Milton Friedman vs the Austrian Perspective

So you are a good free market Chicago School guy.  You have rejected Keynesian economics in favor of the free market Chicago school.  You have read Milton Friedman’s “Right to Choose” and you are convinced that the free market is the way to go.

Well, maybe he is not such a free market guy.  He is, in fact, in favor of compulsory taxation, monopoly, price controls, and the welfare state.  Milton Friedman proposed the tyrannical payroll deduction in the United Sates during WW2 and it has stuck with us like a curse ever since.  He is against cartels in most areas except for money.  Though Chicago School has done many positive things in promoting liberty, its faults are glaring and can no longer be ignored after September 2008. The Chicago School was fundamental in popularizing the idea that almost all government regulations are actually lobbied for and constructed by the industries that are to be regulated to push out competition and raise costs for new competitors entering the sector.  This allows large firms to absorb regulatory costs while pushing out small businesses and new upstart companies.  The term popularized by many from the Chicago school is “Cui Bono” or who benefits?.  The Chicago School realized that in almost all cases, the big players in the industries being regulated are almost always the same beneficiaries of such regulations and are also the biggest pushers of regulation (just like today’s health care legislation and insurance companies.)  Chicago School has written hundreds of books on almost every industry when making their case but have somehow missed the elephant in the room, the Federal Reserve. So the largest monopoly of all escapes all scrutiny from the Chicago School.  Chicago School refuses to use this same method of “Cui Bono?” on the banking cartels that exist around the world in the form of Central Banks.  This seems absurd when considering that all the shareholders of central banks are private and have enormous leverage in setting the price for money (the interest rate).  So the Chicago School and Milton are completely inconsistent in their theories when it comes to money.  They are for free competition in all fields except for banking, where the Chicago school supports government sponsered monopoly.

When it comes to methodology, the Chicago School is as bad if not worse than the Keynesians.  The Chicago School and every other school of economic thought besides the Austrian School since the 1930s have viewed human beings as mathematical aggregates.  That is to say, human beings are simply numbers to be put in mathematical formulas.  The Austrian School completely rejects this because human beings are conscious actors that change their behaviors based on conditions. For example if you raise the income tax, some people will likely find other ways to generate income through investment or some other method.  Therefore, human behavior and concious actors will change how much revenue will be brought in.  All other schools of thought pretend that human behavior is for the most part unchanging and can be constructed as part of a mathematical formula. For example, if government action A is taken than B will be the result.  Ludwig Von Mises established in “Human Action” that human behavior cannot be predicted and observed in the same way that hard sciences make predictions. All particles in the universe act in the same predictable way when a force is applied to them. This is not true with human behavior.  When a new variable is applied to human interaction, humans will react in multiple different ways, each to achieve their own desired goals. Since economists can’t possibly know the goals and motives of every single person, it makes human beings almost impossible to predict the same way that chemists or other scientists make predictions with their respective studies.  This puts economics closer to the field of sociology rather than a hard science, i.e. physics, that mainstream economists’ fantasize about making economics into.  Human beings are conscious actors but the Chicago School’s methodology leads to many conclusions that are not logical because they often do not take this into account. Murray Rothbard gives the example of Milton Friedman’s negative income tax or guaranteed annual income.  Rothbard argues that it is precisely because the welfare bureaucracy is so inefficient that the United Sates is not more bankrupt than it is.  Friedman’s plan to make it more efficient by automatically sending out checks to anyone making below a certain income creates a hugely distorted incentive structure that is logically obvious but which Chicago School’s methodology seems unable to grasp.

Lastly if you still think that the Chicago School is free market consider this; Ben Bernanke is a student of the Chicago School, specifically Milton Friedman’s book on the Great Depression. Everything that Ben Bernanke has done has been lock step with what Milton Friedman had suggested should have been done during the Great Depression. Not one major economist from the Chicago School publicly protested against TARP or the mind boggling expansion of the money supply.  The Chicago School has completely capitulated to the Keynesian world view and have shown their true colors. The only school of thought that has not been toppled in the wake of September 2008 has been the Austrian School.

Here Gary North goes into some of the intellectual history of economics. Additionally, Gary North makes the argument that the intervention of 2008 was so massive that it was arguably taken even further than anything that Milton Friedman would have suggested thirty years ago.

Here is another lecture comparing Milton Friedman to the Keynesian paradigm.

Here is an article about how mainstream conservatives and supply siders are Keynesian.

 

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