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NOTE 07. The Political Economy of the Chicago School: Libertarian or Jacobin? (video)

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Good morning and welcome to the lecture on the Chicago School, Libertarian or Jacobin.

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Actually, the full title is The Political Economy of the Chicago School, Libertarian or Jacobin.

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Well, I don't think it surprised anyone yesterday that there were fascist tendencies and implications in Keynes' political economy.

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But it is surprising that these implications exist, and it's more than actually implications, exist in the major figures of the Chicago School of Economics, which is known as the leading free market school of thought in the post-World War II era.

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But, where Keynes was an avowed elitist, the Chicago School, and especially its founder, Frank Knight, was a radical egalitarian, and actually was a follower of Rousseau. He used the term quite often, General Will, or Volonté General.

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And this is where the Jacobin connection comes in.

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It might be surprising to see the term Jacobin in the title.

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As I'll point out in a moment, Jacobins at least pay lip service to a free market,

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but in the same way that neocons today pay lip service to a free market.

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But their political economy, their overall political economy,

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certainly undermined what we would all think as a free market.

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So who are the Jackamins?

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Very briefly, they were really a network of clubs that were formed before the French Revolution.

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Their main inspiration was the egalitarian and utopian philosopher Jean-Jacques Rousseau.

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During the Revolution, the most prominent orator and ideologue was Maximilien Robespierre, he of the guillotine.

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The movement evolved and derived its name from a club that met at a Jacobin convent in Paris.

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The clubs were a school, debating society, political organization and church, all rolled into one.

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The Jacobins came to power for two years in revolutionary France and ruled from 1792 to 1794.

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And they ruled with the guillotine.

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And as someone mentioned to me yesterday, they also baked people in ovens alive.

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The Nazis simply used the ovens to get rid of the bodies of the people that they murdered.

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Let me just run down very briefly Jacobin's beliefs.

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They believed in mass democracy as Rousseau's general will.

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Mass democracy would lead to an expression of the general will.

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They believed in politics as the only means of implementing certain absolute and universal moral principles.

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They had a murderous, literally murderous hatred of traditional western society, especially its naturally evolved morality, religious institutions and elites.

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So they hated aristocrats, they hated the ecclesiastical hierarchy, and they hated various elements of bourgeois morality.

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There was also a rejection among the Jacobins of the pre-revolutionary view of the nation

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as comprising property owners who had diverse interests and were sharing the same homeland.

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And they wanted to replace that view with one of an abstract nation.

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Now we've heard that before from the neocons that the US is some sort of abstract universal

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nation.

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They wanted to replace it with one of an abstract nation composed of equal and homogeneous patriots

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or citizens.

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There's a great book on the French Revolution by Schama, and it's called just Citizens.

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And these patrons and citizens would have no independent existence outside the nation.

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Patriotism, quote, was no longer that exclusive love of the plot of land where we were born,

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but embrace the countries whose law embodied the general will, unquote, that quotes from

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Schama describing the Jacobins.

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They also had a suspicion, if not an outright hatred, of all mediating institutions between the citizen and the central government, including and especially the family.

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They had, as I said, a rhetorical belief in private property and free exchange, but this was contradicted by the emphasis on a society without barriers, as they called it,

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or sometimes used the term career open to the talents, which led to policies of what we would today call equal opportunity.

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This was designed to produce equality in the distribution of income and property.

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If everyone was a citizen equally incorporated in the general will,

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then for the Jacobins, they ought all to have equal material income and wealth.

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For the Jacobins, the struggle was for social equality,

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for Social Equality, and it went beyond the abolition of political aristocracies, monopolies and privileges, which was worthy.

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That was one of the initial calls made by the original French revolutionaries.

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But when the Jacobins took over, it went beyond that, to a demand for equality of property.

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Thus the Jacobin model of liberty, equality and fraternity.

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Interestingly, the communist revolutionary Leon Trotsky, later murdered by Stalin with an ice pick in Mexico, referred to Jacobinism as, quote,

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the highest degree of radicalism that bourgeois society can provide, unquote. So he liked the Jacobins.

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Finally, despite the strongly egalitarian rhetoric, the Jacobin leaders were profoundly elitist. Of course, that's always true.

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Someone had to possess the intuition and the virtue that was necessary to articulate and to implement the so-called general will.

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And of course, it was Roves-Pierre and the other Jacobin leaders who assumed the role of the incorruptible guardians of universal principles.

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And of course, they were willing to spread these principles, as the neocons are today, through military adventures, through invasions, to spread them beyond the borders of France.

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That is, until they all got their heads chopped off by the same guillotines used to murder thousands of opponents of the general will.

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Finally, and most distressing to the Jacobins, evidently, before and after they seized power, engaged in endless discussions, debates, speeches, as a method of discovering and conveying the general will.

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Well, this emphasis on discussion you're going to see in Knight, this whole idea that democracy is nothing really but an ongoing, open-ended discussion in which society comes to agreement again and again on what values are and how they should be implemented.

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Okay, so now we get to Frank Knight, who was originally a philosophy major, or actually

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a graduate in philosophy at Cornell, before shifting over to the study of economics.

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In fact, James Buchanan referred to the philosophical economics of Frank Knight.

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James Buchanan, the leader and founder of the public choice school, was a student of

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and he's an extreme Knightian and also in his work you'll find many Jacobin policies advocated.

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In any case, in an earlier article, Knight wanted to clarify the relationships between economics and ethics.

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And in this article he professed the belief in the, quote, the validity and necessity of real, non-scientific, transcendental ethics,

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which would account for, quote, the feeling element inherent in all belief

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and Whose Principles Will Be Available Through Sympathetic Interpretation Rather Than Intellectual Cognition

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Now, through all that gobbledygook, what Knight is saying is that ethics are intuitionist.

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They come from within. They don't come from looking at the real world and seeing how human beings naturally develop and flourish

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and what types of institutions they require for this development and flourishing.

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No, that's not the way ethical ideals were discovered.

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Robert, according to Knight, and I'm going to read a quote from him. He says that in

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the quest for values, minds work internally to an ideal world as subject matter. So you're

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looking within to find these ideal values. So he has intuitionist ethics. His intuitionist

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ethics was later developed by Knight into an argument that all social systems must ultimately

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What were these ideals, according to Knight, now where did he get this information from?

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From his own secret intuition, from his own gnosis, secret source of knowledge within.

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There were four ideal social values. Efficiency, freedom, justice, by which he meant equality

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or distributive justice, and the pursuit of interesting activities. He thought human beings

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were game players and they liked interesting games. The market economy was not an interesting

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game. That's one of the reasons why he didn't like it and I'll explain why.

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So Inaitzu then, the so-called liberal social philosophy he espouses, quote, does not pretend

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that existing economic conditions are just, but recognizes that justice can be approached

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but never attained, and freedom likewise, and any other social ideal in its ideal form.

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So you're always approaching these ideals.

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The question is, what political arrangements leads best to the approach toward these ideals?

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And then he goes on to say that this is logically entailed by the very concept of an ideal.

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Whether we construe it as a moral ought or as a desired goal of action.

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Because according to Knight, an ideal, and I'm quoting him now, is essentially a concept of limits in a mathematical sense.

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You can move toward it but never reach it.

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According to him once more, he says, ethical ideals have meaning only if what ought to be desired is more or less different from the actual desire.

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What does that mean? Someone desires to assault another person who doesn't like what he's saying.

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He ought not to desire that, but in fact he does desire that.

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What if your natural desire is not to assault the other person?

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Then is the ideal desire or the ideal ethic to punch another person that agrees with you?

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All right, well, you know, it's kind of fuzzy.

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He says, an actual goal or intention has meaning only if it isn't perfectly realized.

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Thus we face a paradox.

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It's very interesting.

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That perfectly economic behavior, which would reduce to a mechanical response to conditions, is not economic at all.

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So what he's saying here is, this is how the notion of perfect competition, in which there is no competition,

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No one cuts prices, no one improves quality, no one introduces new products.

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This is why perfect competition is held up as a standard for the market economy.

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The whole notion of perfect competition comes from Frank Knight.

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It doesn't come from Milton Friedman's positive economics.

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Milton Friedman says, well, we use perfect competition because the market economy operates as if it's in perfect competition.

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And therefore by using this model it allows us to generate hypotheses which are not falsified by tests.

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So this in some way, this idea of perfect competition is a radically empirical approach to economics.

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Well in fact it's not, it came out of Frank Knight's intuition.

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And Friedman tries to cover that up by developing later on the notion of positive economics.

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So he tries to cover up the radical non-imperialism of his mentor

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through the development, he and Stigler and Arthur Burns all developed this whole idea of positive economics.

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So out of this nonsensical idiosyncratic, intuitionist concept of an ideal, Knight hatched his crazy model of perfect competition,

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that unfortunately has infected mainstream economics since the 1930s.

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There are a few other points I want to make about Knight. First of all, he says the ideals of absolute ethics of intuitionism are never completely attainable in the real world

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Because we are dealing with ideals and not inquiring whether or in what respects the possibilities of the real world may be harmonious with our moral cravings.

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So that's where our notion of what an ideal is, our moral cravings, our internal cravings, just our feelings basically.

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He also says the human mind is never capable of fully and finally apprehending any absolute ideal.

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Why? Because the ideals themselves are progressively redefined as they are progressively realized.

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So as we reach these ideals, somehow we realize that we really haven't reached them.

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They're continually changing, yet they're absolute.

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To explain this, James Buchanan used the word relatively absolute absolutes.

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So as Murray Rothbard pointed out, muddled language and muddled thinking,

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Muddled language really is a cover for muddled thinking.

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Don't think because someone speaks in terms that you can't understand or you can't grasp,

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that it's for that reason profound.

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No, it's simply a reflection of muddled thinking.

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Another point he makes is this is especially true of truth itself that is continually changing.

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He contends, truth is an ideal, and I'm quoting him, which we must believe to give meaning to thought and life.

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It's going to give meaning to our thought and our life. We're always striving for truth.

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But there is no way of knowing if any particular belief is true.

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And every belief must be held subject to revision.

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Except the belief that there are better and worse reasons for believing.

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So try to figure that out.

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So the absolute is, we can tell that there are better reasons for believing and worse reasons for believing, but we really never know if those reasons are completely true.

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So ascertaining a proper balance to be struck, oh by the way let me mention one other thing here.

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So somehow Knight manages to combine a system of what he calls absolute ethics with an epistemology of skepticism.

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Ascertaining the proper balance to be struck among these absolute social ideals of efficiency,

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freedom, justice, and the pursuit of interesting activities remains forever beyond the capability

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of the individual intellect.

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So no one of us in particular can figure out what is the proper balance between these colliding

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and Conflicting Values, no human mind contemplating in isolation or pondering amid the individualistic

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exchange relationships of a politically-negativistic laissez-faire capitalism can grasp this.

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The proper balance can only be apprehended by what he forthrightly calls the group mind,

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which historically achieves its most perfect formation as the outcome of rigidly egalitarian

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political discussion, characteristic of what we today would call a democratic welfare state.

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So while the individual human mind is incapable of discovering a true and workable system

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of Social Ethics, the so-called group mind emerging from the social democratic politics

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is practically infallible. So this discussion is going to go on among all of us in this

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social democracy and we're going to come out with a proper balance. But once we reach

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that balance it's not really going to be completely the right balance as we're going to find out

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and we're going to have more discussion and we'll change the balance again and again and

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Now, let's apply this philosophy, such as it is, to a critique of laissez-faire capitalism, as he does.

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He says, in his critique of the real-world market economy, he focuses not only on its failings in attaining ideal efficiency,

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which he believes, since it doesn't live up to perfect competition, I don't have to go through much of that, it fails right off the bat.

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The market economy is a complete failure because it doesn't meet the ideal of efficiency that stems from Knight's intuition.

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But he also criticizes it very severely because of the inevitable conflict among the various social ideals entailed by its operation.

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It exacerbates these conflicts according to him, the market economy does, when the government doesn't attempt to intervene and ensure a better balance.

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The Group Mind can allow the economy to work, but it has to monitor, it has to channel the economic processes so that it doesn't exacerbate the inevitable conflict between values.

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He goes on to say that there's a deep-seated conflict between liberty and equality on the one hand and efficiency on the other.

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And also the intricate conflict of values in the market economy includes freedom with order, efficiency and progress,

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so freedom conflicts with order, efficiency and progress, and also interesting activity.

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But the main conflict is between freedom and justice. By justice, again, he means equality.

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Okay. Okay, let me just talk about this in a little bit more detail, his critique. He says that the assumptions of perfect competition define the concept of ideal efficiency and therefore also must serve as the premises of pure economics.

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So, the premise of his economic system, which is accepted by the later Chicago School, okay, comes out of ethics. It's hardly value for your positive, as Friedman says.

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It's some ideal, some otherworldly ideal that we should be moving the economy towards.

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Now, Friedman twists the whole thing up and says, well, no, what it is is simply a tool for generating hypotheses which can be falsified.

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He also goes on to say that in his view economic efficient behavior is ideal in two distinct

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senses.

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It is what individuals seek to attain and also what they feel they ought to attain keeping

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in mind that neither case is the ideal actually attainable.

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Now, does anyone really feel they ought to attain in their business activities the characteristic

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of being exactly like every other business?

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Because we know under perfect competition, all output is homogeneous.

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Does anyone, and we'll talk about this in a few minutes, anyone believe that they should

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treat other human beings and their business dealings as simply vendors with absolutely

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no personal relationships?

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Knight claims if you don't treat others as vending machines, simply putting money in and getting out what you want,

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if there's any personal relationship which causes me maybe to go to you and purchase your scarf instead of his scarf,

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then you've violated the efficiency criterion of perfect competition.

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So I have to treat all of you as nameless, faceless vending machines, according to ideal efficiency.

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So he says, the absolute ideals of efficiency and freedom are inextricably bound together.

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The perfect market, by which he means perfect competition, and I'm quoting him, is the embodiment of complete freedom.

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There are no power relations, since everyone has a choice among a number of equally good alternatives.

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There's absolutely no difference between any of the goods in a particular market, nor are there personality differences among their sellers.

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Moreover, in the perfect market, there is no bargaining and no effort to manipulate other human beings in any way.

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In other words, there's no advertising, there's no persuasion, and so on.

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And now, why should that be so? Why does the perfect market require that there's no persuasive power?

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Because according to Knight, all personal association involves power.

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Why? Because you choose one person over another. So if I'm your friend, I have power over you in that I can withhold my friendship from your closest friend. I can withhold my friendship and there is no equally good alternative to my friendship.

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Marriage is a power relationship, according to Knight, in the very same way, that because your spouse is the most beloved in your life, she has power over you, in that she can break the marriage up and you will find no equally good alternative.

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So this whole idea of what power is, infects Chicago economics.

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He is quite adamant on this point, contending that, and I'm quoting him, skill in verbal

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utterance or capacity in any form to influence other persons is a form of economic power,

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for which there is hardly a limit to the distortion it may produce if allowed to work cumulatively.

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Now the 90 and ideal of freedom is thus realized in the person of Robson Crusoe. Robson Crusoe

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Marx was really the only truly free individual on the face of the earth, or the fictional castaway, is the only truly free individual.

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Because his choices are unconstrained by interpersonal influences and attachments, the perfect market, so conceived, is never closely approximated.

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There's always personal relationships, let alone replicate it, by any historical market order.

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and Knight admits this, that he says, to realize its ideal character, the system would have to be operated through vending machines.

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I mean, this is a quote. Avoiding personal contact between the parties through the exchange.

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This is nuts. I mean, this is completely inconsistent with reality.

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Natural law gives us ideals that are attainable, that allow individuals to peacefully interact with one another, the natural law approach.

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Knight's absolute ethics slash intuitionist approach does almost the exact opposite.

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It gives us ideals which no one can ever reach, which he admits, but who should ever want to reach them?

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I don't think that reflects my moral cravings that I think that I should deal with you as a vending machine. It's absurd.

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Now, there are other moral cravings which conflict with these moral cravings.

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I do want to interact with you and play interesting games.

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So business has turned, in some sense, into a game, to some extent.

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So using the performance of the perfect market as a standard,

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Knight presents his most ongoing evaluation of the efficiency aspects of laissez-faire capitalism

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in his classic article called The Ethics of Competition.

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And I'm not going to go through them.

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Basically, he goes point by point and shows how the market economy, in every instance, violates a particular attribute of perfect competition.

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So, tough. I mean, I don't care about that. I don't think that has any ethical or economic implications for the real world.

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Now, not only does the market fall far short of attaining the ideal standard of efficiency deduced from the perfect market, so it's inefficient.

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But the freedom to exchange, now this is freedom, as it operates in human history, supposedly undercuts the ethical ideal of freedom itself.

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Knight points out that freedom of exchange gives rise to attempts by sellers to persuade the buyer to purchase his product via advertising.

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Such, quote, efforts to persuade introduce the exercise of a kind of coercive force in the relationship between buyers and sellers that causes it to lose the character of a pure exchange relationship.

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The latter entails that each individual treats other human beings as if they were slot machines.

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Hence, Knight concludes paradoxically, freedom alone would not produce an approximation to the conditions required for market itself, the freest possible market.

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Because as soon as you have freedom, people begin to try to persuade one another and establish power relationships, which then causes the market to move away from a free market.

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Knight's philosophical case against laissez-faire or free market capitalism goes beyond identifying its gross shortcomings in achieving efficiency and approaching his ideal concept of freedom.

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He also seeks to demonstrate that it clashes with the ethical ideal of distributive justice, which in his view is pretty much an equal distribution.

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I'll qualify that in a moment.

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So he says, look, even if the historical market was a perfectly competitive market in his sense, even if we achieve that ideal, he says, under that ideal, people are compensated according to the value productivity of labor and other factor services they own and contribute to production.

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So in a perfect market, everyone gets their marginal revenue product. And so that's efficient. However, people come into the market with different productive capacity.

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And this different productive capacity he means by that human capital, your skills, and capital goods and money capital.

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So that's all unequal when you come into the perfect market.

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And he says that is the result of three factors, inheritance, luck and effort in that order of importance.

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He's very big on inheritance, both genetic inheritance and the inheritance of material wealth as causing gross inequalities among human beings.

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So those are the three factors that ultimately determine how much you earn.

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As I said, inheritance, luck, and conscientious effort.

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And he says, only conscientious effort should be according to justice.

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Now this is conflict with efficiency.

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According to justice, only conscientious effort should determine how much we receive.

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But even the perfect market will not redistribute capacity, and hence product, to a chord better than the realities do with any ideal norm of justice.

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Atomistic motivation, meaning in a perfect market where everyone is atoms, they're atomistic, they're not connected, tends powerfully towards cumulatively increasing inequality.

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For all productive capacity, whether it's own property or whether it's your own inherent human capital, is essentially capital.

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And that is a joint creation of your pre-existing capacity, which as I said is a result of luck and inheritance.

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And those who already have more capacity are always in a better position, I'm still quoting him, to acquire still more with the same effort and sacrifice.

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So in effect he argues capital begets capital.

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So, the inequality generated by a perfect market may also work in the direction of diminishing freedom, the freedom to use power.

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What he means by that is that freedom can only be effective to the extent that the would-be actor possesses the complementary power in the form of control of a productive capacity.

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And he goes on to say, unbelievably, quote,

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Economic freedom may, in effect, become slavery for the person who has little power at his disposal, since life itself requires practically continuous control of a certain minimum of economic power.

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Well, what about, to go back to his example, Robinson Crusoe on his island?

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What if the island is very niggardly, in the sense that the resources are very, very, very scarce?

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Is he enslaved as a result? Does he have much economic power? And who is he enslaved to himself? The rocks? The fish?

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So there are all these sort of contradictions.

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Then he goes on and goes into some great detail.

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People want interesting games.

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Interesting games include luck, skill, and capacity in certain proportions.

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And if people come into a game, if you come into a game of Monopoly with a lot more money than everyone else, let's say,

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Well, that's not fair, and it's not fun, and people don't like it, and the market economy is like that.

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And so, it's not fair, and it's not interesting.

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That's the point of tonight.

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So, the real world market economy conflicts with every single absolute ideal that we intuit.

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And he says, even if business competition measured up perfectly to the absolute ideal of a fair and interesting game,

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The economic system remains also a want-satisfying mechanism, and therefore the ideal of a competitive game is in constant conflict with the absolute ideals of efficiency and distributive justice.

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Because even if you get the ideal game, some people are going to win, other people are going to lose, which means that some people are going to have more money now in the next round than other people, and so that this is unjust because it creates inequity.

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So even the fair game, an interesting game, creates inequity.

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Basically, what he's trying to do is to show that everything is so screwed up on a free market that only massive controls by government can rectify the situation and make it tolerable.

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Knight maintains that the rigorous elaboration of the assumptions of perfect competition, combined with an inquiry into the absolute science of ethics, goes far to discredit laissez-faire as a policy.

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So we look at ethics and the ideals, we look at what an ideal market is, and we find out that free market or laissez-faire capitalism is completely inadequate.

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He goes on to say, by the way, he includes that freedom, and it's all because of freedom.

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He says that freedom is not enough, was carried too far in the Western world, and must be sweepingly limited by political measures.

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I'm quoting him here.

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Now, let's look at his view of social evolution. It's very, very interesting. He says the original liberal revolution resulted in what he calls the dual order of negativistic political democracy, where rights are negative, and economic laissez-faire. Those are the two products of early liberalism.

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And he claims that this was an extreme reaction to the, quote, medieval authoritarian ecclesiasticism, which marked the pre-liberal epoch.

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In other words, it's the church that's the real enemy. It's authority, it's not power. Something else is very interesting.

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He goes on to say, under the latter system of medieval authoritarian ecclesiasticism, whose archetype was Western Europe in the Middle Ages,

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The Roman Catholic Church enforced conformity to a moral law viewed as given, eternal and immutable and not open to question.

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Now, this is power, according to him.

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The Church was able to compel obedience to a static conception of moral law by the exercise of power.

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Now, he goes on to say, it's true that the Church and State was combined during that period, but that's not what he's talking about.

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He says, mainly by the power to persuade. It was because the Church was persuasive.

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not because it had used the state to do its bidding in some cases

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and then he goes on to say that persuasion ranks as, quote, perhaps the most important form of coercion

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so advertising is immensely coercive

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the arch enemy of freedom and justice was therefore not the arm might of the medieval kings

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but the moral authority of the church

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basically because they didn't understand that values are something that aren't fixed

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and that there's something that we continually move towards and that they should not be given to people or persuaded, or you shouldn't have people being persuaded to follow these values or adhere to this moral code by a hierarchy.

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What you should do is have everyone involved in this huge democratic discussion

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and arrive at these tentative agreements about what values should reign in society.

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So, laissez-faire capitalism was thus tonight a confused attempt to implement the liberal principles in economics and politics.

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According to tonight, quote, many of the vicious aspects of laissez-faire were put into effect in the legal system here in the United States

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through judicial review under the Bill of Rights.

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So he's not a big fan of the Bill of Rights.

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Very interesting.

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Well, he's like Bush in that respect.

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Or other presidents.

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Let me mention something else going back to the Church as being the primary enemy here.

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It's a well-known fact.

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Knight used to insult nuns and priests and drive them out of his classes.

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And you can see why.

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Precisely because he thought that they were the archenemy.

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Now, he goes on to say laissez-faire was for doom to break down, he's writing in the 1930s now, when he thought it was breaking down, because it was dynamically unstable for three reasons.

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First, wealth once acquired gives a powerful advantage in acquiring additional wealth, causing a growing disparity in economic power and the elimination of perfect competition and of freedom itself for much of the population.

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The elimination of freedom, again, in the sense of economic freedom or disposal over goods.

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Secondly, personality power, the ability to persuade and organize, is one of the most unequally distributed in society,

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and the one most likely to be aggrandized through repeated exercise reinforcing the tendencies towards monopoly and inequality of wealth and power.

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And finally, three, economic activity is undertaken not only to satisfy wants but as a social contest,

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whose goal is a differential accumulation and exercise of power in the form of wealth and personal influence.

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The very playing of such a game under the rules of laissez-faire implies a systematic destruction of ideal competition and freedom.

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Okay, so the breakdown comes then when the market economy becomes shot through with monopoly and inequality becomes intolerable

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and the losers of the contest become ideologically disillusioned and turn to democratic socialism.

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and includes under that term the New Deal, Fabian Socialism and Social Democracy in Germany, Fabian Socialism in Great Britain and New Deal in the US.

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However, he says democratic socialism is not a real New Deal, it's against democratic socialism because political democracy as it works in practice is like free enterprise, competitive and individualistic.

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Hence, it is incapable of initiating ideal democratic discussion that will at last awaken the social mind and succeed in, quote, ascertaining a real general will.

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So he doesn't like this negativistic political democracy, even where the state would own the means of production under democratic socialism.

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So he goes on to say that politics and economics under liberalism are the same game.

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The fundamental fact in both is the moral fact of rivalry, competitiveness and the interest in power.

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In fact, he says that politics may even be worse in some sense than economic power.

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Why is that so? Well, because he believes that persuasion and prestige power,

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which people compete for when they run for office in a political democracy is actually stronger than wealth power is, which you achieve under laissez-faire capitalism.

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So therefore, he does conclude that both wealth power and persuasion and prestige power will exist and be utilized under democratic socialism to acquire more power of both kinds.

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And the predominance of politics under democratic socialism will render it susceptible to an even quicker self-destruction than laissez-faire capitalism.

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Because now the people who are at the top have economic power because they control the means of production and they have the prestige power.

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At least under laissez-faire capitalism, that's split.

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So what has the liberal game, what he calls the liberal game, degenerated into?

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into. Well, by the 1930s, according to 1935, he says, it gives rise to a real new deal.

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Now, guess what the real new deal is? It's fascist nationalism, the term he uses. That's

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the next stage in the political evolution of the liberal democracies, quote unquote.

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Fascist nationalism is, and I'm quoting him, a natural, although extreme, reaction to economic

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individualism as a movement from crushing competitiveness to a worship of emotional unity,

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and from, quote, intolerable insecurity to morbid craving for security.

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Now, despite, unquote, despite the fact that he professes hatred for nationalistic dictatorship,

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Knight perceives in the emergence of fascism the first stirrings of the consciousness of the social mind

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and identifies in nationalist philosophy, meaning German social, national socialism in Germany.

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The Truth is that there can be no human life without group life, and no group life without real devotion, in a religious sense, of the members of the group as a more or less mystical entity, and beyond it, to some set of values, these absolute ideals, for which the group is supposed, in a special way, to stand.

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goes on to say that the position of the leader under fascist nationalism, Fuhrer or Ilduche, their power and position relies partly on power in the forms of both armed might and persuasion, which is bad if not worse than armed might,

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but it also rests in part on deliberate acceptance by the group based on failure to secure adequate unity by democratic methods.

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So what he's saying up to this point is that political democracy and laissez-faire capitalism have been a failure ethically and efficiency-wise and that fascist nationalism is a reaction to this and it's a step up because it does contain a core of truth.

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And then he goes on to say, coolly considered, I'm quoting him,

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the ethical ideal of fascist reddened circuses cannot be considered inferior to the ideal of economic man.

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Although Knight does personally regret, quote, the passing of freedom as an ideal to be striven for and to an important degree in actuality.

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So in a way he's admitting that there was some amount of freedom under laissez-faire, despite the persuasion power, despite the economic power.

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So what's his ideal system? He doesn't really tell us much. This is where the other Chicago economists come in.

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He basically advocates two types of interventions. One he calls interventions that are designed to solve mechanical problems and improve the efficiency of the market.

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And the other are those that are going to address the balance between competing ideals, freedom, efficiency, justice, and so on.

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And he's very, very skimpy on what he says about these things. Basically he says that, in the case of the first type, this tendency towards monopoly that's inherent in all real world markets should be corrected, okay, because they cause this allocation of resources and by pervasive externalities that are generated by voluntary exchange.

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So, what he wants is, he wants, you know, he mentions very strict enforcement of the anti-trust laws.

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He also wants the government to take measures to alleviate the business cycle,

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which he sees as an inherent feature of the market economy,

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which is attributable to the fact that action on the market tends to be too speculative.

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People take too many risks and don't understand the risks they take.

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and because action on the market is decentralized.

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Then he says the second type of intervention where you're balancing the various ideals,

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the way to cure that is through progressive taxation, especially of inheritance.

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He hates inheritance, right, because that breeds inequality.

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As the main instrument for simultaneously improving the balance between freedom and justice,

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so when you tax someone, when you tax away inheritance,

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Inheritance, you start everyone in the next round off equally, or at least you move towards that, so that's just, but also the people in the next round don't have more power than other people, so everybody's power is equal, so you're moving towards the ideals of both justice or equality and freedom.

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And he also says the equality of opportunity is important in the interest of a fair and interesting game.

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By leveling incomes you're also starting everybody off with an equal opportunity to win the game.

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So that's something else he says.

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So basically he says enforce antitrust, take measures to mitigate the business cycle,

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and heavily progressive taxation and taxation of inheritance.

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Finally, in the long run, he believes progressive taxation solves what he considers to be the main social problem,

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determining what types of people and primary social units, that is, families, will be produced.

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So he looks on somehow the state as having to go to the root of all the problems, which is the family itself.

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The family, remember, is the one that is responsible for the individual's inheritance.

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So he wants to manipulate things so that he can strike at the root causes of all these departures from these ideal values.

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And he sees one of the main root causes, the family.

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So, for Knight, the ideal is to produce individuals of equally equipped productive capacity, especially in the area of human capital, which means everyone with the same education, basically, and skills, and whose value scales accord a very high place to the realization of Knight's ideal of democracy by discussion.

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And so as far as we can see what he's in favor of, he's against democratic socialism, he's against laissez-faire capitalism, he wants some sort of neo-con social democracy, or what let's say called in America democratic capitalism.

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Now the person who really spins out the implications of Knight's philosophy is Henry Simon, who was also Friedman's teacher.

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He was a colleague of Knight University of Chicago, one of his closest disciples. He worked explicitly within the framework of Knight's philosophical economics and he greatly clarified what Knight's objections to the free market economy were.

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He also elaborated a comprehensive program for a large welfare state that would provide remedy for market failures.

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In the ethical realm, Simon says that equality is nearly equal with liberty in the hierarchy of absolute social values.

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I don't know how he knows that. He must have consulted his intuition to tell us that.

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And what does that mean? How does he measure that? He doesn't tell us.

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He says freedom without power to dispose of resources has no substance or meaning.

377
00:45:12.480 --> 00:45:22.480
Marked inequality of income or of power, according to Simons, is perceived as unlovely, by all but medieval minds.

378
00:45:22.480 --> 00:45:27.480
So if you don't hate inequality of income and inequality of power, meaning economic power,

379
00:45:27.480 --> 00:45:32.480
if you don't hate Bill Gates, or at least hate his position, then you have a medieval mind.

380
00:45:32.480 --> 00:45:50.480
So consequently, a substantial measure of inequality may be essential as an incentive, but it should be recognized as evil and tolerated only as far as the dictates of expediency are clear.

381
00:45:50.480 --> 00:46:06.480
The source of inequality of property among individuals in the form of external property and human capital, both skills and capacities and aptitudes, as well as material property, is mainly the family. That's the cause of inequality.

382
00:46:06.480 --> 00:46:15.480
So he's even more anti-family than I. He says both kinds of property are the result of investment. Both are largely inherited and hence are bound up with the family.

383
00:46:15.480 --> 00:46:35.480
Both are largely acquired by luck, and each is subject to deliberate transfer from parents to children. Thus Smith urges government assumption of responsibilities, once largely or exclusively those of families, notably as regards to the health and education of children and also substantial restriction on family accumulation of wealth.

384
00:46:35.480 --> 00:46:43.480
So he wants to smash the family. He wants to limit the amount of wealth they can accumulate, and he wants to take the children away and educate them all equally.

385
00:46:43.480 --> 00:46:47.480
Now, this is a free market economist, supposedly.

386
00:46:47.480 --> 00:46:58.480
Now, although a commutative justice, which is simply freedom to exchange, is thus in conflict with distributive justice or equality,

387
00:46:58.480 --> 00:47:02.480
on the free market they are on a large degree reconcilable by government intervention.

388
00:47:02.480 --> 00:47:08.480
So as long as the government can intervene and make everything equal, well then, commutative justice won't lead to bad results,

389
00:47:08.480 --> 00:47:26.480
He recommends sharply modifying the distributional results of free exchange, but he doesn't want to abolish the market process.

390
00:47:26.480 --> 00:47:30.480
What he wants is a progressive taxation of income and inheritance.

391
00:47:30.480 --> 00:47:34.480
In the short run, progressive taxation will suppress inequality of incomes,

392
00:47:34.480 --> 00:47:40.480
Well, in the long run, these expenditures of the tax proceeds will expand health and

393
00:47:40.480 --> 00:47:45.420
educational services for children, which will result in leveling accretions of capacity,

394
00:47:45.420 --> 00:47:47.420
capital, and possessed power.

395
00:47:47.420 --> 00:47:53.340
Now, he doesn't want to level people's material income, he wants to level their capacities

396
00:47:53.340 --> 00:48:00.600
and their power, in the sense of persuasive power and so on, and prestige power.

397
00:48:00.600 --> 00:48:12.600
Mises, according to Knight, once equality of opportunity is assured by the state, the market may then be trusted to operate without precipitating a collision between the ideals of freedom through exchange and distributive justice.

398
00:48:12.600 --> 00:48:19.600
Now there's a second problem that Knight assignments attributes to the market economy, and this is caused by monopoly.

399
00:48:19.600 --> 00:48:29.600
He sees, he's really got a bugbear about monopoly, he sees a free market as a breeding ground for monopoly, because monopoly is purely and simply a problem of bigness, that's all it is.

400
00:48:29.600 --> 00:48:40.600
If a firm is big, it's per se monopolistic, and this violates the assumption of atomistic individualism, of the perfect competition.

401
00:48:40.600 --> 00:48:47.600
Thus, for example, he writes, business monopoly is largely and basically a problem of excessive corporate size,

402
00:48:47.600 --> 00:48:56.600
of corporate imperialism run mad, of the fantastic monstrous aggregation of businesses we mistakenly regard as monuments for economic efficiency.

403
00:48:56.600 --> 00:49:10.600
He also says that every departure from private competition represents an encroachment of power on freedom and it requires remedying by the state.

404
00:49:10.600 --> 00:49:16.600
Because, according to Simons, the ultimate liberty obviously is that of men equal in power.

405
00:49:16.600 --> 00:49:31.600
Simon has also said that monopolies or even large organizations of any type, quote, are not merely an economic evil. They are also an impairment or usurpation of the state monopoly of coercion and of individual freedom of association.

406
00:49:31.600 --> 00:49:42.600
So, churches, large clubs, he even says cities. In fact, let me actually quote him here, because it's right here. He says,

407
00:49:42.600 --> 00:49:48.600
He would actually have, in order to achieve the Knight's ideal of what he calls ultimate liberty,

408
00:49:48.600 --> 00:49:55.600
Simons would have the state literally crush into atoms, or atomize individuals, all other institutions capable of exercising power,

409
00:49:55.600 --> 00:50:02.600
The Theory of Money and Credit The Theory of Money and Credit

410
00:50:25.600 --> 00:50:29.600
An organization with power of any type except the state.

411
00:50:29.600 --> 00:50:36.600
So it's just the atomized individual, the perfectly free in his sense, atomized individual and the state.

412
00:50:36.600 --> 00:50:44.600
So really this is a neocon vision where the central government has all the power

413
00:50:44.600 --> 00:50:52.600
and the mediating institutions between the individual and the central government are completely shorn of any power whatsoever.

414
00:50:52.600 --> 00:51:11.600
Simon's laughably wrote an article, or wrote an article laughably entitled, A Positive Program for Laissez-Faire, Some Proposals for Liberal Economic Policy.

415
00:51:11.600 --> 00:51:17.600
Let me very quickly mention some of the things he says in here. If this is laissez-faire, then I'm a radical Trotskyist.

416
00:51:17.600 --> 00:51:40.600
With regards to the methods of controlling monopoly, Simon recommends that every industry in the economy either be rendered perfectly competitive by vigorously enforcing antitrust laws, or in the cases of industries that enjoy certain economies of scale, which benefit consumers of course, such as railroads and utilities, they should be subject to outright socialization.

417
00:51:40.600 --> 00:51:55.600
In the former case, this should result in outright dismantling of our gigantic corporations, persistent prosecution of our producers who organize for price maintenance, or outright limitation, quote unquote.

418
00:51:55.600 --> 00:52:02.600
Also, corporation law should be completely changed so as to specify a limit on the total amount of property that a corporation may accumulate.

419
00:52:02.600 --> 00:52:24.600
In addition to this, general limit on the size of the corporation, he wants the Federal Trade Commission to mandate a limit for each particular industry, and all horizontal mergers would be prohibited.

420
00:52:24.600 --> 00:52:31.600
Now, secondly, he regards retailing as a racket, engaged in wasteful competition of merchandising and advertising.

421
00:52:31.600 --> 00:52:37.600
Now, in order to limit the waste of advertising and what he calls the artificial separation of wholesale and retail markets.

422
00:52:37.600 --> 00:52:42.600
Now, why is that artificial, the separation of wholesale and retail?

423
00:52:42.600 --> 00:52:48.600
Because under perfect competition, there's a producer, and as the consumer goes to the producer, buys things.

424
00:52:48.600 --> 00:53:08.600
Now, he calls that artificial, the real world, the emergence of a real world evolved institution of retail and wholesale markets is artificial, whereas this supposedly ideal that he and Knight has come up with in their cracked brains, that's natural.

425
00:53:08.600 --> 00:53:13.600
Well, how is that natural? To treat people as slot machines and so on. That's absurd.

426
00:53:13.600 --> 00:53:36.600
By the way, we get rid of this artificial separation by punitive taxes, which would be levied on advertisers and progressive taxes on manufacturers and jobbers in proportion to the percentage of total expenses constituted by their selling expenses.

427
00:53:36.600 --> 00:53:48.600
Whatever they didn't spend strictly on producing the good, the physical good, anything they spent on marketing, anything they spent on sales would be taxed to stop them from that activity.

428
00:53:48.600 --> 00:53:54.600
Then he says to alleviate the business cycle, he argues for absolute federal control over money and banking.

429
00:53:54.600 --> 00:54:02.600
He wants all private bank notes suppressed, all private bank deposits unbacked by 100% reserves, and that's paper money reserves.

430
00:54:02.600 --> 00:54:32.600
He wants that suppressed. He would even, because they're near monies because people tend to hold them to economize their cash balances and because he wants the Federal Reserve to completely control the money supply, he would even prevent firms from issuing bonds any longer. They can only issue stocks because we know that bonds issued by reputable firms are held as sort of secondary reserves in people's cash balances even though they're not part of the money supply.

431
00:54:32.600 --> 00:54:44.600
He was a specialist in taxation. He wrote a book on personal income tax. That was his preferred tool for effecting the radical transformation of the various evolved institutions of the historical market, including family.

432
00:54:44.600 --> 00:55:00.600
He wanted to radically and heavily tax everything that resulted in a departure from what he believed was a free market, but he wanted to allow the market to operate within that heavy regime of taxation.

433
00:55:00.600 --> 00:55:23.600
What he wanted, he wanted to abolish all taxes that distort the market like tariffs and excise taxes, but he wanted to close all loopholes, and drastically increase the progression of taxes, and he says, really substantial levies upon the so-called middle and lower income brackets, so he wanted to heavily tax them.

434
00:55:23.600 --> 00:55:30.600
Then he proposed, he wanted to retain property taxation to represent the established equity of the state in real property.

435
00:55:30.600 --> 00:55:33.600
So the state was going to be a part owner of all land.

436
00:55:33.600 --> 00:55:40.600
The other thing he wanted to do was, in answer to the question, well, wouldn't these high marginal tax rates discourage business?

437
00:55:40.600 --> 00:55:44.600
Wouldn't it discourage resource owners from selling their land?

438
00:55:44.600 --> 00:55:48.600
And wouldn't it discourage highly skilled laborers from working?

439
00:55:48.600 --> 00:55:52.120
and discourage entrepreneurs.

440
00:55:52.120 --> 00:55:53.800
And he says, no, no, no, no.

441
00:55:53.800 --> 00:55:58.160
As long as we allow them to keep, as long as the taxes are less than 100%,

442
00:55:58.160 --> 00:56:01.720
people will use their land in production.

443
00:56:01.720 --> 00:56:05.840
So 90%, that'll be fine.

444
00:56:05.840 --> 00:56:09.800
He also says that the same thing is true with the captains of industry,

445
00:56:09.800 --> 00:56:12.120
or the capitalist entrepreneurs.

446
00:56:12.120 --> 00:56:15.560
He says, because really, they're not engaged in earning a living,

447
00:56:15.560 --> 00:56:16.360
according to him.

448
00:56:16.360 --> 00:56:23.360
They're engaged in, quote, playing a great game, whose states may just as well be a prominent representation on the income tax rolls.

449
00:56:23.360 --> 00:56:28.360
In other words, the return would be, yeah, I pay high income taxes.

450
00:56:28.360 --> 00:56:35.360
It may just as well be that as outfitting one's wife with sable and diamonds, or what their wives have to say about that.

451
00:56:35.360 --> 00:56:45.360
Hey, look, honey, I'm third on income tax. I pay the third highest income tax in the country. Oh, that's great.

452
00:56:45.360 --> 00:56:50.360
The heavily taxed entrepreneurs would also maintain enthusiasm for the game.

453
00:56:50.360 --> 00:56:55.360
This whole thing about the game, this crazy thing about the game, because it affords them the privilege of exercising power.

454
00:56:55.360 --> 00:56:58.360
Because they're still going to order people around.

455
00:56:58.360 --> 00:57:05.360
Not in the sense that politicians can order people around, but in the sense that they can direct people how to use capital and so on.

456
00:57:05.360 --> 00:57:10.360
So he's crazed. He's certainly not a libertarian.

457
00:57:10.360 --> 00:57:25.360
He's out now, Jacobin, and then he goes even further. He says, granting that confiscatory taxation is non-neutral to capital accumulation and economic progress.

458
00:57:25.360 --> 00:57:34.360
In other words, he does admit that it may have an effect on saving, that maybe we won't progress as rapidly with our material progress if there's this high taxation.

459
00:57:34.360 --> 00:57:44.360
He says, well, that's just a fact of life. Progress and justice are costly luxuries when you have to trade one off against the other. If we want more justice, we're going to have less progress.

460
00:57:44.360 --> 00:57:51.360
He also goes on to say, and if saving becomes too little, we'll just have the state save.

461
00:57:51.360 --> 00:58:05.360
Keynes says almost the exact same thing. Saving in the past under laissez-faire has come at the expense of a lack of consumption on the part of the lower classes.

462
00:58:05.360 --> 00:58:15.360
He echoes Keynes there, though he hated Keynes, just like Knight did, just like Stalin and Hitler hated one another.

463
00:58:15.360 --> 00:58:24.360
Anyway, as he points out, he says this will allow us, as heavy taxation, a great opportunity for expanding socialized consumption.

464
00:58:24.360 --> 00:58:35.360
Okay, he loves socialized consumption. He says, we may look forward to, confidently, to continued augmenting of the free income of the masses in the form of commodities and services made available by government.

465
00:58:35.360 --> 00:58:48.360
There are remarkable opportunities for extending the range of socialized consumption, medical services, recreation, education, music, drama, and especially for extending the range of social welfare activities.

466
00:58:48.360 --> 00:58:54.360
Okay, now this is someone who thought he was a liberal and who was one of the founding members of the Mont Pelerin Society.

467
00:58:54.360 --> 00:59:24.360
Okay, but he's simply an out and out, well I mean he's moving towards socialism there, talking about status, and he goes even further, he says, if there's a real falling off in capital accumulation, okay, and if we're actually going to consume capital because there's so much consumption, he goes on to say, well then the government may accumulate capital, right, and it can pay off the public debt, and that's a way of accumulating capital, and if additional savings are still necessary,

468
00:59:24.360 --> 00:59:43.360
The government may gradually abandon its passive creditor role and undertake the actual administration of industries and may actually take over industries.

469
00:59:43.360 --> 00:59:49.360
This may come to pass as socialization of production, but it doesn't have to.

470
00:59:49.360 --> 00:59:54.160
Okay, it will only happen if there's not enough capital accumulation.

471
00:59:54.160 --> 00:59:57.160
Okay, let's go to Milton Friedman.

472
00:59:57.160 --> 01:00:00.860
Okay, so does anyone think Knight is a liberal or a libertarian?

473
01:00:00.860 --> 01:00:05.560
I mean, Simon is a liberal or a libertarian? Certainly not.

474
01:00:05.560 --> 01:00:08.360
Yeah.

475
01:00:08.360 --> 01:00:13.760
I mean, you have to go back and read these. When the paper's done, I'll give you all the citations.

476
01:00:13.760 --> 01:00:23.760
Friedman was the one who whitewashed his masters and really painted them as libertarians, he and George Stigler.

477
01:00:23.760 --> 01:00:34.760
Friedman is much more libertarian than either Simons or Knight, but there still is a Jacobin streak in Friedman.

478
01:00:34.760 --> 01:00:38.760
It comes out in some of his proposals.

479
01:00:38.760 --> 01:00:45.760
So he was a student of both Knight and Simons. He eventually became the acknowledged leader of the Newer Chicago School.

480
01:00:45.760 --> 01:00:57.760
Friedman and other prominent members of the Newer School have openly repudiated or apologized for some of Simons interventionist orientation in economic policy.

481
01:00:57.760 --> 01:01:07.760
George Stigler said, well, that's Simons. He just went a little too far. I've seen Stigler write things like that.

482
01:01:07.760 --> 01:01:12.760
And they said, oh yeah, that's crazy, Henry, I just went too far.

483
01:01:12.760 --> 01:01:17.760
That was their attitude. They didn't take him that seriously when he started talking about these types of things.

484
01:01:17.760 --> 01:01:21.760
But they did take the philosophy very seriously, including Friedman.

485
01:01:21.760 --> 01:01:27.760
And the philosophy is the root of the rot.

486
01:01:27.760 --> 01:01:32.760
Friedman begins in a nightly vein and basically Friedman's capitalism and freedom.

487
01:01:32.760 --> 01:01:36.760
Friedman's capitalism and freedom is where you get much of this stuff.

488
01:01:36.760 --> 01:01:45.760
He declares freedom of the individual or perhaps the family is the main ultimate goal in judging, or is our ultimate goal in judging social relations.

489
01:01:45.760 --> 01:01:54.760
He says that as a component of freedom, economic freedom is both a value in itself and an indispensable means for achieving political freedom.

490
01:01:54.760 --> 01:02:01.760
And he points out that competitive capitalism is the embodiment of economic freedom and serves to promote political freedom.

491
01:02:01.760 --> 01:02:06.760
So he's much more pro-freedom than certainly Knight or Simons was, or were.

492
01:02:06.760 --> 01:02:15.760
He says the ideal of economic freedom is defined by, or this ideal is defined by freedom in terms of Knight-Simons conception of a perfect market.

493
01:02:15.760 --> 01:02:20.760
Thus, in a competitive market, according to Friedman, the individual possesses, quote,

494
01:02:20.760 --> 01:02:25.760
No appreciable power to alter the terms of exchange. He is hardly visible as a separate entity.

495
01:02:25.760 --> 01:02:30.760
So he's going back to the slot machine idea here. He does believe in perfect competition.

496
01:02:30.760 --> 01:02:44.760
He slips here. He's talking about this as an ideal. He's not talking about this as some sort of a positive, you know, perfect competition as a positive tool for generating hypotheses that are testable. It's not what he's doing here.

497
01:02:44.760 --> 01:02:55.760
He's defining freedom in a certain sense. He concludes that the essence of a competitive market is its impersonal character. He says that a lot throughout his work.

498
01:02:55.760 --> 01:03:01.760
quote unquote. It's impersonal character, i.e. the slot machine vending machine analogy.

499
01:03:01.760 --> 01:03:05.760
He doesn't use that analogy, but that's what he has in the back of his mind.

500
01:03:05.760 --> 01:03:13.760
This whole idea about impersonal, that we treat each other as sort of non-entities when we exchange.

501
01:03:13.760 --> 01:03:18.760
On the other hand, when there are an insufficient number of alternative sellers from whom the consumer can purchase,

502
01:03:18.760 --> 01:03:22.760
or an insufficient number of buyers from whom the seller is able to offer his products,

503
01:03:22.760 --> 01:03:27.760
Each is subject to coercion. He says that in Capitalism and Freedom.

504
01:03:27.760 --> 01:03:30.760
He says each is subject to coercion.

505
01:03:30.760 --> 01:03:35.760
If there are too few sellers, then I, as a buyer, in some sense, in the Nidian sense,

506
01:03:35.760 --> 01:03:38.760
I, as a buyer, am subject to coercion.

507
01:03:38.760 --> 01:03:45.760
He says exchange is truly voluntary in a podium here, only when nearly equivalent alternatives exist.

508
01:03:45.760 --> 01:03:47.760
So you see the Nidian philosophy there.

509
01:03:47.760 --> 01:03:55.760
Monopoly implies the absence of alternatives and thereby inhibits effective freedom of exchange.

510
01:03:55.760 --> 01:04:01.760
Friedman does admit that the notion of monopoly he is propounding is really the ordinary concept of competition.

511
01:04:01.760 --> 01:04:10.760
In other words, where sellers are unequal and where they're all trying to give you a better package as you as a consumer than the next guy.

512
01:04:10.760 --> 01:04:16.760
So he admits that what he's saying is monopoly is really the common sense notion of competition.

513
01:04:16.760 --> 01:04:22.760
Which brings us to his view of monopoly. He goes much easier on monopoly.

514
01:04:22.760 --> 01:04:27.760
He's not as rabidly anti-monopoly as Simons and Knight.

515
01:04:27.760 --> 01:04:31.760
Monopoly in the sense of large firms operating on a free market.

516
01:04:31.760 --> 01:04:38.760
What he says is the following. He does not conclude, as do Knight and especially Simons,

517
01:04:38.760 --> 01:04:46.760
Simon's that real-world markets are fought with monopolistic imperfections that require remedial measures such as antitrust.

518
01:04:46.760 --> 01:04:51.760
The reason why is because of his methodology of positive economics.

519
01:04:51.760 --> 01:05:00.760
He says, yes, yes, we have large firms that depart from perfect competition if you look at it strictly through realistic terms.

520
01:05:00.760 --> 01:05:06.760
He uses the term ideal types.

521
01:05:06.760 --> 01:05:12.760
He says, economic concepts such as competition are, quote, ideal types, like Euclidean lines or points.

522
01:05:12.760 --> 01:05:17.760
Okay? I mean, the strict lines and points don't exist, okay?

523
01:05:17.760 --> 01:05:24.760
However, he says, their appropriateness are determined not by their ability to provide an accurate description of existing reality,

524
01:05:24.760 --> 01:05:31.760
but by their analytical usefulness in generating hypotheses that successfully withstand empirical tests of falsification.

525
01:05:31.760 --> 01:05:48.760
So now you can see that what he's trying to do is to take this unrealistic conception of competition and revive it and to hide the fact or obscure the fact that it's really just an ideal that has arisen out of Knight's ethics.

526
01:05:48.760 --> 01:06:00.760
He's trying to say it's a tool like a Euclidean line or a point that allows us to do science, even though earlier he has defined competition and he has defined freedom in Knightian terms.

527
01:06:00.760 --> 01:06:15.760
So he's shrewd and he's brilliant in rehabilitating Chicago economics and making people forget the fact that it just emanated almost full blown from the brain of Frank Knight.

528
01:06:15.760 --> 01:06:26.760
So Friedman sought to deflect attention from the idealized and radically non-empirical source of the analytical concepts of Chicago economics,

529
01:06:26.760 --> 01:06:37.760
by arguing that the realism of a theory's assumptions has nothing to do with establishing its validity as a positive explanation of economic phenomena.

530
01:06:37.760 --> 01:06:43.760
Sanderson once described Friedman as a crypto-positivist, which is completely wrong.

531
01:06:43.760 --> 01:06:50.760
Friedman is better described in my terminology as a crypto-idealist. That's in fact what he is.

532
01:06:50.760 --> 01:06:58.760
He's hiding the intuitionist basis of the perfect competition model.

533
01:06:58.760 --> 01:07:01.760
What would he do to rectify monopolistic inefficiencies?

534
01:07:01.760 --> 01:07:06.760
He says, well, in the case of natural or technical monopolies, they're very rare.

535
01:07:06.760 --> 01:07:10.760
The conditions of their existence tend to be eliminated over time by market forces.

536
01:07:10.760 --> 01:07:15.760
And he even comes out and says an unregulated private monopoly is better than a government regulated monopoly.

537
01:07:15.760 --> 01:07:18.760
So he wouldn't do much about them.

538
01:07:18.760 --> 01:07:28.200
He says this would be true unless it is an essential commodity or service whose technical conditions of supply yield the seller considerable monopoly power.

539
01:07:28.200 --> 01:07:31.840
In that case, he would have the government do something about it.

540
01:07:31.840 --> 01:07:41.560
Now he says in the case of monopolies whose sources are private collusion, not natural monopolies, but ones that result from private collusion, or government grants of legal privileges,

541
01:07:41.560 --> 01:07:45.920
the remedy is the application of antitrust laws or the withdrawal of the exclusive privilege.

542
01:07:45.920 --> 01:07:54.920
So in 1962, he is in favor of applying antitrust laws, and in fact, he puts collusion into the same category as government privileges.

543
01:07:54.920 --> 01:08:08.920
Collusion on the free market between free individuals and entrepreneurs who have decided that it would be more profitable to make some decisions in unison.

544
01:08:08.920 --> 01:08:15.920
He also said, alright, so he doesn't believe that this whole idea that there's a lot of monopoly justifies a lot of government intervention in the economy, number one.

545
01:08:15.920 --> 01:08:26.920
Number two, also, the attainment of the ideal of, well, that's the attainment of the ideal of efficiency, does not afford a justification for extensive government intervention into the free market.

546
01:08:26.920 --> 01:08:33.920
But according to him, neither does the alleged conflict, and these are my words, between the ideals of freedom or efficiency and distributive justice.

547
01:08:33.920 --> 01:08:42.400
of Justice. Basically, in Friedman's view, on a free market, you tend to get a situation

548
01:08:42.400 --> 01:08:50.120
in which, if there is inequality, it tends to be as a result of the fact that people

549
01:08:50.120 --> 01:08:56.280
put forth different efforts, number one, or they have different amounts of human capital,

550
01:08:56.280 --> 01:09:07.920
Number Two, but he can't really bring himself, and by the way, he also says that you do tend,

551
01:09:07.920 --> 01:09:12.200
and also people take different types of risks in the market economy, so it's a result of

552
01:09:12.200 --> 01:09:15.540
choice to a great extent.

553
01:09:15.540 --> 01:09:21.880
So he thinks that distribution in accordance with product should be the ideal.

554
01:09:21.880 --> 01:09:28.880
He disagrees with Friedman and Simons that it should be equal distribution.

555
01:09:28.880 --> 01:09:34.880
However, he cannot bring himself entirely to put aside Knight's conception of distributive justice.

556
01:09:34.880 --> 01:09:40.880
So he argues that, quote, much of the actual inequality observed in the distribution of income is due to imperfections in the market,

557
01:09:40.880 --> 01:09:44.880
caused by special treatment accorded by government to favored groups,

558
01:09:44.880 --> 01:09:48.880
and he would abolish these monopoly privileges and tariffs, etc.

559
01:09:48.880 --> 01:10:00.880
and that will tend to diminish inequality. He also proposes and defends the possibility that a large part of the existing inequality of wealth can be regarded as produced by men to satisfy their tastes and preferences for risk.

560
01:10:00.880 --> 01:10:12.880
People take risks and they lose money and so on. So he's not really upset about the fact that we have some inequality and he believes it tends to be diminished on the market as opposed to other arrangements like socialism.

561
01:10:12.880 --> 01:10:23.880
Now, Friedman argues that freedom and distributive equality are complementary, rather than antithetical.

562
01:10:23.880 --> 01:10:30.880
And this rests on Adam Smith's assertion that differences among individuals in labor skills and productivities are not the result of innate human differences,

563
01:10:30.880 --> 01:10:34.880
but reflect an inequality of educational and vocational training opportunities.

564
01:10:34.880 --> 01:10:39.880
So here he becomes a nightian. Here he thinks that there's a better way to get rid of inequality.

565
01:10:39.880 --> 01:11:07.200
In describing equality of opportunity, Friedman adopts a phrase coined by the Jacobins during

566
01:11:07.200 --> 01:11:18.200
The French Revolution, quote, a career open to the talents, unquote. So anybody should be able to get any job who has the requisite qualities and aptitudes.

567
01:11:18.200 --> 01:11:27.200
And this implies, according to Friedman, not birth, nationality, color, religion, sex, nor any other irrelevant characteristic should determine the opportunities that are open to a person.

568
01:11:27.200 --> 01:11:34.200
Only his abilities, unquote. On the other hand, Friedman mentions private barriers to competition and even social practices,

569
01:11:34.200 --> 01:11:42.200
which yields special advantages to individuals depending on their family, race or religion as constituting an impairment of equality of opportunity.

570
01:11:42.200 --> 01:11:52.200
So, he doesn't come out in capitalism and freedom or anywhere else in favor of equal opportunity laws or affirmative action laws,

571
01:11:52.200 --> 01:12:02.200
but he does mention that racial discrimination or discrimination according to family background or religion,

572
01:12:02.200 --> 01:12:10.200
He sees that, even though it's voluntary and purely private, he does see that as a violation of equality of opportunity.

573
01:12:10.200 --> 01:12:17.200
But he doesn't, to his credit, come out and suggest any corrections to that.

574
01:12:17.200 --> 01:12:25.200
So basically he's demolished the two major intellectual props for government intervention that his mentors had developed.

575
01:12:25.200 --> 01:12:34.200
So, what is his reason for promoting, in some cases, extensive government intervention?

576
01:12:34.200 --> 01:12:47.200
And basically, he introduces the scientific concept, which Sanderson had pioneered, or actually before that, Pagu, of externalities.

577
01:12:47.200 --> 01:12:50.200
He calls them neighborhood effects.

578
01:12:50.200 --> 01:13:03.200
So, now what he wants to do is, he gets rid of these other fuzzy reasons for intervention and he comes up with what he believes is a scientific bedrock for the Knight-Simons welfare state.

579
01:13:03.200 --> 01:13:15.200
And that's neighborhood effects. And what do we mean by that? Well, he says, external benefits and costs are widespread, just like Knight believed, in a system of voluntary exchange.

580
01:13:15.200 --> 01:13:20.200
And a large degree of government intervention into the economy can be justifiable on these grounds, and those are my words.

581
01:13:20.200 --> 01:13:25.200
However, Friedman points out that government action also generates externalities, to his credit,

582
01:13:25.200 --> 01:13:32.200
so that the task of determining the exact extent of government intervention is a matter of comparing the costs and benefits of such intervention.

583
01:13:32.200 --> 01:13:37.200
So now, in Friedman's estimation, there are three areas that require significant involvement of the state,

584
01:13:37.200 --> 01:13:42.200
and they are education, alleviation of poverty, and the monetary system.

585
01:13:42.200 --> 01:13:53.200
In the area of education, he says that all members of society benefit from an educated child who is likely to develop into an informed voter and better citizen.

586
01:13:53.200 --> 01:14:02.200
Now, that generates neighborhood effects. People are benefiting from this. You and I are benefiting from someone else's educated child, but we're not paying for the benefits.

587
01:14:02.200 --> 01:14:08.200
That's not good. That violates commutative justice. We're getting benefits that we're not paying for.

588
01:14:08.200 --> 01:14:18.200
So, what would he do? He says, because the potential third-party beneficiaries of the individual's education cannot be efficiently identified,

589
01:14:18.200 --> 01:14:22.200
because you can't identify how much benefit each of us gets, and therefore charge us separately,

590
01:14:22.200 --> 01:14:27.200
educational services will tend to be under-produced on the free market.

591
01:14:27.200 --> 01:14:35.200
So, for freedmen, this state of affairs justifies compulsory attendance laws and state financing and certification of schools.

592
01:14:35.200 --> 01:14:55.200
In 1962, he believed that you should have compulsory attendance laws, all children should be forced to attend, and the government should finance that education through vouchers, for example, but there doesn't have to be government or socialistic running of the schools.

593
01:14:55.200 --> 01:15:10.200
So what he did favor as a practical program in 1962 was a hybrid, some public schools and sort of a hybrid public-private system of primary and secondary schools financed by vouchers.

594
01:15:10.200 --> 01:15:17.200
Some massive intervention into family decision making and how much they want to spend on their kids' education.

595
01:15:17.200 --> 01:15:20.200
Massive intervention into an important area of the market.

596
01:15:20.200 --> 01:15:33.200
He also argued that state vouchers for professional and vocational training may also be defended on grounds that imperfections in the capital markets lead to underinvestment in human capital relative to the investment in physical capital.

597
01:15:33.200 --> 01:15:44.200
And Chicago School always stresses this, that there's not enough investment in human capital. In fact, there's underinvestment and there's too much investment in physical capital.

598
01:15:44.200 --> 01:15:49.200
Now why would that be? What's the imperfection in the capital market that they identify?

599
01:15:49.200 --> 01:16:02.200
We don't have slavery. So, you can't make a contract with the bank for a loan to finance your vocational and professional training.

600
01:16:02.200 --> 01:16:08.200
And if you default on the loan, the bank isn't able to enslave you and force you to work for them.

601
01:16:08.200 --> 01:16:16.200
Because of this imperfection in the capital markets, therefore that justifies government financing these activities.

602
01:16:16.200 --> 01:16:22.200
I don't think it's an imperfection of the capital market. I think that's the real world, the real world of a free market economy.

603
01:16:22.200 --> 01:16:32.200
Your will is inalienable. You can't be taken in. If you default on a loan, they can seize your assets, but they can't force you to work for them.

604
01:16:32.200 --> 01:16:37.200
Or maybe they could if you made a contract that you would work for them.

605
01:16:37.200 --> 01:16:49.200
In any case, he says existing imperfections in the capital market can restrict the more expensive vocational and professional training to individuals whose parents or benefactors can finance the training required.

606
01:16:49.200 --> 01:16:54.200
He's talking about doctors, lawyers, advanced scientists and so on.

607
01:16:54.200 --> 01:17:02.200
They make such individuals a non-competing group sheltered from competition by the unavailability of the necessary capital to many able individuals.

608
01:17:02.200 --> 01:17:05.200
The result is to perpetuate inequalities in wealth and status.

609
01:17:05.200 --> 01:17:27.200
Thus for Friedman, the ideals of economic efficiency as well as equality of opportunity dictate significant control over the supply and ultimately the quality of education from kindergarten to medical school.

610
01:17:27.200 --> 01:17:37.200
Friedman felt compelled to record his increasing doubts about the efficiency of compulsory attendance laws in 1980 in free to choose,

611
01:17:37.200 --> 01:17:47.200
and even in tax financing for elementary and secondary education, because he had come to believe that the cost of such political remedies of market failure no longer exceeded their benefits.

612
01:17:47.200 --> 01:17:56.200
So there were still neighborhood effects and so on, but the costs of government running the system were much higher than the benefits that all of us received, so we shouldn't do it.

613
01:17:56.200 --> 01:18:17.200
Finally, regarding alleviation of poverty, Friedman argues that donations to private charity will tend to be inefficiently small. Why?

614
01:18:17.200 --> 01:18:23.200
Well, because each would-be donor will be tempted to free ride on the beneficial effects generated by the donations of others.

615
01:18:23.200 --> 01:18:33.200
I don't really see that. I see generous people all around me, giving to their churches and their communities and volunteering. Where he comes up with this, I don't know.

616
01:18:33.200 --> 01:18:45.200
And also, what about people, as Murray Rothbard pointed out, that think that charity goes too far in some sense. If you're William Graham Sumner, an able-bodied person maybe shouldn't get charity.

617
01:18:45.200 --> 01:18:49.200
He's out of work, but maybe it was his own fault or something.

618
01:18:49.200 --> 01:18:53.200
In other words, you don't know if everyone, I'm not saying that that should be your attitude,

619
01:18:53.200 --> 01:19:01.200
but you don't know if everyone has the attitude that, oh yes, I'm glad that Simon gave Lauren five dollars for lunch.

620
01:19:01.200 --> 01:19:03.200
Oh, it makes me feel good.

621
01:19:03.200 --> 01:19:10.200
I might think that Lauren is too heavy and shouldn't be eating much more, but you get the idea.

622
01:19:10.200 --> 01:19:17.200
So finally, he comes up with a massive welfare state program. What do you think comes out of all of this?

623
01:19:17.200 --> 01:19:22.200
Because all the Chicago economists always want to run their welfare state efficiently.

624
01:19:22.200 --> 01:19:26.200
That's a big thing. They want the market to do as much as possible.

625
01:19:26.200 --> 01:19:34.200
He comes up with, once again, with all welfare programs, the whole panoply of welfare programs that had grown up by the 60s and more by the 80s,

626
01:19:34.200 --> 01:19:38.200
and simply institutes a very simple negative income tax.

627
01:19:38.200 --> 01:19:44.200
So, if you have less than a certain income, the government would send you a check in the mail.

628
01:19:44.200 --> 01:19:49.200
This is basically implementing a minimum living standard.

629
01:19:49.200 --> 01:19:54.200
And this has tremendous economic effects on people's incentives to work and so on.

630
01:19:54.200 --> 01:20:00.200
And it's inefficient, for example, for the Chicago school, it's inefficient to give somebody food stamps.

631
01:20:00.200 --> 01:20:04.200
It's inefficient to pay somebody's rent. Why?

632
01:20:04.200 --> 01:20:12.200
Well, because from the point of view of the individual, we know that money, they may have better uses for the value of those benefits.

633
01:20:12.200 --> 01:20:17.200
They may want to spend it on drugs or alcohol. That may have a higher utility to them.

634
01:20:17.200 --> 01:20:22.200
So it's inefficient to actually give them in-kind transfers.

635
01:20:22.200 --> 01:20:27.200
That's one of the reasons why he's against in-kind transfers and just wants to give sums of money.

636
01:20:27.200 --> 01:20:31.200
Well, now that's true in gift-giving.

637
01:20:31.200 --> 01:20:39.200
A person would always, now, apart from special occasions, birthdays and so on, you'd get killed if you gave your wife or girlfriend, you're just, you know, here's a hundred dollars.

638
01:20:39.200 --> 01:20:54.200
I think Seinfeld did that once to Elaine. You can't do that, I mean, because it's not purely the act of, it's not purely the act of giving a sum of money that is involved there.

639
01:20:54.200 --> 01:20:59.200
There, a person derives a further benefit from the thoughtfulness that goes into the gift.

640
01:20:59.200 --> 01:21:06.200
But where you don't know someone and you want to help them, the best way to help them, certainly, is to give them a sum of money, because they know their interests best.

641
01:21:06.200 --> 01:21:15.200
That's true in a voluntary charitable relationship, but why should it be inefficient, you know, if you want to help somebody, you know, why not just...

642
01:21:15.200 --> 01:21:22.200
Look, I know this guy drinks all the time, but I don't want him to starve to death, so I'll buy him a meal. I think that's efficient.

643
01:21:22.200 --> 01:21:30.200
or, you know, I don't want to spend the money on drugs, so I'll pay a month's rent for him.

644
01:21:30.200 --> 01:21:42.200
Anyway, Chicago economists are economistic, where they substitute economics for ethical judgments in certain situations.

645
01:21:42.200 --> 01:21:51.200
And finally and lastly, he defends the monstrous program of a national fiat currency monopolized by a central bank

646
01:21:51.200 --> 01:22:00.320
because he believes that there's a large savings in resource costs of gold and other commodity money.

647
01:22:00.320 --> 01:22:06.920
And not only that, he believes that gold doesn't effectively meet changes in the demand for money

648
01:22:06.920 --> 01:22:09.520
and therefore can cause deflation and inflation.

649
01:22:09.520 --> 01:22:13.520
Okay, I'll stop here and I'll take any questions that you have.

650
01:22:13.520 --> 01:22:14.800
Yes?

651
01:22:14.800 --> 01:22:27.800
It is ethical theory, are there, do Knight and Simon ever try to give any kind of objective content to evil, because it seems like if ethical ideals are inherently unattainable, we've emptied the word evil of any meaning.

652
01:22:44.800 --> 01:22:54.800
Because it would seem like everything is inherently evil. Ideals are inherently understandable.

653
01:23:14.800 --> 01:23:44.800
I think what has to be done is, I'm not a philosopher, I think someone else, a philosopher to go back and look at night, and he's written so much more than even I could look at. It's unbelievable how much he wrote on philosophy and ethics, I think a trained philosopher to go back and look at this stuff, and try to come up with a coherence

654
01:23:44.800 --> 01:23:53.800
Explanation and critique of what he's saying. I was just giving a critique of the economic implications of these ethics.

655
01:23:53.800 --> 01:23:57.800
But something more thoroughgoing has to be done.

656
01:23:57.800 --> 01:24:01.800
Other questions?

657
01:24:01.800 --> 01:24:10.800
I'm going to rewrite it this summer and reorient it a little bit and then probably by the end of the summer, early fall.

658
01:24:10.800 --> 01:24:15.800
And I would appreciate anyone else who has any thoughts on this or any comments to write to me about it.

659
01:24:15.800 --> 01:24:23.800
Because I think it's really important to tear the veil away from the Chicago schools as a school of libertarian political economy.

660
01:24:23.800 --> 01:24:25.800
I really think that's important.

661
01:24:25.800 --> 01:24:32.800
These writers such as Knight and Simons are much worse than anyone has really ever conceived of.

662
01:24:32.800 --> 01:24:39.800
And all Chicago economists, whenever they write about Knight, it's almost in the way of deifying him.

663
01:24:39.800 --> 01:24:43.800
Okay, I'll stop here. Thank you.