We have an economic system that is on trial. Those of us on the Left and progressives (L&P) have already reached a verdict. What is in question is legitimacy. There are huge swathes of people:- capitalists, investors, workers, carers and yes, children, who cannot imagine there could be anything better. And yet . . for many of those people who are working class and middle class, their lives are not improving. All round us a social fabric has been stretched thinly to the point where the tears are clear for all to see. The tears represent a gulf between the promise and the reality, between what those not on the Left believe in and what they are experiencing. This a problem for the L&P too because our legitimacy is being eclipsed by the Right who are increasingly being listened to. How do we achieve legitimacy and what are the economic realities?
Legitimacy can be achieved by distortion and exaggeration – strategies that the Right readily adopt. Or it can be achieved by having your interpretation of reality accepted over others – an ideological struggle. The two are going on at the moment, but distortion is dominating. However, people do not believe lies just because they are repeated. That is to simplify why many in Europe (including UK & Ireland) were drawn to fascism in the 1930s or were sympathetic towards it. It is to dismiss the many who find Trump’s message so appealing that they would put their ‘X’ on a ballot paper next to his name. It is not repeated lies that does that, it is generating the conditions where anxiety and fear can thrive. Those conditions are economic conditions and the victors are those who can make the links between the reality of those economic conditions and a way out of them.
When what we believe no longer assists in explaining what we experience, that is where anxiety steps in. This is why ‘Fact-checking’ has become an increasing part of our lexicon in the media. But fact-checking can help state what the ratio of debt to GDP is, but that won’t help my concern when I am told that we cannot afford our primary care system, our hospitals, schools, social housing, water & sewage network, social & mental health workers, roads, police, prisons . . and my anxiety festers as the list lengthens. Facts won’t get in the way of feelings; only alternative mental lenses can do that. These lenses provide belief systems about how society ought to be structured and work.
Questions about how we live our lives and provide for our future, I see as fundamental economic questions. So how could we change our economic lenses? An answer can be found in how it was done before. It happened in the 1930s and again in the 1970s. In the 1930s there was a move from a classical economic lens to a Keynesian one. In the 1970s it was the monetarists who explained the economic reality of stagflation and Milton Friedman led that change. This is what he said in a lecture at Utah State University in 1978:
“When myths get established . . . they tend to be so strongly held, they tend to become so much a part of you, that when anyone comes along and differs with them and contradicts them, he risks automatically being dismissed as a crackpot.[1]”
By late 1970s, Milton Friedman had become the doyen of economists. His Chicago School became the spring of mainstream economics through to today. That thriving class of economists suffered a severe stroke when the 2008 Crash happened. The economics tectonic plates opened sufficiently to allow those of us who were crackpots to come out into the light. I’m referring of course to all those who fundamentally disagreed with free-market practitioners and supporters. The 2008 Crash also raised questions within the university economic departments, yet it remains dominant outside in many governments throughout the world.
In 1982, Friedman explained how he managed the change:
“Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable[2]”
Friedman’s starting point in raising the legitimacy of his economics was to cast doubt on ‘existing policies’ and he did this by referring to them as ‘myths’. In the same lecture referenced above, he went through five ‘myths that conceal reality’ using his inimical logical style that left his depiction of reality the only legitimate one.
I have chosen four of his five myths on the basis that mainstream politicians still use these demolition points today. They are all taken from his 1978 lecture.
Milton tackles economic ‘myths’
Capitalism and the path to prosperity
In his first one, capitalism is depicted as being a-historical; it appeared fully-formed and is the end of history in so far as it is humanity’s highest and final form. And in doing so, all other societies and cultures are either ignored or backward. For Freidman, it is the former: “Millions of people came from all over the world . . . . They made what was a desolate country, a country that was prosperous and . . . productive.” Friedman depicts US capitalism as a purer form: “It [the United States] started with a clean slate: fewer vestiges of class and status; fewer government restraints; a more fertile field for energy, drive and innovation; and an empty continent to conquer.[3]” He ignores that the ‘clean slate’ had to be ‘cleaned’ first. It was ‘cleaned’ of native Americans who respected nature, retained its cyclical prosperity and consequentially were sufficiently productive to enable a culture to thrive and live in approximate harmony.
Then he uses what I believe to be a myth which is that of trickle-down economics: In his own US history, he refers to the myth of ‘Robber Barons’ at the end of the 19th century “ . . . exploiting the poor unmercifully . . ”, declaring this to be nonsense. In fact, he continues, ‘there was almost no period in history which saw as widespread an increase in the well-being of the ordinary man as the 19th century’. Migrants came from across the world and bettered themselves. Friedman goes on to state “it was the ‘robber barons’ who built railroads, the industries and provided opportunities for the ordinary man”. And here we have it that the wealth of the very wealthy spills over and cascades to every deserving corner of society. This ‘gilded age’ produced the Rockefellers, Carnegies, Vanderbilts and J.P. Morgan. And yet, where is the reality[4]? Firstly, that increased prosperity began from very dire beginnings – almost medieval and agrarian; the ‘cleaned slate’ began in the late 15th century by colonisers. The only way could only have been up. And secondly, this prosperity came at enormous cost that the Freidman’s ‘ordinary man’ had to wrest from the wealth of those ‘robber barons’. The era was described on Radio 4 in this way, “In the late nineteenth century, the US has the bloodiest history of industrial relations of any industrialising country[5]” This gilded age suffered a five-year depression from 1873, impacting the farmers in particular, a general railroad strike 1877 (the Great Upheaval), a general strike 1886 and the Haymarket Affair (from which we, in Europe, get our May Day) and a second Depression in 1893 when national unemployment went from 3% to 19% and as much as 43% in Michigan. And despite this history, Friedman stridently affirmed his belief in the capacity for wealth to ‘cascade’. “The same system that enabled people to become wealthy also enabled others to improve their own lot.” This was not an enablement; it was won.
His second myth is that the Great Depression was due to a failure of private enterprise. Why, he asks, is this myth so prevalent? I am disappointed that such an articulate advocate of free markets could give the answer he did; It is because private enterprise and free markets have “no press agents”. Even from his opening remarks about anyone contradicting myths being dismissed as a “crackpot”, someone has to be doing the dismissing. As for the explanation for the Great Depression, that is for another paper.
There was never a need for a public sector
His third myth is that ‘government services’ or the public sector arose because the private market failed to provide it. He dismisses this by arguing that there was no demand for publicly-funded public services. The proof he gives for this is that any politician who proposed it in the US (and continues to propose it) couldn’t get it passed into legislation. He didn’t refer to the UK (but his audience was in Utah) where a successful war leader, Churchill was replaced by Attlee and Labour with the promise of an expanded welfare state. Friedman then went on to rubbish a welfare state in the following way: “National Insurance is not a health benefit. . . it’s a programme for socialized medicine, for making physicians government employees . . .for creating long waiting lines and inferior medical services.” In the US, any state-funded or public programmes are seen as socialist which became a pejorative term in the 1930s.
Friedman always recommended judging economic policies by their outcomes. The US health care system is largely provided by the private sector and paid for by a complex mix of public & private insurance. It is the most expensive per capita and in absolute terms, the least efficient (high administrative costs) and with lowest outcomes[6]. Life expectancy at birth lags behind eleven other comparable OECD countries and the gap has grown since 1980[7]. Child mortality and maternal deaths is one of the highest in OECD countries[8]. 44% of US adults struggle to pay for healthcare and 93% feel that what they do pay is not worth it[9].
Tax and the free lunch
His fourth myth is the belief that governments can spend money at nobody’s expense. His take on this was ‘there’s no such thing as a free lunch’. Theresa May’s expressed a similar sentiment when she insisted: ‘money does not grow on trees’. Friedman’s ‘free lunch’ analogy is so broad as to be quotable by the wealthy when they are required to pay tax. But it also can apply to the externalities of the fossil fuel industry meaning they should be contributing towards climate damage as a result of their extractions. Indeed, any processing of nature involves a cost from broom-stick handles to sky-scrapper buildings. Equally, the idea that governments can spend money at nobody’s expense is only a rhetorical statement aimed at those who have given no thought at all to where governments get their money from. And ‘money does not grow on trees’ raises the interesting question of where does money come from. And money can be created out of nothing, but that too is for another paper.
Business Taxes are paid largely by consumers or workers
Freidman addresses his myth about free lunches in two ways: Business or corporation taxes, he argues are ultimately passed on to stockholders, customers or workers. There is a fourth source, which he doesn’t mention, which is the profit generated by the business. He concludes that as corporation tax is passed on, it should be abolished completely. Allow the companies to keep their money for innovation, keep prices lower or give due payment to investors who have risked their own money. Apply the abolition more widely; think what we all could do if none of us paid tax? We would all have more money and pay lower prices – wouldn’t we? But this leads into why we pay taxes at all. Friedman only hints at this in his lecture when he states that any tax on the employer is ultimately paid by the employee. In relation to corporation tax, businesses may well pass these on, but there are caveats. In raising prices, corporations risk being less competitive. They can choose to absorb the costs without raising prices or reducing dividends and their product’s elasticity is very significant too. So it doesn’t automatically follow that corporation tax is always passed on.
His second take on free lunches is to ask ‘can you print money at no cost? Does this get society something for nothing?’ The cost of doing so, he argues, is inflation. This is because if you give people more money to buy the same amount of goods, then prices go up. The cost of inflation he equates to the effect of a tax.
If increasing the money in the economy alone created inflation, the US pumped trillions of dollars into its economy after the 2008 Crash with no sign of inflation. The UK followed and finally the European Central Bank. There was no inflation and interest rates went to their lowest ever with Japan having negative interest rates. Japan was one of the first to introduce QE in 2001 in order to generate demand to create inflation, yet inflation did not appear. The cliché of inflation and money ‘printing’ is misleading.
In 2008, central banks everywhere created more money. They did so to stop capitalism from grinding to a halt or recreating the Great Depression. Quantitative Easing was not a targeted economic strategy, but a scatter-gun panic response. Its main purpose was to generate confidence back to the markets by injecting liquidity. They did this by injecting money into markets via commercial banks, pension and hedge funds. Bearing in mind that the intention was that this money would end up in productive industry and manufacturing, of the £875bn created by QE[10] (The Federal Reserve in the US created $24.5trn), only 8% went to productive industry. That is 8p in every £1. Nearly 92% went to the finance industry and housing. These are fixed assets (equities, paintings, whisky,) with the result that the stock market reached uncharted heights and housing became even more unaffordable. The impact of QE was to further increase inequality.
Lessons from Milton
There are lessons in Milton Friedman’s appealing lecture. We take taken-for-granted economic assumptions and subject them to the myth test. And there are many of them. There is the myth that governments need to balance their budgets, that Debt is a negative, that public sector is a drag on the private sector, that only wealth can be generated in the private sector, that Supply & Demand explain price increases, that taxes are a burden and there was no alternative to austerity because ‘we don’t have the money to pay’ for hospitals, social housing, transport infrastructure, water treatment and social care.
Neo-liberalism arose during the crises of the 1970s. Hayak and Friedman were ready to provide the alternative. What Reagan and Thatcher did with their brand of neo-liberalism was to seek to shrink the state (they didn’t), to deregulate, to promote free markets in all areas of public life and thinking, to reduce the power of Unions used to curtail the demands of capital and to promote society’s highest aspiration as material accumulation and economic growth. Instead of taking our populations towards this, the wealth that has been extracted has benefitted a small minority in the Global north and autocratic regimes. In the ensuing dissatisfaction amongst those who feel they have been left behind, we suffer the no-such-thing-as-a-free-lunch syndrome. That is – the cost. Mainstream political parties in the Global north have asserted the lack of political alternatives. The Right have increasingly filled the space. The Right don’t have to point to a way forward; they only have to point at who is to blame. I would change Friedman’s sentence in his preface in this way: “Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the feelings that are lying around.” The Right is doing this. Meanwhile the mainstream parties keep jostling for the ‘middle ground’ while all the time that middle ground is getting smaller.
The Left and progressives do have clear alternatives. There is a better future to be created. It is possible to live in self-sustaining communities whose focus is the well-being of those who make up those communities. Such communities celebrate the social that characterises our humanity and the cooperation that can enhance it. And fulfilment is not predicated on ownership. We gain legitimacy when we point out the myths of capitalism, that it is one of many social systems and that there can be better alternatives. And we do this now, ‘until the politically impossible becomes politically inevitable’.
[1] https://www.youtube.com/watch?v=xNc-xhH8kkk
[2] Preface to Capitalism and Freedom https://www.youtube.com/watch?v=xgXda61MtWE
[3] https://rickbulow.com/Library/Books/7-11-2024/FreeToChooseByMiltonAndRoseFriedman.pdf P.3
[4] https://fscj.pressbooks.pub/modernushistory/chapter/politics-in-the-gilded-age-1870-1900/
[5] https://www.bbc.co.uk/sounds/play/m0023gm2
[6] https://www.internationalinsurance.com/health/systems/
[7] https://www.ncbi.nlm.nih.gov/books/NBK587178/
[8] https://en.wikipedia.org/wiki/Healthcare_in_the_United_States
[9] https://westhealth.org/news/112-million-americans-struggle-to-afford-healthcare/
[10] https://lordslibrary.parliament.uk/quantitative-easing/
ZNetwork is funded solely through the generosity of its readers.
Donate