Wednesday, September 26, 2012

Just for fun: Keynes vs. Hayek rap

Clash of the Economic Titans

We have now explored the seminal works of Keynes, Friedman and Hayek – the titans of 20th century economics. The question is, who will remain fashionable well into the 21st century? While they each identify a set of similar economic problems and market failures, many of them stemming from the Great Depression, their theories for suggested government action (or inaction) to remedy these issues are all quite distinct, and each has had their heyday. Currently, it seems that we employ a nuanced approach that takes into account elements of all three approaches, even though each economist most likely believes that his theory can only be truly realized when applied exclusively and wholeheartedly.

Friedman was originally a Keynesian and sharply changed course (though he ended up closer to Keynes in some sense, envisioning a significant role for government remedying of the business cycle via manipulation of the money supply). Hayek never bought into what he saw as the irresponsible excesses of Keynesian economics, waiting out this fashionable theory to step into the limelight later on.

Hayek’s approach is tied to human nature. Insights from modern fields like behavioral economics are favorable to many of Hayek’s insights about the complexity and irrationality of human behavior. His approach is simple in some ways, yet nuanced. He envisions a carefully crafted rule of law and reverence for competition that guides human exchange to prosperity. So long as these are expertly designed and maintained, he argues, we will avoid the evils of socialism and maximize benefits from voluntary exchange. He is careful to clarify that he does not propose laissez-faire economics, rather he envisions a role of government that ensures an environment that elevates the plans of all of its individual economic actors, as opposed to making these subservient to a single state plan that inherently must privilege particular individuals. His account, propounded in The Road to Serfdom, really gets it right in a lot of ways, considering that his strand of Austrian economics draws upon little mathematics and data aggregation, and more on intuitive awareness of the scope and limits of human knowledge.

While Hayek has always been somewhat of a fringe character in mainstream economics, Friedman’s bold ideas of monetarism combined with the notion that economic freedom underlies political freedom gained much public attention, thanks in no small part to Reagan’s popularization and enactment of the theory in the 1980’s. As the poster child of the Chicago School, Friedman saw Keynesian economics as insufficient to deal with persistent inflation and unemployment. Friedman came out guns blazing with ideas of deregulation, privatization, and a host of neoliberal policies aimed at setting markets free from some kind of government shackles. Friedman is more extreme than Hayek in many ways, particularly in his view of the narrow view of the role for government. Though his ideas have faded somewhat in the modern era, their sentiment still remains (as well as his monetary theory), especially in regards to expanding free market systems and democracy around the world. (A comical call-out in Friedman is #6 of his list of activities which the government has no right in meddling with – “detailed regulation of banking”).

What’s clear is that the zealous proponents of all three strands of economic theories put forth by these expert economists often go too far in asserting the doctrines and dogmas of their leaders, taking their ideas to the extremes. While each of these figures has been proved wrong in a number of contexts, each was certainly right in some ways, which is why we’ve taken a hybrid approach that combines many of the insights from these legendary economists three different backgrounds. I suppose that is why these are the first three texts that we have read. 

In Defense of National Parks?

Friedman’s understanding of the ideal role of the state is one with rigid constraints on government involvement; specifically, a government may step in and modify the free market system for two reasons: to promote, adjudicate, and enforce the rules of the game in order, for example, to counter technical monopolies, or it may step in to overcome neighborhood effects. It is upon this second category that I wish to focus in the context of national parks. Friedman admits that pollution, for example, is an example of an externality that requires government intervention, but suggests that national parks should not receive this same categorization. Specifically, Friedman advocates for the removal of government subsidies to national parks, arguing “if the public wants this kind of an activity enough to pay for it, private enterprise will have every incentive to provide such parks.” I would like to explore more fully the implications of his argument for the removal of governmental support.  In 2010, U.S. National Parks and Services had a budget of $3.14 billion. In addition to this price, national parks collected approximately $ 251 million in recreation fees, park concessions, and filming and photography. In total, national park maintenance and administrative costs added up to around $3.4 billion. In this same year, US’s 397 national parks, which consist of more than 84 million acres, received 281,303,769 recreational visitors.  Thus, if these visitors were expected to pay all the expenses pertaining to national park maintenance and care, the price of entry may roughly equal $12. I’ll admit that I was shocked by the reasonableness of this price. Especially when considering that visitors collectively spend a total of around 1.2 billion hours in the park, it is not difficult to imagine a privatized park system where people were charged by the hour, bringing prices to a little below $3 / hour.

Thus, perhaps the privatization of national parks will not, as I initially feared and assumed, lead to the almost complete elimination of these beautiful spaces. The $12 entrance fee, which would most likely vary depending on popularity of park, does not seem to create a huge exclusionary barrier (though survey and opinion analyses would be necessary to insure this). However, as an avid park user and nature appreciator, I am instinctively reluctant to remove national parks from the current nationalized system and push their regulation into the private sphere. I believe my fear stems from a disagreement with Freidman’s rejection that national parks create neighborhood effects. At the risk of sounding like a paternalistic hippy, I believe there is a positive correlation between interaction with nature and societal and personal happiness. Nature seems to have intrinsic value that is independent of how much people are willing to pay to appreciate it. Personally, I am willing to pay (and perhaps “coerce” my fellow countrymen to pay as well) to insure that this land and all those creatures that live within this habitat have a future.


Friedman and Corporate Social Responsibility

All in all, I enjoyed Friedman's writing, his arguments made sense from one logical step to another, very dynamic, and he provided lots of historical examples to support his case. Many other blog posts cover various chapters and arguments in the reading, but one I am curious to explore is the "subversive social responsibility" that corporations and businesses should not focus on. While many of his arguments are timeless, this one is not.

Chapter 8 talks largely about the different types of monopolies that can exist in society (public monopoly, private monopoly, or public regulation). Friedman argues that none of these are desirable, and monopolies should be prevented from forming wherever possible because it counteracts the free market forces of Adam Smith's invisible hand. However, he spends some time also arguing against the doctrine of social responsibility, that a business should "discharge his power not solely to further his own interests but to further socially desirable ends. Yet the widespread application of such a doctrine would destroy a free society." In his point of view, governments need to act like self-interested individuals, maximizing corporate profits to return to its shareholders. Since a business' core mission is that, then "giving by corporations is an inappropriate use of corporate funds in a free-enterprise prevents the individual stockholder from himself deciding how he should dispose of his funds."

Back when Friedman was writing this, perhaps this was the case. Corporations were matching contributions made by individuals, getting some tax breaks, etc. However, with the advent of technology, innovation, and a socially conscious generation, corporate social responsibility is being DEMANDED by the consumers today. We demand the free-trade coffee (although this model is debatable), nonprofit contests sponsored by large financial institutions, and clothes sold at a mark-up because we boycott child labor. Many can argue that CSR is more of a marketing tool than anything else - in many ways, I agree. Companies try to be environmentally friendly and ethical where they can, but only if it aligns with their financial interests. According to these studies, it does help. CITE DATA HERE.

At the end of the day, though, companies are making margin differences. The oil companies try to drill less into the ocean, but the bottom line is that the business model is still based on polluting the water. Instead, they are easing their conscience by donating to some nonprofit organizations that try to save marine wildlife. In that case, Friedman's argument that trying to do the socially responsible thing is merely taking away from what businesses do and should do best: make returns for the shareholders. According to this study by the Haas School of Business, CSR has an ambiguous relationship with a company's financial performance in the short run, but enormous financial advantages in the long-run.

This brings me to a third dimension of social responsibility, the kind that actually establishes a social mission as the core of its business model. Social entrepreneurship is still a new intersection of CSR and for-profit businesses, and not fully understood yet. However, businesses like TerraCycle make money out of something that ends up helping the environment. It is a complete alignment of social responsibility and for-profit business. It's a pretty neat idea, and something that Friedman could not have anticipated.

Why Friedman Sides with Free Man

Mr. Friedman finally threw me a bone. I spent the entire time reading his book thinking what he summed up in his last page:
"the liberal will therefore distinguish sharply between equality of rights and equality of opportunity, on the one hand, and material equality or equality of outcome on the other....At [some] point, equality comes sharply into conflict with freedom; one must choose. One cannot be both an egalitarian, in this sense, and a liberal." (195)
Friedman is what he would call a liberal. We know that. However, Friedman does not persuasively explain why. The freedom-is-more-important-than-equality reason is an entirely separate argument than the one I will address in this blog post. It is more of a philosophical question than an economic one. So, I investigated Friedman's other claim: that everyone is better off under capitalism. Then I looked into some data.

At the end of his first chapter, Friedman argues that even minorities benefit from a free market. He notes how "no one who buys bread knows whether the wheat from which it is made was grown by a Communist or a Republican, by a constitutionalist or a Fascist, or, for that matter, by a Negro or a white." (21) On the other hand, minorities are at high risk for extreme poverty in an economy run by a majoritarian government. At any given point, the argument goes, the majority can advance policies that will exploit the minority.

But is that really what non-liberal Western nations are doing? I looked into some data on welfare programs in the United States.

We see that African Americans and Hispanics clearly suffer from persistently lower income. Interestingly, the income levels see periods of both growth and decline under Republican (Friedman-esque policy) and Democratic (less Friedman-esque) administrations. Yet these same minorities disproportionately benefit from government programs. While Hispanics represent 15% of the population, they represent 22% of the Medicaid-receiving population. Blacks comprise 14% and 22%, respectively. Both groups receive similarly disproportionate assistance under TANF due to the high levels of "needy" black and hispanic families. The majoritarian governments are clearly choosing to spend on minorities.

While it is difficult to prove conclusively that welfare programs are the best poverty-fighting policies, the data suggest that Friedman's task is even more challenging. Proving the counter-factual - that minorities are better off without government programs aimed at benefiting minorities - will be tough for Friedman since the government expenditures are so obviously helping minority groups from an empirical stand point. 

We see that a sympathetic majoritarian government does in fact further the minorities' interest. It is not wholly paradoxical, then, that "the enemies of the free market, the Socialists and Communists, have been recruited in disproportionate measure" from minorities. (21) Minority groups might be more at risk in an economy run by a majoritarian state, but in modern and advanced Western nations, that risk is so much lesser than Friedman intimates.

To Friedman's credit, he grants that men will fundamentally differ regarding the merits of equal materiality versus equality of opportunity. He concedes that such "fundamental differences in basic values can seldom if ever be resolved at the ballot box," thus perpetuating social tension (20). However, his claim that equality of opportunity through liberal policies is best for the material wealth of minorities is unsubstantiated. We talked in class about the human tendency to defy maximum absolute utility in favor of lower-but-equal utility (remember the lollipop example?), but that does not save Friedman here. He makes interesting points about some government programs like the minimum wage being ineffective, but offers no proof that broad government welfare programs like Medicaid and TANF will frequently hurt the lower class. And if we accept that modern Western governments will not actively exploit minorities - which I find to be an entirely reasonable assumption in today's world -  then the data certainly indicate that the welfare state will be better for minority material wealth than the free market. 

Tuesday, September 25, 2012

Free Speech and the Overlap of Powers

            In the first part of Capitalism and Freedom, Friedman emphasizes the relationship between economic freedom and political freedom – while economic freedom is valuable in and of itself, it is also “an indispensable means toward the achievement of political freedom” (8).  This is because the main frustration of freedom is the concentration of power; competitive capitalism allows economic power to offset political power.  “The preservation of freedom requires the elimination of such concentration of power to the fullest possible extent and the dispersal and distribution of whatever power cannot be eliminated – a system of checks and balances” (15).   However, Friedman’s position on free speech thwarts this end of decentralized power, severely complicating this relationship between economic and political freedom.

            The first problem is the empirical concentration of economic power in the United States today.   The top 1% owns 34.5% of the wealth (as of 2010), 5% more than they did 20 years ago, and the bottom 50% owns only 1.1% of the wealth.  Not to push Occupy too hard, but if this isn’t concentration of economic power, I don’t know what is.  Furthermore, it is challenging to think of a plausible explanation for this distribution other than economic freedom – in Friedman’s ideal liberal world, this 1% would of course be free to accumulate wealth through any voluntary exchange, and most attempts to prevent this accumulation would be violate their freedom.  This income gap seems OK by Friedman.

            More problematic, however, would be this economic power concentration in conjunction with political power – a situation in which the two concentrate power together, rather than balancing each other out.  For example, if the salary of members of Congress (not counting benefits) put them in the top 5% of U.S. workers.  Or if campaign finance rules allowed for effectively unlimited contributions to issues or candidate races.  The power of the economic top 1% can be heavily leveraged in political matters.   Friedman emphasizes this impact of economic power on political power, arguing that for free speech to “mean anything, the proponents [of an issue] must be able to finance their cause” (17).  He seems to agree that free speech, including political speech, goes hand in hand with available economic resources.  Why, then, is he not concerned that the top echelon of economic power will out-finance and crowd-out the bottom? Even if economic freedom is valuable in and of itself, its ability to further concentrate political power is very difficult to forgive.

(I give Friedman credit for his use of historical examples, and appreciation of the importance of context – perhaps the context of 1956, this issue of realizing free speech and the concentration of economic and political powers was not yet salient.  This would be similar to his reference on p.35 to “detailed regulation of banking” as an unjustifiable role of government, which perhaps was not able to appreciate the complete context of the market failure leading to our most recent economic crisis). 


Market Power and Economic Freedom

I found the Friedman reading quite interesting as I actually agreed with Friedman a lot more than I had expected. In particular, I appreciate that he addressed the issue of monopolies and acknowledgement that there will be instances in which the market does not operate perfectly or even might fail. Too often it seems that capitalist-minded individuals rail against concentration of government power without acknowledging the problematic aspects of sufficiently large concentrations of market power. Indeed, for Friedman, part of the main issue with excessive government involvement in economics and business matters seemed to be that the government would create effective monopolies or at least hold most of the market power. This concentration of economic power, combined with the concentration of political power, would easily deprive citizens of both political and economic freedoms.

It seems to me, though, that a concentrated government expanding into the realm of concentrated economic power is not the only thing those who philosophically favor freedom should fear. Recent events, perhaps uncommon in Friedman's time, suggest that the relationship between economic and political power is such that those who hold economic power can use it to achieve (and abuse) political power, as much as the reverse is possible. In particular, those who hold economic power and are very organized can disproportionately influence government. Such examples include labor unions (which, though they do not necessarily have concentrated economic power in the sense of financial wealth, do hold a certain degree of sway because of the labor power and voting power they potentially represent) as well as trade associations such as the Motion Picture Association of America (MPAA) and Recording Industry Association of America (RIAA). I have little doubt that Friedman would find certain aspects of the influence of labor unions on government troubling. I hope, too, he would see as trouble actions such as the promotion of the Stop Online Piracy Act (SOPA), which, if it did not directly restrict many personal freedoms related to use of the internet, would at the least pave the way for restriction of such freedoms. Ironically, what ultimately impeded the success of SOPA was a concentration of economic power and organization on the other side of the issue - through tech heavyweights such as Google, Wikipedia, and others actively protesting.

But what if the other side wasn't well organized and didn't have the resources to make their voices heard? If the same amount of "cost" resulting from a policy is spread out among a very disparate, very large group rather than concentrated among a small and organized group, the first group will necessarily be less active - and less capable of taking action - to combat the policy than the second group even though the total cost is the same. Clearly, concentration of the ability to influence politicians can lead to economically inefficient, if not downright unjust, outcomes. Insofar as concentration of economic power leads to concentration of the ability to influence politicians (and at this point in history I would say it does), then concentration of economic power can create such political outcomes, even restricting the individual freedoms of citizens.

I really wonder what Friedman would say about this sort of issue and what solution, if any, he might suggest. Certainly, he would consider a firm or a person's freedom to spend their money as they choose - including contributing to campaigns - to be important. But what of the freedom of citizens, and their right to "compete" to have their voices heard and needs considered by government? This seems, to me at least, to require the sort of check and balance between economic and political forms of power that Friedman was encouraging earlier. It does not seem right for large firms, monopolies or oligopolies, to be able to abuse their market power both in the market and through government to deprive citizens of political freedoms and even economic freedoms (through abuse of taxpayer money or otherwise). Perhaps Friedman would have some explanation for how the free market or existing freedoms and competition would ensure that such abuses would not happen. Yet given cases such as farm subsidies, I doubt that such a theory could be fully correct. Growth and changes in technology, like with the transportation monopolies Friedman discusses, can certainly help the situation, particularly through making organization easier for disparate groups, but certainly, technology alone cannot protect the freedoms of these individuals and firms. Of course, the "problem of freedom to combine and freedom to compete" is even today a complex issue and solutions are not easy to find and probably would not be even for Friedman.

Vocation, Vocation, Vocation

I honed in pretty quickly on the chapter “the Role of Government in Education.”
Disclaimer: I spent all last fall on an education themed study abroad program in Chile and Argentina. Consequently, I’m recovering from a bit of academic whiplash. To put it nicely, let’s just say my Chilean and Argentine education Profs would be aghast.

I disagreed with a couple of Friedman’s points on vocational education. 

I think Friedman holds a very conflicted view of vocational schools and who attends them.  His approach is nearly bipolar.  In one passage, he treats vocational schools as “a form of investment in human capital precisely analogous to investment in machinery, buildings or other forms of non-human capital” (101).  This seems to compare man to machine.  However, a few pages later, he laments vocational schools as a bourgeois institutions that “tend to restrict [enrollment]…to individuals whose parents or benefactors can finance the training required” (107).  This view seems to be a bit paradoxical.  Which are they – programs reserved for the middle-to-upper class or basic training centers that invest in humans as though they are machines?  
My impression was that trade schools are thought to lack the prestige of those who can afford a private education. I think my disagreements with Friedman may be partially attributable to our generational gap. 
Two years ago, the Economist published this piece addressing this negative view of vocational education.  It notes that, in 1982, 1/3rd of high school students completed a vocational degree.  That proportion dropped to 1/5th by 2005.  The sub headline of the article was “America’s misplaced disdain for vocational education.”  Interestingly, America’s disdain seems remarkably different than Friedman’s disdain.  The piece called vocational training “arguably America's most sneered-at high-school programme.” It is not that vocational education is reserved for only those who can afford it; twenty-first century vocational training is generally reserved for those who don’t have the luxury to pursue other options. 

But the cost isn't the only reason Friedman believes that vocational education should not be subsidized. Friedman bemoans that “[s]ubsidizing the training of veterinarians, beauticians, dentists, and a host of other specialists…cannot be justified on the same grounds as subsidizing elementary schools or, at a higher level, liberal arts colleges” (88).  His complaint is that vocational training “increases the economic productivity of the student but does not train him for either citizenship or leadership” (88). I find this argument almost laughable. Good citizenship is obviously a vital component of education curriculum, but Friedman himself admits that there is a "neighborhood cost" component that also helps justify educating the population.  It is illogical to say that a society as a whole is better off if its citizens have good, maybe even liberal-arts college level, "leadership" training (my sincerest apologizes to whoever coined "Leaders in the Making"). Wouldn't it seem more beneficial -- and more in sync with Friedman's argument --  to give a citizen the tools to "vote" with his wallet?  
Friedman should consider the possibility that in the absence of vocational programs, especially today, students of lower socioeconomic classes may find themselves lacking the technical ability to hold employment. The “neighborhood costs” of unemployment are similar to those of poverty. To keep students gainfully employed is an important end in itself to combat the creation of an idle, discouraged youth population -- the kind that might instead turn to crime.

I visited several vocational high schools abroad and found that them to be great resources for students in troubled living situations.  Government-funded vocational schools gave them the training they needed to stay off the streets.  Students from lower socioeconomic backgrounds appreciated the more pragmatic focus -- it makes opportunity cost much more worthwhile.  With this education came the opportunity to build a career that they may not have had otherwise.  And with that career, came the freedom to vote on tie colors. 

If Friedman is going promote a voucher system, and I won't get into the flaws of that system, he should allow government subsidies to be used for vocational schools as well. They too curb "neighborhood costs."

This data from the U.S. Dept of Education = super interesting.  They were unable to prove a correlation between hours worked or salary and # of occupational credits earned in high school, but it seems like graduates with vocational training are also employed, slightly more than the average person without any occupational credits! (Source:

A Rant on Education: No to Vouchers!

Education policy is very important to me, so I was quite interested to see how Friedman handled education in a capitalist framework. In my experience, hardcore conservatives/capitalists often ignore tough realities in the field of education, but he surprised me at first by seeming open to the idea of the government standardizing and compelling some level of education — at least insofar as that learning advances “citizenship or leadership” (Friedman 88) (Friedman believes that “training which increases the economic productivity of the student” (Friedman 88) should be viewed as an investment in human capital and is thus a transaction best left to the private sphere). Once I read into his plan for basic education, which outlines a voucher system, I found that reality-bereft conservatism I had originally expected.

As we read in Friedman’s book, a voucher system means parents may purchase as much education for their kids as they (1) desire and (2) can afford. This seems contrary to Friedman’s initial assertion that “[a] stable and democratic society is impossible without a minimum degree of literacy and knowledge on the part of most citizens” (Friedman 86) because many parents may desire, or more likely only be able to afford, less than this minimum threshold. Even with a robust (albeit often mismanaged) public education system in the U.S., we are flirting with destabilizing mass incompetence. A 2009 USA today headline read “1 in 7 U.S. adults are unable to read this story,” citing a federal study. As the world modernizes, and literacy, mathematical and analytic skills become increasingly important (as opposed to labor-based skills), the poor are being left further and further behind. “The achievement gap between children from high- and low-income families is roughly 30-40 percent larger among children born in 2011 than among those born twenty-five years earlier.” (Reardon 1) Low-income children are growing up increasingly incapable of fully functioning in their society. 

There is an abundance of data and studies supporting the hypothesis that higher parental income and/or educational attainment is closely correlated with higher academic success and educational attainment among children. Further, higher educational attainment is closely linked to higher income. (If you don’t believe me check out the graphs below; one is from BLS, the other is from data from D.C. schools. The latter is especially dramatic because D.C. is a city highly segregated by income, but the same pattern holds true throughout the country.) Put these two factors together, and it’s easy to see how the pattern is cyclical: Rich/well-educated parents have kids who grow up to be rich/well-educated (and so on for the next generation), while poor persons suffer the opposing cycle of under-education and poverty.

Recently, studies have begun to show that the correlation between parental income and education to educational achievement among children is explained by parenting style. Essentially, richer and better educated people are better parents (if you’re into numbers, charts and regressions, here’s a cool study that makes that rather intuitive point with math: Since parenting starts from birth, and school doesn’t start until several years into life, poor kids are behind from the start: One study found that “[b]y age 3, children whose parents were professionals had vocabularies of about 1,100 words, and children whose parents were on welfare had vocabularies of about 525 words... The average I.Q. among the professional children was 117, and the welfare children had an average I.Q. of 79. (Tough, 2006)

Somehow, Friedman and other voucher proponents believe that these kids — who start social participation 38 I.Q. points behind many of their peers, and 21 points below average — must accountable for their parents’ failures. Are we really going to throw poor kids into the capitalist game when they reach maturity and tell them it’s their fault when they lose? Isn’t a personal responsibility a fundamental tenet of capitalism?

There’s a lot of proposed strategies on how to educate poor children to compensate for subpar parenting, most of which include more classroom time, a longer school year, and all of which require increased funding; the “typical resources provided to a public-school teacher, would find it near impossible to educate an average classroom of poor minority students up to the level of their middle-class peers.” (Tough, 2006) Poor kids need more help if they are ever to be competitive market participants.

The bottom line is this: If we are to have a society built on personal accountability and decision-making (e.g. capitalism) then we must have an educational system which favors the poor to compensate them for their upbringing. A voucher system which by default would allocate more education to the wealthy than the poor is antithetical to this goal.

Here’s a GREAT article on the achievement gap, if this is a subject that interests you: 
“What It Takes To Make a Student”
By Paul Tough.
The New York Times
November 26, 2006 
(You can find it on Lexis Nexis)


“What It Takes To Make a Student”
By Paul Tough.
The New York Times
November 26, 2006 

The Great Gatsby Curve, Income Dispersion, and Friedman

                  Friedman’s writing was clear, persuasive, and very much in line with the concepts taught in Econ50 from market efficiency to neighborhood effects (externalities) and potential market failures. While I found many of his ideas foundational and convincing, I was unimpressed by his analysis of income distribution. I believe this was, in large part, shaped by recent research and movement within the United States in terms of income inequality. First what I agree with. I agree with Friedman’s general thoughts on the subject—namely that some degree of income dispersion is to be expected. Individuals have different tastes for work, there is a degree of randomness, and the importance of distributing significantly due to an individual’s production. I also agree that future income is significantly predicted by initial endowments, both of fundamental human capital and wealth. Finally, I agree with the conclusion that paying each person an equal wage is both undesirable in terms of overall growth and in the philosophical sense unfair.
                  Mr. Friedman and I part ways in two significant areas. I am not entirely convinced that that it maximizes societal wellbeing for there to be complete freedom to transfer wealth from parent to child. However, this is more of a philosophical debate between utilitarianism and libertarianism—one that I will leave to focus on the economic debate. The fundamental disagreement I have is how he treats the distinction between income inequality and distribution of opportunity. The distinction itself is important and he is right in his initial definitions, there are two types of inequality: “short-run differences in income, and differences in long-run income status. Consider two societies that have the same distribution of annual income. In one there is great mobility and change so that the position of particular families in the income hierarch varies widely from year to year.” (171) The other has greater rigidity. In a real sense, there is less inequality in the first. However, Friedman then claims that the two types of inequality are likely to be negatively correlated: “competitive free-enterprise capitalism tends to substitute the one [type of inequality: opportunity/result] for the other.” (171) This is where I, and I think the data, disagree.
                  Let’s look at a graph from the current head of the CEA, Alan Krueger:

What do we see here but a positive correlation between intergenerational earnings elasticity (a proxy for intergenerational mobility, or more technically defined the frequency of movement between quintiles of income distribution) and the Gini coefficient (a single number representing the equality of a country’s income distribution based off a mathematical calculation and the Lorenz curve). Likewise, a cursory glance reveals those countries that are generally deemed more socialist (Scandinavian countries) not only have less inequality of result (Gini) but also have more equality of opportunity. Looking at Krueger’s comments on the graph we see just a sampling of explanations for why this might be the case: “There is a cost to the economy and society if children from low-income families do not have anything close to the opportunities to develop and use their talents as the more fortunate kin from better off families who can attend better schools, receive college prep tutoring, and draw on a network of family connections in the job market.”
                  Looking at recent trends in the US we see the trend moving towards less equality of opportunity and less equality of result. The OECD identified 6 potential causes for this:   Globalization (minimal impact);  Progress in technology;  less redistributive tax/benefit systems;  an increase in part time or atypical workers;  changing family structures and regulatory reforms;  changes in labor market institutions widening inequality. These changes may imply a changing market, one that is less dependent on the ability of an individual but based on investments in human capital often available only to those who already have money.  Some of these are automatically influenced by governmental policy.

                  Friedman glosses over some of the negative impact of concentrated wealth ranging from worse health, more political corruption, lower economic growth, more frequent revolution and civil unrest, and a number of other negative impacts (economists writing on these include, but are not limited to: Torsten Persson and Guido Tabellini, Stiglitz). It is unclear that if the free market is moving towards a newly unequal  distribution, that this is an efficient or desirable result.
                  While there may be some theoretical coherency to Friedman’s argument that the free market will reward those with the ability and willingness to produce, the data seems to support that there is a market failure preventing this from occurring. I suspect Friedman would like to argue that this failure is actually due to unintended consequences and rent seeking through government policy. However, given recent increasing inequality corresponding with deregulation and the fact that more socialist countries have had more equality of opportunity seems to undermine a number of Friedman’s claims on the subject.


Capitalism, Discrimination, and Affirmative Action, oh my!

Although he would grit his teeth, dig his feet into the ground, and ultimately hate it, Milton Friedman would have to agree that, based on his logic, Affirmative action laws are justified.  In the chapter entitled ‘Capitalism and Discrimination,’ in his book Capitalism and Freedom, Friedman makes the argument that Fair employment practices in legislation, right to work laws, and mandatory desegregation in schools actually interfere with a free market that, if left to its own devices, allows for decreased discrimination over time. To explain this, Friedman uses an example of a grocery store owner being forced by law to hire a black man to work as one of his store clerks instead of a white man. This grocery store is in a community of people who are opposed to being waited on by a black clerk. The community’s aversion to black clerks could hurt the grocery store owner’s business, or even lead to the store being shut down. By hiring a white clerk in this community, the grocery store owner is simply “producing the services for the consumers that the consumers are willing to pay for” (112). Friedman continues, claiming that the grocery store owner is not harming the black clerk because the type of harm suffered by the black clerk is negative harm, and thus justifiable because it occurs when two individuals are unable to find mutually acceptable contracts. Friedman gives the example of  “a community at large has a preference for blues singers rather than opera singers.” The community is increasing the economic well being of the blues singer relative to the opera singer (113).
Now let’s look at the Affirmative action we see in today’s society. To do this, I will specifically apply Friedman’s argument to one of the more recent Supreme Court cases concerning affirmative action that was decided in 2003. In Grutter v. Bollinger, the Supreme Court upheld the University of Michigan Law School’s affirmative action admission policy. Grutter claimed that the Law School was using race as a predominant factor, giving applicants belonging to certain minority groups a significantly greater chance of admission than students with similar credentials from disfavored racial groups; and that respondents had no compelling interest to justify that use of race.
However, Friedman’s logic in ‘Capitalism and Discrimination’ chapter give the University of Michigan Law School a very compelling reason, and justify its actions. The University of Michigan Law School is similar an employer choosing which employee to hire. Like the employer hiring the white clerk instead of black clerk in Friedman’s example, the Law School needs to admit students who will make it the most profit; using race as a factor in considering whether or not to admit a student helps the School create diversity, a characteristic that is becoming a more and more important selling factor when colleges advertise to the community of students and alumni that ‘consume’ its goods through tuition and donations. Essentially, allowing Affirmative action in the University admissions process allows Universities to meet the demands of the community that gives them profit.  Moreover, just as community members can decide to buy from a different grocery store that does not hire black clerks as stated in the above example, students can simply apply to a law school that does not factor race into their admissions process. This is likewise similar to Freidman’s proposed voucher system in the sense that if enough students decide to apply to other Law Schools instead of University of Michigan because of their affirmative action policy, the University of Michigan will change their admission evaluation process. This system, as it stands, works as the market does by permitting cooperation (not interfering with the contracts individuals are entering into) without conformity.
This justification of Affirmative action is likewise supported by a study conducted in the 1990's by Harry J. Holzer, a professor of public policy at Georgetown University, and David B. Neumark, a professor of economics at Michigan State on the economic impact of Affirmative action policies. Their research showed that affirmative action might actually help fine-tune the labor market (in our case the market for students as well) because it increases the use of recruitment and screening procedures for job applicants. In a working paper released by the professors in1999, they concluded that ''the empirical case against affirmative action on the grounds of efficiency is weak at best.'' The study also noted that while unfavored majority races might have missed opportunities to work or learn as a result of affirmative action, this occurred because colleges and companies have begun to value the potential of minorities and women more accurately, meaning economic efficiency is attained.