Economy

Even the Father of Modern Libertarianism Criticized the Kind of Austerity That's Crushing Greece

Milton Friedman went public with concerns about imposing austerity on debt-ridden countries in return for loans.

Chicago School economist Milton Friedman, an avowed anti-government crusader and founding father of the modern right-wing libertarian movement, warned against the austerity programs that are so popular today.

Friedman is widely recognized as a progenitor of the wave of neoliberalism that spread across the world in the 1970s and '80s and beyond, establishing the groundwork for the economic and political climate of today, manifesting itself in the form of Thatcherism in the UK and Reaganism in the US.

Although Friedman served as one of Ronald Reagan’s key economic advisors, the Democratic Party largely adopted his policies as well. In a rhapsodic panegyric in the New York Times, former Clinton administration Department of Treasury executive, World Bank chief economist, and Harvard University president Lawrence Summers announced “any honest Democrat will admit that we are now all Friedmanites.”

The name and work of Milton Friedman, to this day, is almost religiously uttered by laissez-faire economists in defense of neoliberal measures such as privatization of the public sector, dismantlement of government institutions, and depletion of social resources. A Wall Street Journal editorial board member compared quoting Friedman to quoting the Bible.

Yet even Friedman understood that austerity had its limits, and could in fact create more problems than it purports to solve. In “Fearless Forecast: Economists Don’t See Threats to Economy Portending Depression,” an article published in the Wall Street Journal on Oct. 12, 1984, Friedman voiced concern about the already firmly established idea that austerity must be imposed on debt-ridden countries in return for loans. (High-quality scans of the article in an original copy of the newspaper are archived here and here.)

“Fearless Forecast: Economists Don’t See Threats to Economy Portending Depression"
Photo Credit: 
Wall Street Journal

International debt concerns Milton Friedman, a Nobel-Prize winning economist at the Hoover Institution in Stanford, Calif. “I’m worried,” he says, “about the austerity programs” that the International Monetary Fund has recently been urging on many Third World nations as a condition for borrowing. “Austerity may make sense for one or two developing countries,” Mr. Friedman remarks, “but not for such countries as a whole.”

Friedman did not oppose austerity because he advocated government intervention in the economy. He openly called for the abolishment of numerous federal executive departments of the US government and resolutely declared, "I am in favor of cutting taxes under any circumstances and for any excuse, whenever it’s possible.”

Rather, Friedman opposed austerity because even he, a hardline right-wing libertarian, understood that it does not work. He insisted that governments must “hold down and have a gradual reduction in the rate of monetary growth.” A gradual reduction, not the kind of immediate and drastic cuts in government spending that are mandated by austerity.

Today, nevertheless, the idea that austerity is a solution to economic crisis amounts to dogmatic doctrine throughout not just the West, but much of the world. While southern European nations, particularly Greece, writhe in agony over soaring unemployment and poverty rates, the Eurozone indefatigably imposes severe cuts to public spending and ruthlessly guts social services in return for loans to crisis-stricken countries.

Greece’s Austerity Trap

In Greece, approximately a quarter of the population, and half of the youth, is unemployed. Millions are on the verge of abject poverty, even though Greeks work the longest hours in Europe

The Troika, the European body that oversees the loans to Greece, as well as to Portugal, Ireland and Cyprus, refused to back down on its demands of harsh austerity. The Greek people democratically expressed numerous times that they oppose such neoliberal measures. They elected Syriza, a left-wing anti-austerity government. Almost two-thirds of the population then explicitly voted against austerity in a referendum. But the Troika persisted.

Not all of the constituents of the Troika—which consists of the European Commission, the International Monetary Fund and the European Central Bank—were equally comfortable with imposing further austerity. In 2013, the IMF admitted it failed to realize the damage austerity would do to Greece. Before the Troika forced a deal on Greece on July 13 that ordered the adoption of harsh austerity measures and the privatization of €50 billion of state assets, the IMF sent a secret report to Eurozone finance ministers (the Eurogroup), warning that Greek debt will be “unsustainable” under the plan. The IMF explained that, within a few years, Greek debt would climb to 200% of Greece’s gross domestic product. It called for giving Greece a 30-year grace period on servicing its debt. The Eurogroup ignored its warnings.

Even the pro-business publication Forbes alerts that, under the extreme austerity deal the Eurogroup imposed, drafted primarily by German Finance Minister Wolfgang Schäuble, it "is simply impossible" for Greece to pay off its debts.

In other words, European governments are demanding hardline right-wing economic policies that both the IMF and Milton Friedman cautioned against.

The IMF is by no stretch of the imagination a bastion of progressive economics. As even Friedman warned, the IMF is, along with the World Bank, infamous for imposing what are called “structural adjustment programs” on countries in desperate need of loans. These programs are austerity policies writ large; they mandate privatization of state-owned enterprises, corporate deregulation, and liberalization of trade. Very often, they are forced onto Global South countries that are saddled by enormous, unpayable odious debts left over by previous corrupt regimes. In return for an IMF bailout, these developing nations must agree to privatize resources, which are then invariably exploited by multinational corporations, and cut back on labor and environmental regulations.

Yet today, the IMF and the father of modern right-wing libertarianism are actually to the left of Europe’s finance ministers, who with insatiable appetite demand crippling austerity, with complete disregard for the mountains of evidence that indicate that such a policy will almost inevitably lead to horrific and deadly consequences.

A Bloody History

Being to the right of Milton Friedman is a frankly difficult endeavor. The renowned Chicago School economist had a strong influence on the repressive, far-right, US-backed dictatorship of Augusto Pinochet in Chile, which was established after a CIA-backed coup overthrew the democratically elected marxist government of Salvador Allende in 1973. Under Pinochet, tens of thousands of Chileans—leftists, labor organizers and dissident journalists—were killed, tortured and disappeared. Hundreds of thousands more were forced into exile.

In 1975, Friedman sent a letter to the Chilean dictator, outlining a laissez-faire program he deemed an economic “shock program” (this would inspire journalist Naomi Klein to write the book The Shock Doctrine). That same year, he spent a week in Chile delivering economics lectures. The Independent notes that Friedman “chose not to criticise the assassinations, illegal imprisonments, torture, exile and other atrocities – all exhaustively chronicled by Amnesty International – now being carried out in the name of the free market.”

Andre Gunder Frank, a professor of economics who did his dissertation under Friedman, wrote, "Economic Genocide in Chile: Open Letter to Milton Friedman and Arnold Harberger,” condemning what he characterized as his former mentor’s extremist economic views. The missive was published in the scholarly journal Economic and Political Weekly in June 1976. Frank subsequently followed up with a second letter.

Friedman’s staunch free-market ideology was not always tantamount to gospel among economists, as it largely is now. The Economist notes that, in “the wake of the Great Depression and the second world war, with the Keynesian revolution still young, championing the free market was deeply unfashionable, even (or especially) among economists. Mr. Friedman and kindred spirits … were seen as cranks.” Yet Friedman came to be “the most influential economist of the second half of the 20th century (Keynes died in 1946), possibly of all of it.”

Today, Friedman’s neoliberal legacy echoes throughout not just the West, but most the globe. Yet, just as the Right ignores what Adam Smith actually wrote, instead selectively quoting the 18th-century economist and waxing poetic ad nauseam on the “invisible hand,” a phrase he only mentioned three times in his entire oeuvre, the most fervent of free-market fundamentalists so often ignore the warnings of their hallowed fiscal prophet. Austerity does not work. Even Milton Friedman recognized this.

 

Ben Norton is a reporter for AlterNet's Grayzone Project. You can follow him on Twitter at @BenjaminNorton.

 

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