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Subj: Re: Milton Friedman: Economist
Posted: Wed Oct 15, 2008 at 12:06:41 pm EDT (Viewed 636 times)
Reply Subj: Re: Milton Friedman: Economist
Posted: Wed Oct 15, 2008 at 06:47:53 am EDT (Viewed 716 times)

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> Friedman's quote is directly in line with Adam Smith's "invisible hand" idea. Each individual acts in the their own self-interest and by doing so promotes the interest of society even though they may not intend to do so. Friedman is saying that is true for companies too. By acting in their own self-interest to maximize profit, they are acting in the best interest of society. Thus companies have no more or less responsibility to society than that.

Taken from Wikipedia under "Invisible Hand":


Joseph E. Stiglitz
The Nobel Prize economist (2001) Joseph E. Stiglitz says: "the reason that the invisible hand often seems invisible is that it is often not there." (Making Globalization Work, 2006) [3]. Stiglitz explains his position:

Adam Smith, the father of modern economics, is often cited as arguing for the “invisible hand” and free markets: firms, in the pursuit of profits, are led, as if by an invisible hand, to do what is best for the world. But unlike his followers, Adam Smith was aware of some of the limitations of free markets, and research since then has further clarified why free markets, by themselves, often do not lead to what is best. As I put it in my new book, Making Globalization Work, the reason that the invisible hand often seems invisible is that it is often not there.

Whenever there are “externalities”—where the actions of an individual have impacts on others for which they do not pay or for which they are not compensated—markets will not work well. Some of the important instances have been long understood—environmental externalities. Markets, by themselves, will produce too much pollution. Markets, by themselves, will also produce too little basic research. (Remember, the government was responsible for financing most of the important scientific breakthroughs, including the internet and the first telegraph line, and most of the advances in bio-tech.)

Building on the above, I will comment on the fact that globalization has created externalities in relation to the United States as follows:

1. American business owners are investing much of their wealth in places external to the United States.

2. These external investments compensate workers who are external to the United States.

3. These workers spend their income externally to the United States.

This economic leakage wasn't envisioned by Adam Smith, and not surprisingly, because communications and transportation hadn't been developed in his day to the levels they have reached today. For Adam Smith, globalism meant exports and imports, not outsourcing. In Adam Smith's day, the wealth of business owners was reinvested in their country of origin. Not so today. Therein lies the difference and it is crucial. The result is expressed well in the paper I cite below.

> To answer your question, yes, I basically agree with it. Life is seldom perfect and markets are no exception, but the free market's track record of improving living standards, reducing poverty, and preventing a dismal existence is unmatched. "We the people" have yet to think of anything better.

Here is a serious, academic paper, discussing how to view the living standards of Americans versus those of other first world nations. The conclusion is that we would do well to pay attention to the discrepancy of living standards between wealthy and not-wealthy in America, a discrepancy that becomes "invisible" (there's that word again) when we focus on mere averages:

The discrepancy between the living standards of the wealthy and the non-wealthy in America is the inevitable result of the economic leakage I described above. Money that should have been circulating round and round in a never-ending cycle here in America has instead been siphoned out of the American system and poured into external systems which don't reciprocate. Because the business owner straddles both systems, and the American worker doesn't, the business owner continues to grow more wealthy while the American worker doesn't, hence the discrepancy documented in the paper cited above.

Three approaches toward lessening the discrepancy in livings standards would be:

1. Make outsourcing illegal.

2. Make outsourcing unattractive through tax code revisions; I.e., companies who outsource would be penalized.

3. Allow outsourcing to continue unencumbered but tax the wealthy at sufficiently high percentage rates so as to create a new siphon of wealth, equal to the outsourcing siphon, but pouring in the right direction: back into the American system.

A combination of the three would also be possible, if the first were limited to certain scenarios; I.e., some outsourcing would be legal but other outsourcing would not; e.g., outsourcing to the most brutally repressive nations would be illegal. This approach would be augmented through tax code penalization of companies who outsource legally, and higher tax rates for the wealthy. This threefold approach may well be the best.


Your response is taking your question completely off its orignal intent [and I need to go to work now \:\) ], but I will respond as briefly as I can.

1) Your definition of externality is not the economic definition of externality. Also, you are not considering the fact that globalization is a two-way street. Yes, American companies sometimes go overseas, but foreign companies and investors come here too. The US attracts foreign investment of all types in tremendous quantities. In fact, the US is so attractive it's created a downside of allowing us to live beyond our means through borrowing.

2) Actually, outsourcing in terms of customer service and so forth is exactly like the export/import of goods. It's the export/import of services. Labor service is just like anything else. Free trade has created far more jobs than have been lost. While that may be of no solace to the person that lost their job due to outsourcing, many more have gotten jobs. The need to provide support to people adversely affected by trade is a separate issue, not evidence to eliminate free trade.

3) Free markets make people unequally rich. While looking at the average (or better, the median) can be useful, you can look at all sorts of other metrics to see that free markets improve living standards. For example, take the poorest 10% of Americans today and compare their material wealth and living standard to the poorest 10% of Americans 50 years ago (or 100 years, etc.) and you will see dramatic differences.

4) Your policy prescription to limit outsourcing won't work. By that same logic, U.S. states should pass laws so that companies headquartered in those states can't ship jobs to other states. Basically, if specialization has net benefits for individuals, cities, and states, it should for countries as well.

Could more be done at a public policy level to help those that have been hurt by trade? Maybe. Globalization and the spread of capitalism more generally are exactly as Schumpeter would have commented "the perrenial gale of creative destruction."



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