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How Milton Friedman and Chicago Economics Undermined America
Here’s the thing about the Chicago School of Economics – it wasn’t always this way.
Chicago School now means – market good, government bad.
But that was Chicago School hijacked by Milton Friedman, Robert Bork, and Richard Posner.
There was a Chicago School before Friedman, Bork and Posner.
“The Chicago School began with the view that in order to have a properly functioning free market, the government must drastically curtail the ability of businesses to build and maintain concentrated economic power,” writes Kenneth Davidson in his new book Reality Ignored: How Milton Friedman and Chicago Economics Undermined American Institutions and Endangered the Global Economy (2011). “Early incarnations advocated forbidding corporations to retain their earnings or to purchase other businesses. The explicit fear was that the disproportionate power of big businesses would distort commercial markets and corrupt political freedoms.”
That sounds more like Ralph Nader than the Chicago School.
“It was Henry Simons and Aaron Director,” Davidson told Corporate Crime Reporter in an interview last night.
“Aaron Director was very close to Milton Friedman. Henry Simons was one of his teachers during the 1930s.”
“Both Director and George Stigler were students of Simons. Simons wrote an essay called A Positive Program for Laissez Faire.”
“It was in the middle of the depression. At that time, people thought that many of the problems affecting the economy in the United States and the rest of the world were due to the growth of the then relatively new giant corporation.”
“They had this ideal that the market would work and would perfectly, but only if you could take out of the market the giant firms that dominated through their economic power.”
“And they saw that economic power as a great threat to the nation and national freedom.
That was essentially a Jeffersonian notion of the market. The market would regulate itself if everybody was a farmer, a yeoman farmer, a small businessman.”
“They thought it would be automatic.”
“By the time Friedman wrote his book – Capitalism and Freedom – in 1962, they had totally changed their minds.”
“The problem was not big business. The problem was government.”
Henry Simons thought the market had to be pretty rigidly controlled. It was bad to allow companies to keep their profits. The profits should be given back to the shareholders every year. And the businesses should have to sell the market every year on whatever their development plans are and raise new capital.”
“Friedman just swept that away. The government could not make a decision that would be correct. He and Stigler were adamant on the fact that the government was not only incompetent to make these decisions, but that whatever regulatory organizations were created would inevitably be dominated by big businesses.”
“So, it was better to let the businesses fight it out themselves in a survival of the fittest mode.”
One hundred years ago, antitrust policy was a populist policy. It was seen as a way not just to break up cartels, but to challenge concentrated economic and political
power. Now, antitrust seems weak in comparison. The Chicago School has eviscerated its powers. Antitrust today seems to challenge power only at the edges.
“It’s true,” Davidson said. “The objectives of antitrust when passed were directed at political and social corporate power.”
“People feared the power of the large businesses. Some of those fears went away with the countervailing power of unions.”
“And some went away with the increased income and economic growth of the United States.”
“But we are now seeing much of the same kinds of fears re-emerging out of the deregulation, not only of antitrust as a social and political force, but also the deregulation of the financial sector.”
“The Supreme Court in the Credit Suisse decision two years ago said that antitrust can’t go after misbehavior in the stock markets.”
“Robert Bork, in his book The Antitrust Paradox, denies the history of the antitrust laws – he denies the social and political foundations.”
“To the extent that he would admit the legislative history, he says – that’s just words, it doesn’t make any sense.”
“And he invents or applies a Chicago theory about how the economy works and redefines antitrust.”
“And he says – if its not about this and only this, we should get rid of the antitrust laws.”
“Richard Posner comes along and writes the same thing – it’s about prices, it’s not about power.”
“They are simply making up this history, which then becomes the foundation for saying – when we look at mergers, we don’t look at the consolidation of corporate power, or the enhancement of corporate power. Instead, we look at the question of whether the price of individual products is going to go up or not. And that’s the only thing we look at.”
Do you see any chance for a new trust busting politician like Teddy Roosevelt coming down the pike?
“No,” Davidson said. “I don’t see the President taking the kind of leadership that Roosevelt took in the early 1900s that created antitrust as a political force in the United States.”
“President Obama is much more cautious in the way he goes about these things.”
“What inevitably causes the shift in the political winds is overreaching.”
“And we are seeing overreaching by these large corporations. I very much fear that the temporary resolution on Wall Street of our economic crisis, which ended up in the merger of even larger banks, which are going to be even more susceptible to disastrous failure, is eventually going to cause another crash, and this time the governments will have to break them up.”
“They will have to see that the original Chicago School theory that smaller is better is in fact better.”
“The idea that we let commercial private institutions get bigger and bigger is a recipe for disaster to the economy.”
[For the complete transcript of the Interview with Kenneth Davidson, see 24 Corporate Crime Reporter 14(12), April 4, 2011, print edition only.]