettuali sono anticapitalisti, e gli ebrei sono più che proporzionalmente presenti tra gli intellettuali”. Spiegazione soddisfacente? Friedman si dice convinto anche lui di una certa propensione ebraica all’intellettualismo, che spiega così: primo, gli ebrei sarebbero stati di fatto costretti a concentrare la loro attività in settori senza eccessive barriere all’ingresso e nei quali fosse effettivamente premiato il merito. Secondo, “se sei parte di una minoranza perseguitata, o sei costretto a fuggire da doveti trovi, desideri accumulare il tuo capitale in forme che puoi portare con te. E il miglior modo, ovviamente, è per via intellettuale”. Parola di figlio di ebrei emigrati alla fine dell’Ottocento dalla Carpazia, provincia dell’Impero austroungarico, per trasferirsi a Brooklyn. Ma anche in questo caso la spiegazione è incompleta: perché “gli intellettuali ebraici sono più anticapitalisti degli intellettuali in generale, e anche tra gli ebrei non intellettuali si registra la stessa tendenza rispetto ai non ebrei”. Lo dimostrerebbe il fatto che in generale i cittadini americani di fede ebraica, almeno dagli anni 30, abbiano avuto un ruolo significativo nei movimenti comunisti, socialisti, e in generale di sinistra, attivi negli Stati Uniti. Perciò Friedman guarda piuttosto a due ipotesi ulteriori. Per una di esse si dice debitore “a una tesi di dottorato dell’Università di New York, non ancora pubblicata, di Werner Cohn”. “A partire dalla Rivoluzione francese, il panorama politico europeo si organizzò in un’ala destra – strettamente connessa con la chiesa e con i movimenti religiosi cristiani – e in un’ala sinistra, con i partiti socialisti e comunisti che erano anti-clericali. La sinistra dunque offriva l’unico spazio politico in cui un ebreo potesse fare politica senza essere fuori posto per la sua fede”. Il ragionamento è valido per l’Europa, nonostante Friedman non dimentichi di citare il fenomeno dell’antisemitismo di sinistra, ma è difficilmente applicabile al caso degli Stati Uniti, paese nel quale la separazione tra stato e chiesa è sempre stata netta e condivisa da tutte le parti politiche. Senza contare che le élite puritane erano perfino pro-semitiche. Anche prendendo in considerazione l’influenza degli intellettuali europei trasferitisi oltreoceano, l’enigma del caso statunitense richiede un’ipotesi ancora più raffinata. “La mia personale spiegazione – riprende allora Friedman – è che l’antisemitismo abbia prodotto uno stereotipo dell’ebreo fondato sull’idea che egli sia interessato solo ai soldi, egoista e avido. Ora… non c’è nessun problema ad essere interessato ai soldi!”. Risate e applausi. “Ma è molto difficile isolarsi dai valori intellettuali e culturali nei quali viviamo. Gli ebrei accettarono i valori della società nella quale vivevano e quei valori denigravano tali caratteristiche. Per questo essi si sono detti: ‘Se fossimo così, gli antisemiti avrebbero ragione. Quindi dimostreremo che noi non siamo così’”. “Dimostreremo che al contrario noi siamo altruisti, crediamo nella possibilità di fare il bene tramite l’intervento del governo, che crediamo in una filosofia molto differente”. Friedman spiega di aver formulato questa ipotesi dopo un suo primo soggiorno in Israele: “Ho compreso allora che il modo migliore per farsi un’idea di quello che era vero in Israele, era chiedersi cosa fosse valido per gli ebrei della diaspora ed invertirlo”. Se gli ebrei della diaspora vivono soprattutto in città, quelli israeliani tengono in alta considerazione l’agricoltura. Tanto i primi sono anti-militaristi, quanto i secondi pongono un’enfasi enorme sull’esercito. Mentre la diaspora parla lo yiddish, in Israele l’ebraico è la lingua predominante. “E poi, volete la prova decisiva? Gli ebrei della diaspora erano considerati grandi cuochi. Adesso in Israele è l’opposto”. Lunghi applausi e risate. “Concludo quindi che le motivazioni principali per la mentalità anticapitalista degli ebrei siano da una parte le circostanze particolari del XIX secolo in Europa, che legarono i partiti pro-mercato con le religioni stabilite e che spinsero gli ebrei alla sinistra dello spettro politico; e dall’altra parte i tentativi inconsci degli ebrei di dimostrare a se stessi e al mondo la fallacia dello stereotipo antisemita”. Quantomeno peculiare il fatto che tale ideologia sviluppata nei decenni si opponga fermamente “all’interesse personale degli ebrei”, non solo all’interno degli Stati Uniti, come prova a dimostrare Friedman con la sua domanda al pubblico: “Quale sarebbe oggi la situazione di Israele se ogni altro paese fosse socialista? Da dove prenderebbe finanziamenti? Nella sua storia questi sono arrivati da paesi capitalisti, come gli Stati Uniti, il Sud Africa, il Regno Unito. Non dai governi di questi paesi, ma dai residenti ebrei di questi stati. E gli ebrei russi hanno mandato forse un ammontare comparabile di aiuti? O sono forse stati in grado di influenzare il loro governo perché inviasse aiuti?”. Risposta: “Se tutti i paesi del mondo si fossero conformati al tema dominante l’ideologia intellettuale ebraica, Israele non sarebbe mai stato in grado di esistere”. Non è detto che però la situazione resti immutata: “Gli ebrei potevano permettersi di essere favorevoli a muovere verso il socialismo nei settori delle public utilities, delle ferrovie, del telegrafo, delle banche, all’interno dei quali non giocavano un ruolo importante. Arricchendosi però contemporaneamente grazie al mercato competitivo che esiste nel commercio, nell’industria dell’intrattenimento, nell’educazione. Ma con l’espansione del ruolo dello stato anche in questi settori, sta divenendo sempre più difficile per gli ebrei muoversi nel libero mercato. Non so se questo conflitto porterà nel tempo a un cambiamento delle attitudini, ma credo che aiuterà quantomeno a scalfirle. Sarebbe molto desiderabile che gli intellettuali ebrei divenissero molto più consapevoli e critici di queste attitudini che hanno sviluppato, anche per capire pienamente che il mercato è il sistema, l’unico sistema, che permetterà a tutti di cooperare l’uno con l’altro, che consentirà a ogni persona di andare per la sua strada mentre ciascun altro va per la propria”

. Su “2+2”, il blog di economia e finanza del Foglio.it, l’audio dell’intervento di Friedman: www.ilfoglio.it/duepiudue/251

Informazione Corretta

Don Boudreaux of Cafe Hayek points out an interesting paragraph from a 2005 CBO study:

The resulting [tax] rate on equity-financed corporate capital income is 36.1 percent and that on debt-financed corporate capital income is -6.4 percent, a difference of 42.5 percentage points. The rate on equity-financed corporate capital income is higher than the statutory corporate tax rate because of the extra tax imposed on dividends and capital gains at the individual level.

Obviously, this will steer corporations towards debt financing over equity financing. Some quick definitions: equity financing is financing by issuing stock, i.e. financing from your shareholders; while debt financing is done by borrowing. Firms typically use a mix based on their individual needs. The important point is that the tax code is quite probably influencing corporate decision-making for the worse and distorting capital markets.

So is this a case of a tax cut with negative consequences? Milton Friedman once said:

I am in favor of cutting taxes under any circumstances and for any excuse, for any reason, whenever it’s possible.

My preferred solution is to cut all tax rates drastically. But assuming we have some situation where our only choice is a 36.1% tax rate for both debt and equity financing, or 36.1% for equity and -6.4% for debt; is the best solution to have both at 36.1%, as this probably causes less severe market distortions?

As always, we welcome your thoughts.

In my global marketing strategy class the other day, instructor David Thomsen showed two pretty shocking videos in discussing public relations. One was on the Bhopal disaster of 1984. The Bhopal gas tragedy is the worst industrial disaster in human history, leaving 8,000 dead within hours of the gas leak in the Indian city, 25,000 dead since the disaster, hundreds of thousands adversely affected by the chemicals, continuing side effects on humans and other animals, and environmental damage that persists today. The “compensation” the video talks about was less than $900 per injured person. Union Carbide, the corporation responsible for the leak, denied any culpability. The Dow Chemical Company later bought them in 2001. The CEO of the company at the time, Warren Anderson, was charged with homicide and manslaughter. He left the country and fled to the United States, where he currently resides, and refuses to appear before Indian courts.

The second video was a report by Australia’s Channel 7 revealing that Nike, a corporation marred by its human rights violations and despicable working conditions in Third World countries, continued to engage in forced labor practices in sweatshops in Malaysia as late as 2008. Note this is after they claimed to have cleaned up their act.

There is a simple reason these types of actions, and others like them, occur, which is what’s called the profit motive. When profit-maximization is the creed, what happens to people is only incidental. There is a whole generation of businesspeople who have been influenced by the work of people like Milton Friedman and Ayn Rand, whose principle message is that the only socially responsible (and indeed morally right) action is to maximize self-interest by way of profits. These ideas are justified by ethical egoism, a morally bankrupt and vacuous theory that says the only morally right actions are actions that maximize the acting agent’s self-interest. That’s what’s called “the moral economy.” The right, in their usual perversion of Smithian theory, always tries to defend this on economic grounds, appealing to what they refer to as “the invisible hand,” a term meant to describe the unintentional benefit to society that corporations bring about through acting in their self-interest. Adam Smith, of course, only used the term once in his The Wealth Nations and only as a “casual metaphor” for risk-adverse merchants wary of foreign exchange who inadvertently help their own countries. Smith, like many of the other great anti- and pre-capitalist Enlightenment thinkers, denounced greed and selfishness. As most serious scholars of Smith recognize, Smith never saw the “invisible hand” as a reality or “law” of markets. As Joseph Stiglitz puts it, “the reason that the invisible hand often seems invisible is that it is often not there.”

As ethical egoism posits to us, there is a certain calculus all moral agents are supposed to undertake in their actions. Namely, they are to ascertain which actions will ultimately lead to profit maximization and undertake those actions. For Union Carbide, that meant denying responsibility for the worst industrial disaster in human history and paying its victims an inconsequential and truly unjust fraction of its coffers. For Nike, that meant finding the cheapest source of labor and exploiting them in the worst kinds of ways—that is, until they’re caught. And while these might indeed be the profit-maximizing choices, surely nobody agrees they have improved the lot of all. When we ignore the rights of people and the laws that regulate acceptable behavior (as, indeed, ethical egoism asks us to do when it is profitable), the necessary result is an abject and deplorable world. The fact that the far-right advocates the abolition of regulations intended to safeguard against such massive injustices from ever happening is justified, they say, by a certain euphemism they call “market democracy” (the idea that ordinary market participants, like you or me, can shape business behavior—but you more than me, because I’m poor). The sobering reality: Dow’s revenues in 2008 totaled more than $57.5 billion, and over $16.6 billion for Nike.

So long as corporations continue to operate within the framework of this “moral economy,” justified by Friedman, Rand and others, we will continue to witness the tragedies and corruption that we hear about on an everyday basis. What is needed instead, at the most minimal level, is a better consideration for those other than the self, as advocated in theories like stakeholder theory, and better regulations and stiffer penalties to ensure “profit over people” (what Smith described to as “the vile maxim of the masters of mankind”) does not become the norm.

First, from Walter Williams, A Minority View: Excused Horrors.

Nazis were responsible for the deaths of 20 million of their own people and those in nations they conquered. Between 1917 and 1983, Stalin and his successors murdered, or were otherwise responsible for the deaths of, 62 million of their own people. Between 1949 and 1987, Mao Tsetung and his successors were responsible for the deaths of 76 million Chinese.

For decades after World War II, people have hunted down and sought punishment for Nazi murderers. How much hunting down and seeking punishment for Stalinist and Maoist murderers?

…the reason why the world’s leftists give the world’s most horrible murderers a pass is because they sympathize with their socioeconomic goals, which include government ownership and/or control over the means of production. In the U.S., the call is for government control, through regulations, as opposed to ownership. Unfortunately, it matters little whether there is a Democratically or Republican-controlled Congress and White House; the march toward greater government control continues. It just happens at a quicker pace with Democrats in charge.

In Worse Than Taxes, John Stossel makes the point that while taxes are bad enough, what’s worse – and gets little attention – is government spending.

[California and New York] would have big surpluses had they just grown their governments in pace with inflation. But of course they didn’t. Now the politicians act like their current deficits are something imposed on them by the recession.

Had the government of New York state grown at the rate of population and inflation over the past 10 years, it would have a $14 billion surplus today. Instead, spending grew at twice the rate of inflation (http://tinyurl.com/yguvfpm). So New York has a $3 billion deficit.

Stossel quotes Walter Williams:

It reminds me of Walter Williams’ riff: “Politicians are worse than thieves. At least when thieves take your money, they don’t expect you to thank them for it.”

And Milton Friedman:

The true burden of government, the late Milton Friedman said, is the spending level. Taxation is just one way government gets money. The other ways — borrowing and inflation — are equally burdens on the people. (State governments can’t inflate, but they sure can borrow.)

]]> http://oldhardhead.wordpress.com/2009/11/19/socialized-medicine-milton-friedman-ronald-reagan/ Thu, 19 Nov 2009 11:47:43 +0000 oldhardhead http://oldhardhead.wordpress.com/2009/11/19/socialized-medicine-milton-friedman-ronald-reagan/

Milton Friedman – Socialized Medicine

Ronald Reagan Speaks Out Against Socialized Medicine

This is not new. It was a bad idea then, and it’s a bad idea now. Shall we look at history and use the knowledge we have or make an ignorant mistake?

We are on a path to single payer (this is a link), let’s hope it never sees the light of day.

http://wp.me/pFeEj-7R

“History suggests that capitalism is a necessary condition for political freedom”

~ Milton Friedman

Wanted to share this insightful (and quite funny and fun to read) rebuttal of Thomas Friedman’s recent ignorant and shallow New York Times column. Chris Lang takes Friedman’s arguments apart, line by line. Cross posted from REDD Monitor. Enjoy.

Why did Conservation International invite Thomas Friedman to go to Brazil?

Thomas Friedman’s most recent column for the New York Times comes from Tapajós National Forest, Brazil. His trip was organised by Conservation International and the Brazilian government (Friedman doesn’t say who paid). Conservation International could not have chosen a better journalist to back up their pro-carbon market ideology. Friedman, author of The World is Flat and Hot, Flat and Crowded, firmly believes that markets are the solution, regardless of the question. Even better, Friedman is incapable of putting forward an argument. He doesn’t even try. He simply makes statements and assumes that because he’s made them they must be true. His latest offering “Trucks, Trains and Trees“, reveals his genius for taking a complex issue and rendering it as complete gobbledygook.

Friedman’s story is straightforward enough: Man flies from the USA to the Brazilian rainforest. The rainforest is full of trees. Saving the rainforest will allow man to continue flying.

Matt Taibbi, the journalist who recently described Goldman Sachs as “a great vampire squid“, points out that Friedman doesn’t actually do anything except write books and newspaper columns. “So in my mind it’s highly relevant if his manner of speaking is fucked,” Taibbi writes. Taibbi has taken apart Thomas Friedman’s manner of speaking on several (very entertaining) occasions.

“No matter how many times you hear them, there are some statistics that just bowl you over,” Friedman starts his article. The statistic he’s talking about is the “roughly 17 per cent” of global emissions coming from deforestation. That statistic doesn’t bowl me over. It became a cliché several years ago. Clearly, Friedman hasn’t heard this statistic very often, which perhaps indicates how much research Friedman did before writing this article. Last week, Friedman’s friends at Conservation International signed a statement that states “The best current estimate would be about 15% if peat degradation is included.” Without peat degradation (Friedman does not mention peat in his article) the figure is more like 12%.

Friedman continues:

“It is going to be a long time before we transform the world’s transportation fleet so it is emission-free. But right now — like tomorrow — we could eliminate 17 percent of all global emissions if we could halt the cutting and burning of tropical forests.”

To Friedman, then, “right now” is the same as “like tomorrow”. Perhaps he’s never had to negotiate with a five year old child who is threatening to throw his wallet down the toilet. Otherwise he would recognise the difference between “Give me the wallet, right now” and “Give me the wallet, like tomorrow”.

Friedman can see no way to change the world’s transportation fleet overnight, so he suggests we forget that inconvenient source of emissions. But stopping deforestation? Easy. So why don’t we do it “right now – like tomorrow”?

In the next sentence Friedman explains what we have to do to stop all deforestation:

“to do that requires putting in place a whole new system of economic development — one that makes it more profitable for the poorer, forest-rich nations to preserve and manage their trees rather than to chop them down to make furniture or plant soybeans.”

So all we need is a “whole new system of economic development”. Why didn’t Friedman tell us how to stop deforestation decades ago? Friedman, the great proponent of globalisation and neo-liberalism, has gone anti-capitalist. No really. Here’s what he says next: “Without a new system for economic development in the timber-rich tropics, you can kiss the rainforests goodbye. The old model of economic growth will devour them.”

The genius of Friedman is that just as we’re trying to wrap our heads around whatever it is he’s talking about, he throws a Friedmanism at us. “The only Amazon your grandchildren will ever relate to is the one that ends in dot-com and sells books.”

I suspect that the vast majority of the grandchildren of readers of the New York Times relate to the Amazon rainforest through books, TV programmes and the internet. Most of them will not be invited by Conservation International to fly there. How does anyone “relate to” an ecosystem covering 5.5 million square kilometres in nine countries? What is Friedman talking about?

Taibbi makes fun of Friedman’s ability to screw up, not sometimes, but always: “He has an anti-ear, and it’s absolutely infallible; he is a Joyce or a Flaubert in reverse, incapable of rendering even the smallest details without genius.” Taibbi’s right. Why on earth did Friedman add the words “and sells books” to the end of his sentence about the Amazon? How many readers of the New York Times don’t know that the website Amazon-dot-com sells books?

Friedman tells us he’s gone to Brazil “to better understand this issue”. But Friedman writes by talking to himself. Here he is flying over the Amazon:

“Flying in here by prop plane from Manaus, you can understand why the Amazon rainforest is considered one of the lungs of the world. Even from 20,000 feet, all you see in every direction is an unbroken expanse of rainforest treetops that, from the air, looks like a vast and endless carpet of broccoli.”

Who considers the Amazon rainforest “one of the lungs of the world”? Friedman isn’t telling. Trust me, Friedman says, if you flew over the Amazon, then you too would know why the Amazon is considered to be one of the lungs of the world.

But if the Amazon is one of the lungs, where is the other one? The Congo, Indonesia, Siberia, Canada? How much forest do you need before it becomes a lung? How many lungs does the world have?

Friedman tells us he flew over “an unbroken expanse of rainforest treetops”. Crikey. What did Friedman expect to see while flying above the biggest area of rainforest in the world other than treetops? Skyscapers? Spaghetti junction? The Star Ship Enterprise?

The combination of “vast and endless” is another Friedmanism. The Amazon is vast, but it is not endless. If Friedman thinks it’s endless, that’s because he’s forgotten that when his plane took off from the USA, he was not in the Amazon rainforest.

Here’s what Friedman learned when his plane landed (he doesn’t tell us how the plane got through the unbroken expanse of treetops, or the endless carpet of broccoli, but apparently it did):

“What you learn when you visit with a tiny Brazilian community that actually lives in, and off, the forest is a simple but crucial truth: To save an ecosystem of nature, you need an ecosystem of markets and governance.”

Friedman doesn’t tell us what he saw or heard in the community to reach this conclusion, apart from one villager who told him “We were born inside the forest. So we know the importance of it being preserved, but we need better access to global markets for the products we make here. Can you help us with that?” (That, incidentally, is the only quotation in the article from anyone living in the Amazon.)

Friedman does not explain what on earth he’s talking about when he says “an ecosystem of markets and governance.” Perhaps this is the “new system for economic development” that he mentioned earlier on. José María Silva, vice president for South America of Conservation International, tells Friedman that “You need a new model of economic development — one that is based on raising people’s standards of living by maintaining their natural capital, not just by converting that natural capital to ranching or industrial farming or logging.” So now we have Friedman and Conservation International saying the same thing about economic development. On planet Friedman, that makes it true. No need for anything pesky like arguments or evidence.

Friedman tells us that “Brazil has already set aside 43 percent of the Amazon rainforest for conservation and for indigenous peoples. Another 19 percent of the Amazon, though, has already been deforested by farmers and ranchers.” He doesn’t tell us where those numbers come from, he just tells us that 38% of the Brazilian Amazon rainforest is still “up for grabs”.

Then Friedman reveals that he’s not gone anti-capitalist after all. In fact, his “whole new system of economic development” looks a lot like CO2lonialism:

“The more we get the Brazilian system to work, the more of that 38 percent will be preserved and the less carbon reductions the whole world would have to make. But it takes money.”

This, then, is Friedman’s solution. Brazil has to stop deforestation so that the rest of the world can carry on polluting.

[W]e need to make sure that whatever energy-climate bill comes out of the U.S. Congress, and whatever framework comes out of the Copenhagen conference next month, they include provisions for financing rainforest conservation systems like those in Brazil. The last 38 percent of the Amazon is still up for grabs. It is there for us to save. Your grandchildren will thank you.

Needless to say, Friedman doesn’t explain how “we” are supposed to influence the U.S. energy-climate bill or the UN climate negotiations in Copenhagen. Or what “we” are supposed to do to “save” the 38 per cent of the Brazilian Amazon that is “still up for grabs”.

Trading forest carbon, which seems to be what Friedman is proposing as a solution (although not explicitly), would create a vast loophole allowing business as usual (at least for the countries and corporations that can afford to buy the carbon credits – the same countries and corporations that created the climate problem in the first place).

On planet Friedman, as long as the “vast and endless carpet of broccoli” is still there, there’s no need to “transform the world’s transportation fleet so it is emission-free”. And on planet Friedman there’s no meaningful discussion of the issues involved. Presumably that’s why Conservation International invited Friedman to go to Brazil.

Milton Friedman analiza en el cuarto capítulo de la serie televisiva Free to Choose,  los planes de bienestar social en los Estados Unidos y explica como estos destruyen la independencia del individuo.

Milton Friedman (1912 – 2006) fue un destacado economista estadounidense, defensor del libre mercado y oponente máximo del keynesianismo (intervención fiscal como motor de crecimiento). Obtuvo el Premio Nobel de Economía en 1976, por sus logros en el análisis de consumo, historia y teoría monetaria.

1-EL PODER DEL MERCADO

2-LA TIRANÍA DE LOS CONTROLES

3-ANATOMÍA DE LA CRISIS

liberalismoonline@gmail.com

Reflexiones luego de la muerte del Señor Friedman y su herencia.
Muchas veces me detuve a pensar cuánto daño hicieron a la humanidad estos grandes cerebros equivocados.  Alguna vez leí que hasta Sigmund Freud con su  método de examinar sueños o traumas de infancia retrasó muchos años  la medicina siquiátrica.Aquí deseo comentar  de la forma más simple posible a dos hombres relacionados  con la economía: Carlos Marx  y Milton Friedman. Ambos contra el Estado.

Carlos Marx con su socialismo científico, tan complicado  e inaplicable que todos los intentos realizados   fracasaron (aún matando a miles  de opositores); nunca se pudo llegar a su materialización real.

El marxismo pretende que no haya la propiedad privada o diferencia de clasespropugnando que todos los medios de producción fuesen  de los  trabajadores, sin patrones; eliminar la condición de explotador y explotado. Llegaría a tal nivel de igualdad que por inercia  el Estado se extinguiría…

Se olvidó que  el ser humano no es perfecto y  que siempre habrá el que trabaja menos, el menos emprendedor,  el que   ambiciona menos  y, por tales realidades, acaban por explotar a sus socios o camaradas, ya que al final  todo el resultado de la producción se dividiría en partes iguales. De una forma  u otra siempre habrán  explotadores y explotados, y se agrava cuando no hay educación  o  un rigurosísimo control.

El señor John Keynes, mucho más equilibrado y viable, creía  que el modelo ideal era  el Estado Social de Derecho, un capitalismo regulado para proteger el bien común.  Capitalismo porque  estimula la competitividad, da más libertad al emprendedor y al trabajador con deseos de progresar, todos pueden dedicarse a ganar dinero, pero  también estarán obligados por Ley a apartar cierta cantidad de sus lucros  por el bien de todos (pagar impuestos), seria como una gran cooperativa o una caja única común administrada por el Estado, que a su vez proporcionaría  educación, salud,  rutas,  plazas de diversiones, seguridad y   jubilaciones,  servicios, etc., siempre con el objetivo de lograr el Bienestar Social (de todos). En el Capitalismo  Social el empresario emprendedor puede también  contratar  sus empleados, pero debe velar por todos sus derechos (Leyes Laborales).   Es el modelo que vemos actualmente en todos los países del primer mundo. (Infelizmente en proceso de destrucción por culpa del señor Friedman).

Nosotros, en América Latina, así como en África,   no llegamos a conocer el  Bienestar Social,  (apenas un ensayo).

El señor Milton Friedman, recientemente fallecido, proponía el Capitalismo Libertario, sin Estado,  pues daría total libertad al dinero, lo desobliga del pago de impuestos. Abandona las políticas sociales sistemáticas, flexibiliza las Leyes Laborales.  Es el individualismo, el individuo por si mismo.

El señor Friedman creía que el capitalista o empresario  emprendedor  arriesga su capital, muchas veces  hace préstamos, invierte y abre su empresa,  contrata empleados (los explota hasta la esclavitud, ya que el Estado no interfiere), y se volviéndose multimillonario  debe disfrutar de su riqueza. No lo considera  responsable por los pobres ya que creía que éstos lo son por opción propia. Abogaba por el libre comercio, sin trabas, sin regulaciones,  solamente oferta y demanda, que gane el mejor  o el más creativo (la esclavitud es válida en ese modelo). Consideraba injusto que el emprendedor  que puso su capital en riesgo deba soportar la carga de la pobreza en su espalda (pagando impuestos). Sin  imposición alguna, el señor Friedman creía que  se puede ayudar a los pobres haciendo esporádicas donaciones. (lo que estimularía el regreso de los padrinos).

Para los que no entienden  y creen que este es el mejor  modelo de gobierno, observen  las estadísticas del  mundo.  Considero imperdonable el daño que el señor Friedman hizo a la humanidad sugiriendo prescindir  del Estado de Bienestar y enseñando los medios para  destruirlo.

El señor Milton Friedman, murió el día 16 de Noviembre último, irónicamente en el Día Mundial de la Tolerancia – preocupación de la  ONU  con el maltrato a  los inmigrantes. No voy a celebrar la muerte de un ser humano, pero si lloraré porque por su macabra idea, que está más fuerte que nunca cumpliendo su receta, muere  un niño cada 3 minutos en el planeta. Conclusión, el señor Friedman se equivocó,  todo lo que debilita al Estado nos debilita  a todos los seres humanos.

Que Dios lo perdone…

Fuente: Soberania.org - 27/11/06

Dr. Friedman states, “There is not a single person in the world who can make this pencil.” He explains that the creation of even a simple object – like the “lead” pencil – requires the knowledge of many people, lumberjacks, steel manufacturers, miners, etc. These people may not speak the same language, they may not know or like one another, yet the market enables them to combine knowledge and effort to produce wealth. Introduced by Arnold Schwarzenegger. Discussion with David Brooks, Wall Street Journal and James Galbraith, University of Texas.

“When anyone complains about unfair competition, consumers beware.” Friedman tells us about the writings of Adam Smith who, 200 years ago, warned that businesses always try to sell for the highest price and will try to control the market to do so. But without government help businesses cannot force people to buy their goods. Consumers will always get the lowest possible prices when competition is free and robust. Introduced by George Schultz. Discussion with Michael Walker, Fraser Institute and Steve Cohen, UC Berkeley.

Milton says “Everybody knows what needs to be done. The property that is now in the hands of the state, needs to be gotten into the hands of private people who can use it in accordance with their own interests and values.” Eastern Europe has observed the history of free markets in the United States and wants to copy our success. Ironically, we seem unable to turn away from the temptations of socialism despite its long history of bankrupting economies. Introduced by Ronald Reagan. Discussion with Gary Becker, University of Chicago and Sam Bowles, University of Massachusetts at Amherst.

“Parental choice, parents choosing the teachers, parents monitoring the schooling,” is Friedman’s answer to the problem. In almost every case, giving individuals the power to choose, to set their own course, will lead to better results than centrally planned activity. That applies to schooling and every other activity in a modern society. Introduced by David Friedman. Discussion with Gordon Tullock, University of Arizona and Henry Levin, Stanford University.

“The society that puts equality before freedom will end up with neither. The society that puts freedom before equality will end up with a great measure of both.” The desire to have more, to have what those who are better off have, is a powerful emotion. Friedman points out that the most governments can do is provide all citizens with equal opportunity to use their time and abilities as they best see fit, in pursuit of a better life. Introduced by Steve Allen. Discussion with Thomas Sowell, Hoover Institution and Michael Kinsley, New Republic.

Nobel Laureate Economist Milton Friedman discusses the free market solution to America’s health care problems (from 1978).

Like fish stranded by a fast retreating tide, most mainstream economists, commentators and governments tend to be flapping around frantically and aimlessly, unaware of the real cause of their distress.  The  more cautious among them hope for a slow return of the tide;  most merely hope against hope that somehow, sometime, all will return to what it was.  It almost certainly will not.

Nobody saw it coming.  This is an oft repeated mantra about the global economic crisis, which is also — and equally erroneously — referred to frequently as a financial crisis.  But it is certainly true that most mainstream economists and commentators continued to talk up the economy even as the first serious signs of collapse became evident.  And most also tended to refer to it — at least initially — as a purely financial affair.

They did so out of an almost religious belief in the market and, in most cases, an obvious absence of knowledge about economic history.  Clearly blinded by the chimera of Stock Exchanges and the smoke and mirrors of booming futures and derivatives trading, they lost sight — if ever they had it — of the real productive economy.  Their god was profit and their church, the market.

So when the economic bubble began to deflate, punctured by what was an effective pyramid scheme based on sub-prime mortgages in the United States, they did not question church or deity;  the search was for individual sinners, those who had abused the rites and rituals that they believe guarantee profits ever after.  So instead of rational appraisals, there were frequent outpourings of dogmatic incantations and calls for regulatory patches to repair the sub-prime hole that had begun deflating the economic bubble.

And there is the continued insistence by any number of economists and commentators that the crisis could not have been foreseen;  that its precise cause and probable consequences still remain a mystery.  But this is simply untrue.  For 20 years and more, the warning signs have existed — and have been pointed out, although usually from the more radical margins of economic debate.

However, even that standard bearer of free market capitalism, The Economist magazine, warned in 1999 that the spectres of over-capacity and over-production were haunting the world economy.  A survey by the magazine of international demand, supply and capacity resulted in the conclusion that a time of glut leading to stagnation, was on the cards.

This was something that had been pointed out even earlier by the likes of economic historian Robert Brenner in the United States.  He was not alone.  Economic commentator T. N. Vance in the US was raising warnings in the 1950s and the so-called oil price crisis of 1973 led to a veritable flurry of analysis on the margins of economic debate, illustrating what probably lay in store.

However, these commentators and economists not only looked to productive capacity and the related sources of supply and demand in the world economy, they based their analysis on the much earlier work of Karl Marx and his collaborator, Frederick Engels.  In 1848 Marx and Engels wrote that the then relatively new capitalist economic system needed to expand its market globally;  it needed to “nestle everywhere, settle everywhere, establish connections everywhere”.

It was a system, they wrote, that has “conjured up such gigantic means of production [that it] is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells”.  This, they maintained, would lead to crises and to “an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production”.

But the mass of free market praise singers grew as the world recovered from the barbarity and destruction of the second world war and a lengthy economic boom began.  The collective attitude of the praise singers was well summed up by economics Nobel laureate Paul Samuelson.  In 1970 he told a conference of his peers that the days of crises — of boom and bust — were over.  “The National Bureau of Economic Research has worked itself out of one of its first jobs, namely business cycles,” he claimed.

Three years later came the first crisis.  But it failed to dent the psuedo-religious belief in the market and the system as it existed.  Sinners were found:  the oil producers and their “artificial” lifting of the oil price.  What was needed was merely some adjustment;  there had apparently been too much tinkering with the market.

This attitude was summed by British Labour Party prime minister James Callaghan in 1976 when he said:

“We used to think you could just spend your way out of recession by cutting taxes and boosting government borrowing…that option no longer exists…it worked by injecting inflation into the economy.  Each time that has happened…unemployment has risen.”

Callaghan’s statement announced the turn away from what was known broadly as the Keynsian approach to that advocated by Milton Friedman and the Chicago School, an  approach now labelled neo-liberal.  Thirty years later, neo-liberalism has been found wanting and, without apparent irony, history is now repeating itself:  the present British prime minister, Gordon Brown, has increased government borrowing and embarked on a policy of spending as a solution to recession.

But this begs the main question:  is this merely another recession/depression, one of the cyclical slumps inherent in the system, or is it something different?  The answer is probably both yes and no:  yes, it is one of the slumps inherent in the system and no, it’s underlying cause is no different from those preceding it.  However, it is by far the greatest crisis the system has suffered, the cumulative result of decades spent ignoring a growing and fundamental fault.

The economic history of the modern, capitalist, world is peppered with examples of booms and slumps, of struggles for economic supremacy by individuals and exploiting minorities in regions, countries and blocs.  All the while, productive capacity and the ability to manufacture more with less grew as mechanisation and the bloody history of colonial plunder replaced plantation slavery and the dehumanising horror of the workhouse.

Peasants and self-sufficient communities, driven off their lands by force or taxes, swelled the ranks of the sellers of labour who, at one and the same time, became the purchasers of the very products they helped to make, distribute or provide the raw materials for.  Their wages and conditions improved only after desperate and often bloody struggles.

However, there were always some employers who realised the link between the worker as producer and as consumer.  None more so than Henry Ford.  He had little regard for workers, but understood that the survival of the system demanded the ability to sell, at a profit, the products that the sellers of labour create — and buy.  In his 1922 autobiography he noted:

“…Our own sales depend in a measure upon the wages we pay.  If we can distribute high wages then that money…will serve to make storekeepers and distributors and manufacturers and workers in other lines more prosperous and their prosperity will be reflected in our sales”.

But he too did not foresee the looming absurdity of over capacity and over production that now afflicts almost every manufactured item, but is especially obvious in the textile, garment and motor vehicle industries.  Take vehicle maker Toyota, for example.  This year the company estimates that production will be more than 30 per cent below its current, 10 million units a year capacity.  It now contemplates reducing output by another 1 million vehicles.

Such reductions in capacity mean more and more unemployment and less and less purchasing power.  It also means tumbling prices as competition intensifies and this, in turn, leads, on a global basis, to a race to the bottom in terms of wages and conditions.

South Africa — and especially the garment centres of Cape Town and Durban — have already borne the loss of tens of thousands of rag trade jobs.  Vehicle makers and component suppliers in the Eastern Cape have also been badly hit and are gearing up for even more job losses.

So far, government and its “social partners”, business and labour, have responded with a policy framework that amounts to financial bailouts and short-term retraining at half wages for retrenched workers.  This is based on the almost certainly forlorn hope that there will be an economic revival in the short to medium term.

The hope is forlorn because the mircrochip revolution is continuing apace.  These slivers of silicon lie at the heart of vehicle assembly lines, televisions, cell phones, the national power grid and the automated machines in factory and home.  They make work faster, easier and cheaper, using less and less labour.

This technological advance could herald a world of plenty for all.  It could liberate humanity from drudgery and poverty and repair the destruction already wrought on the physical environment.  But it could only do so on the basis of collective action for the benefit of the majority.

Our present anarchic system of minority ownership, based competition and the need to accumulate increasing levels of profit in order to compete even more successfully, works against such a development.  There is already evidence of where this may lead:  to fortified islands — whether suburbs, cities, or regions — of affluence in a global sea of desperate poverty and increasing savagery.

So we are faced with a stark choice, not just nationally, but internationally:  start to transform radically the economic system to one based on co-operation, under collective, democratic control — or persist with the existing system of competitive, minority control, whether by individuals, companies or states.  It may amount to a choice between planetary survival or annihilation.

In 2001, Milton Friedman wrote:

Employer financing of medical care has caused the term insurance to acquire a rather different meaning in medicine than in most other contexts. We generally rely on insurance to protect us against events that are highly unlikely to occur but that involve large losses if they do occur—major catastrophes, not minor, regularly recurring expenses. We insure our houses against loss from fire, not against the cost of having to cut the lawn. We insure our cars against liability to others or major damage, not against having to pay for gasoline. Yet in medicine, it has become common to rely on insurance to pay for regular medical examinations and often for prescriptions.

This is partly a question of the size of the deductible and the copayment, but it goes beyond that. “Without medical insurance” and “without access to medical care” have come to be treated as nearly synonymous. Moreover, the states and the federal government have increasingly specified the coverage of insurance for medical care to a detail not common in other areas. The effect has been to raise the cost of insurance and to limit the options open to individuals. Many, if not most, of the “medically uninsured” are persons who for one reason or another do not have access to employer-provided medical care and are unable or unwilling to pay the cost of the only kinds of insurance contracts available to them.

If the tax exemption for employer-provided medical care and Medicare and Medicaid had never been enacted, the insurance market for medical care would probably have developed as other insurance markets have. The typical form of medical insurance would have been catastrophic insurance (i.e., insurance with a very high deductible).

HT: Carpe Diem

A special report on the world economy

Oct 1st 2009

http://www.economist.com/specialreports/displaystory.cfm?story_id=14530093

The world economy is recovering from financial disaster. But it will not return to normal as we know it, says Simon Cox.

NEWPORT BEACH, California, is not a bad place to contemplate the future of the world economy. Its information office
promises nine miles of pristine sand, fine dining for devoted epicureans and an atmosphere of laid-back sophistication. Yet students of economic turmoil will find their subject matter conveniently close to hand.

California’s unemployment rate has doubled to 12.2% since the start of 2008. Saddled with the worst credit rating in
the country, the “Golden State” is cutting spending on schools, prisons and health care for the elderly, as well as closing parks and laying off staff for three days a month. It will pay its workers a day late at the end of the fiscal year so that the expense will show up in next year’s budget. Financial shenanigans are not the sole province of the banking industry.

Newport Beach is also the home of Pimco, the biggest bond manager in the world, which handles $840 billion on behalf of pension funds, universities and other clients. In May the company held its annual “Secular Forum”, in which it tries to peer five years into the economic future. After two days of rumination, Pimco’s laid-back sophisticates concluded that the financial markets may well “revert to mean”, which is a statistician’s way of saying that what comes down must go up. But the next five years will not resemble the five preceding the crisis. Not every change wrought by the financial breakdown will be reversed. The world economy is fitfully getting back to normal, but it will be a “new normal”.

That phrase has caught on, even if people disagree about what it means. In the new normal, as defined by Pimco’s CEO, Mohamed El-Erian, growth will be subdued and unemployment will remain high. “The banking system will be a shadow of its former self,” and the securitisation markets, which buy and sell marketable bundles of debt, will presumably be a shadow of a shadow. Finance will be costlier and investment weak, so the stock of physical capital, on which prosperity depends, will erode.

The crisis invited a forceful government entry into several of capitalism’s inner sanctums, such as banking, American carmaking and the commercial-paper market. Mr El-Erian worries that the state may overstay its welcome. In addition, national exchequers may start to feel some measure of the fiscal strain now hobbling California. America’s Treasury, in particular, must demonstrate that it is still a “responsible shepherd of other countries’ savings”.

The notion of a “new normal” is convincing, even if you do not agree with every particular. But some forecasters now harbour higher expectations. They think the economy will bounce back to its old self, almost as if nothing had happened. They draw inspiration from the work of the late Milton Friedman, who showed that in America deep recessions are generally followed by strong recoveries. He likened the economy to a piece of string stretched taut on a board. The more forcefully the string is plucked, the more sharply it snaps back.

Friedman’s piece of string represents the demand side of the economy: the sum of spending by households, firms, foreigners and the government. The rigid board symbolises the supply side. When spending is strong enough, the economy’s resources are fully employed, allowing it to realise its full potential. As the workforce grows, capital accumulates and technology advances, this limit expands over time.
String theory

In a recession demand falls short of supply, leaving a sorry trail of unemployed workers, shuttered factories and unexploited innovations. But when the recovery arrives, Friedman suggested, it is all the more forceful because these resources have been lying idle, waiting to be brought back into production. The economy can grow faster than normal for a period until it reaches the point where it would have been without the crisis, when it reaches its full potential again (see chart 1, scenario 1).

Friedman’s story is heartening, but it can come unstuck in two ways. If the shortfall in demand persists it can do lasting damage to supply, reducing the level of potential output (scenario 2) or even its rate of growth (scenario 3). If so, the economy will never recoup its losses, even after spending picks up again.

Why should a swing in spending do such lasting harm? In a recession firms shed labour and mothball capital. If workers are left on the shelf too long, their skills will atrophy and their ties to the world of work will weaken.

When spending revives, the recovery will leave them behind. Output per worker may get back to normal, but the rate of employment will not.

Something similar can happen to the economy’s assembly lines, computer terminals and office blocks. If demand remains weak, firms will stop adding to this stock of capital and may scrap some of it. Capital will shrink to fit a lower level of activity. Moreover, if the financial system remains in disrepair, savings will flow haltingly to companies and the cost of capital will rise. Firms will therefore use less of it per unit of output.

The result is a lower ceiling on production. In the IMF’s latest World Economic Outlook, its researchers count the cost of 88 banking crises over the past four decades. They find that, on average, seven years after a bust an economy’s level of output was almost 10% below where it would have been without the crisis.

This is an alarming gap. If replicated in the years to come, it would blight the lives of the unemployed, diminish the fortunes of those in work and make the public debt harder to sustain. But even worse scenarios are possible. A financial breakdown could do lasting damage to the growth in potential output as well as to its level. Even when the economy begins to expand, it may not regain the same pace as before.

Financial crises can pose such a threat to national incomes because of the way they erode national wealth. From the start of 2008 to the spring of this year the crisis knocked $30 trillion off the value of global shares and $11 trillion off the value of homes, according to Goldman Sachs, an investment bank. At their worst, these losses amounted to about 75% of world GDP. But despite their enormous scale, it is not immediately obvious why these losses should cause a lasting decline in economic activity. Natural disasters also wipe out wealth by destroying buildings, possessions and infrastructure, but the economy rarely slows in their aftermath. On the contrary, output often picks up during a period of reconstruction. Why should a financial disaster be any different?

The answer lies on the other side of the balance-sheet. Before the crisis the overpriced assets held by banks and households were accompanied by vast debts. After the crisis their assets were shattered but their liabilities remained standing. As Irving Fisher, a scholar of the Depression, pointed out, “overinvestment and overspeculation…would have far less serious results were they not conducted with borrowed money.”

Japan found this out to its cost in the 1990s after the bursting of a spectacular bubble in property and stock prices. For a “lost decade” from 1992 the economy stagnated, never recovering the growth rates posted in the 1980s.

Richard Koo of the Nomura Research Institute in Tokyo calls Japan’s ordeal a “balance-sheet recession”.

The typical post-war recession begins when the flow of spending in the economy puts a strain on its resources, forcing prices upwards. Central banks raise interest rates to slow spending to a more sustainable pace. Once inflation has subsided, the authorities are free to turn the taps back on.

But in a “balance-sheet recession”, what must be corrected is not a flow but a stock. After the bubble burst, Japan’s companies were left with liabilities that far exceeded their assets. Rather than file for bankruptcy, they set about paying down their stock of debt to a manageable level. This was a protracted slog which, by Mr Koo’s reckoning, did not finish until 2005. In the meantime Japan’s economy stagnated. By 2002 its output was almost 23% below its pre-crisis trajectory.

Since Pimco’s forum concluded in May, the world economy has palpably improved. In many ways the new normal is beginning to look a lot like the old, vindicating Friedman’s plucking model. China is outpacing expectations.

Goldman Sachs is making hay. The premium banks must pay to borrow overnight from each other is now below 0.25%, the level Alan Greenspan, a former chairman of the Federal Reserve, once described as “normal”. Companies in Europe and America are selling bonds at a furious pace. A few months ago financial newspapers were debating the future of capitalism. Now they are merely discussing the future of capital requirements. Shock has given way to relief.
The persistence of debt

But the relief is likely to be short-lived. Just over a year ago, the day Lehman Brothers filed for bankruptcy, the world economy fell off a precipice. When you are falling, you do not look up. Only when you hit bottom can you stop and contemplate the cliff you must now climb.

This special report will argue that although a “new normal” for the world economy is now in sight, it will be different from the old normal in a number of ways. Demand in rich countries will remain weak and emerging economies will not be able to compensate. The report will explain why many governments will have to keep their stimulus packages going for longer than expected, or face entrenched unemployment that will permanently lower their economic potential. Public debt will rise so that private debt can fall. The banks, the report will show, will remain cautious about lending again, which will slow up the recovery but also make companies more careful about their investment; and the securitisation markets that became so fashionable during the boom will recede, though not disappear altogether.

A persistent shortfall in demand will weigh on supply. By the time this crisis is over, as many as 25m people may have lost their jobs in the 30 rich countries that belong to the Organisation for Economic Co-operation and Development (OECD). The danger is that several million may never regain them. The mobilisation of capital will be fitful as the financial system copes with past mistakes and impending regulation. The travails of finance, in turn, may prevent the recovering economy from backing and exploiting innovations.

Like Japan’s bubble years, the years that led to the global financial crisis have left a heavy legacy of debt on the balance-sheets of banks and households, especially in Britain and America. It is this legacy that allows past losses to depress future gains. Fisher, again, put it best: “I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles its victims into debt.” There is no better example of that than American consumers.

Critics of capitalism (and therefore freedom in general) are ever quick to hold up cases of consumers and employees exploited by greedy corporations. These attacks often have negative consequences for the stockholders of corporations.  Stockholders of GM and Chrysler were sacrificed in order to serve the “greater good” (a term that, as I’ve stated before, is so idiotic it is depraved in its purported meaning).  David Friedman recently penned an excellent blog post on the ways in which stockholders are actually more vulnerable to corporate mismanagement than consumers or employees.

…my situation as customer and employee is very much better in this respect than my situation as a stockholder. It is true that, as a stockholder, I have the option of selling my shares of stock, which at first glance looks rather like my option as a consumer of not buying a product or as a worker of quitting a job. But the apparent similarity is an illusion.

If I choose not to spend twenty thousand dollars buying a car from Ford, Ford has one more unsold car and twenty thousand dollars less money. If I choose to sell twenty thousand dollars of Ford stock, on the other hand, the money I get is not coming at Ford’s expense. Another investor has paid me the money and now owns the stock, leaving Ford itself unaffected.

If the firm is being run in a way that fails to maximize stockholder value, he cannot escape that cost by selling his share, since the price he can sell it for will reflect the reduction in future profits and dividends, insofar as it can be estimated by other stockholders.

It follows that the stockholder is dependent, very much more than the other stakeholders, on other mechanisms for controlling a firm to make it act in his interest. That is a strong argument in favor of the current mechanism for corporate control and the current legal rules defining the fiduciary obligation of the directors.

Indeed, it is an argument for more than that. It is an argument for strengthening stockholder control in order to provide more protection to the most vulnerable party in the network of relationships that makes up a corporation. One way of doing so would be by removing current legal barriers that make takeover bids more difficult, and so protect managers and directors from the consequences of serving their own interests at the expense of the stockholders whose interests they are supposed to be serving.

I would like to add two points to this already outstanding argument. First: regardless of the practical effects on stockholders and stakeholders; the fact of the matter is that the corporation belongs to the stockholders. It is their property. As property is gained by money, as money is gained by production, as production is performed at the expense of an individual’s time, and as an individual’s time is an individual’s life, the right to property is inseparable from the right to life – which is an inalienable possession of every human being. So, practical considerations aside, the stockholders’ interests should still be protected over the interests of the stakeholders (note that “interests” are not synonymous with “rights” – the protection of the rights of one individual cannot necessitate the violation of the rights of another).

Second: the stakeholders rely on stockholders for their lives. Stockholders are not pirates scouring the market for plunder – they are the enablers of production. It is only by the productive energies and subsequent investments of stockholders that capital is raised to improve the quality of life for the masses (the beauty of capitalism is that society’s betterment is in no way a necessary motivation of the investors).

For all of the reasons discussed above, stockholders should be lauded for their contributions to society and not branded as blackguards of “corporate greed”.

“In any activity you have manufacturers, wholesalers, and retailers; and all three are essential and necessary. There are only a relatively small number of manufacturers of ideas. But there can be a very large number of wholesalers and retailers.”

~ Milton Friedman