Typical Misunderstanding of Capitalism

In November 2008, Scott Stephens wrote his piece in response to global economic crisis. Rev. Stephens is the minister of Forest Lake Uniting Church and teacher of theology and ethics at Trinity Theological College. His article, Dishonest money: What the financial crisis tells us about ourselves is a typical example of misunderstanding the real character of capitalism.

Free Market

If a capitalist billionaire himself with the caliber of Warren Buffett could misunderstand capitalism, it is but natural to see typical misunderstanding of capitalism similar to Rev. Stephens’. This is where we need discernment to see beyond the appearances of things and also the ability to distinguish between dominant social themes and alternative story.

The influence of mainstream media is very powerful to shape public opinion. Add to it the popularity of both the external and internal critics of capitalism. From the outside, we have the Marxists; and from the inside, we have people like Scott Stephens who himself enjoyed the blessings of capitalism. Both camps agreed in their analysis of the inherent flaws of capitalism.

The fear of Peter Schiff is not at all baseless. He is worried that the worsening crisis would be blamed on capitalism. This is exactly what is happening. Only few are able to take a deeper look at capitalism and realize that the so-called “inherent flaws” are really not coming from the free market, but from another version of it.

A good place to start in this social discernment is to learn the distinction between the economic positions of Warren Buffett and George Reisman. But before we do that, allow me to identify first the misunderstanding in Scott Stephens’ article. After reading Stephen’s article, you can compare it with George Reisman’s open letter to Warren Buffett and see for yourself the discrepancy between two versions of capitalism.

Scott Stephens rightly identifies as “dishonest money” the modern economic phenomenon of monetary expansion. The 2008 crisis not only exposed its faulty foundation, but according to Stephen should also lead to self-examination as to our participation in this crisis due to greed and extravagant lifestyle. Furthermore, it ought to direct us to a realization working for common good and the need for alternative community with a different economic system. He looks to the Church to provide such a community with an economic system different from capitalism.

This is the point that disturbs me, his association of “dishonest money” with capitalism. He appeals to history as his basis. He identifies that monetary expansion has been in existence since 4th century B. C. Aristotle was actually “shocked to observe that the efficiency and simplicity of the market seemed to unleash something monstrous in the human heart.” He further narrates that as people perceived the potential of monetary expansion, they started to lust after unlimited profit. This seemingly unlimited increase in the quantity of money carried with it destructive moral vices like greed, dissatisfaction, and loss of self-control.  Stephens then mourned that those destructive vices in time have been turned into “celebrated virtues” serving as the basic foundation of modern economy. He then concluded, “Capitalism thrives only through these vices.”

As we will see in Reisman’s open letter, it is not actually the free market that unleashed those destructive vices. It was something else. It was the government intervention appearing as “free market.” Stephens’ reading of capitalism is a typical example of misinterpretation of capitalism and an evidence of the success of intervention done by the state.

Stephens’ hope “that those in positions of influence will find a just and effective response to the current credit contraction,” is actually a resignation. Can we really expect that those in power would initiate genuine monetary reform apart from the initiative of an informed public? As Murray Rothbard rightly identifies that due to the combination of both evil and good in human nature, those in power could actually utilize their privilege position for legalized theft.

Stephens’ longing for an alternative community with a different economic system exemplified by the Church could only happen on the basis of a solid understanding of what is really going on. This requires education leading to concrete action. Here I think the Austrian school of economics could provide the necessary tool for us to re-examine the real nature and character of free market economy. 

Part 2


Disappointed and…Encouraged

After writing “Savior of Capitalism and Champion of Free Market,” I happened to join a LinkedIn group, Ludwig von Mises. Since I am new to this “Austrian School,” my intention in joining is just to have a feel of the current developments in Austrian ideas. One thread caught my attention. It is about Milton Friedman.

To my surprise, members of the group are praising Friedman as a libertarian. I could not understand for it is contrary to what I have been reading so far. So I raised a question and quoted Murray Rothbard about the need to precisely identify the economic position of Milton Friedman. I received an immediate reply implying that Rothbard’s position is invalid in “real world economics,” and Rothbard himself an “escapist” into economic fantasy land. The responder further asserts that to ignore the contribution of Milton Friedman going to the “right direction” is foolish. Murray Rothbard is foolish in the eyes of this group member.

Being a new member, I just voiced out my disappointment by stating what I thought to be in his mind. My greater disappointment is caused by the silence of other members that to me, it only means that the position of the group on Milton Friedman is the dominant one.

Resulting from that experience, I made a tentative conclusion that for Austrian ideas to spread, the economic position of the followers of Friedman must be exposed. They claim to be proud members of the “libertarian” camp. To me, they are nothing but confused followers of the statist version of “libertarianism” and “free market” ideas.

After a day, as my custom, I visited LewRockwell.com to see new articles written by Gary North. I am happy to read The Future of Austrian School. It is a confirmation of my early conviction. I am glad to receive such confirmation from an Austrian economist himself about the future of Austrian School. In that article, North reports about a seminar at Mises Institute attended by more than 150 students from 20 different countries. As a result of such experience, he foresees a promising future for the spread of Austrian ideas. He recalls that from a humble beginning in the 1950s, the Austrian mindset is now an international movement that is rapidly growing.

North cites how the web serves as a powerful tool to educate the people. The present economic crisis is waking up increasing number of people to the significance of Austrian thoughts. Ron Paul is the common starting point for most people. His consistent message serves as an eye-opener to many.

Savior of Capitalism and Champion of Free Market

Coming from the world of theological education, it surprises me to see that the pattern of theoretical confusion also exists in economics. I thought that the field of economics operates in the world of certainty and predictability. I was wrong.

I realize this confusion as I encounter reputable economists. And I think the most popular of them is Milton Friedman.

Milton Friedman’s Honorable Titles

July 31, 2012 marked the centennial birthday of Milton Friedman described by Stephen Moore of The Wall Street Journal as “the man who saved capitalism” and the “world greatest champion of free market.” The Foundation for Economic Education confirms this in their Twitter updates honoring Milton Friedman as “one of the twentieth century’s most influential champions of individual liberty and free markets.”

Like Moore and FEE, several economists wrote articles yesterday to commemorate the greatness of the man. Professor Richard Epstein of Ricochet accepts Friedman as an “articulate public defender of free market” and is calling for recognition for the latter’s “great contributions to the science of economics and the cause of freedom throughout the world.” He especially mentions Friedman’s contribution to the idea of “stable currency.” Daniel J. Flynn of City Journal even quotes Friedman’s “ideological opposite,” Paul Krugman who admits that Friedman is “a man of intellectual courage” and “one of the most important economic thinkers of all time, and possibly the most brilliant communicator of economic ideas to the public that ever lived.” And finally, Michael Walker of National Post seems to represent the official position of Canadian economists in giving honor to Milton Friedman as “the most influential economist of the 20th century” and believes that Friedman’s “work will continue to have an effect as long as humans engage in economic activity.”

What an honor given to a deceased economist – savior and champion of free market and capitalism (by the way, all the mentioned writers above, advocate free market and capitalism)! However, not all people agree in giving Friedman those great titles. Moore though he refutes it, also reports his observation that the Occupy Wall Street movement identifies Milton Friedman as the “father of global misery.” There is truth in it, but it depends on how you look at it. If you are coming from the Left, indeed you would say that Friedman is the primary cause of global misery due to his “free market” and “capitalistic” ideas. On the other hand, if you are coming from Friedman’s camp, you would deny it and insist that Friedman is indeed a hero of capitalism and free market. The blame for economic recession then would go either to the government or central banking for their refusal to listen to Friedman’s teaching.

Austrians’ Perspective on Milton Friedman

But there is still another voice, the Austrian economists. I find four relevant articles refusing to give those honorable titles to Milton Friedman. I mentioned the first two articles in my previous post. Reading Richard M. Ebeling’s article, I state, “Yes, in terms of opposition to Keynesian economics and basic free market ideas, the Chicago School shares them with the Austrian School.” After reading Murray Rothbard’s, Milton Friedman Unraveled, I find my own statement misleading. From Rothbard’s point of view, there is no commonality between Milton Friedman and a true Austrian economist.

Including Rothbard’s article, the other two remaining articles are also very strong in their critique of Friedman’s position. I already mentioned that for Robert Murphy, the great difference between the Austrian and the Chicago schools are in the areas of “epistemology, methodology, interpretation of business cycle, application of Coase theorem, and above all, in policy about the supply of money.”

Gary North’s article is the most recent. It is written this day.  In Detours on the Road to Freedom: Where Milton Friedman Went Wrong, he dissected Stephen Moore’s article and from a true Austrian perspective, he pointed out, which part is acceptable and which part is misleading. In conclusion, for North, there is no reason to celebrate Friedman’s “victory party” as the hero of free market economy.

For North, agreeing with Rothbard’s analysis, Milton Friedman remains a Keynesian. He is a Keynesian economist who opposed Keynesian economics. This makes Friedman’s position confusing for many libertarians and free market thinkers, but not for North and Rothbard.

Milton Friedman’s Alleged Contributions to Free Market Economy

Concerning the contributions made by Milton Friedman to economics, Nick Gillespie of Reason.com mentioned five, which I consider three of them relevant. These are the introduction of school vouchers, documentation of the role of government in inflation, and the integration of economic freedom with political and cultural freedom.

Stephen Moore continues his praise of Friedman “as an influential voice for global economic freedom,” “the savior of capitalism,” an opponent of central planning, and the “apostle of free market.” Basing on the study of Andrei Schleifer of Harvard, he ascribes to Friedman as the one who opens the door to the 25 years of prosperity; referring to the era from 1980 to 2005 as “the Age of Milton Friedman.” Nick Gillespie voiced out such confidence earlier than Moore that in his July 28 article last year, he claimed that the Friedman’s century is just starting; it’s far from being over. Speaking of such an era, Moore describes it as a time of “remarkable progress” for humanity resulting from the implementation of free market ideas. He further describes that Friedman’s influence result to growth in living standards, improvement of life expectancy, educational attainment, and democracy. And above all, “absolute poverty declined” resulting to the liberation of over 200 million people from poverty.

Michael Walter confirms the widespread influence of Milton Friedman especially to Canadian economy due to his monetary policy of “flexible exchange rates.” He laments that the countries of European Union failed to listen to the wisdom of Friedman and that is why they are now sinking into financial pit. In line with economic policy to offer solution to global economic crisis, the Economist article posted July 28 this year claims that if Milton Friedman would be alive at present, his answer would be “deregulation.”

Daniel J. Flynn also mentions the “flexible exchange rates” and “school vouchers” among the contributions of Milton Friedman. Furthermore, he adds among Friedman’s significant contributions are putting “an end to wage-and-price controls,” “legalizing private gold ownership,” and reducing tax.

It appears to me that among the admirers of Milton Friedman, Flynn refutes the arguments of those who deny the economic impact of Friedman’s “free market ideas” describing the man as “real world economist,” “pragmatic libertarian,” and “a product of the concrete jungle.” As such, Friedman refused to isolate himself into some economic “idealist’s fantasy land.” His realism explains his inconsistency.

Milton Friedman’s Failure and Harm Done to Free Market Economy

Both Gary North and Murray Rothbard refused to accept Milton Friedman as member of libertarian camp. They exposed his real economic position. Both of them agree that even though in appearance Milton Friedman opposed Keynesian economics, but in reality, he still remains a Keynesian economist.

Gary North gave a detailed analysis of Friedman’s position. I just want to mention two. First, North identifies Friedman as a disciple of Irving Fisher, an advocate of “central bank-based fiat money economy.” In the eyes of Friedman, Fisher is “the greatest American economist.” However, according to North, Ludwig von Mises sees Fisher’s fiat money economics differently; it is a threat to liberty. As a faithful follower of Fisher, Friedman agrees that minimal inflation is acceptable. Second, Friedman’s followers welcome his 1971 book, A Monetary History of the United States as a masterpiece. But for North, the book did more harm than anything that Friedman wrote.

Among the ten articles that I used as my source, I find Murray Rothbard’s the most difficult and most penetrating to the real economic position of Milton Friedman. His article was written in 1971. For Rothbard, he finds it unacceptable to consider Friedman a convert from the “New Deal” to libertarianism. Instead an appropriate description of Friedman would be the statist version of “free market” and “libertarianism.” This serves as a reasonable explanation why Friedman was a favorite of the Establishment.

Except from the fallacy of Friedman’s ideas about the stability of money and uncritical acceptance of central banking as given, his concept of macro-statism as basic framework required for the existence of micro free market is also erroneous. As far as Rothbard is concerned, the macro and micro economics are inseparable. Friedman was attempting to synthesize two irreconcilable economic theories. If you retain macro economics as separate from micro economics, in time you will see the termination of free-market activity.

Personally, I think Milton Friedman gave free-market a bad name in the eyes of the public. Knowingly or unknowingly, instead of championing free market, he actually promotes statism at the expense of free market. We hope that by July 31, 2013, as the world will celebrate Milton Friedman’s 101st birthday, we will see economists giving him honor not as the savior of capitalism and champion of free market, but a hero of a new form of Keynesianism. And I think that would be honest.

In closing, let us listen to Murray Rothbard’s warning:

The libertarian movement has coasted far too long on the intellectually lazy path of failing to make distinctions, or failing to discriminate, of failing to make a rigorous search to distinguish truth from error in the views of those who claim to be its members or allies. It is almost as if any passing joker who mumbles a few words about “freedom” is automatically clasped to our bosom as a member of the one, big, libertarian family. As our movement grows in influence, we can no longer afford the luxury of this intellectual sloth. It is high time to identify Milton Friedman for what he really is. It is high time to call a spade a spade, and a statist a statist.