Foundational Myths

I want to draw your attention to a talk given, I’m guessing, more than 30 years ago by Milton Friedman on “Myths That Conceal Reality”. The myths that he addresses might be thought of as the foundational myths of our current political-economical system.

The five “myths” that Dr. Friedman addresses in his talks are:

  • Robber barons played a dominant role in the U. S. economy of the 19th century.
  • The Great Depression of the 1930s was caused by a failure of the private sector.
  • There’s a high, persistent demand for services that only the government can provide.
  • Government can spend money at nobody’s expense.
  • Government benefits the poor at the expense of the poor.

I found some of the sections of his talk stronger than the others. For example, I thought his treatment of the Depression of the 1930s and the demand for government services were stronger than his treatment of the robber barons and the U. S. economy of the 19th century. Let me give a few examples.

In the talk Dr. Friedman asserts that rising prices for prime farmland demonstrate that farmers were becoming better off rather than worse off. I don’t think you can make that claim based on the available data. All that rising prices for farmland demonstrates is that people wanted more farmland. Land prices could well increase even as farmers became worse off as a consequence of a large increase in the number of farmers, something we know was definitely the case in the 19th century. Prices of farmland increasing from 1870 to 1880 says less about whether farmers in the United States were better off in 1880 than in 1870 than it does about whether farmers in the United States in 1880 were better off than farmers in Germany in 1880. And that might have been due to other factors like, say, Bismarck’s military draft.

Additionally, I think he was too ready to give the “robber barons” of the 19th century credit for their own riches by comparison with today’s ultra-rich. While I don’t disagree that today’s .1% benefit enormously from government intervention of various different kinds, I think the same was true of the 19th century robber barons. John D. Rockefeller was a war profiteer and I believe the same was true of Cornelius Vanderbilt and Jay Gould. Land franchises and monopolies granted by state governments were enormously influential in the construction of the railroads and steamboat lines. The robber barons had no compunctions against wielding the levers of government, particularly against each other whether via lawsuit or outright bribery.

I also think he misinterprets the history of political power in the United States and elsewhere as a conflict among the rich, the middle class, and the poor in which the middle class has triumphed. I think that the history of political power everywhere is an internecine conflict among the top 10% of income earners. That conflict occasionally breaks out into bloody warfare as in the French and Russian Revolutions. It may have been the poor charging the barricades but on both sides of those conflicts it was those in the top 10% of income earners who were giving the orders.

Still, the talk is well worth a listen. It’s nearly a full hour in length so you might want to listen to it in pieces.

16 comments… add one
  • I read J. Stiles’ bio of Vanderbilt. According to him , what you say here is true regarding the barons.

  • steve Link

    Will get to it later, but is it any different than his Monetary History? Have just started Kindlebergers book, so should be interesting for comparison. I think his view of the robber barons is what you might expect from a true academic. Spend some time in coal country and you know that there was zero difference between the barons and the government. They owned it and used it as they wished. On the Depression, it has always seemed to me that Friedman, and lots of others, ignore the problems in the 20s leading up to the Depression.

    Steve

  • TastyBits Link

    @steve

    … On the Depression, it has always seemed to me that Friedman, and lots of others, ignore the problems in the 20s leading up to the Depression.

    I have always thought the same thing, and I think the US is in the same position today. It will take time to unwind.

  • Drew Link

    I have to confess, I haven’t viewed this particular talk. Although on a rainy day recently- and those have been rare this year – I sequentially watched many Friedman lectures.

    As for the point, it really wasFriedman more than anyone I know who pointed out that some “robber barrons” simply used government, and government regulation, to their own benefit. This is a point that simply seems to be totally lost on big government types even today, despite citations of rent seeking all the time.

    It should also be noted that someso called robber Barron’s turned around and contributed huge sums of money to worthy causes.

    I think you will find our last two Dem Vice Presidents did no such thing. But of course, they “care.”

  • Drew Link

    As long as they can claim such for avote.

  • steve Link

    Drew- 1) The robber barons ran the government when it was much, much smaller than it is today. Kind of blows holes in the theory that you need to have smaller govt so that it cannot be used by the private sector.

    2) The current GOP VP candidate contributed even less than the current Dem VP to charity for the last year. Of course, he is a self-avowed serious Christian. In the case of the robber barons, many donated a lot to charity at the ends of their lives. However, the working conditions of their employees were often abysmal. They controlled company towns and company stores. They exploited foreign labor. The worst of these people used local law and judges to make employees little better than slaves.

    Steve

  • Drew Link

    It really doesn’t, Steve. Your comment, with all due respect, is simplistic. The government has had a regulatory structure for quite some time. It has been used by the powerful and wealthy for quite some time.

    Your abyss is flimsy.

  • Drew Link

    Analysis

  • Drew- 1) The robber barons ran the government when it was much, much smaller than it is today. Kind of blows holes in the theory that you need to have smaller govt so that it cannot be used by the private sector.

    Heh…false premise much? I don’t know about Drew, but my position isn’t that they wont use it if it is small, but that they (big business, the top 1%, wealthy, etc.) wont be able to do as much with it if it is small. If I hit you with a 2 oz. rock it will likely hurt and do some damage. If I hit you with a 50 pound rock you are fucked. We are moving towards the 50 pound rock and you don’t even realize it.

    I believe Dave linked to a Ritholtz post (IIRC) a few months, maybe even more than a year ago, where he briefly had a flash of brilliance, IMO. Ritholtz noted that it isn’t about Democrat or Republican or progressive or liberal, that really what was at stake was living in a society that valued the individual vs. corporatocracy. I submit this is why we have such a huge amount of carrying on about stuff like abortion, gay marriage, and the war on drugs. It is a way to distract people from the more insidious path our country has taken and that is the direction of corporatism. Of the corporation, by the corporation, and for the corporation. Both Democrats and Republicans are now pretty much tools for big monied interests.

    If you are sitting here thinking, “Hmmm….Democrat or Republican”, I’m sorry but you are a freaking idiot.

    Ahhh..here is the post.

    For a long time, American politics has been defined by a Left/Right dynamic. It was Liberals versus Conservatives on a variety of issues. Pro-Life versus Pro-Choice, Tax Cuts vs. More Spending, Pro-War vs Peaceniks, Environmental Protections vs. Economic Growth, Pro-Union vs. Union-Free, Gay Marriage vs. Family Values, School Choice vs. Public Schools, Regulation vs. Free Markets.

    The new dynamic, however, has moved past the old Left Right paradigm. We now live in an era defined by increasing Corporate influence and authority over the individual. These two “interest groups” – I can barely suppress snorting derisively over that phrase – have been on a headlong collision course for decades, which came to a head with the financial collapse and bailouts. Where there is massive concentrations of wealth and influence, there will be abuse of power. The Individual has been supplanted in the political process nearly entirely by corporate money, legislative influence, campaign contributions, even free speech rights.

    This may not be a brilliant insight, but it is surely an overlooked one. It is now an Individual vs. Corporate debate – and the Humans are losing.

    I highlight part of that Steve….to show you are on the wrong side. And if Drew thinks the answer is in the Republicans…he is on the wrong side too.

  • John D. Rockefeller was a war profiteer and I believe the same was true of Cornelius Vanderbilt and Jay Gould.

    Do you mean that Rockefeller benefitted from the higher prices during the Civil War? If so, so what? Higher prices (and the profits they engender) for whatever reason are basically a way of getting more resources into a given area of production. And this benefit would likely accrue to just about any business that saw prices go up due to the war…big and small alike. This would make many, many northern businesses and the men who ran them war profiteers.

  • TastyBits Link

    @Steve Verdon

    It is good Barry Ritholtz has arrived to the party, but he (and many) are quite late. I am guessing you have been here for some time. It has been 20-25 years for me.

    I think the big government types work with big business to further their goals. The big gov.’s think they can control big business, but it is the other way around. Both parties are for big government, but they have different agendas.

    Ritholtz references Hayek: “Keynes vs Hayek?” Hayek and von Mises address some of these issues. They caused me to begin questioning “conventional wisdom”.

    The Democrats and Republicans need each other to continue the game. While one party advances their agenda, the other party defends the system. If one of the parties morphed into an anti-big party, the game would change.

    I want the government in my life as little as possible. The problem is that I must use government to achieve that goal. Therein lies the trap. The solution to the problem requires you to become part of the problem. Those who are part of the problem usually think increasing the problem is the solution.

  • Do you mean that Rockefeller benefitted from the higher prices during the Civil War?

    No, I mean that when others were fighting he paid a substitute to fight for him, contributed to causes that furthered the cause of war, and actively pursued contracts with the Union Army which formed the basis of his fortune. I think that’s a pretty good definition of a war profiteer.

  • No, I mean that when others were fighting he paid a substitute to fight for him, contributed to causes that furthered the cause of war, and actively pursued contracts with the Union Army which formed the basis of his fortune. I think that’s a pretty good definition of a war profiteer.

    There was a substantial number of people who did all of that in the North. As for contributing, people in the South did that as well. I find that to be pretty weak, IMO.

    As for paying someone to fight that strikes me as a cost, not a benefit.

    Maybe if Rockefeller had contracts with the Northern army. I know he was a commission merchant and was mainly into shipping. I’m not aware of him actually having contracts with the Union Army.

    By the way, by that latter definition the list of war profiteers in the U.S. is long and quite respectable now….

    Haliburton,
    Blackwater USA,
    Boeing,
    Lockheed Martin,
    General Dynamics,
    Perot Systems,
    Carnegie Mellon University,
    Bechtel Corporation,
    MIT,
    IBM,
    Northrop Grumman Corporation ,
    Hewlett Packard,
    and on and on….

    Rockefeller….he was just ahead of the curve.

    I know it is often the case that people slag on Rockefeller…but exactly what did he do that was so egregious?

  • Drew Link

    SteveV

    I’m on the side of small government. Period. I think you know that.

    I just happen to believe you have to make a choice. Democrat means ginormous government. Always and everywhere. Republican? I’m hoping the much maligned Tea Party has a say. Im hoping the Republicans refind their way.

    One thing I know for sure: Obama has increased debt by what, 60%? And we have nothing to show for it. I’m a private equity guy. I know for sure what Romney thinks, which is this an effing train wreck, and unsustainable. Can he lead and legislate a solution? Only time will tell. But Obama? National financial and employment disaster. That’s for sure. Guaranteed, and unnecessary.

    Perhaps a Hobsons choice. But 4 more of the incompetent will fuck over so many.

  • Brett Link

    Land franchises and monopolies granted by state governments were enormously influential in the construction of the railroads and steamboat lines.

    Agreed on the railroads. There were a few early ones that were built with private money (the B & O railroad), but they still relied on granted right-of-ways and the like. Later railroads were often intertwined with state aid and support, and the Transcontinental Railroad was subsidized with loans, per-mile money, and land grants (which led to almost hilarious forms of corruption).

  • I just happen to believe you have to make a choice. Democrat means ginormous government. Always and everywhere. Republican? I’m hoping the much maligned Tea Party has a say. Im hoping the Republicans refind their way.

    I don’t see it Drew, I really don’t. Who started the bailouts and who finished them? Bush and Obama, a Republican and a Democrat. When the chips were down they were on the same side…preserve the status quo…especially for the financial industry and other large corporations.

    When large scale legislation is being considered who has a significant hand in writing that legislation? Why the very companies that are going to be affected by that legislation…a perfect recipe for rent seeking.

    One of my favorite hobby horses, intellectual property rights….who wanted the Disney extension? A Republican by the name of Sonny Bono. Who signed it into law? A Democrat named Bill Clinton.

    Granted I think individual Republicans are a bit more open to my views than the typical Democrat, but in the end the guys at the top of the Republican party are still owned by big business….as as with the Democrats.

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