Dr. Friedman or: How I Learned to Stop Worrying and Love the Market Economy

Upon entering university, I was a staunch economic rationalist. I was as firm in my beliefs about the virtues of the free market as any wet-behind-the-ears eighteen year old could be. I attribute this largely to my year 11 and 12 economics teacher (Mr. Hutchinson). By degrees, partly because of the left-leaning environment I found myself in at university and due to the highly intelligent people who were telling me that my position was the wrong one – you all know who you are ;-) – I was persuaded to see that free markets were not the solution to the world’s problems. I was, and still am to some degree, impressionable, though hopefully I’m a bit more capable of thinking for myself these days. My friends began to refer to me as a "bleeding heart lefty". However, during the course of my postgraduate studies, which introduced me to complex systems theory, I was once again forced to re-evaluate my position, and at this point in time, I’m not sure where I stand. The idea of small government and the free market economy has once again become appealing to me. So much of my reading highlighted the ideas of structure emerging from the bottom up, of the resilience and robustness of systems in which there is no top down or central point of control. Furthermore, I now begin to understand why staunch free market economists such as Milton Friedman argue that the free market is morally unassailable (this is something I hadn’t thought about in my first incarnation as an economic rationalist).

Let me first address this issue of the apparent moral superiority of free markets over other economic systems. The reason Friedman and others claim this superiority has to do with the importance given to the concept of freedom. So, the argument goes, capitalism is morally superior to, say, communism because the individual assumes responsibility for spending (or not spending, as the case may be) their income as they see fit. This contrasts with communism in which the state dictates how wealth is distributed. It strikes me that a counter-argument might be made along the lines that in capitalist societies, the rich have freedom of spending because they have a surplus of wealth over the amount needed for survival, whereas the poor have no such freedom because their spending is governed purely by need. Nevertheless, it is morally no better for a central authority to decide how wealth should be distributed because that system does not by implication endow the individuals within society with superior morality. That is to say, the individuals do not give up a share of their earnings because they want to. They do so because they are forced to. In capitalism, on the other hand, individuals are free to manage their earnings as they wish, including distributing some of it to others, which brings me to my next point.

I want to address the issue of greed. Those who argue against capitalism often point to what they perceive to be its reliance on selfishness. Greed and selfishness, to be sure, are detestable in any circumstances. But there is nothing in capitalism that says one must be "in it" for oneself. Capitalism can be about doing the best for yourself and those people around you, as well as any others you wish to help. Although it could be claimed that this is socialism in capitalism’s clothing, there is a large difference. One works in a top down fashion where the government decides how to distribute wealth, the other works in a bottom up fashion, where individuals and companies form support networks or clusters. Typical examples of support networks are nuclear and extended families, though these are by no means the only examples. It seems to me that organisations such as the Gates Foundation, born out of a capitalist society are, collectively, doing as much or more than any socialist government has done to eradicate the causes of poverty. (Aside: I once thought that Bill Gates was evil, but now I know that not to be true. Will I switch to Microsoft products? Not likely; I like my Linux box too much.)

But wait, you might say, sometimes left-leaning governments are democratically elected by the rich and poor alike so that the less wealthy are looked after by the state. This is absolutely true; but why must this kind of welfare be managed by a government rather than by many smaller private institutions? If the majority wants a welfare system, is it not possible for them to invest in "welfare businesses"? These organisations, if they are anything like traditional businesses, would be more efficient and better equipped than the government to provide the required services anyway. In other words, a dollar invested freely by individuals is likely to be stretched further than a tax dollar spent by a government. Still, one could argue, in this system there is no guarantee that people will invest their money in these sorts of services. And yet, the defence retorts, a moment ago you were willing to believe that these same people could elect a government that would implement policies that take a substantial part of your income and use it to provide these same services in a less efficient manner than might otherwise be possible. The defence for the capitalists must acknowledge, though, that the current conservative Australian government is one of the highest taxing governments ever, which shows that it’s not only big leftist governments who tax heavily.

This discussion about private enterprise being potentially better able to provide required services leads me to my next point, which concerns the notion of risk – enterprise’s capricious companion. In order to achieve growth and technological advancement in any economic system, a certain level of risk must be taken on board. This risk arises from the fact that not all investments – not all enterprises – pay off. The question is, in our society, which entities are most capable of shouldering this risk? Capitalist societies can provide a level of robustness that socialist systems cannot. The reason for this is that risk is taken by individual investors. If an enterprise in which money has been invested fails, then the damage from that failure is usually limited to the individuals and other entities who invested in that enterprise. When the government is the major investor within a nation, and those investments fail, then everybody suffers. Moreover, it’s entirely likely that it will be those who rely on government welfare who will suffer the most, because the government will be forced to cut spending, including spending on welfare (unless they tax the rich even more, which completely destroys any incentive to make money, which will have even further damaging effects on the already suffering economy). Thus, as Paul Graham (link via Explorer Street) points out, risk is an integral part of growth, and if we wish to sustain our current levels of growth and technological advancement, the free market must be allowed to flourish because only private investors can take the risks that are needed to sustain this growth. So, risk is an ever-present factor unless we decide that society has advanced far enough and that the economy doesn’t need to expand further. This, by the way, might be an entirely acceptable position to hold, especially when one considers that a lot of this growth is due to increases in human capital, and that a large part of these increases arise from people working harder and longer. (Although I am attracted to capitalist philosophy, it has always struck me as rather odd that we spend such a large part of our lives at work rather than with our families and friends.) But I digress. The crux of this paragraph is that it is, in effect, less risky for society as a whole to let individuals bear the risk and be duly rewarded for doing so than to allow governments to take on that risk.

But a complete embrace of free markets could (will) lead to inequality. The thing is, it’s not inequality that worries me, it’s poverty. I see no problem with some people having an abundance of wealth while others must live more moderately, as long as nobody (or as few people as possible) lives in poverty and as long as children are given equal opportunity to prosper as adults. Thus, if there must be taxes, a substantial part of that revenue should, in my opinion, be used to ensure that children have access to a great education system. Schools and universities ought to be able to compete for students in terms of the quality of education on offer. Students will pay for this education via the money set aside by the government. As such, education remains "free", but the rigours of competition should help to deliver a higher quality of education to students, and publication of school performance will allow better decisions to be made by parents. In some states of Australia the performance of public schools is not published (from Economist.com).

So, have I really learned to stop worrying and love the market economy? I’m still unsure. As with most of the people in my social circle, my political and philosophical stances are motivated by trying to get the best outcome for the greatest number of people. It has always been a question of figuring out which philosophy will deliver that, but this is obviously a hard question with no easy answer. The weight of the evidence says to me that capitalism has more going for it at the present juncture than the alternatives. Does this automatically make me a Liberal voter? Not on your nelly. There are factors other than economics to consider, and in my evaluation, the Libs score extremely poorly on these. Besides, I don’t think the Liberals are going far enough or fast enough with reforming the economy. I want a political party prepared to make significant (rather than token) economic reforms, who will incentivise industry to invest in renewable energy (by using tax breaks, for example) and who will seek, not to prop up the rural economy, but to allow nature and competition to take its natural course for the betterment of the economy as a whole and the rejuvination of the natural environment in regional areas (how many droughts will it take before we realise that Australia is not the most suitable place to be farming certain crops and livestock).

By attracting investment in renewable energy, Australia has the opportunity to lead the world in clean energy technology, meaning that we not only provide greener forms of energy to houses and industry, but we create a whole new industry of its own, adding growth to our economy. So while nuclear power might provide a cleaner form of power to industry (depending on how you define clean), Australia will never be a leader in developing nuclear power technologies because so many countries have a head start in that area. There will always be a government, and that government will always invest some of that money (either by spending, or by foregoing collection in the first place). It’s a question of finding those low risk areas that will provide a good return on investment. With the price of oil going through the roof and countries like China placing huge demand on our coal mines, I’d have thought investing in sustainable energy at this point in time would be a very clever thing to do.

The policy of providing subsidies to farmers in times of drought, on the other hand, does not strike me as being sensible at all. Nor is it fair to those farmers who have invested significant amounts of money in ensuring that their farms are sustainable. Obviously some relief needs to be provided to farmers who can’t afford everyday necessities, but the largest part of the relief ought to be spent on enticing farmers (and especially their children) to take up other forms of work rather than allowing the money to be sunk back into farms that are unsustainable in the long term and turning the land to salt. I’m sure the world produces enough grain and meat for all of us, without us Australians trying to farm large parts of a continent that were never, and will never be, suited to farming. For environmental reasons alone, farming is one area where I think minimum government intervention and maximum competition ought to be the order of the day.

That’s where I stand today. Not quite confused, but not altogether sure of the ground I’m standing on. The only thing I can say at the moment is that there are too many variables to make a well-informed decision. It could be just that fact – that there are too many variables for me or any other entity such as a large government to consider – which provides a hint as to which side of the fence my allegiances should lie. Maybe I do just have to learn to love the bomb. Then again, I kind of like the view from the fence.