Milton Friedman on social democracy

by John Q on December 17, 2004

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

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

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

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

{ 50 comments }

1

abb1 12.17.04 at 12:52 pm

There are large sectors of the economy where competitive markets either can’t be sustained or don’t perform adequately in the absence of government intervention.

Instead of enumerating the cases where competitive markets don’t work well, can I say that the only sector where competitive markets do work well is mass-production and distribution of identical or similar easily comparable items or services? Is this not true?

Thanks.

2

Deb Frisch 12.17.04 at 1:46 pm

“There are large sectors of the economy where competitive markets either can’t be sustained or don’t perform adequately in the absence of government intervention. In all these sectors, governments are bound to get involved.”

I agree with the gist of your post, but I would emphasize the fact that governments are always involved, even in cases where the market does a good job doing its thing. Governments issue currency, enforce property laws, etc. So it’s not a question of market vs. government, it’s always a question of how the two interact.

Unfortunately, many economists do not share your view and have blind faith in the invisible hand of the market (Arnold Kling’s econlog is a great example).

3

azad 12.17.04 at 2:35 pm

well maybe a corrolary would be that the those countries that have the resources to continue their public sector growth do, while the neoliberal ideology precludes some developing government’s from providing the same sorts of services…

4

Henry 12.17.04 at 2:54 pm

So the Habermas and Offe late-capitalism legitimation crisis model has some legs after all.

5

asg 12.17.04 at 3:27 pm

can I say that the only sector where competitive markets do work well is mass-production and distribution of identical or similar easily comparable items or services? Is this not true?

Not even a little bit true, as a passing glance at the world around you might reveal. But, judging from your other comments here, familiarity with the world around you might be a expecting too much.

From a social-democratic perspective, I’d put things differently. There are large sectors of the economy where competitive markets either can’t be sustained or don’t perform adequately in the absence of government intervention.

From a free-market perspective, I’d put things still differently. The explanation for government intervention in large parts of the economy is not that competitive markets fail, but more along the standard public choice lines (concentrated benefits/diffuse costs, Olson interest group theory, etc.), as well as the general sentiment embodied by “I should have the best health care in the world and someone else should pay for it,” pretty much a unifying statement of health-care politics in the western world.

Just as an aside, deb frisch, if you think Kling has “blind faith in the invisible hand of the market”, then you haven’t been reading him very carefully. But hey, if that’s what comes out when someone pulls the string on your back, by all means go with it.

6

jet 12.17.04 at 3:40 pm

Abb1,

Yeah, because all those state ran industries in the pre-soviet breakup really tore up the competition.

Why was it again that E. Germany was so poor and they put up a wall to keep the people in? I forget.

7

George 12.17.04 at 3:55 pm

Thanks for the pointer, John Q. And your summary and comments sound about right — at least to this economic layman, a free market believer who works with the public sector. I did, however, rub my eyesw hen you described agriculture as ‘the archetypal competitive industry.’ How times change.

And abb1, just off the cuff, I’d point out that many market sectors characterized by “mass-production and distribution of identical or similar easily comparable items or services” owe their very existence to competitive market forces. Examples include cellphones, computers, software, pharmaceuticals, and cars. Not that government may not have an important role to play in each of those sectors — it does — but they would look pretty stunted today if it had been up to government to create them in the first place. Perspective.

8

Matt 12.17.04 at 4:38 pm

Jet,
Maybe I’m misreading you or abb1 (easy enough to do when sarcasim is the main form of discourse…) but I don’t see that you really conflict- after all, it seems the areas abb1 notes are those making most consumer goods, while those were the areas where the soviet economy was by far the worse at. So, are you two not saying largely the same thing? And, I don’t think anyone here is suggesting that we either have a fully “free market” (whatever that might mean) or a command economy. So, please, E. Germany and the Soviet Union are not really relavent to John’s discussion.

9

Deb Frisch 12.17.04 at 5:07 pm

Arnold Kling is a cheerleader for the religion of economics.

[Despite Brad DeLong’s claims to the contrary, economics is still primarily a faith-based science.]

He writes: If I were given my choice of one policy change in Social Security, I would rather fall on my sword for a higher retirement age than for privatization. But I do believe that privatization would raise economic growth.

He’s not so crazy that he thinks privitization is more important than other changes in the US SS system, but he’s crazy enough to think it’s a good idea.

More evidence that he has blind faith in the invisible hand (not to be confused with blind faith in the invisible guy in the sky, although the two afflictions tend to be highly correlated):

In respose to Will Wilkison’s argument that educational goods should be allocated by the market, not the government, AK writes:

Great minds think alike.

I thought dubyadubya@Cato’s column in Reason was mind-bogglingly stupid. AK thought it was brilliant. This pattern (strong negative correlation between what I think is brilliant and what AK thinks is brilliant) is what led me to deduce that he suffers from economics-induced dementia.

10

praktike 12.17.04 at 5:31 pm

Actually, I think many people are realizing that the scope of government activity isn’t the end and be all that Friedman and all would make it our to be. Europe ain’t exactly going like gangbusters right now, but it ain’t exactly impoverished, either.

11

George 12.17.04 at 5:37 pm

Having now read Friedman’s piece, I’d like to point out something that John Q omitted. Friedman’s article does illustrate (in John Q’s words) that “the general movement of policy since the end of World War II has been in a socialist direction, that is towards an expansion in the share of GDP allocated to the public sector.” But Friedman states that this trend more or less stopped in 1983 under Ronald Reagan:

Reagan’s election brought the growth in government non-defence spending to a halt. As of 2003, government non-defence spending equalled 30 per cent of national income, the same as it was in 1983.

So I would ask John Q: how does this square with your explanation that “the parts of the economy where competitive market provision is problematic” — including “human services like health and education, social insurance against unemployment and old age, production of public goods and information, and a range of infrastructure services” — have “grown in relative importance”? Did the relative growth of these sectors stop 20 years ago?

The question is not rhetorical; I have no evidence one way or the other. But it does seem counterintuitive that things like health care, education and social insurance, if they were growing in relative importance from 1955-1983, should have stopped growing after that. If anything, I’d expect them to continue to grow as the population matures. Any explanation? Has the service economy grown so much that it has talen the place of manufacturing in keeping apace the growth of the private sector?

12

rvman 12.17.04 at 5:38 pm

The market also delivers custom-made products pretty well. Hand built boats, arts and crafts, high-end restaurants, they do pretty well. Plenty of companies deliver custom software to firms, custom flower designs for weddings. The mass market revolution has done well to deliver something to the folks who have nothing but their work to pay with, but the rich still get their custom stuff. (Indeed, I would argue that mass-production of staples is where socialism comes closest to succeeding – it is meeting customer demand which it fails at, and markets do well at.)

What the market fails to deliver is getting everyone what they want without working for it, something abb1 will never forgive it for.

13

George 12.17.04 at 5:41 pm

Having now read Friedman’s piece, I’d like to point out something that John Q omitted. Friedman’s article does illustrate (in John Q’s words) that “the general movement of policy since the end of World War II has been in a socialist direction, that is towards an expansion in the share of GDP allocated to the public sector.” But Friedman states that this trend more or less stopped in 1983 under Ronald Reagan:

Reagan’s election brought the growth in government non-defence spending to a halt. As of 2003, government non-defence spending equalled 30 per cent of national income, the same as it was in 1983.

So I would ask John Q: how does this square with your explanation that “the parts of the economy where competitive market provision is problematic” — including “human services like health and education, social insurance against unemployment and old age, production of public goods and information, and a range of infrastructure services” — have “grown in relative importance”? Did the relative growth of these sectors stop 20 years ago?

The question is not rhetorical; I have no evidence one way or the other. But it does seem counterintuitive that things like health care, education and social insurance, if they were growing in relative importance from 1955-1983, should have stopped growing after that. If anything, I’d expect them to continue to grow as the population matures. Any explanation? Has the service economy grown so much that it has talen the place of manufacturing in keeping apace the growth of the private sector?

14

Guy 12.17.04 at 5:43 pm

John Q wrote:
From a social-democratic perspective, I’d put things differently. There are large sectors of the economy where competitive markets either can’t be sustained or don’t perform adequately in the absence of government intervention.

asg replied:
From a free-market perspective, I’d put things still differently. The explanation for government intervention in large parts of the economy is not that competitive markets fail, but more along the standard public choice lines (concentrated benefits/diffuse costs, Olson interest group theory, etc.), as well as the general sentiment embodied by “I should have the best health care in the world and someone else should pay for it,” pretty much a unifying statement of health-care politics in the western world.

I think you’re both right. Government intervention in the economy tends to be concentrated in areas where markets don’t function as well. At the same time, there’s no doubt that political economic factors result in far-from-optimal government intervention.

15

George 12.17.04 at 5:43 pm

Sorry for double post; another victim of comment bug.

16

George 12.17.04 at 5:44 pm

Sorry for double post; another victim of comment bug.

17

Walt Pohl 12.17.04 at 5:56 pm

The only comment I can make about the comments: Ugh.

Henry: Care to elaborate? I think whatever I once knew about Habermas has since been overwritten with football scores.

18

Jim Harrison 12.17.04 at 5:57 pm

Government intervention in the economy tends to be concentrated in areas where nothing functions very well, for example, providing health insurance to high risk patients or educating low income kids.

In this spelling bee, the corporations are asked to spell C-A-T while the public agencies get S-Y-N-E-C-D-O-C-H-E.

19

Dan Kervick 12.17.04 at 6:20 pm

John,

You say:

He draws a distinction between ‘welfare’ and the traditional socialist belief in public ownership of the means of production, seeing the latter growing at the expense of the former.

But I haven’t been able to find any place in the article where Friedman says that public ownership of the means of production has grown at the expense of welfare spending. I assume you just meant it the other way around?

20

Sebastian Holsclaw 12.17.04 at 7:00 pm

“So, please, E. Germany and the Soviet Union are not really relavent to John’s discussion.”

They weren’t so great at providing health care services either so they aren’t totally irrelavent.

I think asq’s point about: “I should have the best health care in the world and someone else should pay for it” is worth repeating. A huge problem in talking about health health care is that people want the most advanced technology available, and they want it for free.

21

fdl 12.17.04 at 7:17 pm

instead of insulting the intelligence and, presumably, the morality of the “people” by accusing them of wanting something for free (hell, i’d like to get paid for not working, but that’s not really the basis of a useful policy discussion),

we could say that people want health care at a “fair” price, but there is no consensus on what is fair.

Is it “fair” that american policy holders bear a disproportionate share of the cost of new drug development?

Is it “fair” that employees of large corporations get better benefits than those who buy solo policies?

Is it “fair” that insurance policies can take into account pre-existing conditions, or any individual characteristics at all? (Should an insurance contract be year to year, or should it be for life?)

and so forth.

Francis

22

abb1 12.17.04 at 7:18 pm

The market also delivers custom-made products pretty well.

Hmm, I dunno. I mean, yes, of course, ‘the market’ in a wide sense, in the sense that you’re not forced to buy those custom-made products; but not market capitalism.

Crafsmanship existed long before market capitalism, and pretty much in the same form it exists now. There is no ‘efficiency’ here, no branding, not much competition, capital is not essential; you find your hairdresser, your car mechanic or you violin maker by a word of mouth, they are people you trust. It’s a completely different paradigm.

Would you agree?

23

abb1 12.17.04 at 7:32 pm

Why is getting healthcare ‘for free’ is unthinkable, but getting, say, police protection ‘for free’ is the most natural concept in the world?

Those who reject ‘free’ healthcare as immoral (or whatever) should seriously think about mob protection racket as a model for the law and order system.

Actually, I think either Milton himself or his son David does exactly that. But still…

24

John Biles 12.17.04 at 8:20 pm

The market works best on non-essentials. Anything where people can survive not buying it, and thus both ends of the market remain responsive to changes in conditions (televisions, yachts, mansions). It works less well on things which are necessary to life, but sufficiently plentiful to keep the price down at a reasonable level anyway (food). It works poorly on things which are necessary, but more expensive than can be afforded by those in most need (health care, education). Category III also tends to be the hardest area for supply to reach demand’s level.

25

Matt 12.17.04 at 8:58 pm

Sebastian,

If you were to ask most people in Russia if health care is better now or in the late soviet union, you might be surprised to find out it was much better then. It’s actually gone seriously down hill for most people. (Unlike some, I’ve had the joy of going to a Russian hospital, and my wife’s mother is a doctor in Russia, so I don’t have to just make shit up or guess.) As part of a conditionf for an IMF loan Russia cut off much of its subsidization of health care, leaving it to “the market”. Alas, for many people there there is now no health care.

26

S. Weil 12.17.04 at 9:29 pm

A few points. It is not unusual to think of government as a superior good – as societies become richer, and most needs are met, consumption should shift from commosities to social consumption. After all how many cars/houses/boats can one person consume? Also, as your own needs are met, the welfare of those around you might inreasingly enter into your own preference set. To call this socialism is a bit of a stretch. The more interesting question is what in the political economy of the US was responsible for derailing this process in the early 80s?. My guess is racial and social wedge issues, as well as the influence of big money interests.

27

John Quiggin 12.17.04 at 10:25 pm

Dan Kervick: thanks for picking this error up. I’ve fixed it now.

George: My argument is that, although underlying demand for services has grown, neoliberalism has held spending down, more in the US than elsewhere. If you look at projections for health care spending in the US though, this balance is going to be difficult to sustain.

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Nicholas Weininger 12.18.04 at 3:13 am

The market works *extremely* well in most of the areas you mention, John– just not by egalitarian metrics. Much as it may surprise you, there are some people who don’t think that universal provision regardless of ability to pay is a necessary condition for working “adequately”.

29

abb1 12.18.04 at 11:16 am

Well, Nicholas, mechanism that doesn’t meet all the specs – ‘egalitarian metrics’ in this case – can’t be characterized as working ‘extremely well’; obviously it doesn’t work well enough to meet these egalitarian requirements.

This is like saying that Windows 3.1 worked extremely well, only not by reliability metrics.

30

benton 12.18.04 at 11:29 am

Eat Germany and USSR were command economies. But, in a more or less peaceful head to head match up for global domination, the Great Society and whatever frenchified term there is for univiersal healthcare for europeans turned out to be part of the winning combination. West Berlin, mind you, was the ultimate welfare state. I think it is unwise to use the cold war competition as a model for arguing that our economy should move away from this so called “socialistt” paradigm. Its a bit like saying the Lakers didn’t win a championship until Kobe got a bigger role, so trading Shaq to Miami and replacing him with more Kobe like players is the thing to do….

31

Brett Bellmore 12.18.04 at 1:44 pm

I think Nicholas’ point is, not everyone agrees that “egalitarian metrics” are the right metrics to use. To a large extent, “what works” depends on your value system, and what you want to achieve.

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Nicholas Weininger 12.18.04 at 4:17 pm

What Brett said. Which is how I should have said it, only I was too busy being snarky. My bad.

There’s a larger point here, too, about the intellectual history of defenses of capitalism. It seems to me that, faced with the popular domination of socialist/egalitarian intellectual premises in the mid 20th century, many defenders of capitalism made a sort of strategic retreat or “even if” move. They argued that welfare capitalism– or a “mixed economy”, if you like– beats socialism by *all* plausible metrics, even the socialists’ own. Hayek is a good example: his earlier stuff contains a great many caveats about how you can keep a large welfare state and still have something quite different from, and superior to, outright central planning.

This is the argument that has largely triumphed today, and this triumph is what I think Friedman is talking about. Not a surprising triumph, either, since it’s a very easy case to make both empirically and theoretically. There is also a case to be made that even by some socialist metrics, laissez-faire capitalism can beat welfare capitalism; but it’s much less obvious and easier to attack. And many of us (myself included) are not as good at making it because we don’t buy the socialist metrics in the first place.

So capitalism has won intellectually only in a narrow sense. In the sense of normative premises and metrics, socialism is not much less dominant today than it was sixty years ago. The battle for a thoroughgoing individualist vindication of market freedoms is now as ever an uphill one. One symptom of this is that very often in discussions like this one, the participants assume without comment the validity of socialist metrics, which assumption tends occasionally to drive us dissenters to snarky rejoinders.

33

abb1 12.18.04 at 7:13 pm

socialist/egalitarian intellectual premises in the mid 20th century

I thought the egalitarian intellectual premises have been with us since the 18th century: the great French revolution, ‘all men are created equal’ and so on – the Enlightenment. I figure we could argue about a relative weight of the “egalitarian metrics” in regards to other metrics but not whether they are ‘right metrics to use’.

If you’re throwing the “egalitarian metrics” out of the window, then you’re – seems to me – removing yourself from the mainstream civilization and to some wacky fringe.

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Nicholas Weininger 12.18.04 at 7:21 pm

abb1: if you think that, you don’t understand the difference between equality of liberty and equality of outcome, nor that between classical liberalism and egalitarianism. (Nice appeal-to-authority fallacy thrown in there too, BTW).

35

abb1 12.18.04 at 8:04 pm

Nicholas, it’s true, I am not an expert, but my impression is that the difference is not as straightforward as you are implying. Everyone, including 18th century eqalitarians, understood that complete equality is not an option, but also, I think, everyone understands that it’s at least a desirable quality. Some would put ‘liberty’ before ‘equality’, others would rather have ‘equality’ at the expense of ‘liberty’, but you don’t just say that equality is a wrong metric, I don’t think so.

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John Quiggin 12.18.04 at 8:23 pm

I’ve pointed out here that the distinction between equality of opportunity and equality of outcome is problematic. The two are complements, not substitutes.

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S. Weil 12.18.04 at 8:52 pm

Univeral health care in most of the industrialized world beats the current system in the US by almost any metric, egalitarian or otherwise. Those countries spend far less/person yet have better macro -level healthcare outcomes. The idea that the low costs of healthcare in the other countries is due to free-riding on US funded drug research fails a basic smell test. Drug reasearch is a trivial (30B/500B) portion of pharma revenues – what the other-country health care systems refuse to do is add to the 200B+ a year in ecomomic rents captured by big Pharma through patent monopolies. It is only common sense to regulate the prices charged by a government established monopoly.

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Nicholas Weininger 12.18.04 at 9:20 pm

John– when did I mention equality of opportunity? I’m talking about equality of negative liberty. I do *not* view equality of positive opportunity as any more of an appropriate metric than equality of outcome.

s. weil– “macro-level healthcare outcomes” are, in fact, an egalitarian metric. Moreover, the failures of the US health care system are not an argument against free-market health care, since the US system is not a free-market one and has not been so for at least forty years.

39

Firebug 12.18.04 at 10:16 pm

Weininger: John— when did I mention equality of opportunity? I’m talking about equality of negative liberty. I do not view equality of positive opportunity as any more of an appropriate metric than equality of outcome.

Your views represent a lunatic fringe shared by less than 5% of the population (and that is a generous estimate). I’m guessing that you’re a libertarian, or maybe you’ve drunk Ayn Rand’s Kool-Aid. That’s OK, I drank it once too. Maybe you’ll get over it when you move out of your parents’ basement and into the real world where the “free market” isn’t always perfect.

No doubt you believe that self-interest is very important. So do I – and guess what? For the VAST MAJORITY of people, a laissez-faire system is NOT in their best interests, compared to European (or 1960s-1970s American) welfare capitalism. Why should the working class and middle class support a government that protects the property of the rich and does little else? What’s in it for them? You don’t seem to understand the idea of a social contract. Your property doesn’t exist in a state of nature (where it would be subject to seizure by the strongest brute on the block at will); it exists due to the protection of the laws and the government. And the government exists at the sufferance of We, the People. Why would we – the majority of Americans – want a system that offers no safety net and no protection against the cruelties of the marketplace? You want to have your cake and eat it too. You want the protection of your property that only the law can provide, but without the concessions every civilized society demands in return. The type of robber baron government you want can be imposed only by a dictatorship. If you were in charge, working Americans would be wheeling out the guillotines by the end of the first week. We were damned lucky that we in the US got FDR instead of some lunatic like Huey Long. If you and your coterie of clowns manage to bring back laissez-faire, God only knows what it will lead to this time.

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John Quiggin 12.18.04 at 10:21 pm

Nicholas, I misunderstood you, but then isn’t equality of negative liberty a definitional characteristic of your preferred system rather than an outcome?

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abb1 12.18.04 at 10:29 pm

This ‘equality of negative liberty’ – is this something like that caricature about Bill Gates and a homeless guy both being equally denied the right to sleep under the bridge (by Anatole France, IIRC)?

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Nicholas Weininger 12.18.04 at 10:56 pm

John– maybe, but I’m not sure the distinction is meaningful. One can certainly compare at least roughly the extent to which different folks’ negative liberty is protected under different systems, so equality of negative liberty can be used as a metric. And a commitment to equal outcomes, or “not-too-unequal” ones, could well be taken as a definitional characteristic of a socialist system.

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Tracy 12.19.04 at 8:04 pm

As more people figure out how to game the welfare system (or, more kindly, find themselves supported when they make bad decisions and thus face greater incentives to make more of them) then the welfare system will get more expensive.

Then you can add in an aging population to the expensive side. And isn’t it interesting how in health and education, which are dominated by government provision, there either don’t seem to be any productivity increases (education) or productivity increases don’t lead to price drops (health)?

And governments can always find things to regulate. After all, all those MPs were elected to make the world a better place. And the tool they have to do that is to pass laws. Hammers, nails?

Incidentally, all those who think that markets are dependent on the government – how long do you think it would take you to buy some illegal drugs? It would take me, I estimate, about 4-5 phone calls. Markets can survive in the face of intense hostility from governments, albeit rather less efficiently and more bloodily. Probably not for every product – running an illegal trans-Pacific airline would probably be impossible – but the black market is alive and well.

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derrida derider 12.20.04 at 3:15 am

And isn’t it interesting how in health and education, which are dominated by government provision, there either don’t seem to be any productivity increases (education) or productivity increases don’t lead to price drops (health)?

This reasoning is a classic instance of inverted causality. The same innate market failures that make a laissez faire solution very unattractive in these industries make productivity increases difficult. The point is that govermnets tend to intervene only in the hard bits of the economy.

And BTW have you noticed how “productivity increases don’t lead to price drops” in Defence too? Is that because of public rather than private provision?

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derrida derider 12.20.04 at 3:16 am

And isn’t it interesting how in health and education, which are dominated by government provision, there either don’t seem to be any productivity increases (education) or productivity increases don’t lead to price drops (health)?

This reasoning is a classic instance of inverted causality. The same innate market failures that make a laissez faire solution very unattractive in these industries make productivity increases difficult. The point is that govermnets tend to intervene only in the hard bits of the economy.

And BTW have you noticed how “productivity increases don’t lead to price drops” in Defence too? Is that because of public rather than private provision?

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cm 12.20.04 at 10:09 am

tracy: Well, maybe you should send your kids to a productivity-enhanced school with 1 teacher in front of 40 students, then to a college where the lectures are given by TAs and 1 professor runs 500 students, and when you see the doctor, you’re through with it in 10 minutes. (Actually the latter may not be too far from the truth already.)

Doing multiple-choice tests (that require less original thought) instead of going through essays is cheating. (But it makes for great test evaluation “productivity”.)

What are you doing for a living? And how is *your* productivity coming along? As opposed to that of fat government for a change.

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jasper emmering 12.20.04 at 12:13 pm

We (the reality-based community) need to have an easy, short and clear anwer to give people who “trust” (“believe in” is the better term) markets over anything else. That’s why I think posts like Quiggin’s ought to flood the internets.

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George 12.20.04 at 10:04 pm

George: My argument is that, although underlying demand for services has grown, neoliberalism has held spending down, more in the US than elsewhere. If you look at projections for health care spending in the US though, this balance is going to be difficult to sustain.

But for 20 years? If so, amazing that “neoliberalism” has been so successful as to halt the march of such inevitable social factors, through both Republican and Democratic Presidents and Congresses. Perhaps Reagan’s admirers are right when they talk about his fundamental and positive effect on the economy — going so far as to claim the boom of late 1990s as the “Reagan economy.” I’ve always wondered about how true that is.

I’m not saying you’re wrong, just that more evidence would be necessary to support your explanation of Friedman’s observation. And if you’re right, there are a few obvious follow-on questions. For instance, if social spending as a proportion of GDP has been artificially held down for the past two decades by “neoliberal” thinking, will it inevitably explode to make up for lost time, like a balloon mortgage? Has permanent damage been done to the economy in the meantime? On the other hand, is it possible that the trends forcing growth in the relative importance of social spending have been permanently stilled?

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John Quiggin 12.20.04 at 10:44 pm

The aggregate ratio of government expenditure (all levels) to GDP has been more or less constant in the US since 1980, but defense spending and interest have declined, so there has been a modest upward trend in the kind of spending I’m talking about.

And it’s my perception that in areas like access to higher education, there are problems traceable to spending cuts that will have to be paid for in the future. However, I need to do more work on this.

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George 12.20.04 at 11:49 pm

John Q: thanks for your response. Not trying to create more work for you, of course. I wouldn’t have known to ask the question without your pointer to Friedman’s article. Yet it does shed more light on the familiar argument between Reaganites and New Dealers — though in my experience, only those on the fringes are saying anything really fundamentally different from each other. Most people in the center just choose slightly different soapboxes. But if there were real evidence for some long-term change in the relationships between the public and private sectors, now *that* would be interesting.

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