Why Pope Francis Is A Better Economist Than Milton Friedman

How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points?  
[S]ome people continue to defend trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world. This opinion, which has never been confirmed by the facts, expresses a crude and naïve trust in the goodness of those wielding economic power and in the sacralized workings of the prevailing economic system … 

While the earnings of a minority are growing exponentially, so too is the gap separating the majority from the prosperity enjoyed by those happy few. This imbalance is the result of ideologies which defend the absolute autonomy of the marketplace and financial speculation. Consequently, they reject the right of states, charged with vigilance for the common good, to exercise any form of control. A new tyranny is thus born, invisible and often virtual, which unilaterally and relentlessly imposes its own laws and rules.

These are not the words of a socialist, or a trade unionist. These are the words of Pope Francis’ latest Apostolic Exhortation. I am not a Christian and I do not agree with the religious and theological contents of the Pope’s message. As a secularist I have always felt a deep mistrust towards the Catholic Church, which all too often has tried to influence politics with its anti-progressive, conservative stand. But Pope Francis seems different. He talks about important things, and his views reflect a simple, but wise common sense which seemed to have disappeared from the thinking of the ruling elites of our times. Pope Francis’ message echoes a growing opposition to the current economic system. I have criticised this system many times on my blog, and I will continue to do so. 

The present-day dominant economic ideology can be defined as “neoliberal”. It began to penetrate universities, think tanks, and politics in the 1970s. Its triumph was sealed by the political movements of the 1980s, led by Margaret Thatcher and Ronald Reagan. Since then, neoliberalism has become mainstream, and it has reigned nearly unopposed in the Western world. 

What is neoliberal ideology? According to David Harvey, neoliberalism is “a theory of political economic practices that proposes that human well-being can best be advanced by liberating individual entrepreneurial freedoms and skills within a framework characterized by strong private property rights, free markets, and free trade” (A Brief History of Neoliberalism 2005, p. 2). This theory is based on the premise that the state should stay away from economic activity, as it doesn’t possess enough information to direct it successfully, and that market exchange is an ethic in itself, which guides human action and guarantees individual freedom and social equilibrium (ibid., p. 3).

Neoliberalism ignores all facts that may contradict its assumptions, such as successful government intervention and regulation. Moreover, its relationship with government intervention itself is ambiguous, to say the least. 

For a detailed analysis of this subject, I refer you to Harvey’s book, chapter 3. Here I will mention only the following contradiction inherent in neoliberal thinking: while the neoliberal state in theory should guarantee absolute individual freedom and fairness, in practice it favours certain social and economic groups more than others. For example, the neoliberal state has a clear bias against trade unions and workers, while it actively supports finance and big corporations through targeted deregulation and taxation. Therefore, neoliberalism appears abstract and ideological in theory and contradictory in practice.

Milton Friedman and the Myth of Free Market

In Free to Choose: A Personal Statement, the guru of neoliberalism Milton Friedman depicted the extraordinary success of the United States as the consequence of its freedom:

Ever since the first settlement of Europeans in the New World America has been a magnet for people seeking adventure, fleeing from tyranny, or simply trying to make a better life for themselves and their children …

When they arrived, they did not find streets paved with gold; they did not find an easy life. They did find freedom and an opportunity to make the most of their talents. Through hard work, ingenuity, thrift, and luck, most of them succeeded in realizing enough of their hopes and dreams ….

According to Friedman, two sets of ideas made the ‘American miracle’ possible: the theories of Adam Smith and the political values of Thomas Jefferson.

Friedman, however, absolutely misinterprets American economic history. It is revealing that he does not talk about economic policy, but of individual characteristics such as thrift and hard work. Rather than an economist, Friedman was a philosopher who created an abstract system, detached from reality. History shows that many countries have succeeded economically through a mix of market and state intervention (for example Taiwan). Neoliberals ignore every example that could refute their ideas. They are not pragmatists, but ideologues.

Moreover, the history of the United States itself contradicts the principle of free market. To begin with (but this is not the main point) European settlers took land that already belonged to other people; the state favoured white settlers and employed armies to defend the right of colonisers to take possession of something that did not belong to them. This has absolutely nothing to do with free market and free exchange of goods. Colonialism and state went hand and hand in taking by force natural resources and land.

However, the most important thing is that the United States were not a free market economy. In his bestseller Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism, Cambridge economist Ha-joon Chang argues that the United States pursued a completely different economic policy from that envisioned by Adam Smith. In fact, Adam Smith believed that under the conditions of that time the British colonies should not develop their own industry but first of all develop what they were good at: agricultural products and raw materials. Stopping the importation of European industrial goods, said Smith, would “obstruct instead of promoting the progress [of the US] towards real wealth and greatness” (ibid., p. 49).

Thomas Jefferson, the man admired by Milton Freedman, agreed with Adam Smith. But the first Secretary of the Treasury of the United States, Alexander Hamilton, opposed such views. In 1791, Hamilton submitted his Report on the Subject of Manufactures to the US Congress. He was the man who popularised the expression “infant industries”. According to Hamilton, the US needed to develop their own industrial capacity, and they had to use tariffs, import bans, subsidies etc. to nurture American infant industries before they could compete with the more developed industries of Europe. 

Contrary to what neoliberal historiography has been telling for decades, for around 150 years the United States did not follow Jefferson’s and Smith’s advice, but Hamilton’s economic principles. To name only one example, US tariffs rose from 12.5% at the beginning of the 19th century to around 40% by the 1840s (ibid. p. 51). In doing this, the US actually pursued an economic policy similar to that which Britain had followed, and which other British colonies were to follow.

As Norwegian economist Erik Reinert argues in his book How Rich Countries Got Rich . . . and Why Poor Countries Stay Poor, most rich countries have not succeeded through free market and free trade, but through a mix of government intervention and market forces. Simply put, they have pursued conscious economic policies rather than entrusting economic activities to alleged “natural” market mechanisms. These countries include the English-speaking states, Sweden, Norway, Singapore, Japan, Germany, Austria, China etc.  

Surprisingly, it is not politicians or the media that in these hard times question the legitimacy of neoliberalism, but Pope Francis. As a non-Christian, I think he is the first leader of the Catholic church that deserves to be admired for his ideas and common sense and who can give a real contribution to public opinion beyond the circles of believers.

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