A Highly Mathematical Model Endorses Friedman’s View that Feds Directed Economics toward Highly Mathematical Models

(p. 1138) . . . , in many areas, the existing organization of research is characterized by large research institutions staffed with hundreds of
researchers and national funding agencies who set the research agenda for the field. Given the size of such institutions, if they decide to launch a new research program, then the critical mass of scholars can be reached with certainty, and individual researchers need not fear the coordination risk. Researchers should thus choose to work on that research topic, provided that they perceive an expected reward that is larger than s. (p. 1139) Unfortunately, if the large institution selects a poor idea (with a small or even negative θ), it would then be responsible for the emergence of a strand of research with modest scientific value. As an example, Diamond (1996) recalls Milton Friedman’s criticism of the U.S. National Science Foundation, which, in his opinion, has directed the economics profession toward a highly mathematical model.12
. . .
12. Ironically, his opinion is endorsed in this paper by a “highly mathematical model.”

Source:
Besancenot, Damien, and Radu Vranceanu. “Fear of Novelty: A Model of Scientific Discovery with Strategic Uncertainty.” Economic Inquiry 53, no. 2 (April 2015): 1132-39.
(Note: ellipses added; italics in original.)

The 1996 Diamond article mentioned above, is:
Diamond, Arthur M., Jr. “The Economics of Science.” Knowledge and Policy 9, nos. 2/3 (Summer/Fall 1996): 6-49.

Nader Enlists Mises, Hayek, Friedman and Stigler in Critique of Crony Capitalism

(p. A9) Mr. Nader, the consumer crusader who ran for president to the left of Al Gore, is perhaps the last person one would expect to admire a libertarian critique of the corporate state. But in “Unstoppable” he respectfully describes the views of Ludwig Von Mises, Friedrich von Hayek, Milton Friedman, George Stigler and other free-market economists. He praises their distrust of politicians, lobbyists and businessmen who seek to put government power in the service of corporate profit.
Not that the Republican Party is always guided by such thinkers. Mr. Nader neatly describes how corporatist RINOs (Republican In Name Only) co-opt the party’s anti-statist crusaders. “The corporatist Republicans,” he writes, “let the libertarians and conservatives have the paper platforms . . . and then move into office, where they are quick to throw out a welcome mat for Big Business lobbyists with their slush funds.” He cites Adam Smith’s suspicion of regulations that benefit special interests: “Such restraints favor the privileged interests that want to entrench their economic advantages through the force of law.”
These are profound observations and ones that I saw play out while editing the Americas column for this newspaper in the 1980s and ’90s. Mercantilist Latin American businessmen who claimed to cheer market forces often thrived only because of their contacts in government. They reached out to the Journal’s editorial page as allies but were more socialist in practice than some of their left-wing enemies. Little did I suspect that a similar form of mercantilism, or corporate statism, would take root in the U.S. It is a pleasure to see Mr. Nader doing battle against such cozy arrangements.

For the full review, see:
DAVID ASMAN. “BOOKSHELF; Let’s Make a Deal; Ralph Nader’s latest crusade is against the convergence of big business and government power. Let’s hope he succeeds.” The Wall Street Journal (Fri., July 18, 2014): A9.
(Note: ellipsis in original.)
(Note: the online version of the review has the date July 17, 2014, and has the title “BOOKSHELF; Book Review: ‘Unstoppable’ by Ralph Nader; Ralph Nader’s latest crusade is against the convergence of big business and government power. Let’s hope he succeeds.”)

Book under review:
Nader, Ralph. Unstoppable: The Emerging Left-Right Alliance to Dismantle the Corporate State. New York: Nation Books, 2014.

June 16th Is Liberalism Day

In the old days a “liberal” was someone who believed in freedom, including free markets and minimal government. Milton Friedman defended “liberal” in its original sense in his article “Liberalism, Old Style.”
At some point the left hijacked the word, at least in the United States. (I understand that in much of the rest of the world “liberal” still retains more of its original meaning.)
Maybe there’s some defensible justification for hijacking a word, but most of the time it seems like a dishonest and cowardly way to win an argument by muddying up the debate.
Dan Klein and Kevin Frei are trying to reclaim the word “liberal” from the pirates of the left. As part of their effort, they have proclaimed June 16th to be “Liberalism Day.”
I believe their cause is just, but I am not sure it is efficient. Time and effort are scarce, so we must pick our battles.
On the other hand, the meaning of “libertarian” has narrowed over recent decades. It used to be that most libertarians believed in minimal government; increasingly more libertarians endorse anarchism. It used to be that most libertarians believed in national defense; increasingly more libertarians endorse total isolationism.
I do believe in some minimal night-watchman state, and I do believe that sometimes there is evil in the world that must be fought. So maybe I should start calling myself a “liberal” in the original sense, what Friedman called a “classical liberal”?

#LiberalismDay

Samuelson Disputed Nephew Summers’ Praise for Milton Friedman

(p. A4) [Uncle Paul Samuelson and nephew Larry Summers] clashed over the fate of struggling mortgage giants Fannie Mae and Freddie Mac, which were bolstered by a government backstop in July 2008 and later taken over completely by the U.S. Treasury.
Mr. Samuelson found “strange and harmful” his nephew’s skepticism about the government backstop for the firms. Mr. Summers, a longtime critic of the two firms, wrote back that shareholders and management of Fannie and Freddie didn’t deserve taxpayer support.
Friction had emerged earlier in 2006, when Mr. Summers praised the late Mr. Friedman in a New York Times column. Friedman was “the most influential economist” of the second half of the 20th century, Mr. Summers said.
“For your eyes only,” Mr. Samuelson wrote to his nephew of Mr. Friedman, “I had to grade him low as a macro economist” and “stubbornly old fashioned.”

For the full story, see:
JON HILSENRATH. “A Close Bond and a Shared Love for ‘Dismal Science’; Correspondence Between Famously Brash Summers and His Uncle, a Nobel Economist, Reveals Flashes of Humility and Tenderness.” The Wall Street Journal (Sat., September 14, 2013): A4.
(Note: bracketed words added.)
(Note: the online version of the story was updated on September 15, 2013 and has the title “Letters Show Little-Known Side of Summers; Correspondence With Uncle, a Nobel Economist, Reveals Flashes of Humility and Tenderness.”)

A Firm’s Social Responsibility Is to Make a Profit

(p. B1) Milton Friedman, the Nobel laureate economist, blasted the very idea of corporate social responsibility four decades ago, calling it a “fundamentally subversive doctrine.” Speaking for many capitalists then and now, he said, “there is one and only one social responsibility of business–to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game.”
Companies shouldn’t spend profits on unrelated job creation or social causes, he said. That money should go to shareholders–the owners of the companies. Pronouncements about corporate social responsibility, he added, are the indulgence of “pontificating executives” who are “incredibly shortsighted and muddleheaded in matters that are outside their businesses.” And that indulgence can lead to inefficient markets.
. . .
(p. B2) “Jobs are an input, not an output; they’re a cost of doing business, not a goal of doing business,” says William Frezza, a Boston-based venture capitalist and fellow at the Competitive Enterprise Institute.
“From the perspective of defending capitalism, if you accept the premise of your opponent that business has to give back to society, you’ve already lost,” he says. “To put sack cloth and ashes on–you’ve delegitimized capitalism, which is the goal of the protesters. Businesses give back to society every day by pleasing their customers and employing their employees. There’s nothing business owes other than selling the best product at the best price.”

For the full commentary, see:
JOHN BUSSEY. “THE BUSINESS; Are Companies Responsible for Creating Jobs?.” The Wall Street Journal (Fri., October 28, 2011): B1-B2.
(Note: ellipsis added.)

Diversity of Sources of What We Consume in a Free Market

Matt Ridley’s wonderful riff below reminds one of Leonard Read’s classic essay “I, Pencil,” made even more famous by Milton Friedman’s rendition of it.

(p. 35) As I write this, it is nine o’clock in the morning. In the two hours since I got out of bed I have showered in water heated by North Sea gas, shaved using an American razor running on electricity made from British coal, eaten a slice of bread made from French wheat, spread with New Zealand butter and Spanish marmalade, then brewed a cup of tea using leaves grown in Sri Lanka, dressed myself in clothes of Indian cotton and Australian wool, with shoes of Chinese leather and Malaysian rubber, and read a newspaper made from Finnish wood pulp and Chinese ink. I am now sitting at a desk typing on a Thai plastic keyboard (which perhaps began life in an Arab oil well) in order to move electrons through a Korean silicon chip and some wires of Chilean copper to display text on a computer designed and manufactured by an American firm. I have consumed goods and services from dozens of countries already this morning. Actually, I am guessing at the nationalities of some of these items, because it is almost impossible to define some of them as coming from any country, so diverse are their sources.

Source:
Ridley, Matt. The Rational Optimist: How Prosperity Evolves. New York: Harper, 2010.

Manuel “Muso” Ayau, RIP

AyauManual2010-10-23.jpg

Manuel “Muso” Ayau. Source of image: online version of the WSJ article quoted and cited below.

(p. A21) Lago Amatitlán, Guatemala

High on a hill overlooking this picturesque volcanic lake, Manuel “Muso” Ayau–arguably Latin America’s most influential champion of liberty in the second half of the 20th century–was laid to rest last month.
. . .
Ayau and his colleagues read voraciously and debated vociferously. “All of us were self-taught in these subjects, which would come to absorb much of our time,” he recalled. Over the next half century CEES would publish over 900 pamphlets in defense of the market. Ayau’s many contributions (98) had titles like “On the Morality of Government,” “Planning: Rational or Absurd,” and “Robinson and Friday Invent the Common Market.” In October 1978 he wrote an essay in a CEES pamphlet called “Price Controls,” while Milton Friedman penned “In Defense of Dumping” in the same publication.
Those pamphlets went all over the region. Peruvian Enrique Ghersi, one of the co-authors of the 1986 best-seller “The Other Path,” says that one called “Ten Lessons for Underdevelopment” was “key to awakening in me the vocation and commitment to defend liberty.” CEES brought to Guatemala such intellectual giants as Ludwig von Mises (1964), Friedrich Hayek (1965) and Ludwig Erhard (1968).

For the full commentary, see:
MARY ANASTASIA O’GRADY. “Manuel Ayau: Champion of Liberty; He opened Latin America’s eyes to the true source of prosperity.” The Wall Street Journal (Mon., SEPTEMBER 20, 2010): A21.
(Note: italics in original; ellipsis added.)
(Note: the online version of the article is dated SEPTEMBER 19, 2010.)

IMG_2452-2.JPGOn the left is a photo autographed by Ayau and Hayek. On the right is a bust of Hayek. Source of photo: taken by Art Diamond on April 4, 2009 at the APEE meetings held at Francisco Marroquín University (UFM) in Guatemala City.

Becker Believes the Fight for Liberty Can Be Won

(p. A13) My last question involves a little story. Not long before Milton Friedman’s death in 2006, I tell Mr. Becker, I had a conversation with Friedman. He had just reviewed the growth of spending that was then taking place under the Bush administration, and he was not happy. After a pause during the Reagan years, Friedman had explained, government spending had once again begun to rise. “The challenge for my generation,” Friedman had told me, “was to provide an intellectual defense of liberty.” Then Friedman had looked at me. “The challenge for your generation is to keep it.”

What was the prospect, I asked Mr. Becker, that this generation would indeed keep its liberty? “It could go either way,” he replies. “Milton was right about that.”
Mr. Becker recites some figures. For years, federal spending remained level at about 20% of GDP. Now federal spending has risen to 25% of GDP. On current projections, federal spending would soon rise to 28%. “That concerns me,” Mr. Becker says. “It concerns me a great deal.
“But when Milton was starting out,” he continues, “people really believed a state-run economy was the most efficient way of promoting growth. Today nobody believes that, except maybe in North Korea. You go to China, India, Brazil, Argentina, Mexico, even Western Europe. Most of the economists under 50 have a free-market orientation. Now, there are differences of emphasis and opinion among them. But they’re oriented toward the markets. That’s a very, very important intellectual victory. Will this victory have an effect on policy? Yes. It already has. And in years to come, I believe it will have an even greater impact.”
The sky outside his window has begun to darken. Mr. Becker stands, places some papers into his briefcase, then puts on a tweed jacket and cap. “When I think of my children and grandchildren,” he says, “yes, they’ll have to fight. Liberty can’t be had on the cheap. But it’s not a hopeless fight. It’s not a hopeless fight by any means. I remain basically an optimist.”

For the full interview, see:
PETER ROBINSON. “‘Basically an Optimist’–Still; The Nobel economist says the health-care bill will cause serious damage, but that the American people can be trusted to vote for limited government in November.” The Wall Street Journal (Sat., March 27, 2010): A13.
(Note: the online version of the interview is dated March 26, 2010.)

Housing Crumbles Under Portugal’s Rent Control Laws

Stigler and Friedman’s only co-authored paper showed the flaws in rent controls. Although excellent, the paper apparently is seldom read in Portugal (or New York City).

(p. B3) LISBON — José Gago da Graça owns a Portuguese real estate company and has two identical apartments in the same building in the heart of Lisbon. One rents for €2,750 a month, the other for almost 40 times less, €75.

The discrepancy is a result of 100-year-old tenancy rules, which have frozen the rent of hundreds of thousands of tenants and protected them against eviction in Portugal. Mr. Gago da Graça has been in a lawsuit for a decade over the €75-a-month apartment, since his tenant died in 2000 and her son took over and refused to alter his mother’s contract, which dates to the 1960s.
“We’re the only country in Europe that doesn’t have a free housing market and that’s just amazing,” Mr. Gago da Graça said.
Rules like these, which economists also blame for contributing to Portugal’s private debt load, help explain why this nation of 11 million has followed Greece and Spain into investors’ line of fire.
. . .
The . . . rules helped protect tenants, but also led to a chronic shortage of rental housing. This, in turn, persuaded a new generation of Portuguese to tap recently into low interest rates and buy instead — often in new suburbs — thereby exacerbating the country’s mortgage debt and leaving Portugal with one of Europe’s lowest savings rates, of 7.5 percent.
“This system of controlled rents is a major problem for the Portuguese economy, but we will probably be waiting for a generational change to have room for institutional reform,” said Cristina Casalinho, chief economist of Banco BPI, a Portuguese bank. Beyond fueling housing credit, she added, the system “basically stops flexibility and mobility in the labor market because you can perhaps find a new job in another city but it will then be very difficult to rent a house there.”
. . .
“Nobody has had the political courage to change something like these rental laws and I don’t see the situation changing in the short term, even if I don’t think the Portuguese tend to react as dramatically as the Greeks,” said Salvador Posser, who runs a family-owned company renting out construction equipment.
Besides distorting pricing in the housing market, the tenancy rules have left physical scars. Portugal’s historic city centers are dotted with abandoned and crumbling houses that are either subject to a court dispute or have rental income that cannot cover repair and maintenance costs.
“This economic crisis is clearly keeping our very slow courts even more occupied because of the amount of conflict that it is creating between landlords and tenants,” said Menezes Leitão, a law professor and president of PLA, a property owners association.
Mr. Posser cited a recent estimate that 8 percent of the buildings in central Lisbon were deserted, in large part because of rent-related obstacles. In Porto, the second-largest city, less than 10 percent of inner-city housing is available for rent, which has helped shrink the population by a third over three decades.
“We’re still losing about 30 inhabitants a day,” said Rui Moreira, president of the Porto Commercial Association.

For the full story, see:
RAPHAEL MINDER. “Like Spain, Portugal Hopes to Make Cuts, but It Is Mired in Structural Weakness.” The New York Times (Fri., May 14, 2010): B3.
(Note: the online version of the article is dated May 13, 2010 and has the title “Portugal Follows Spain on Austerity Cuts.”)
(Note: ellipses added.)

The original source of the Friedman and Stigler article (in pamphlet form) was:
Friedman, Milton, and George J. Stigler. Roofs or Ceilings? The Current Housing Problem. Irvington-on-Hudson, New York: Foundation for Economic Education, 1946.

School Choice “Lifts the Performance of Public-School Students”

(p. A15) There is . . . clear evidence that many private schools outperform public schools academically. The first children to enter the Washington, D.C., voucher program, for example, now read more than two grade levels above students who applied for the program but didn’t win the voucher lottery.

Researchers from Northwestern University will soon release a study on how competition from Florida’s education tax-credit program is impacting the performance of children who remain in public schools. The preliminary evidence is that school choice lifts the performance of public-school students significantly.
Florida’s scholarship program appears to be the first statewide private school choice program to reach a critical mass of funding, functionality and political support. As an ever increasing number of students in Florida take advantage of the scholarship program, other states will find it hard to resist enacting broad-based school choice.

For the full commentary, see:
ADAM B. SCHAEFFER. “Florida’s Unheralded School Revolution; A scholarship program could produce a new era of choice.” The Wall Street Journal (Fri., APRIL 30, 2010): A15.
(Note: ellipsis added.)