Friedman, Milton – Page 6 – artdiamondblog.com

How Speculators Stablilize Gas Prices

As long ago as 1953, Milton Friedman argued that speculation normally helps to stabilize prices rather than destabilize them.

Mr. Friedman’s argument was applied to currency trading, but the same reasoning works here.  If speculative trading tends to push prices higher when they are already high and lower when they are already low, then traders must be buying high and selling low.

That would mean that traders have to lose money on average — which does not seem very likely.  To the contrary, speculative traders try to buy low and sell high, activities that by their nature tend to push prices up when they are too low and down when they are too high.

Since Mr. Friedman’s 1953 article several papers have been published, both supporting and attacking this argument.  But the general principle seems quite robust.

For the full commentary, see:

Hal R. Varian. "ECONOMIC SCENE; The Rapidly Changing Signs at the Gas Station Show Markets at Work." The New York Times (Thurs., August 24, 2006): C3.

The Milton Friedman article that Varian refers to, is:

Friedman, Milton. "The Case for Flexible Exchange Rates." In Friedman. Essays in Positive Economics. Chicago: University of Chicago Press, 1953.

Laptops Update Read and Friedman’s “I, Pencil” Story

Source of graphic: scanned from p. B1 of NYT article cited below.

Leonard Read in his classic "I, Pencil" told the story of how the various compenents of a mere pencil came from different suppliers the world over. People who did not know each other, and might not like each other if they met, but who were brought together in productive co-operation through the power of the market. Milton Friedman frequently presented his own verison of this story. The cover of my 1980 edition of Free to Choose has a picture of Friedman holding a pencil as if in the middle of this story. And there is a short video-clip of Friedman telling the story.

A similar story could be told with many other products, and several sources have presented the raw materials in print to tell the story for laptop computers. (By "raw materials" I mean that they list the diversity of sources of the inputs; but usually without drawing all the lessons that Reed and Friedman drew.) One source is a chapter in Thomas Friedman’s The World is Flat.

Two other sources are articles that appeared within a few days of each other in The New York Times and The Wall Street Journal.

The reference to The New York Times article is:

DAVID BARBOZA. "An Unknown Giant Flexes Its Muscles; Amid Talk of Deal With I.B.M., Lenovo of China Sheds Some Obscurity." The New York Times (Sat., December 4, 2004): B1 & B3.

The reference to The Wall Street Journal article is:

Jason Dean and Pui-Wing Tam. "The Laptop Trail; The Modern PC Is a Model Of Hyperefficient Production And Geopolitical Sensitivities." The Wall Street Journal (Thurs., June 9, 2005): B1 & B8.

Source of graphic: scanned from p. B1 of WSJ article cited above.

“Free to Choose” Turns Estonia into “Boomtown”

Source of book image: http://search.barnesandnoble.com/booksearch/imageviewer.asp?ean=9780156334600

If, like Mr. Laar, you are only going to read one book in economics, Milton Friedman’s Free to Choose, is not too bad a choice:

(p. A23) Philippe Benoit du Rey is not one of those gloomy Frenchmen who frets about the threat to Gallic civilization from McDonald’s and Microsoft. He thinks international competition is good for his countrymen. He’s confident France will flourish in a global economy — eventually.

But for now, he has left the Loire Valley for Tallinn, the capital of Estonia and the economic model for New Europe. It’s a boomtown with a beautifully preserved medieval quarter along with new skyscrapers, gleaming malls and sprawling housing developments: Prague meets Houston, except that Houston’s economy is cool by comparison.

Economists call Estonia the Baltic tiger, the sequel to the Celtic tiger as Europe’s success story, and its policies are more radical than Ireland’s. On this year’s State of World Liberty Index, a ranking of countries by their economic and political freedom, Estonia is in first place, just ahead of Ireland and seven places ahead of the U.S. (North Korea comes in last at 159th.)

It transformed itself from an isolated, impoverished part of the Soviet Union thanks to a former prime minister, Mart Laar, a history teacher who took office not long after Estonia was liberated. He was 32 years old and had read just one book on economics: ”Free to Choose,” by Milton Friedman, which he liked especially because he knew Friedman was despised by the Soviets.

Laar was politically naïve enough to put the theories into practice. Instead of worrying about winning trade wars, he unilaterally disarmed by abolishing almost all tariffs. He welcomed foreign investors and privatized most government functions (with the help of a privatization czar who had formerly been the manager of the Swedish pop group Abba). He drastically cut taxes on businesses and individuals, instituting a simple flat income tax of 26 percent.

For the full commentary, see:

JOHN TIERNEY. "New Europe’s Boomtown." The New York Times (Tues., September 5, 2006): A23.

Schumpeter Not Invited to Milton Friedman’s Dinner Party

Rose and Milton Friedman. Source of image: the online venison of the WSJ article cited below.

Milton Friedman is one of my heroes. But my dinner party invitation list would include Hayek and Schumpeter in place of Marshall and Keynes.

If they were to throw a small dinner party . . . for Mr. Friedman’s favorite economists (dead or alive), who’d be invited? . . . he reeled off this answer: "Dead or alive, it’s clear that Adam Smith would be No. 1. Alfred Marshall would be No. 2. John Maynard Keynes would be No. 3. And George Stigler would be No. 4. George was one of our closest friends." (Here, Mrs. Friedman, also an economist of distinction, noted sorrowfully that "it’s hard to believe that George is dead.")

For the full interview, see:

TUNKU VARADARAJAN. "COMMENTARY: THE WEEKEND INTERVIEW; Rose and Milton Friedman; The Romance of Economics." The Wall Street Journal (Sat., July 22, 2006): A10.

Precariousness: In France it is Sought and it is Feared

Coombs and VanderHam on the April 3, 2006 extreme ski run, in which they both died. Source of caption information, and of photo: online version of the first NYT article cited below.

Some seem to seek risk:

(p. A1) ”La Grave goes from tranquil to frightening and mad, and it’s so exhilarating to be in those moods,” Mrs. Coombs said in a telephone interview last week. Her husband, she said, ”never found anything more perfect.”

Last month, Mr. Coombs slipped off a cliff and fell 490 feet to his death. He was 48. He was trying to rescue Chad VanderHam, his 31-year-old protégé and skiing partner from the United States. Mr. VanderHam had gone over the same cliff moments earlier. He also died.

Their accident, during a recreational outing, has focused attention on extreme skiing and on this remote destination, high in the Alps about 50 miles east of Grenoble.

For the full story, see:

NATHANIEL VINTON. "Skiing Beyond Safety’s Edge Once Too Often." The New York Times (Wednesday, May 17, 2006): A1 & C23.

Others seem to fear risk:

PARIS, April 8 – Standing amid the chaos of the protests here this week, Omar Sylla, 22, tried to explain why the French are so angry about what seems to many people like such a small thing: the French government’s attempt to loosen labor laws a bit by allowing employers the right to fire young workers without cause during a trial period on the job.

Even after President Jacques Chirac promised to shorten the period to one year from two, the protests continued, and French students and unions have vowed to keep demonstrating until the law is repealed.

”We need less precariousness, not more,” said Mr. Sylla, the son of immigrants from Ivory Coast, who still lives with his parents in a government-subsidized apartment in a working-class suburb of Paris.

Mr. Sylla said he had searched for years for a job before finding work about a month ago as a baggage handler at Charles de Gaulle International Airport. Even then, he said, he only got the job because his sister works at the airport and pulled strings on his behalf.

For the full story, see:

CRAIG S. SMITH. "French Unrest Reflects Old Faith in Quasi-Socialist Ideals." The New York Times, Section 1 (Sunday, April 9, 2006): 8.

Economists have long puzzled at how the same person can both buy insurance and gamble in a casino. The first seems an act of risk-aversion, and the second of risk-seeking. (Milton Friedman, and others, have tried to explain the paradox.)

But I am puzzled by something else. When risks are taken, why are they so often taken in arenas such as rioting in the streets, or extreme skiing, where they achieve no noble purpose? Whatever risks one is going to take, why not take them in the arena of innovation and entrepreneurship, where the potential benefits to the innovator and to human progress, are huge?

Omit the Footnotes?

When I was a graduate student at Chicago, Milton Friedman was rumored to have given a presentation on how to write a doctoral dissertation in which he said something like:

Take everything nonessential, and move it into footnotes. Then collect all the footnotes into an appendix. Finally, delete the appendix.

My memory is that Deirdra McCloskey, in her wonderful advice on how to write economics clearly, also advises against footnotes. I at least attribute this advice to McCloskey (and Friedman) when I pass it on to students.

But sometimes, when I write an article, a misguided referee, or editor, insists that I omit some stuff that I think is really good. When that happens, sometimes, if I feel strongly, I sneak some of that material back into the paper in footnotes. Maybe no one will ever read it, but I feel better that it is still there.

And every once in awhile, it may turn out that the footnotes are what matter most:

It was typical of Schumpeter’s love for theory that he rejected Marshall’s view that the reader could skip the footnotes and appendixes. If time were short, Schumpeter advised, read them and skip the text! (p. 7; italics in original.)

In this case, though, I suspect that Marshall was right, and Schumpeter wrong.

Source:

Samuelson, Paul. "Compete as an Economic Theorist." In Schumpeterian Economics, edited by Helmut Frisch, New York: Praeger Publishers, 1981, pp. 1-27.

Vouchers Enable Choice, Competition, and Learning

John Tierney. Source of image: online version of NYT article cited below.
The New York Times Op-Ed education columnist offers a provocative evaluation of how Milton Friedman’s educational voucher proposal is working in Milwuakee:

The Journal Sentinel, which endorsed John Kerry in 2004, has parted company with the Democratic Party on the voucher issue. It backed Republican efforts this year to expand the program, which has led to the creation of dozens of new private schools in Milwaukee.
“We’ve seen what school choice can do,” said Gregory Stanford, an editorial writer and a columnist at the paper. “It’s impressive to go around to the voucher schools and see kids learning. Their parents are much more satisfied with these schools. And the fears that the public schools would be hurt have turned out to be wrong.”
In fact, the students in public schools have benefited from the competition. Two studies by Harvard researchers, one by Caroline Hoxby and another by Rajashri Chakrabarti, have shown that as the voucher program expanded in Milwaukee, there was a marked improvement in test scores at the public schools most threatened by the program (the ones with large numbers of low-income students eligible for the vouchers).
The competition spurred the public system to shift power from the central administration to individual schools, allowing councils of parents and teachers to decide who should teach there, instead of forcing the schools to accept incompetent teachers just because they had seniority.
“Poor teachers used to shuffle from one school on to another in what we called the dance of the lemons,” says Ken Johnson, the head of the school board. “But we couldn’t let that continue once our students had the option to go somewhere else. We had to react to students’ needs. We had to start seeing them as customers, not just seat-fillers.”
Some of the new voucher schools have flopped — but the advantage of a voucher program is that a bad private school can be shut down a lot faster than a bad public school. And while critics complain that there still isn’t definitive evidence that voucher students are doing better over all in their new schools, the results so far in Milwaukee and other cities are more than enough to declare vouchers a success.
“All the good research, including the voucher opponents’ work, shows that kids who accept vouchers are doing at least as well as their public school peers,” says Joseph Viteritti of Hunter College. “That’s remarkable, considering how much less money is being spent on the voucher students.”
In Milwaukee, where the public system spends more than $10,000 per student, private schools get less than $6,400 for each voucher student. But when you see what can be done for that money, you realize what’s wrong with Democrats’ favorite solution for education: more money for the public-school monopoly.
. . .
The school principal, Denise Pitchford, worked in the public schools, but she took a pay cut in exchange for less red tape. “I wanted the flexibility to give immediate personal attention to every student,” she said. “To me, it represented less money but a better opportunity.” Just like the whole voucher program.

For the full story, see:
JOHN TIERNEY. “City Schools That Work.” The New York Times (Tues., March 7, 2006): A25.
Note: This article was reprinted under the title “Vouchers Offer Many Positives.” in: Omaha World-Herald (Weds., March 8, 2006): 7B.

Free to Choose in Education

Here is the text of my brief letter-to-the-editor that was published several months ago. “OPS” stands for Omaha Public Schools.

Competing school districts within the Omaha area permit parents some freedom of choice in the education of their children.
If OPS succeeds in ending that freedom, the Legislature should restore freedom of choice by adopting Milton Friedman’s proposal to issue vouchers to parents, to be spent at the public or private school of their choice.

Art Diamond. “Try Vouchers.” Omaha World-Herald (Thurs., June 16, 2005): 6B.

Never Say Die: Milton Friedman on Vouchers, Again

From an opinion-piece by Milton Friedman, at age 93, in today’s Wall Street Journal:

Whatever the promise of vouchers for the education of New Orleans children, the reform will be opposed by the teachers unions and the educational administrators. They now control a monopoly school system. They are determined to preserve that control, and will go to almost any lengths to do so.
Unions to the contrary, the reform would achieve the purposes of Louisiana far better than the present system. The state’s objective is the education of its children, not the construction of buildings or the running of schools. Those are means not ends. The state’s objective would be better served by a competitive educational market than by a government monopoly. Producers of educational services would compete to attract students. Parents, empowered by the voucher, would have a wide range to choose from. As in other industries, such a competitive free market would lead to improvements in quality and reductions in cost.
If, by a political miracle, Louisiana could overcome the opposition of the unions and enact universal vouchers, it would not only serve itself, it would also render a service to the rest of the country by providing a large scale example of what the market can do for education when permitted to operate.

MILTON FRIEDMAN. “The Promise of Vouchers.” The Wall Street Journal (Mon., December 5, 2005): A20.

Milton Friedman on the Fed

David Levy of the Minneapolis Federal Reserve Bank (not to be confused with George Mason’s David Levy), interviewed Milton Friedman for the bank’s The Region publication. Here is a Levy question and Friedman’s answer:

Region: If you were advising the Federal Reserve, what would you say are the unsolved economic problems of the day?
Friedman: One unsolved economic problem of the day is how to get rid of the Federal Reserve.

Levy, David. “Interview with Milton Friedman.” The Region (June 1992); downloaded 10/05/05 online from: http://minneapolisfed.org/pubs/region/92-06/int926.cfm

Tenure and the Market as Protectors of Free Thought

Mark Blaug as a young tutor at Queens College in New York, endorsed a student petition protesting the firing of a left-wing tenured professor for having refused to co-operate with the Un-American Activities Committee. Less than a day later, Blaug received a note from the President of Queens College, telling Blaug that his choice was either to resign or be fired. He resigned.
Fortunately, he received a grant from the Social Science Research Council to complete his dissertation, after which, again seeking employment, he obtained a job interview at Yale:

(p. 77) In the course of the interview, I felt impelled to explain how I had lost my previous teaching position at Queens College. I always remember how Fellner cut me off, saying: ‘We don’t want to hear about that. This is a private college and what transpired at a public university a few years ago is of no concern to us.’ I never had a better demonstration of Milton Friedman’s thesis that a free market, by multiplying the number of probable employers, is more likely to secure liberty for the individual than a socialist system in which the state is a monopsonist.

Source:
Blaug, Mark. “Not Only an Economist: Autobiographical Reflections of a Historian of Economic Thought.” In Reflections of Eminent Economists, edited by Michael Szenberg and Lall Ramrattan, 71-94. Cheltenham, UK: Edward Elgar, 2004.