Friedman’s Mistake: The State Cannot Become Efficient on Local Market “Injections”

Milton Friedman is rightly considered the father of the so-called “neoliberalism” loathed by Keynesians and at best taken circumspectly by classic liberals and libertarians.

His intellectual legacy is important more than anything through the optics of critical diagnostic applied to etatism, often in short, exact and memorable phrases. “The government solution to a problem is usually as bad as the problem and very often makes the problem worse.”; “Governments never learn. Only people learn.” “A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both.”

To his credit, he was also reasonable enough to realize how hard it is to reach the ideal of a free society: “I want people to take thought about their condition and to recognize that the maintenance of a free society is a very difficult and complicated thing and it requires a self-denying ordinance of the most extreme kind. It requires a willingness to put up with temporary evils on the basis of the subtle and sophisticated understanding that if you step in to do something about them you not only may make them worse, you will spread your tentacles and get bad results elsewhere.”

Moreover, he understood the ambiguous relationship between entrepreneurs and economic freedom: “With some notable exceptions, businessmen favor free enterprise in general but are opposed to it when it comes to themselves.”

In these circumstances, it is hard to figure out what got Friedman to the conclusion that the state can become more efficient by well-dosed local “injections” of free market. This idea has seduced many first-rate rightist politicians, from Ronald Reagan to Margaret Thatcher. To summarize, Friedman’s idea - which we seen applied on a wide scale even today, when it’s the mainstream practice - is that the state must preserve its control as owner of the so-called public utilities, but it has to leave their management and actual operation to the private sector, by concessions, management contracts, public-private partnerships and so-called “privatization.”

Ultimately, this is the essence of neoliberalism: inserting market and entrepreneurship in a controlled manner into increasingly etatist societies and economies, hoping for more efficiency. That’s why it is so loathed by socialists, who see in it a dangerous form of reaction to the “progressive” advance of etatism. To the same extent, however, from a classic liberal or libertarian standpoint, Friedmanism is merely the consolidation of the unholy alliance between the state and the big companies, and ultimately of the etatism, of the central control power.

Because it’s useless to privatize, grant concessions and sign management contracts for public services kept as state property. Firstly, the action incentives for action are entirely different from the situation where the owners are private. Secondly, it’s useless to have private operators of state monopolies with profit margins guaranteed by regulations, purportedly to provide “continuity” of the relevant public utility. Competition - which is the only motivation and guarantee of the companies’ efforts to act for the benefit of their customers, the only way of accommodating the opposite interests of entrepreneurs and consumers - cannot be dictated by decrees; it only occurs when decrees are abrogated.

All these are visible in the operation of various public utilities on concession to the private sector, like transportation, distribution of energy, gas, heating and water, garbage disposal, public lighting, etc. We not that, to the difference of the prior situation, when the state managed them directly, these generate constant, hefty profits for their private operators, without a correspondence between the permanent raise of tariffs, guaranteed by law, and quality improvements for consumers. It doesn’t come as a surprise; it’s the way of operation for any monopoly, either of a state-owned or a private company.

Similar examples of Friedmanian reforms are the private administration of penitentiaries, widespread in the U.S., and the partial privatization of public pensions, seen in all the states with a second pillar of privately managed mandatory pension savings system. Friedman even proposed the replacement of the Federal Reserve with a computer who would increase every year the monetary mass with a certain amount of money.

We can even see as Friedmanian the sadly failing experience of Romania with “private managers of state-owned companies”, an attempt to reintroduce the corporate management standards of the private companies into the public sector, of course without the incentives specific to a free market.

Unquestionably, corporative neoliberalism of Friedmanian origin is preferable to Socialism anytime. The current status quo avoids at least extreme shortages, and things can work reasonably to well, also depending on the general conditions of economy, legislation and so on. But the state cannot be turned into an entity both efficient and ethic. These can only be the features of a free society and a free economy. And the built-in defects of Friedmanism, incorrectly diagnosed by socialists, can revive anytime the delusion of absolute etatism.