Archives For international politics

Economic Illiteracy of the Week

Josh Wright —  12 September 2009

Comes by way of US Trade Representative Ron Kirk defending the protectionist White House move to impose a 35% tariff on imported Chinese tires as … wait for it … well, just read for yourself:

The three-year remedies, consisting of an additional tariff of 35 percent ad valorem in the first year, 30 percent ad valorem in the second, and 25 percent ad valorem in the third year, are being imposed after a finding by the United States International Trade Commission that a harmful surge of imports of Chinese tires disrupted the U.S. market for those products. . . .

This Administration is doing what is necessary to enforce trade agreements on behalf of American workers and manufacturers. Enforcing trade laws is key to maintaining an open and free trading system.

HT: Peter Klein.

Seth Weinberger and I have a new article up at SSRN injecting some IR theory into the debate over international antitrust law.   Abstract:

The article, written jointly by a law professor and political science professor, endeavors to explain why the United States is particularly resistant to various efforts at international harmonization of antitrust law. While others have wrangled with this question over the years, none has assessed the question from within the broader political framework in which all relations between nations exist. Our article endeavors to fill this intellectual gap.

Existing efforts to describe or explain the lack of international harmonization have generally focused on the direct economic effects, and the narrow political difficulties, of the harmonization of competition laws through certain international mechanisms, most notably the WTO and the OECD. Largely absent in these accounts is a background theory of international politics against which the practicalities – and the ultimate desirability – of international competition law harmonization can be assessed. Our article presents such a theory. It places the conflict over international competition laws within the larger framework of international relations, and in so doing draws out some novel and important implications of the debate.

An important insight of this Article is that, largely independent of the economic calculus regarding the costs and benefits of entering into a multilateral international antitrust agreement, there is an inherent “transaction benefit” in the act of engaging in political exchange between states. Traditional economic and legal analyses of international relations have focused largely on the choice of organizational form (market exchange (no explicit agreement) versus bilateral versus multilateral institutions) and the likelihood and nature of compliance with each type in the absence of a central enforcement authority. By contrast, we strive here to develop a political theory of international law which accounts on the one hand for the costs of entering into international agreements, but also accounts for the state’s political preference for a specific form of agreement.

The novel implication of this understanding is that, by crafting international agreements in which the other parties are made to alter their domestic institutions as a condition of agreement, the dominant state (here, the United States) receives a credible commitment from the other state as to its willingness to adhere to the terms of the specific agreement under negotiation which, in the absence of centralized enforcement, might not otherwise be forthcoming. Additionally, the alteration of domestic institutions in a manner directed by the dominant state will in and of itself be viewed as a benefit of the agreement. By facilitating domestic normative change, the dominant state will gain a measure of transformative power from the change of domestic institutions. As a result, nations derive political benefits from international agreements in a way that transcends the substance of the agreements themselves.

The process of internationalizing and harmonizing competition law provides fertile ground in which to examine these ideas. Negotiations over antitrust policy are particularly important because as government barriers to trade have fallen they may well be replaced by private barriers. At the same time, as tariff barriers to trade have fallen, governments may resort to the discriminate application of antitrust law to maintain preferred local monopolies, and therefore to make payoffs to politically important constituents. The prospects for the illiberal application of antitrust laws and their economic importance make the debates over their form an issue of abiding concern for the process of global economic liberalization.

Get it while it’s hot!

Free Trade Petition

Josh Wright —  19 March 2009

Atlas Economic Research Foundation is circulating a petition in favor of free trade (HT Sasha Volokh).  The plan is to unveil the petition before the April 1 G20 meetings in London.  Here is the text of the petition.  You can sign it here if you are interested.

Free Trade Is the Best Policy

The specter of protectionism is rising.  It is always a dangerous and foolish policy, but it is especially dangerous at a time of economic crisis, when it threatens to damage the world economy.  Protectionism’s peculiar premise is that national prosperity is increased when government grants monopoly power to domestic producers.  As centuries of economic reasoning, historical experience, and empirical studies have repeatedly shown, that premise is dead wrong.  Protectionism creates poverty, not prosperity. Protectionism doesn’t even “protect” domestic jobs or industries; it destroys them, by harming export industries and industries that rely on imports to make their goods.  Raising the local prices of steel by “protecting” local steel companies just raises the cost of producing cars and the many other goods made with steel.  Protectionism is a fool’s game.

But the fact that protectionism destroys wealth is not its worst consequence.  Protectionism destroys peace.  That is justification enough for all people of good will, all friends of civilization, to speak out loudly and forcefully against economic nationalism, an ideology of conflict, based on ignorance and carried into practice by protectionism.

Two hundred and fifty years ago, Montesquieu observed that “Peace is the natural effect of trade. Two nations who differ with each other become reciprocally dependent; for if one has an interest in buying, the other has an interest in selling; and thus their union is founded on their mutual necessities.”

Trade’s most valuable product is peace.  Trade promotes peace, in part, by uniting different peoples in a common culture of commerce – a daily process of learning others’ languages, social norms, laws, expectations, wants, and talents.

Trade promotes peace by encouraging people to build bonds of mutually beneficial cooperation.  Just as trade unites the economic interests of Paris and Lyon, of Boston and Seattle, of Calcutta and Mumbai, trade also unites the economic interests of Paris and Portland, of Boston and Berlin, of Calcutta and Copenhagen – of the peoples of all nations who trade with other.

A great deal of rigorous empirical research supports the proposition that trade promotes peace.

Perhaps the most tragic example of what happens when that insight is ignored is World War II.

International trade collapsed by 70 percent between 1929 and 1932, in no small part because of America’s 1930 Smoot-Hawley tariff and the retaliatory tariffs of other nations.  Economist Martin Wolf notes that “this collapse in trade was a huge spur to the search for autarky and Lebensraum, most of all for Germany and Japan.”

The most ghastly and deadly wars in human history soon followed.

By reducing war, trade saves lives.

Trade saves lives also by increasing prosperity and extending it to more and more people.  The evidence that freer trade promotes prosperity is simply overwhelming. Prosperity enables ordinary men and women to lead longer and healthier lives.

And with longer, healthier lives lived more peacefully, people integrated into the global economy have more time to enjoy the vast array of cultural experiences brought to them by free trade.  Culture is enriched by contributions from around the world, made possible by free trade in goods and in ideas.

Without a doubt, free trade increases material prosperity.  But its greatest gift is not easily measured with money. That greatest gift is lives that are freer, fuller, and far less likely to be scalded or destroyed by the atrocities of war.

Accordingly, we the undersigned join together in a plea to the governments of all nations to resist the calls of the short-sighted and the greedy to raise higher the barriers to trade.  In addition, we call on them to tear down current protectionist barriers to free trade. To each government, we say: let your citizens enjoy not only the fruits of your own fields, factories, and genius, but also those of the entire globe.  The rewards will be greater prosperity, richer lives, and enjoyment of the blessings of peace.

DG Comp is after Microsoft. Again. Here is the EU’s press release which states the obvious about the basis of the Statement of Objections : the Commission’s decision in the Windows Media Player decision renders illegal virtually any tie by a firm with a “dominant” share under EU law. Therefore, Microsoft’s inclusion of Internet Explorer in Windows (yes, the same one that was the basis of the old U.S. DOJ case) is therefore clearly illegal. Here’s how the Commission puts it:

The SO is based on the legal and economic principles established in the judgment of the Court of First Instance of 17 September 2007 (case T-201/04), in which the Court of First Instance upheld the Commission’s decision of March 2004 (see IP/04/382), finding that Microsoft had abused its dominant position in the PC operating system market by tying Windows Media Player to its Windows PC operating system (see MEMO/07/359).

The evidence gathered during the investigation leads the Commission to believe that the tying of Internet Explorer with Windows, which makes Internet Explorer available on 90% of the world’s PCs, distorts competition on the merits between competing web browsers insofar as it provides Internet Explorer with an artificial distribution advantage which other web browsers are unable to match. The Commission is concerned that through the tying, Microsoft shields Internet Explorer from head to head competition with other browsers which is detrimental to the pace of product innovation and to the quality of products which consumers ultimately obtain. In addition, the Commission is concerned that the ubiquity of Internet Explorer creates artificial incentives for content providers and software developers to design websites or software primarily for Internet Explorer which ultimately risks undermining competition and innovation in the provision of services to consumers.

What’s going on here? Why Microsoft again when its share in the browser market is shrinking and its already paid the piper more than once? Let’s start with some obvious points by way of background. First, there is virtually no way that Microsoft can win if they fight this — in the sense that the liability determination is a foregone conclusion. Despite all the talk of evidence gathering in the press release, in the context of the analysis in the CFI Windows Media Player decision, I suspect that there is not any evidence that an investigation could generate (including evidence that the conduct significantly improves consumer outcomes) that would allow Microsoft to escape liability. Second, press reports indicate that Microsoft’s new strategy with the EU has been, not to put too fine a point on it, to lay down and wait until the beating stops. Third, the ubiquity of tying arrangements by firms with significant market shares (and those without) implies significant prosecutorial discretion for DG Comp. The presence of a significant number of US based firms in technology markets (e.g. Microsoft, Qualcomm, Intel) has led some to argue that there is some protectionist-based geographical discrimination in the selection of targets. Fifth, it seems quite obvious that DG Comp is trying to send some message with its selection of Microsoft as a target, again, in the same case that the US brought years ago. The interesting part is figuring out what the statement is.

Here are a few theories of what that statement might be:

  1. DG Comp is taking the lead as world antitrust enforcer — especially with respect to monopolization
  2. Relatedly, the US Section 2 approach and remedies) are insufficient to police global monopolists and, i.e. so weak that Microsoft was able to violate stricter EC law even after the consent decree
  3. Protectionism and Public choice: Microsoft is a high profile, U.S. company that will pay the fines (beware Intel, Qualcomm, and other large US firms selling globally with significant shares…)

What’s interesting to me is the timing relative to the incoming Obama antitrust regime. By all accounts, or at least my own (see also here), the U.S. is about to start its most active monopolization enforcement regime in decades. With Professor Elhauge at the controls of the DOJ, I suspect the change in course will be significant and visible. So if (1) is the story, one wonders what sort of competition this might engender, if any, between the US and EU enforcers. Or perhaps the story is not competition but convergence in the US towards EU-style monopolization enforcement? I do think there is something to all three stories. And with respect to (3), yes I know there has been Article 82 enforcement against non-US firms, but I’d like to see shares calculated on a dollar fine basis when the EU is through with Qualcomm and Intel. Mostly, given the prior scuffle between Tom Barnett and Neelie Kroes on the CFI Judgment in the Media Player case, its hard to think that (2) is not a significant part of the story. And perhaps rather than competition with the US, motivation for convergence.

Bush has proved himself to be a statist, protectionist ignoramus on many occasions.  But this, one of his final acts in office, is simply appalling:

People in the southern French district of Lozeyron are having a hard time swallowing US President George W. Bush’s parting gift: a tripling to 300 percent in import duty on their world-famous Roquefort cheese.

“Tonnes of produce are going to go up in smoke,” protested one of the seven local producers of the distinctive soft blue cheese. It was a hammer blow to the local region, he said.

The swingeing tariff increase, part of a longstanding trade row between the United States and the European Union, has effectively priced them out of the US market, say producers.

It’s both protectionist idocy as well as an affront to cheese lovers everywhere.  Gordon–are you reading this!?!?!

What an ass.  Good riddance.

Financial Times (HT: Danny Sokol) highlights the problem of multi-jurisdictional antitrust enforcement, emphasizing the rise of India and China.  The article repeats the basic point, worth repeating, that international cooperation can help avoid bad outcomes with multiple regulatory stakeholders with different incentives and institutional environments:

That is not a criticism of the new competition rules in either country – both are modernising laws on which the legal profession has been consulted. If enforced both promptly and evenhandedly, strong antitrust laws will mark a step towards competitive capitalism, rather than crony capitalism, in both countries. Local consumers will benefit. 

On international deals, however, China and India (and the US and European Commission) should leave mergers to the one jurisdiction best placed to handle them. If a merged company would have $200m sales and a 5 per cent market share in India, but $10bn sales and a 30 per cent share in the US, it is obvious who should take the lead. A forum to co-ordinate regulators – the International Competition Network – already exists. China should join it.

I’m pleased to see the FT calling attention to this issue.   Its an important one.  Perhaps one the most important on the antitrust enforcement policy landscape.  Joining the ICN and the international antitrust community more broadly is one way to generate cooperation and avoid bad outcomes.  But count me a skeptic with respect to the proposition that assigning jurisdiction to the competition policy agency with the greatest dollar value interest in the activity at issue will solve the problem.  The problem of mitigating the costs of multiple international competition agencies is a complex one with a lot of moving parts (Chairman Kovacic’s recent speech is a must-read on these issues).

I’ve argued previously that the policy discussion ought not emphasize “convergence or divergence per se, but jurisdictional competition combined with facilitation of superior substantive analytical norms.”  In other words, lets talk about getting optimal substantive standard adopted, say what we mean when we use code words like “convergence” (e.g. in the U.S. this appears to mean, movement to the standards adopted by our courts, and in particular, the Supreme Court), and respectfully but firmly and consistently hold competition agencies accountable for their decisions and enforcement philosophies.  This means that there is a lot of work to be done by economists and lawyers in figuring out the competitive effects of various forms of conduct, both in theory and testing these theories with data, in order to come to some sort of agreement about the design of optimal standards with sensitivity to important institutional differences between countries.

To be sure, jurisdictions will disagree about the state of the evidence of strength of opposing theories.  Differences in legal institutions and history will also drive divergence.   The optimal level of divergence is not zero.  But the substantial current level of divergence, in my view, could be reduced to the benefit of consumers with international agreement on a few important and (to my mind at least) not-so-controversial principles, e.g. the adoption of the error-cost framework as an appropriate lens through which to evaluate optimal antitrust rules.  The ICN and the international antitrust community can and do make substantial efforts to instigate this type of discussion and so must be, along with other institutions which facilitate cooperation, part of the solution.  But my sense is that the current debates focus too little on the actual state of economic theory and evidence and too much on everything else.

FTC Chairman William Kovacic, easily one of the most insightful thinkers and writers on issues of global competition policy, has posted a new paper offering a thoughtful analysis of where the EU and US competition policy systems have been, where they are going, what institutional differences might cause the systems to converge or diverge further, and what to do about it. Kovacic notes that while “the apparent agreement on overall objectives would seem to be, and is, an important step toward achieving convergence between the two systems” it is important not to avoid frank discussions of what both US and EU officials mean when they invoke the concept of “consumer welfare” or “protecting competition, not competitors” precisely because these phrases can “are so open-ended that their true meaning in practice depends on how they are applied.” Kovacic goes on to discuss various institutional forces favoring both convergence and divergence and offering some suggestions for facilitating the adoption of superior norms. The paper is a must-read for anybody interested in global competition issues.

In other events on the “convergence” landscape, I recently attended a conference at Stanford (sponsored by SIEPR, Stanford Law School and Hoover) on the Modernization of Antitrust Law-Private and Public Enforcement and Abuses – Europe and the US where I spoke on a panel discussing issues of transatlantic convergence (and lack thereof) with respect to single firm conduct and abuse of dominance (sorry, I can’t find an online version of the agenda to link to). I must admit that I typically find discussions of the “convergence issue” in competition policy underwhelming as they seem to systematically resort to the types of open-ended and meaningless slogans Kovacic discusses in his paper, avoiding a frank and rigorous assessment of the true costs and benefits of both convergence and divergence of competition systems. However, I’m very pleased to report that the SIEPR conference panel discussing these issues (which was moderated by Roger Noll and including presentations by Tim Bresnahan (Stanford economics) and Matthew Bennett (OFT) and comments from Michael Topper and myself) surpassed my expectations (largely due to the quality of exchange between presenters, discussants and the audience in the open Q&A session).

For what its worth, my brief comments emphasized: (1) carefully distinguishing between convergence at the agency and court level, (2) sensitivity to the relationship between institutional design and convergence/ divergence, and (3) a possibility not frequently discussed in the convergence literature on single firm conduct policies in the EU and US: that the US policies will look more like the EU and not the other way around. On the third point, one would be hard pressed to find an invocation of the benefits of convergence by a U.S. commentator or agency official that does not implicitly assume that convergence means Article 82 looks more like Section 2 in the future. While there are other recent examples available that also threaten this possibility, I discussed recent U.S. antitrust enforcement in the standard setting context as an example of an area where this sort of “reverse” convergence might be occurring. The lesson, of course, is of the “be careful what you wish for” variety. The appropriate focus should not be convergence or divergence per se, but jurisdictional competition combined with facilitation of superior substantive analytical norms.

Luke Froeb gives a short interview on international antitrust, harmonization, China, and all sorts of interesting and timely topics. Towards the end of the interview Luke addresses whether the export of antitrust regulation outside of the United States (and particularly into developing economies) is a good idea. You’ll have to listen to the interview to get Luke’s answer.  But the whole thing is worth a listen.

From the Economic Times:

The European Union’s antitrust agency is becoming more influential just as its US counterparts have grown more cautious and inactive, experts say. The European Commission’s recent success in forcing Microsoft to carry out antitrust sanctions underscores the differences, and academic researchers say the US is also hanging back in merger challenges. That makes Brussels, more than Washington, the place where companies must go to get their deal through and where companies must ready themselves against possible antitrust action. It also means competition agencies around the world look to Brussels.

“Influential” v. “cautious” and “inactive.” I get it. The implication is that EU antitrust enforcement is good and US enforcement is bad. The proof? One is allegedly more interventionist than the other. As a general matter, I do not find “more is better” arguments (see, e.g., here) causally linking agency activity to the quality of antitrust policy to be very persuasive. All of these claims should be taken with a grain of salt or two. It is one thing to make observations about trends in public antitrust enforcement over time. This exercise can be quite useful for addressing a number of questions or motivating a discussion of various issues. For example, the news item excerpted above cites to Baker & Shapiro’s recent article on merger enforcement which provides some evidence that federal merger enforcement is down (largely at the DOJ) and that private practitioners have noticed. Baker & Shapiro use this empirical observation as a jumping off point to discuss the structural presumption, burdens of production and persuasion, and to offer a critique of some recent decisions which (in their view) too readily accept entry and expansion defenses.

All of this can be quite productive in terms of generating dialogue concerning potential improvements in antitrust policy. However, it is quite another thing to assert that such data are capable of establishing a causal link between enforcement activity level and the “quality” of antitrust enforcement and/or consumer welfare. I should be incredibly clear here: I do not read Baker & Shapiro to be claiming to have demonstrated such a link empirically (though it is clear from the article that they believe more enforcement would be a good thing) and am not making this point in response to their article. Rather, I am responding to appeals to evidence on activity levels alone to suggest that “more” or “less” enforcement would bring about positive changes for consumers. Maybe such a link would be useful if we were talking about dramatic changes in the rate of enforcement (say, abruptly plummeting to zero or increasing tenfold).

But one should be very cautious about making inferences about consumer welfare from small changes in aggregate enforcement data or anecdotal evidence from a handful of cases. I offer this word of caution in the spirit of the current season when these types of claims are quite popular with the politicians and journalists: while it may be true that the most active antitrust agency is the most influential for a number of reasons, there is simply no theoretical or empirical basis to suggest that the most active agency produces the greatest benefits for consumers.

Larry Solum points to Fernando Teson and Jonathan Klick’s (both of FSU College of Law) Global Justice and Trade: A Puzzling Omission.  It is a thoughtful and provocative paper.  Teson and Klick motivate the paper as an attempt to address the failure of philosophers and human rights scholars not to advocate free trade as a way to improve the welfare of the poor.  But as this excerpt from the end of the abstract suggests, the paper is more ambitious than that:

It is surprising then that philosophers and human rights scholars do not advocate liberalizing trade as a way to improve the welfare of the poor as a class. While many scholars in these fields are silent with respect to the effect of free trade on the poor, some actually argue that liberalized trade is harmful for the poor, contrary to the claims of economists. In this article, we argue that any serious scholar concerned with the plight of the poor needs to address the theory and evidence regarding the effects of trade liberalization on economic growth, suggesting that the standard policy prescriptions of the philosophers and human rights scholars are, at best, of second order concern and, at worst, likely to be counterproductive in terms of improving the welfare of the poor.

Some preliminary reactions to the paper appear below the fold.

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Here is Senator Obama’s economic advisor Austan Goolsbee on globalization and free trade (as described by George Will in his recent column):

“Globalization” means free trade and various deregulations that supposedly put downward pressure on American wages because of imports from low-wage countries. Goolsbee, however, says globalization is responsible for “a small fraction” of today’s income disparities. He says “60 to 70 percent of the economy faces virtually no international competition.” America’s 18.5 million government employees have little to fear from free trade; neither do auto mechanics, dentists and many others.

Goolsbee’s rough estimate is that technology — meaning all that the phrase “information economy” denotes — accounts for more than 80 percent of the increase in earnings disparities, whereas trade accounts for much less than 20 percent. This is something congressional Democrats need to hear from a Democratic economist as they resist trade agreements with South Korea and such minor economic powers as Peru, Panama and Colombia.

While I was less impressed with Obama’s statement on antitrust policy, and his previous attack on Wal-Mart as competitive problem, this statement from Obama’s top economic advisor seems much more sensible. Of course, one could argue there is not much here to get excited about since this is really Goolsbee talking and not Obama. But while I’m happy to cosign Greg Mankiw’s argument that the economist-as-advisor should not be responsible for all positions that the advised takes, in my view it is also sensible to give credit where it is due to the candidate for any benefits associated with selecting good economic advisors. And yes, I realize I’ve painted myself into a position here where economists are essentially only responsible for the economic policy advice that he or she gives and not much else.

As a side note, and as Jon Adler notes at the Volokh Conspiracy, Goolsbee’s position on free trade is light years ahead of Republican candidate Mike Huckabee’s rather ridiculous statement that a country is not free unless it is able to produce “its own food, its own fuel, and its own fighting apparatus.”

In case you haven’t already, I recommend taking a gander at today’s New York Time Book Review.  In it, there is a review of Naomi Klein’s new book, The Shock Doctrine, by Nobel-winning economist, Joe Stiglitz.  It’s an abomination (I’m sure the book is an abomination, too, but I’m referring to the book review). 

If you know anything about Klein you know that she is an ideological zealot, impervious to facts and reason (although I’m sure some would say the same of me.  Except in her case, it’s actually true).  I’m sure she’s well-meaning and all that, but her book No Logo (yes, I have read it), and now this book, as well (judging only by the reviews–I won’t make the mistake of reading more than one Naomi Klein book), reflect an ignorance of economics, markets and politics that can be born only of utter disdain.  I won’t belabor the point. 

But what’s truly embarrassing is that an economist of Joe Stiglitz’s stature would write an utterly fawning review of her book!  I didn’t know that Stiglitz had slipped as far as Paul Krugman into the land of the “formerly-great-now-blinded-by ideology-to-all-reason” but I can only conclude now that he has.  There is not a single word of criticism in this review.  Not one.  At one point he does note that “she’s not an economist but a journalist,” and he similarly says that she “is not an academic and cannot be judged as one.”  But one gets the powerful sense that these are actually compliments!  Rather than follow these statements by noting one or two errors of, say, oversimplification, omission or confusion (of the sort inexcusable, I guess, by an academic or an economist), he follows them with praise for her tenacity and perspicacity as a journalist and he excuses her oversimplification (apparently there is some in the book (shocking!), but Stiglitz can’t be bothered to hold Klein’s shortcomings up to the light) by claiming that her academic targets–Milton Friedman and his ilk–were guilty of oversimplification, too.  Nya, nya!  I’m rubber and you’re glue, whatever bad you say bounces off me and sticks to . . . economists I disagree with!  It’s very illuminating (but not at all in the way one might want to be illuminated by a book review.  But then I guess most reviews are more about the reviewer than the subject, right?).

And, of course, there is the obligatory, barely disguised self-promotion (remember that part about reviews really being about the reviewer).  Just read this paragraph:

Klein is not an academic and cannot be judged as one. There are many places in her book where she oversimplifies. But Friedman and the other shock therapists were also guilty of oversimplification, basing their belief in the perfection of market economies on models that assumed perfect information, perfect competition, perfect risk markets. Indeed, the case against these policies is even stronger than the one Klein makes. They were never based on solid empirical and theoretical foundations, and even as many of these policies were being pushed, academic economists were explaining the limitations of markets — for instance, whenever information is imperfect, which is to say always.

Now which academic economists were doing all this explaining about imperfect information, Joe?  I can’t recall.  Anyway, even the claims he generously makes here on Naomi’s behalf are themselves untenable oversimplifications.  Please, do show me where Friedman believes that ideas can be implemented in a frictionless world?  The claim that Friedman’s models employed simplifying assumptions is true.  But, then, that’s the point of models, even the ones Stiglitz uses.  They are called “models” not “complete, messy representations of reality.”  The implication that Friedman’s assumptions, because they were simplifications, led to results with no relevance is a claim only a journalist or a non-academic would make.   I commend one of Friedman’s most important works–The Methodology of Positive Economics–to Stiglitz’s attention.  He shouldn’t find it too troubling to read–it doesn’t even mention free markets or Ronald Reagan.  Here’s just one important bit:

A theory or its “assumptions” cannot possibly be thoroughly “realistic” in the immediate descriptive sense so often assigned to this term. A completely “realistic” theory of the wheat market would have to include not only the conditions directly underlying the supply and demand for wheat but also the kind of coins or credit instruments used to make exchanges; the personal characteristics of wheat-traders such as the colour of each trader’s hair and eyes, his antecedents and education, the number of members of his family, their characteristics, antecedents, and education, etc.; the kind of soil on which the wheat was grown, its physical and chemical characteristics, the weather prevailing during the growing season; the personal characteristics of the farmers growing the wheat and of the consumers who will ultimately use it; and so on indefinitely. Any attempt to move very far in achieving this kind of “realism” is certain to render a theory utterly useless.

Most important, however, what Friedman knew and what Stiglitz and Klein utterly ignore is that world is a messy place, and implementation of even the best academic ideas must be undertaken with appropriate expectations about the limitations of the institutions doing the implementing.  The only oversimplification here is the one (propounded by Klein, who is an ardent activist, and Stiglitz, who has no excuse) that says that because markets don’t always work perfectly, government solutions are better.  If you read Stiglitz’s review, you’ll see that all of Klein’s examples have one thing in common:  The only alternatives to the actions she abhors are ones entailing more government “solutions” to the endemic problems of the market. 

But the best part is that the refutation of her (and Joe’s) philosophy jumps off every page of her books.  For the common element in each of the actions she decries (Bush taking advantage of misery in Iraq to impose capitalism; the Sri Lankan government displacing poor fishermen in the wake of the 2004 tsunami, etc.) is that the evil being perpetrated, even by her own standards, is being perpetrated by the government!  I know enough about Klein from her other book to know that the irony of this is completely lost on her.  While advocating tirelessly for various forms of government solutions to the evils of capitalism run amok, it is completely lost on her that all of her alleged examples of such run-amokery are perpetrated by . . . governments.  I’m sure she and Joe believe that if only the right governments were in charge, then none of this would happen and the world would be a shiny, happy place.  The naiveté in that is thick.  Again, excusable for an anti-globalization hack like Klein; a bit jarring for a Nobel Prize winner like Stiglitz.

But enough ranting.  There are more important things to do.  I’ll leave you with just this:

I’ve included a longer excerpt from Friedman below the fold.  It contains not only the above bit about the usefulness of simplifying assumptions, but also a nice refutation of the specific claims Stiglitz makes about the irrelevance of models assuming perfect competition.  Frankly this may be the most embarrassing part:  That Stiglitz would make the claims he does in full knowledge that the very person he tries to tar with irrelevance had long ago penned his own clarification (and refutation) of precisely this point.  As I said, it’s an abomination.

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