Whenever I see Andrei Shleifer, he asks me how the revolution is going. He has in mind of course the kind of views I espouse in this blog, which he considers heretical.
But Andrei is promoting his own counter-revolution, one that enshrines the last quarter century as the age of Milton Friedman. In a recent short paper, he attributes the rapid growth of China, India, and a few others to the turn to markets and the victory of Friedmanite views on economic policy.
The last quarter century has witnessed remarkable progress of mankind. The world’s per capita inflation-adjusted income rose from $5400 in 1980 to $8500 in 2005. Schooling and life expectancy grew rapidly, while infant mortality and poverty fell just as fast. Compared to 1980, many more countries in the world are democratic today.
The last quarter century also saw wide acceptance of free market policies in both rich and poor countries: from private ownership, to free trade, to responsible budgets, to lower taxes. Three important events mark the beginning of this period. In 1979, Deng Xiao Ping started market reforms in China, which over the quarter century lifted hundreds of millions of people out of poverty. In the same year, Margaret Thatcher was elected Prime Minister in Britain, and initiated her radical reforms and a long period of growth. A year later, Ronald Reagan was elected President of the United States, and also embraced free market policies. All three of these leaders professed inspiration from the work of Milton Friedman. It is natural, then, to refer to the last quarter century as the Age of Milton Friedman.
Shleifer's article is purported to be a review of two books with different takes on this period, one by Stanley Fischer and collaborators and another one by Joe Stiglitz and collaborators. No prize for guessing which one Andrei likes and which he trashes.
I have always found this view--attributing the successes of the last quarter century simply to market-oriented policies--as more obfuscating than clarifying. For one thing, countries like China and India have so many blemishes on their record that if you treat them as poster children for economic liberalism you run very quickly into trouble. Had these countries been basket cases instead, the Friedmanite perspective would offer as good an explanation of their failure: look at the corruption, the pervasiveness of state controls, the extent of public ownership!
Secondly, the countries that did a real turn towards markets, chiefly those in Latin America, have been rewarded not by China-like growth, but dismal outcomes. Shleifer recognizes this. His explanation: overbearing taxation and regulation! With this kind of parsing of the evidence ex post, there is no way we can ever be wrong...
For a good antidote, turn to Berkeley economist Pranab Bardhan's demolition of China and India myths in the Boston Review.