IEA Blog

In the early 1960s, Chicago economist Milton Friedman travelled to Hong Kong to meet Sir John Cowperthwaite, the colony’s Financial Secretary. The economic development of Hong Kong had aroused Friedman’s curiosity, but, to his surprise, he was unable to get hold of any detailed economic statistics. So he asked Sir John about the peculiar lack of data. Cowperthwaite, a classical liberal economist, explained that he deliberately refrained from having detailed economic data gathered. He argued the bureaucrats of the colonial administration should not even be tempted to intervene in the economy.

Cowperthwaite’s approach may appear a bit eccentric, but it seems it was not to Hong Kong’s detriment. According to estimates, the city’s income per capita has increased tenfold in real terms over the past half century. With that in mind, perhaps it is not the end of the world if Switzerland does not produce official poverty statistics…

Click here to read the rest of the article.

Proposals to adopt Swedish-style education reforms, put forward by the Conservative Party and others, have recently come under fire from research by the Centre for Economic Performance (CEP). Proponents of the model have argued that allowing parents and civil society actors to set up their own schools will improve educational standards by injecting competition into a sclerotic system. It would also increase diversity in the educational sector and empower parents.

Yet the CEP research has been quoted as evidence that the policy “won’t make any difference” in the UK, or that it “will not work“. According to the CEP authors, the comparison is flawed because Sweden started from a position of zero choice, while in the UK, “there is already much school choice and a diversity of provision”. They also argue that the proposal is expensive because new schools require large capital outlays. In short, going the Swedish way would cost a lot of money and bring little if any improvement. The authors propose reforms within the present top-down system instead, such as improving teachers’ qualifications.

Sweden is a pretty country that everybody likes. To people who have grown up with Astrid Lindgren books, “learning from Sweden” sounds nicer than “learning from Milton Friedman”. Nevertheless, the specific Swedish model is merely a third-best or fourth-best proxy for free school choice and a market for educational services. In this sense, the authors’ criticism misses the point.

The good thing about the Swedish model is that the money follows the pupil, which makes it similar to a voucher system. But as the CEP-authors themselves point out, while the Swedish state is willing to fund new independent schools, it is not willing to let failing public schools go bust. This is reminiscent of the debate about hospital competition in Bismarckian healthcare systems: opponents argue that it will not have much effect because municipalities will never let their hospitals fail, regardless of how poorly they perform.

They are probably right. But this is not an argument for not even starting with a choice agenda. It is an argument for making a real job of it. When adopting a choice model, public funding should come exclusively from vouchers or their equivalent, through the hands of parents. Selective subsidies to a politically favoured institution should be made illegal.

I once saw a strange movie about a woman who made up a fictitious son and convinced everyone in her village that he existed. She tells anecdotes about him all the time, so vividly that in the minds of those around her, he becomes ‘alive’. They totally forget that they have never actually seen this child.

Sounds unrealistic? Not really. As an undergraduate student, I experienced something similar, and on a much larger scale. At university there was constant talk of ‘the neoliberals’. ‘The neoliberals’ were not just economic liberals. They were people who wanted to replace all social relations by commercial ones, and subordinate each and every aspect of life to the profit motive. You never saw these people, of course. But they were the subject of countless conversations, workshops, panel discussions, demonstrations, books, articles, leaflets and graffiti. Clearly, you did not need to meet one of them in person to know that they must be everywhere.

Until today, I have never met a single person who holds views remotely similar to the ones that people in my area ascribed to ‘the neoliberals’. It is fascinating how much anger and indignation was directed against positions which nobody holds.

But what, then, is neoliberalism? Naomi Klein’s wide definition doesn’t leave us any wiser:

“the ideology is a shape-shifter, forever changing its name and switching identities. Friedman called himself a ‘liberal,’ but his U.S. followers [...] tended to identify as ‘conservatives,’ ‘classical economists,’ ‘free marketers’ and, later, as believers in ‘Reaganomics’ or ‘laissez-faire.’ In most of the world, their orthodoxy is known as ‘neo-liberalism,’ but it is often called ‘free trade’ or simply ‘globalization’. “

Originally, the term ‘neoliberalism’ referred to a German school of economic thought, more commonly known as ‘ordoliberalism’. Neoliberals like Walter Eucken and Wilhelm Röpke differed from classical liberals in so far as they wanted to give the state wide remits in competition policy. Classical liberals would criticise neoliberals for an exaggerated faith in cartel authorities. They would appreciate the neoliberals’ sound critique of state interventionism, but would ask why they exempted activist competition policies from this.

So curiously, within the liberal family, the neoliberals were not an ‘extremist fringe’. They would actually cede wider competences to the state than many of their intellectual relatives.

All of us who knew Milton Friedman can attest to the importance of Rose in so many ways it is hard to list. From an IEA perspective I recall the Friedmans living in 1750 Taylor Street, San Francisco, the very same building as IEA founder the late Sir Antony Fisher and his second wife Dorian.

The Fishers back then in the 1980s had a magnificent apartment overlooking the Bay from say the 18th floor or thereabouts. Milton often borrowed it for media filming and it was there that many of the young scholars and intellectuals visiting Antony to get his advice on how to start an IEA would have met Rose and Milton – and what a buzz that gave them.

I also recall standing down in the lobby of that same building talking with the doorman. Across the courtyard I could see a very big American car with a number plate MV PT, the classic monetary equation. I turned to the doorman and said “That must be Professor Friedman’s car!” “How on earth did you guess?” he replied.

Read about the life and achievements of Rose Friedman here.

There is a strange post on Guido’s blog suggesting that even the IEA is advocating quantitative easing (QE). He says that he reached this conclusion after ringing round the “centre-right” think tanks. It is a pity that he did not speak to the Editorial and Programme Director because, if he had done so, he might have understood the issue better.  

Firstly, the IEA has no corporate view and different IEA authors will take different views regarding such a technical issue - though it is certainly true that the SMPC generally supports some element of QE.  

Secondly, because QE is essentially a technical issue and the IEA really aims to address issues of principle, we have taken the decision not just to commission and publish new work on monetary control and so on but also to reissue old works such as Larry White’s Free Banking in Britain and Hayek’s Denationalisation of Money, which are flying off the website like hot cakes.  

Thirdly, though not all IEA authors believe in the denationalisation of money (Tim Congdon does not for example), many do. Meanwhile, the currency is nationalised and it looks likely that it will be for a few years yet. Decisions have to be taken now as to how monetary policy is managed within the current framework. The view of the SMPC is that the Bank of England should take QE measures to the extent necessary to stop the decline in adjusted, real broad money. Why do they believe that? Because the committee is broadly (though not totally) monetarist and they accept the lessons of Milton Friedman (whom Guido mentions) that the Great Depression was so much worse in the USA as a result of the money supply there being allowed to fall rapidly at the beginning of the 1930s. If QE goes beyond this point it will be a mistaken policy and will also be potentially very dangerous.  

There is much to be admired in Guido’s website but he really should (a) take the time to see the range of what the IEA is actually doing (he only has to look at our website) (b) understand QE in the context of the SMPC’s view on the necessity for monetary control and (c) understand that Friedman’s views on such issues were completely different from those of Hayek. In 1976 both monetarist and free-banking arguments were being aired by the IEA and that is still the case in 2009.

Monetary policy has long divided people who believe in free markets as the views expressed on this blog demonstrate. Hayek and Friedman, whom Guido lumps together, never spoke to each other about the subject. If Hayek is turning in his grave, as Guido suggests, Friedman will be cheering – and vice versa.