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VERY BASIC IDEAS FOR AN OVERVIEW ON ECONOMICS
Liberalism
First published Thu Nov 28, 1996; substantive revision Thu Sep 16, 2010
As soon as one examines it, ‘liberalism’ fractures into a variety of types and
competing visions. In this entry we focus on debates within the liberal
tradition. We begin by (1) examining different interpretations of liberalism's
core commitment — liberty. We then consider (2) the longstanding debate
between the ‘old’ and the ‘new’ liberalism. In section (3) we turn to the more
recent controversy about whether liberalism is a ‘comprehensive’ or a ‘political’
doctrine. We close in (4) by considering disagreements as to ‘the reach’ of
liberalism — does it apply to all humankind, and must all political communities
be liberal?
Liberal political theory, then, fractures over the conception of liberty. But a
more important division concerns the place of private property and the market
order. For classical liberals — sometimes called the ‘old’ liberalism — liberty
and private property are intimately related.
From the eighteenth century right up to today, classical liberals have insisted
that an economic system based on private property is uniquely consistent with
individual liberty, allowing each to live her life —including employing her labor
and her capital — as she sees fit.
The Great Depression was a severe worldwide economic depression in the
decade preceding World War II. The timing of the Great Depression varied
across nations, but in most countries it started in about 1929 and lasted until
the late 1930s or early 1940s. It was the longest, most widespread, and
deepest depression of the 20th century, and is used in the 21st century as an
example of how far the world's economy can decline. The depression originated
in the United States, starting with the stock market crash of October 29, 1929
(known as Black Tuesday), but quickly spread to almost every country in the
world.
The Great Depression had devastating effects in virtually every country, rich
and poor. Personal income, tax revenue, profits and prices dropped, and
international trade plunged by a half to two-thirds. Unemployment in the
United States rose to 25%, and in some countries rose as high as 33%..Cities
all around the world were hit hard, especially those dependent on heavy
industry. Construction was virtually halted in many countries. Farming and
rural areas suffered as crop prices fell by approximately 60 percent.[ Facing
plummeting demand with few alternate sources of jobs, areas dependent on
primary sector industries such as cash cropping, mining and logging suffered
the most.
Countries started to recover by the mid-1930s, but in many cases the negative
effects of the Great Depression lasted until the start of World War II.
There were multiple causes for the first downturn in 1929, including the
structural weaknesses and specific events that turned it into a major
depression and the way in which the downturn spread from country to country.
In relation to the 1929 downturn, historians emphasize structural factors like
massive bank failures and the stock market crash, while economists (such as
Milton Friedman) point to monetary factors such as actions by the US Federal
Reserve that contracted the money supply. Recessions and business cycles are
thought to be a normal part of living in a world of inexact balances between
supply and demand. What turns a normal recession or 'ordinary' business cycle
into an actual depression is a subject of debate and concern. Scholars have not
agreed on the exact causes and their relative importance. The search for
causes is closely connected to the question of how to avoid a future
depression, and so the political and policy viewpoints of scholars are mixed
into the analysis of historic events eight decades ago. The even larger question
is whether it was largely a failure on the part of free markets or largely a
failure on the part of government efforts to regulate interest rates, curtail
widespread bank failures, and control the money supply. Those who believe in
a large role for the state in the economy believe it was mostly a failure of the
free markets and those who believe in free markets believe it was mostly a
failure of government that compounded the problem.
New Deal
The New Deal was a series of economic programs passed by Congress during
the first term of Franklin Delano Roosevelt, 32nd President of the United
States, from 1933 to his reelection in 1936. The programs were responses to
the Great Depression, and focused on what historians call the "3 Rs": relief,
recovery and reform. That is, relief for the unemployed and poor; recovery of
the economy to normal levels; and reform of the financial system to prevent a
repeat depression. The New Deal produced a political realignment, making the
Democratic party the majority, with its base in liberal ideas, big city machines,
and newly empowered labor unions, ethnic minorities, and the white South.
The Republicans were split, either opposing the entire New Deal as an enemy
of business and growth, or accepting some of it and promising to make it more
efficient. The realignment crystallized into the New Deal Coalition that
dominated most American elections into the 1960s, while the opposition
Conservative Coalition largely controlled Congress from 1937 to 1964. Few
new programs were enacted after 1936, and many agencies were disbanded
during World War II.
Historians distinguish a "First New Deal" (1933) and a "Second New Deal"
(1934–36). Some programs were declared unconstitutional, and others were
repealed during World War II; in early 1937 almost no new programs were
initiated because of the opposition of the new Conservative Coalition.
The "First New Deal" (1933) dealt with groups; from banking and railroads to
industry and farming, all of which demanded help for economic recovery. A
"Second New Deal" in 1934-36 included the Wagner Act to promote labor
unions, the Works Progress Administration (WPA) relief program, the Social
Security Act, and new programs to aid tenant farmers and migrant workers.
Bank and monetary reforms
With strident language Roosevelt took credit for dethroning the bankers he
alleged had caused the debacle. On March 4, 1933, in his first inaugural
address, he proclaimed:
"Practices of the unscrupulous money changers stand indicted in the
court of public opinion, rejected by the hearts and minds of men. . . .
The money changers have fled from their high seats in the temple of our
civilization."
He closed all the banks in the country and kept them all closed until he could
pass new legislation. On March 9, Roosevelt sent to Congress the Emergency
Banking Act, drafted in large part by Hoover's top advisors. The act was passed
and signed into law the same day. It provided for a system of reopening sound
banks under Treasury supervision, with federal loans available if needed.
Three-quarters of the banks in the Federal Reserve System reopened within
the next three days. Billions of dollars in hoarded currency and gold flowed
back into them within a month, thus stabilizing the banking system. By the end
of 1933, 4,004 small local banks were permanently closed and merged into
larger banks.
Women and the New Deal
During these first days, the New Deal created programs primarily for men. It
was assumed that the husband was the "breadwinner" (the provider) and if
they had jobs, whole families would benefit. It was the social norm for women
to give up jobs when they married; in many states there were laws that
prevented both husband and wife holding regular jobs with the government. So
too in the relief world, it was rare for both husband and wife to have a relief
job on FERA or the WPA. This prevailing social norm of the breadwinner failed
to take into account the numerous households headed by women. The first
projects of the New Deal only hired men, but it soon became clear that the
government needed to help women as well.
Milton Friedman (July 31, 1912 – November 16, 2006) was an American
economist, statistician, and a recipient of the Nobel Memorial Prize in
Economics. As a professor of the Chicago School of Economics, based at the
University of Chicago, he had great influence in determining the research
agenda of the entire profession. Friedman's many monographs, books,
scholarly articles, papers, magazine columns, television programs, videos and
lectures cover a broad range of topics of microeconomics, macroeconomics,
economic history, and public policy issues. The Economist magazine praised
him as "the most influential economist of the second half of the 20th
century…possibly of all of it".
During the 1960s he promoted an alternative macroeconomic policy known as
"monetarism". He theorized there existed a "natural rate of unemployment"
and he argued the central government could not micromanage the economy
because people would realize what the government was doing and change their
behavior to neutralize such policies. He predicted that Keynesian policies then
existing would cause "stagflation" (high inflation and minimal growth).
Friedman's claim that monetary policy could have prevented the Great
Depression was an attempt to refute the analysis of Keynes, who argued that
monetary policy is ineffective during depression conditions and that fiscal
policy — large-scale deficit spending by the government — is needed to
decrease mass unemployment. Milton Friedman was a major proponent of a
volunteer military, stating that the draft was "inconsistent with a free society".
In Capitalism and Freedom, he argued that conscription is inequitable and
arbitrary, preventing young men to shape their lives as they see fit. During the
Nixon administration he headed the committee to research a conversion to
paid/volunteer armed force. He would later state that his role in eliminating the
conscription in the United States was his proudest accomplishment. Friedman
did, however, believe a nation could compel military training as a reserve in
case of war time.
He served as a member of President Reagan's Economic Policy Advisory Board
during 1981. During 1988, he received the Presidential Medal of Freedom and
the National Medal of Science. He said, "I think the term classical liberal is also
(…) applicable. I don't really care very much what I'm called. I'm much more
interested in having people thinking about the ideas, rather than the person."
Friedman was supportive of the state provision of some public goods that
private businesses are not considered as being able to provide. However, he
argued that many of the services performed by government could be
performed better by the private sector. Above all, if some public goods are
provided by the state, he believed that they should not be a legal monopoly
where private competition is prohibited. For, example, in response to the
United States Post Office's legal monopoly of mail, he said
There is no way to justify our present public monopoly of the post office. It
may be argued that the carrying of mail is a technical monopoly and that a
government monopoly is the least of evils. Along these lines, one could
perhaps justify a government post office, but not the present law, which makes
it illegal for anybody else to carry the mail. If the delivery of mail is a technical
monopoly, no one else will be able to succeed in competition with the
government. If it is not, there is no reason why the government should be
engaged in it. The only way to find out is to leave other people free to enter.
—Milton Friedman, Friedman, Milton & Rose D. Capitalism and Freedom,
University of Chicago Press, 1982, 29
Friedman made newspaper headlines by proposing a negative income tax to
replace the existing welfare system, and then opposing a bill to implement it
because the bill merely proposed to supplement the existing system rather
than replace it.
During 2005, Friedman and more than 500 other economists advocated
discussions regarding the economic benefits of the legalization of marijuana.
John Maynard Keynes, 1st Baron Keynes, 5 June 1883 – 21 April 1946)
was a British economist whose ideas have profoundly affected the theory and
practice of modern macroeconomics, and the economic policies of
governments. He identified the causes of business cycles, and advocated the
use of fiscal and monetary measures to mitigate the adverse effects of
economic recessions and depressions. His ideas are the basis for the school of
thought known as Keynesian economics, and its various offshoots.
In the 1930s, Keynes spearheaded a revolution in economic thinking,
overturning the older ideas of neoclassical economics that held that free
markets would automatically provide full employment as long as workers were
flexible in their wage demands. Keynes instead argued that aggregate demand
(in macroeconomics, aggregate demand (AD) is the total demand for final
goods and services in the economy (Y) at a given time and price level)
determined the overall level of economic activity, and that inadequate
aggregate demand could lead to prolonged periods of high unemployment.
Following the outbreak of World War II, Keynes's ideas concerning economic
policy were adopted by leading Western economies. During the 1950s and
1960s, the success of Keynesian economics was so resounding that almost all
capitalist governments adopted its policy recommendations.
Keynes's influence waned in the 1970s, partly as a result of problems that
began to afflict the Anglo-American economies from the start of the decade,
and partly due to critiques from Milton Friedman and other economists who
were pessimistic about the ability of governments to regulate the business
cycle with fiscal policy. However, the advent of the global financial crisis in
2007 has caused a resurgence in Keynesian thought. Keynesian economics has
provided the theoretical underpinning for the economic policies of President
Barack Obama of the United States, former Prime Minister Gordon Brown of
the United Kingdom, and other global leaders to ease the late 2000s economic
recession.
In 1999, Time magazine included Keynes in their list of the 100 most
important and influential people of the 20th century, commenting that; "His
radical idea that governments should spend money they don't have may have
saved capitalism".[6] In addition to being an economist, Keynes was also a
civil servant, a patron of the arts, a director of the Bank of England, an advisor
to several charitable trusts, a writer, a private investor, an art collector, and a
farmer.
Economics: the Keynesian resurgence of 2008–2009
The Financial crisis of 2007–2010 led to public scepticism about the free
market consensus even from some on the economic right. In March 2008,
Martin Wolf, chief economics commentator at the Financial Times, announced
the death of the dream of global free-market capitalism. In the same month
macroeconomist James K. Galbraith used the 25th Annual Milton Friedman
Distinguished Lecture to launch a sweeping attack against the consensus for
monetarist economics and argued that Keynesian economics were far more
relevant for tackling the emerging crises. A series of major bail-outs were
pursued during the financial crisis, starting on 7 September with the
announcement that the U.S. government was to nationalize the two
government-sponsored enterprises which oversaw most of the U.S. subprime
mortgage market—Fannie Mae and Freddie Mac. In October, the British
Chancellor of the Exchequer referred to Keynes as he announced plans for
substantial fiscal stimulus to head off the worst effects of recession, in
accordance with Keynesian economic thought. Similar policies have been
adopted by other governments worldwide. Much of the recent discussion
reflected Keynes's advocacy of international coordination of fiscal or monetary
stimulus, and of international economic institutions such as the International
Monetary Fund and the World Bank, which many had argued should be
reformed at a "new Bretton Woods" even before the crises broke out. IMF and
United Nations economists advocated a coordinated international approach to
fiscal stimulus.
By the end of December 2008, the Financial Times reported that "the sudden
resurgence of Keynesian policy is a stunning reversal of the orthodoxy of the
past several decades" In December 2008, Paul Krugman released his book, The
Return of Depression Economics and the Crisis of 2008, arguing that economic
conditions similar to that which existed during the earlier part of the century
had returned, making Keynesian policy prescriptions more relevant than ever.
In February 2009 Shiller and George Akerlof published Animal Spirits, a book
where they argue the current US stimulus package is too small as it does not
take into account Keynes's insight on the importance of confidence and
expectations in determining the future behaviour of businessmen and other
economic agents.
While the need for stimulus measures has been broadly accepted among policy
makers, there has been much debate over how to fund the spending. Some
leaders and institutions such as Angela Merkel and the European Central Bank
have expressed concern over the potential impact on inflation, national debt
and the risk that a too large stimulus will create an unsustainable recovery.
Among professional economists the revival of Keynesian economics has been
even more divisive with over 300 economists signing a petition stating that
they do not believe higher government spending will help the United States's
economy and some senior figures such as Robert Lucas remaining sceptical
whether stimulus packages can work at all.
Naomi Klein (born May 8, 1970) is a Canadian author and activist known for
her political analyses and criticism of corporate globalization.
The Shock Doctrine
Klein's third book, The Shock Doctrine: The Rise of Disaster Capitalism, was
published on September 4, 2007, becoming an international and New York
Times bestseller translated into 20 languages. The book argues that the free
market policies of Nobel Laureate Milton Friedman and the Chicago School of
Economics have risen to prominence in countries such as Chile under Pinochet,
Russia under Yeltsin, and the United States (specifically, the privatization of the
New Orleans Public Schools after Hurricane Katrina). The book also argues that
policy initiatives such as the privatization of Iraq's economy under the Coalition
Provisional Authority were pushed through while the citizens of these countries
were in shock from disasters or upheavals. It is also claimed that these shocks
are in some cases, such as the Falklands War, created with the intention of
being able to push through these unpopular reforms in the wake of the crisis.
Klein identifies "shock doctrine", elaborating on Joseph Schumpeter, as the
latest in capitalism's phases of "creative destruction."
The Shock Doctrine was adapted into a short film of the same name, released
onto YouTube. The film was directed by Jonás Cuarón, produced and co-written
by his father Alfonso Cuarón. The video has been viewed over one million
times.
Among positive reviews, Joseph Stiglitz wrote in The New York Times that The
Shock Doctrine is an "ambitious look at the economic history of the last 50
years and the rise of free-market fundamentalism around the world"; John
Gray, reviewing for The Guardian, describes the book as "both timely and
devastating"
Among negative reviews, in a report for Cato Institute, Johan Norberg argued
that Klein's analysis is flawed on virtually every level and her historical
examples do not survive scrutiny. Tom Redburn, in The New York Times wrote
"she essentially accuses Friedman of being the godfather of a Mafia-like gang
... There’s a measure of truth about the dark side of globalization ... but
[corporatism] is a lot to lay on poor Milton."
The publication of The Shock Doctrine increased Klein's prominence, with the
New Yorker judging her "the most visible and influential figure on the American
left. On February 24, 2009, the book was awarded the inaugural Warwick Prize
for Writing from the University of Warwick in England.
The Shock Doctrine: The Rise of Disaster Capitalism is a 2007 book by
Canadian author Naomi Klein.
The book argues that the free market policies of Nobel Laureate Milton
Friedman have risen to prominence in some countries because they were
pushed through while the citizens were reacting to disasters or upheavals. It is
implied that some man-made crises, such as the Falklands war, may have been
created with the intention of being able to push through these unpopular
reforms in their wake.
Synopsis
The book has an introduction, a main body and a conclusion, divided into
seven parts with a total of 21 chapters.
The introduction sketches the history of the last thirty years where economic
shock doctrine has been applied throughout the world, from South America in
the 1970s to New Orleans after Hurricane Katrina. Klein introduces two of her
main themes.
1. That practitioners of the shock doctrine tend to seek a blank slate on
which to create their ideal free market economies, which inevitably
requires a usually violent destruction of the existing economic order.
2. The similarities between economic shock doctrine and the original shock
therapy – a psychiatric technique where electric shocks were applied to
mentally ill patients.
Part 1 begins with a chapter on psychiatric shock therapy and the covert
experiments conducted by the psychiatrist Ewen Cameron in collusion with the
Central Intelligence Agency: how it was partially successful in distorting and
regressing patients' original personality, but ineffectual in developing a better
personality to replace it. Parallels with economic shock therapy are made,
including a digression on how government agencies harnessed some of the
lessons learned to create more effective torture techniques. Torture, according
to Klein, has often been an essential tool for authorities who have implemented
aggressive free market reforms – this assertion is stressed throughout the
book. She suggests that for historical reasons the human rights movement has
often portrayed torture without explaining its context, which has made it
frequently appear as pointless sadism. The second chapter introduces Milton
Friedman and his Chicago School of Economics, who Klein describes as leading
a movement committed to free markets even less regulated than before the
Great Depression.
Part 2 discusses the use of shock doctrine to transform South American
economies in the 1970s, focusing on the coup in Chile led by General Pinochet.
The apparent necessity for the unpopular policies associated with shock
therapy to be supported by torture is explored.
Part 3 covers attempts to apply the shock doctrine without the need for
extreme violence against sections of the population. The mild shock therapy of
Margaret Thatcher is explained as being made possible by the Falklands War.
Part 4 reports on how the shock doctrine was applied in Poland, Russia, South
Africa and to the tiger economies during the 1997 Asian financial crisis.
Part 5 introduces the Disaster Capitalism Complex where the author describes
how companies have learnt to profit from disasters. She talks about how the
same personnel move easily from security-related posts in US government
agencies to lucrative positions in corporations.
Part 6 discusses the occupation of Iraq, which Klein describes as the most
comprehensive and full-scale implementation of the shock doctrine ever
attempted.
Part 7 is about the winners and losers of economic shock therapy, how narrow
groups will often do very well by moving into luxurious gated communities
while large sections of the population are left with decaying public
infrastructure, declining incomes and increased unemployment.
The Conclusion doesn't recap the rest of the book, instead it talks about the
backlash against the shock doctrine and economic institutions that propagate it
like the World Bank and IMF. South America and Lebanon post-2006 are
focused on as sources of positive news where politicians are already rolling
back free-market policies, with some mention of the increased campaigning by
community-minded activists in South Africa and China.
Site links
http://plato.stanford.edu/entries/liberalism
www.wikipedia.org
Bibliography
Steve Wiegand, Lessons from the Great Depression for Dummies, Wiley
Publishing, Inc.