Friday, November 17, 2006

milton friedman

From Brad DeLong's obituary for Milton Friedman (who died yesterday):
Gen. William Westmoreland, testifying before President Nixon's Commission on an All-Volunteer [Military] Force, denounced the idea of phasing out the draft and putting only volunteers in uniform, saying that he did not want to command "an army of mercenaries." Friedman, a member of the 15-person commission, interrupted him. "General," Friedman asked, "would you rather command an army of slaves?" Westmoreland got angry: "I don't like to hear our patriotic draftees referred to as slaves." And Friedman got rolling: "I don't like to hear our patriotic volunteers referred to as mercenaries." And he did not stop: " If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general. We are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher." As George Shultz liked to say: "Everybody loves to argue with Milton, particularly when he isn't there."
Via Indian Economy Blog, two reports that Friedman wrote on India are here and here. The first is a memorandum to the Government of India recommending certain policies, the latter -- particularly prescient -- is Friedman's critique of India's Planning model. He makes, for me, two interesting points. The first is that Planning, especially the Soviet model that India followed, could only have worked in an authoritiarian top-down society, like Russia's or China's, not in a democracy-with-private-property like India. More than that:
Though Indian economic planning is cut to the Russian pattern, it operates in a different economic and political structure. Agricultural land is almost entirely privately owned and operated; so are most trading and industrial enterprises. However, the government does own and operate many important industrial undertakings in a wide variety of fields-from railroads and air transport to steel mils, coal mines, fertilizer factories, machine tool plants, and retail establishments; Parliament has explicitly adopted “the socialist pattern of society” as the objective of economic and social policy; a long list of industries have been explicitly reserved to
the “public sector” for future development, and the successive plans have allocated to public sector investment a wholly disproportionate part of total investment - in the third five-year plan, 60 percent although the public sector accounts at present for not much more that a tenth of total income generated. In addition, the government exercises important controls over the private sector: no substantial enterprise can be established without an “industrial” license from the government, existing firms must get government allocations of foreign exchange and also of domestic products in the public sector; and so on in endless variety.

The difference between India and Russia in political structure is at the moment even sharper that in economic structure. The British left parliamentary democracy and respect for civil rights as a very real heritage to India. Though I very much fear that this heritage is being undermined and weakened, as of the moment it is still very strong indeed. There is tolerance of wide range of opinion, free discussion, open opposition by organized political parties, and judicial protection of individual civil rights-except for recent emergency actions under the Defence of India Act. The kind of centralized economic planning India has adopted can enable a strong authoritarian government to extract a high fraction of the aggregate output the people for governmental purposes - Russia is a prime current example and China, though we know much less about her, may be another; Egypt under the Pharaohs is a more ancient example. This is one way, and I believe almost the only way, in which such a system can foster economic growth-if the resources extracted are indeed used for productive capital investment rather than for arms or governments. But this advantage- if advantage it be - of centralized economic planning, India is not able to obtain precisely because of the difference between its economic and political structure and those of Russia or China.
And then, he hits on what exactly makes a strong state (without any checks and balances) dangerous: the contrast between what he calls (tweaking John Kenneth Galbraith's phrase) public affluence and private squalor.
Whether because of the adoption of the Russian model of economic planning or for other reasons. Russia and India have one feature in common that strongly impresses the casual visitor. In both, if I may pervert a phrase made famous by our present Ambassador to India, there is a striking contrast between public affluence and private squalor. In both countries, whenever one sees a magnificent structure, newly built or well maintained, the odds are heavy that it is governmental. If some activity is luxuriously financed and well provided for, the odds are that is governmentally sponsored. The city in India which showed the most striking improvement since my earlier visit was New Delhi, with impressive new governmental buildings, residence and luxury hotels. I should add that although the public affluence is not notably different in the two countries, the private squalor is much worse in India than in Russia.
This strikes me as true even today, as high-rises and shopping malls in Indian metropolises co-exist side by side with slums and all the combined miseries on this earth. Friedman's critique of India's "mixed" economic model makes a lot of sense, but I'm not sure that we had any alternative in those days after Independence. I interpret his point as one of efficiency: even as the State in India grew and grew and reached monstrous proportions (emplyoying, I believe, more than 50% of the working population), no effort was expended in making it more efficient. Regulation can work, and developing societies need regulation in order that they not make the same mistakes that today's industrialized economies made when they were in the throes of the industrial revolution and unfettered capitalism. But regulation also needs efficient institutions (and an efficient Government) in order to make it work and in order that it can encourage economic growth, which is what any free society needs.

I'll go on and quote Friedman's last sentence, almost eerily prescient, and without fifty years of hindsight:
It will, I fear, take a major political or economic crisis to produce a substantial change in the course on which India is no set in economic policy, and I am not at all optimistic that such a crisis if it occurs, will produce a shift toward greater freedom rather than toward greater authoritarianism.
There was indeed a major economic crisis and it did provoke change (reversal is a better word) in economic policy, but I'm happy to say that so far at least, we seem to have come out of it fine. What happens ahead is, of course, no one really knows.

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