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Rejoinder to Appelbaum on Friedman

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Rejoinder to Appelbaum on Friedman

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By John P. Mackey and Walter E. Block

 

In his September 18, 2020 New York Times column, Binyamin Appelbaum appeared to be highly critical of Milton Friedman.

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The former started out by calling the latter “a free-market ideologue,” and he did not mean this as a compliment. He ended on this note: “After 50 years of listening to Friedman, it’s time to do something about the flaws (in the views of this Nobel Prize winning economist).” In between, he maintained we should no longer wait for, or rely on, businessmen to renounce “selfishness portrayed as a principled stand,” as he purported Friedman would have it. It is now time- it is past time, in his view, to get the government involved in compelling the wealthy in effect to support social justice.

It would appear at the outset to be a 180 degree difference between these two writers. Not so, not so, at least not when it comes to goals. Both seek an end to poverty, favor prosperity, freedom and economic development. Appelbaum supports egalitarianism, Friedman did not, but even here it is possible to at least partially reconcile their differences. The journalist favors heavy taxation of the rich and financial support for the poor; the economist would go part way in that direction with his negative income tax (those at the bottom end of the income distribution pay a negative tax; e.g., receive a subsidy). Moreover, Friedman would attest that economic growth disproportionately helps the impoverished. 200 years ago, 94% of everyone alive on Planet Earth lived on less than $2.00 per day. Today it is only 10%.  The average lifespan in 1820 was 30, today it is 72.6 (which is higher than in any country in 1950).  In 1820, illiteracy rates were 88%, while today they have shrunk to only 14%.

No, the gigantic, stupendous, difference between the two scholars concerns means, not ends. And here we side completely with the University of Chicago professor who was the most prominent dismal scientist of the 20th century (many scholars would argue that Keynes was), and should continue that position in the present one.

What are the specifics?

Appelbaum wants to leave off “the public shaming of restaurants that refuse to give paid leave to sick employees” and have a law enacted compelling them to do just that. But what determines employee well-being is total wages, the monetary plus the non-monetary (health care, safety on the job, and other fringe benefits). The firm cares not one whit about the proportions; its eye is only on the cost of the total compensation package. It has every incentive to allocate remuneration in accord with worker preferences. Mr. Appelbaum does not realize that if paid family leave is given, and total compensation (based on productivity) does not change, then something else will be reduced, presumably take home pay. Most workers would rather have higher take home pay than paid family leave if this means to an agreed-upon end is implemented. This is basic economics 101, and there are few people who have contributed more to it than Milton Friedman.

Similarly, the New York Times editorialist avers: “Instead of pleading with McDonald’s to raise wages, raise the federal minimum wage.” But as Professor Friedman would explain, this legislative enactment does not raise compensation, certainly not in the long run; rather, it serves as a barrier over which an employee’s productivity must rise, if he is to obtain and keep a job. When compensation is legislatively raised above what the labor productivity of the low-skilled worker is contributing, the firm will either be forced to make an investment in new technology and/or take on more highly skilled employees, so as to substitute for the displaced workers.  Keep raising it, and more and more less-skilled workers will be legislatively consigned to permanent unemployment. Again, neither man wants that. They disagree on means, not ends.

Also on Applebaum’s wish list is that our society “combat discrimination … reduce pollution (and) maintain community institutions.” Friedman was certainly a world class economist, and his legacy also includes many of his students. Gary Becker, Thomas Sowell and Walter Williams would be the first to reply to Appelbaum that different wage levels, whether between whites and blacks or men and women, do not necessarily indicate discrimination. Friedman would have no problem with a law reducing pollution (he supported his colleague Ronald Coase’s solution in this regard), but he would insist that if any one firm carried out this policy, it would court bankruptcy. He also had no problem with supporting charitable organizations; he only insisted that people do this with their own money, not that of others (such as CEOs on behalf of stockholders).

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States Mr. Appelbaum: “Friedman’s negative vision of government has helped to obscure the ways the public sector can help the private sector, for example by investing in education, infrastructure and research.” But a careful perusal of his famous book, Capitalism and Freedom will demonstrate that Friedman’s concept of “neighborhood effects” supported precisely these three policies. He saw a market failure in what most economists would call positive externalities: we all benefit from the education of others, infrastructure that we need not use directly and general research. Therefore, the government should subsidize these efforts, lest resources be misallocated.

One last example. The editorialist wants “to convince banks to steal less money from customers.” This is presumably a misprint. Obviously, he wants savings institutions to engage in no robbery at all. Does anyone doubt that the economist would enthusiastically support this?

There are deep dark chasms between Freidman and Appelbaum concerning means to an end, but less so, far less so, regarding goals they both share.


John P. Mackey is Co-Founder and CEO of Whole Foods Market

Walter E. Block is Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics at Loyola University New Orleans

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