Milton Friedman on social democracy

Milton Friedman has a piece in today’s Fin and also[1] in the Oz making the point that, even though many fewer people nowadays professes belief in socialism than did so in 1945, the general movement of policy since the end of World War II has been in a socialist direction, that is towards an expansion in the share of GDP allocated to the public sector. He draws a distinction between ‘welfare’ and the traditional socialist belief in public ownership of the means of production, seeing the former growing at the expense of the latter.

From a social-democratic perspective, I’d put things differently. There are large sectors of the economy where competitive markets either can’t be sustained or don’t perform adequately in the absence of government intervention. These include human services like health and education, social insurance against unemployment and old age, production of public goods and information, and a range of infrastructure services. In all these sectors, governments are bound to get involved. Sometimes, the best model is private production with public regulation and funding, and sometimes it is public ownership and production. The result is a mixed economy.

Over time, the parts of the economy where competitive market provision is problematic have grown in relative importance. By contrast, agriculture, the archetypal competitive industry, has declined in relative importance as have mining and manufacturing, areas where governments have usually performed poorly.

The result is that the ideological swing towards neoliberalism has done little more than slow a structural shift towards a larger role for government.

fn1. Thanks to Jack Strocchi for locating this

7 thoughts on “Milton Friedman on social democracy

  1. wonderful to have comments back again!

    I’ve been wanting to post on this one, because coincidentally with reading the Friedman article I was finishing off marking assignments for my course in government finances where one of the questions I had set was “what are some of the explanations for growth in the size of government in OECD countries over the past 30 years? which do you find most convincing”. What surprised me about the Friedman piece was its limited historical span. Government has been growing at a more or less steady pace for virtually the entire period we have had a modern mixed economy and statistics to measure it. The Reagan years he cites only look like they slow the trend in the USA if taken over a short time period – if you draw a 100 year graph the public sector share of GDP is virtually a straight diagonal upwards. It’s a long term trend in most OECD economies. Other economies are harder to asses, because you have to take account of the breakup of the soviet union, those developing countries that remain effectively feudal systems that vest the assets of the State in the ruler, those where there are no reliable statistics etc. but for the sorts of economies we are most familiar with, growth in the public sector is the rule.

    why? I’d fundamentally disagree with Friedman’s “socialism” thesis. you can go back to 1883 to find Wagner’s law (in brief, rising social progress and incomes will lead to expanding government to ensure stability, protection and social welfare); one of my students made a strong case for Boix’s argument that there is a direct relationship between increased trade and size of government in democratic regimes; you can argue that the wealthier a society, the greater its propensity to invest in merit goods (which is a lot like the JQ argument above). Or from a rightwards perspective you could see the growing leviathan of government being a consipiracy between self interested politicians and bureaucrats (see eg Buchanan) that existing political institutions are powerless to control.

    my own view is that there is still a wide range of public goods that government is better placed to provide. This is not always a question of efficiency but one of trust (for example, private policing is entirely feasible in theory but I’d argue that in practice most societies would want policing to be a public function even if a more efficient police force could be set up via a competitive tender). The makeup of the basket of those goods has changed along with changes in society, but as incomes rise we seem to demand more of them, not fewer.

  2. “This is not always a question of efficiency but one of trust”

    This is why I have always been uneasy about private prisons, even when they are better run that public prisons (which wouldn’t be hard). There is something not quite right about private organisations that deprive people of their liberty, and use force to enforce that deprivation, even when those organisations are acting as agents of the state.

  3. The problem with the social democrat “we need government intervention” approach is that the hunger grows with what it feeds on. With the right instutional changes, not mere privatise and be damned to it, the need declines; there are theoretical approaches that allow a transition towards distributism, say, which eliminate both government intervention and the need for it.

    To sum up, government intervention is only necessary to the extent that government intervention has broken things already (even though it is simplistic and unhelpful just to drop everything, thinking that blowing out the match will put out the fire). The social democrat mindset is defective in several ways, one of which is the inherent tendency to tune out the possibility of actually eliminating needs, taking it for granted that this is a priori impossible (whereas the impracticality of distributism today is a mere circumstance, and does not extend to all possibilities of improvement today).

    A more serious defect of social democracy is the idea that jump-or-be-pushed confers legitimacy through the number of people who “voluntarily” embrace it. But they are only doing it faute de mieux because of the jump-or-be-pushed thing. There is this much validity to the right wing “Leviathan” objection to government growth, only I would put it down to tunnel vision rather than deliberate policy. As they say, never blame conspiracy when a cock up will do.

    The spurious justification for social democracy rests on the flimsy idea that democracy trumps liberty, but it can only ever do that as a lesser evil and not a true justification, which doesn’t apply when the need can be engineered out. One might as well say that Munich was a voluntary arrangement.

    On the matter of police efficiency, space does not permit me to go into detail. However, the crucial issue is to have policing that is effective but not efficient. History shows that the “best” policing arises from this model, and foolish bureaucrats tend to tune out the reasons for it and make it efficient. They confuse good-as-efficient with good-as-desirable, the engineering and ethical ambiguity of our language (consider the statement “Eichmann was a good Jew killer”).

  4. John,

    In all these sectors, governments are bound to get involved. Sometimes, the best model is private production with public regulation and funding, and sometimes it is public ownership and production. The result is a mixed economy

    Albert Scheer would be proud of you.

  5. Below a letter sent to the AFR (but not published) re the Friedman piece, reproduced from Friedman’s ideological home base, the Hoover Institution.

    ‘Milton Friedman (AFR Opinion, 15 December) warns of the dangers of ‘collectivism’ and ‘socialism’ in the United States.

    ‘In Milton and Rose Friedman’s overblown Free to Choose, They claim that ‘the Socialist Party was the most influential political party in the United States in the first decades of the twentieth century. … in the course of time both major [Democrat and Republican] parties adopted the position of the Socialist party’.

    ‘Freidman has no conceptual apparatus to understand the nature of the state in an imperial capitalist society. Is a $420 billion military budget collectivist and socialist?

    ‘Friedman is a fool. Giving him publicity makes him a dangerous fool.’

    If the free marketeers want a genuine government free economy and society, then it’s back to a pre-industrial self-help small scale communitarian model. Shades of Proudhon. No corporate entities (and their lavish funding of free market think tanks) in sight.

  6. Social democracy an inevitability?
    John Quiggin has a post on an article by Milton Friedman that discusses the demise of socialism in recent decades, and a similar increase in “welfare” spending (the article is for subscribers, so I have to take his word for…

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