Thomas Friedman Wants A “Center-Left” Democratic Party Based on Austrian Economic Myths

(2d column in my series on Friedman advising Hillary to Move Hard Right)

William K. Black
August 7, 2016     Bloomington, MN

Thomas Friedman has written two columns advising Hillary Clinton to renounce her campaign promises and the Democratic Party’s platform and move to the right of the Republican Party on economic issues.  My first column in this series critiqued the centerpiece of his plea to her – deregulate banking.

This column discusses Friedman’s economic assumption, which he probably does not understand he was making, that is (a) false and (b) dangerous.  Friedman doesn’t cite it as an economic assumption.  Instead, he makes a systems theory assertion without even trying to explain why it would be applicable to his proposed sharp move to the right on economic policies.

“Open Systems”

In his column entitled “Web People vs. Wall People,” Friedman unleashes this stream of slogans.

Web People instinctively understand that Democrats and Republicans both built their platforms largely in response to the Industrial Revolution, the New Deal and the Cold War, but that today, a 21st-century party needs to build its platform in response to the accelerations in technology, globalization and climate change, which are the forces transforming the workplace, geopolitics and the very planet.

As such, the instinct of Web People is to embrace the change in the pace of change and focus on empowering more people to be able to compete and collaborate in a world without walls. In particular, Web People understand that in times of rapid change, open systems are always more flexible, resilient and propulsive; they offer the chance to feel and respond first to change. So Web People favor more trade expansion, along the lines of the Trans-Pacific Partnership, and more managed immigration that attracts the most energetic and smartest minds, and more vehicles for lifelong learning.

In both sentences, Friedman describes “web people” as supposedly “understand[ing]” the world based on “instinct.”  “Web people” are instinctively great people because they share Friedman’s instincts.

The quoted sentences are almost entirely meaningless jargon in the service of Friedman’s self-flattery and sucking up to the Silicon Valley CEOs that buy him lunch.  The phrase that was lifted from systems theory is this:

[I]n times of rapid change, open systems are always more flexible, resilient and propulsive; they offer the chance to feel and respond first to change.

Friedman has become a self-caricature because of his hagiographic praise for slogans he’s lifted from Silicon Valley CEOs.  He presents the slogans as if they are brilliant insights that if followed would transform the (supposedly “flat”) world in great ways.

True “Open Systems” Cannot Exist in the Social Spheres

There are numerous problems with this ode to “open systems.”  First, in the real world of social relationships there is no reason to believe that an “open system” has ever existed or could exist.  “Open systems” are defined as producing “self-organization.”  They are characterized not by rigid rules and outcomes, but by feedback mechanisms and evolution.  It is primarily a concept used in information systems.

It is doubtful that even information systems actually meet the definition of open systems, for proponents tend to ignore the institutions supplied by others, such as the FBI, courts, prosecutors, and the rule of law, that are essential to the purported “self-organization.”  The reader can see that the word “self” is the cheat.  Information systems are in fact subject to catastrophic failure and endemic fraud and abuse absent effective enforcement of the rule of law and other governmental institutions.

“Flexible, Resilient and Propulsive” Can Be A Euphemism for Genocidal

Second, in the social sphere, “self-organization” leading to “flexible, resilient and propulsive” actions is often a prescription for disaster.  In the social sphere, what happens when the Shiites in Lebanon become enraged by the outdated demographics underlying the Lebanese accord that divvies up power among the Shia, Sunni, Christians, and Druze?  What happens when the “rapid change” is the defeat of the Shah of Iran and the rise of Hezbollah?  What happens when Israel invades, the IDF funds Christian militias, and Mossad does targeted assassinations?  What happens when Syria, which believes in “Greater Syria” takes over the Beqaa Valley?   What happens when a six-party combination of civil and international war breaks out with shifting alliances, plus Washington and Moscow, plus terrorism for ransom and arms?

No one would describe Lebanon or the Occupied Territories and Gaza as an “open system.”  Social and economic systems without a rule of law will virtually never be open systems.  Friedman has also forgotten that each of the “actors” that I have described are not simply reacting to “rapid change” – they are deliberately and strategically inducing and shaping “rapid change.”  Open systems are exceptionally unlikely to exist when the actors can cause deliberate, strategic, and nasty “rapid change.”  The best way to do this in Lebanon was to kill leaders and a whole lot of civilians from the rival group.  Once you and your family are targeted for murder because of your group identity, the only survival strategies are to emigrate (which is not generally available) or embrace your group identity and become a partisan.

Friedman knows this fact as well as anyone given his time in Lebanon during its civil war and in the Occupied Territories and Gaza.  Friedman’s description of this perverse dynamic of forcing people who once thought of themselves as “Lebanese” to adopt an identification with one’s religious or ethnic group was the centerpiece of his book From Beirut to Jerusalem.

“Flexible, resilient and propulsive” is a list of amoral descriptors that can include torture, terror, mass rape, slavery, and genocide.  The “system” is “resilient” because the winner is “resilient.”  The losers may be dead or slaves.   The “flexibility” can mean moral flexibility.  The ethnic or religious group with the most flexible approach to ethics may be the first to use poison gas and win the war.  “Propulsive” is a revealing term.  The side with the best artillery can propel the most 155mm shells on the rival city, and (to switch countries to Syria) annihilate its rivals by applying “Hama Rules.”

Hafez al-Assad’s destruction of Hama illustrates other reasons why social systems are not “open systems” – and even if they were, would not inherently produce civilized results.  Notice that power is the key.  The entity that wins a conflict will often combine power, ruthlessness, deception, and treachery.  Hafez al-Assad was an Alawite, a branch of the Shia faith that is a minority group in Syria.  A minority group can maintain control in a nation for many decades if it controls the military – and is prepared to use it ruthlessly against its fellow-citizens.

Colonization and the seizure of continents from the native peoples was a “flexible, resilient and propulsive” process.  Stealing extremely valuable assets is an excellent way to produce “growth” – among the people that steal.

Friedman’s book described how even the most cosmopolitan financial and scientific elites (“Web People” even before there was a web) in Lebanon had to adopt a murderous group identification to survive.  But he seems to have forgotten his own book.

[T]he instinct of Web People is to embrace the change in the pace of change and focus on empowering more people to be able to compete and collaborate in a world without walls.

Really?  What selfless saints.  They “instinct[ively]” spend their lives “empowering more people to be able to compete” with their own companies?  I’ll grant you that Silicon Valley CEOs “collaborate.”  Under Bill Gates, Microsoft illegally “collaborated” (extorted) software developers to extend their operating system monopoly to other fields.  Silicon Valley CEOs, led by Apple’s Steven Jobs, collaborated illegally for years via a “no poaching” pact (notice how they phrased competition as immoral with that term) to suppress workers’ wages.  Jobs also collaborated with other officers to backdate his stock options to receive even larger compensation.  Scores of CEOs collaborated to engage in accounting fraud through “round trip” scam broadband swaps and “channel stuffing.”  Other Silicon Valley CEOs collaborated with other officers to get away for years with sexual harassment.

Each of these crimes and abuses is an example of why economics is not an “open system.” Each of these crimes and abuses demonstrates the essential role of government enforcing an effective rule of law in producing desirable economic outcomes.

Friedman’s proposed economic policies both boil down to deregulation – in finance and health and safety.  As I quoted in my first column in this series, he explicitly calls for banking deregulation as his paramount policy.  But he also calls for Hillary to support the Trans-Pacific Partnership (TPP).  The paramount purpose of the TPP, though you would not learn this from Friedman, is destroying effective financial and health and safety regulation.  The “investment protection” clauses allow powerful corporations to extort government to deter or penalize them if they dare to adopt vital regulations.

Friedman is Peddling Long-Falsified Austrian Economic Dogmas

Austrian economists are famous for asserting that, absent the evil government, economics is self-organizing and optimal.  Their term for this is “spontaneous order” and they were great believers in Social Darwinism.  They also predict that stimulus must fail and that austerity must succeed.  Each of these claims has been falsified for decades by economists, regulators, courts, and criminologists.  It turns out that fraud is a profit-opportunity that is subject to spontaneous criminal order.  Fraud can create a “Gresham’s” dynamic in which bad ethics drives good ethics from the markets.

The Austrians’ ideological heirs supplemented this “self-correcting” myth through three primary claims – each of them discredited.

Efficient markets and contracts

Markets were asserted to be self-correcting.  Any pricing error creates a profit opportunity and all public information is promptly taken into account by market participants.  The optimal trading strategy when there is a pricing error is to buy the undervalued asset and sell the overvalued asset.  This strategy automatically causes both pricing errors to disappear.  The profit opportunity disappears when the pricing error is fixed.  This means that prices will self-correct and tend to move toward their “true” value.

The problem is that the world’s largest asset bubbles in history have occurred in the heart of this era in which markets are supposedly ever more efficient.  Fraud does fool markets.  Asset prices move systematically – for many years – further away from “real” values.  Rather than “self-correcting,” financial markets collapsed and were saved only through massive governmental interventions.

Frank Easterbrook and Daniel Fischel: Financial Markets Automatically Exclude Fraud

Easterbrook and Fischel claimed that financial, professional, and employment markets automatically excluded frauds.  This exclusion occurred because honest corporations had the financial incentive – and unique ability that could not be mimicked by frauds – to “signal” that they were honest.  To be kind, no aspect of their claims was true and when they attempted to apply their theory in the real world they ended up praising three financial firms – each of which proved to be massive frauds.  Naturally, when they wrote their book promoting their theories there was insufficient space to disclose this embarrassment.

General Equilibrium Theory and Pareto Optimality

The Italian economist Vilfredo Pareto argued that voluntary exchange would inherently lead to both parties being made better off.  These voluntary exchanges would take place until all such mutually beneficial exchanges were made.  When that point was reached the economy would have reached optimality.

Microeconomists created a general equilibrium theory that relied on Pareto optimality as a means to claim that an economy with minimal governmental “interference” would produce a grand equilibrium.  Macroeconomists decided to torture the concept even more aggressively and make it their basis for claiming that if the government could be reduced to economic insignificance even the overall economy would be self-correcting and would move naturally toward optimality.

There are so many things wrong with these claims that it would take volumes to develop simply the fatal errors.  I’ll mention only three of those fatal errors. First, fraud.  Both parties are not made better off and the “markets” massively magnify the pricing “errors.”  One party, the bank CEO is made massively better off.  More junior officers and employees and the “independent professionals” who aid and abet the frauds prosper enormously.  The borrowers, shareholders, and the general public losses vastly exceed these gains.

Second, externalities.  Pareto optimal transactions could be a global suicide pact due to pollution, ozone holes, and global climate change.  Calling something “optimal” that is actually suicidal exemplifies the insanity of this economic ideology.

Third, the economists who promoted those dogmas have argued for decades that their claims should be judged on their productive ability.  I agree.  They failed – catastrophically and repeatedly.  But they did not stop spreading dogmas they knew had repeatedly been proved false.

Austrian Economics as “Center-Left”

Friedman’s claim that banking deregulation and health and safety deregulation, through the extortion provided by the “investment protection” obscenity in the TPP, are the keys to super-charging growth and creating a self-correcting economy is based on a slogan rather than real economics, real systems theory, or any historical reality.  The economic dogmas that Friedman is peddling have all been falsified.

The dishonest aspect of all this is that Friedman advises Hillary to adopt these hard-right dogmas, which have repeatedly led to the epidemics of elite fraud that drove our last three financial crises, as a means to achieve rapid economic growth and financial stability.  The hilarious aspect of this is that Friedman claims that Hillary’s embrace of ultra-right wing tropes would produce a “compassionate, center-left Web party for the 21st century.”  Center-left?

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