Karl Marx and Milton Friedman: What They Got Right

People on the left and the right view Karl Marx and Milton Friedman as true icons of their causes, with polar opposite world views. So it is no big surprise that the two men are rarely mentioned for their similarities.

The essence of Marx

After all, Karl Marx loathed capitalism and its exploitation of workers. He believed he understood its inherent logic and predicted that it would self-destruct.

In Marx’s eyes, the concentration of income away from those who produced it would generate ever more destructive business cycles until the workers would depose the owners of the means of production.

The essence of Friedman

Friedman celebrated capitalism and argued that, with a few unchanging institutions added, uninhibited free markets were all society needed to run smoothly.

Friedman often is caricatured as an unqualified defender of free markets, but this is inaccurate.

While he was deeply hostile to government intervention in the economy, he recognized standard market failures including externalities (“neighborhood effects”).

Moreover, he recognized the problem of providing and paying for public goods such as policing and defense, as well as the problem of poverty generated by market outcomes.

No need for fine-tuned intervention

Friedman acknowledged the need for limited policy interventions to mitigate the worst of these failures.

But there was no need for fine-tuned intervention. For the most part, a set of standing institutions could be created to deal with market failures.

In his area of special expertise, macroeconomic policy, especially monetary policy, Friedman adamantly denied the need for any active policy intervention.

As much as they differed in their views of market capitalism, Marx and Friedman are similar in that their most enduring intellectual legacies are not what they thought they had discovered but other aspects of their work.

Where Marx was wrong

Marx was wrong in his historical forecasts. Friedman was wrong in his faith that active government is unnecessary.

Yet, Marx’ insights into the role of material conditions in generating social classes, ideology, culture more broadly, and therefore history, still stand.

And Friedman’s celebration of the importance of a sense of “agency” (freedom) in determining well being, and the power of markets to grant such agency, stands, too.

Each of these incompatible icons deserves to be remembered, if not for what he believed was his crowning achievement.

Central to Marx’ economic theory, and therefore to his theory of history, is the labor theory of value.

His view of history is predicated on the idea that an unlimited supply of labor is available to capitalists at subsistence wages, so the rate of exploitation can rise continually.

The “masses” beyond subsistence

An unlimited labor supply at a subsistence wage may have been a good approximation of labor markets as he was viewing the world in the early 19th century.

However, that assumption has not comfortably fit reality since the early years of the Industrial Revolution.

Through a combination of pressure from organized labor, welfare state policies as introduced first in Bismarck’s Germany, and simply the increasing scarcity of labor due to capital accumulation (my favorite), the price of labor grew from subsistence.

It grew to a level that supports a chicken in every pot, a car in every garage, and a mobile phone in the pocket of every working-class citizen. Marx’s forecast did not foresee accurately the long-run trajectory of capitalist development.

Marx: Not an economist, but a good sociologist

If an inevitable collapse of capitalism has joined the Second Coming as a widespread article of many people’s faith, neither prediction has described history very well, so far. And still, Marx remains a central figure in the foundation of current ideas.

Marx’ recognition of the importance of social classes that arise from material conditions and from economic interests, particularly ownership, undergirds most contemporary political and social analysis, whether “Marxist” or not.

I think of him not as an economist, to be honored for his economics, nor as a visionary, to be honored for the accuracy of his historical vision.

I think of him as a sociologist to be honored for raising to proper prominence the material basis of the behaviors and ideas that give culture and social relations their shape.

Friedman: Market failures can be fixed

If Marx wished for the rapid demise of capitalism, Friedman’s aim was to celebrate capitalism. In particular, he wanted to get rid of government interference in markets.

He acknowledged problems with markets, but he thought a set of once-and-for-all institutional innovations could solve almost all of these problems.

Friedman believed that most regulatory policy was captured by those it ostensibly regulates. (Marx and Friedman may not be so far apart here; Marx might want to substitute “created” for “captured.”)

So Friedman favored only a minimum of regulation, with no discretionary tinkering to meet problems of monopoly and externalities (such as pollution).

Friedman: Negative income tax

In Friedman’s view, a few regulations – such as land-use zoning, well-constructed property law and perhaps a few regulations governing waste disposal and natural monopolies (industries, such as piped water delivery, that are most efficient with a single producer) – could create permanent institutions to deal with most market failures.

To solve the problem of paying for public goods such as policing and defense, as well as to mitigate the poverty generated by market outcomes, Friedman wanted to institute a simple “negative income tax.”

This tax regime would generate revenue for the government while relieving poverty by guaranteeing an income floor above the level of abject poverty.

Friedman: A product of the Great Depression

A product of the Great Depression, Friedman particularly disputed the Keynesian claim for active countercyclical policy. A steady rate of growth of the money supply was all that was needed to stabilize the economy.

In complete contradiction to Marx, Friedman believed that government, not capitalism, produced business cycles.

If monetary policy were driven by simple rules rather than the judgments of policy makers, market economies would grow steadily.

I think of Friedman as an “economic deist” who thought that relatively few government interventions would be sufficient to set the economy running unmonitored, like clockwork.

Build the capitalist clock, wind it up, and then let capitalism run without further intervention.

Hostility to public policy

If history has not been kind to Marx’ ”iron laws,” it has not exactly shined a favorable light on Friedman’s hostility to public policy. Arguably, the best evidence for this is in what happened in Eastern Europe after central planning collapsed in the 1990s.

The photographs of Friedman that replaced those of Socialist saints in Eastern Europe did not stay on walls for long. In every modern economy, it appears that active government intervention is unavoidable.

Similarly, the few attempts to run a passive macroeconomic policy from monetarist principles have not led the way to more such attempts. Active policy to mitigate the business cycle is ubiquitous in large economies.

Societies are complicated

As disappointing as it may be to libertarians (excluding the sizable corps of true believers, immune to evidence), a complicated society needs a lot of complicated, active public policy, both microeconomic and macroeconomic.

In spite of his shortcomings as a guru on government’s role in capitalism, Friedman’s work has left a legacy. His celebration of freedom of choice in a market economy highlights how much people value this freedom.

For example, many on the left want to meet the challenge of climate change through a flood of new restrictions and regulations governing production and consumption.

Friedman would have favored a carbon tax

At the time of his death, Friedman was agnostic about climate change, preferring perhaps not to admit a new, glaring market failure.

But if he had lived long enough to favor any kind of active climate policy, he surely would have favored market-based interventions such as a carbon tax over regulation.

Such a tax would push decision makers throughout the economy — not only those who buy new cars, for example, but those who build the factories where cars are made — to economize on the use of carbon-based energy.

Autonomy of participants

More important than the superior efficiency of such a policy, a market-based intervention would provide greater freedom. It would leave individuals to decide for themselves how much and how to economize on the use of carbon-based energy.

Friedman is onto something essential when he underlines the importance of people making their own decisions. His celebration of markets as interactions that are autonomously resolved by participants is Friedman’s major contribution.

If his dream of inactive government has not been supported by history, his attention to the importance people attach to autonomy, and the social cost of restricting it, is as important as ever.

No lasting contributions to economic theory

Neither Marx nor Friedman made lasting contributions to economic theory, in my view. However, anyone who tries to understand and to intervene in today’s political economic processes had better pay attention to what they said.

We cannot understand modern political economic developments without bringing to bear Marx’ understanding of the role of social class. Nor can we understand them without Friedman’s appreciation of markets as expressions of freedom.