Thursday, April 9, 2009

Milton Friedman's "String Theory"

by Norman Markowitz

Jay Rothermel sent me this remarkable piece from Bloomberg News which I think deserves some commentary, since it comes from the "respectable right" and appears in the media which bears the name of the billionaire Mayor of New York. Jay wrote that he wasn't sure whether to "file it under 'bourgeois ideological rationalization' or latest news from the nuthouse," but I saw a connection with "science", albeit "weird science."

The article, by Kevin Hassett, is titled "Milton Friedman's 'Pluck' Gives Hope to Jobless." Is this the "luck and pluck" that the filled rags to riches stories for young boys of the reverend Horatio Alger, who himself left a school for boys with some charges of hanky panky before he created characters like Ragged Dick the News Boy, in which poverty became a training ground for success. However, Hassett, former Economic Advisor to John McCain and now both Director of Economic Policy Studies for the American Enterprise Institute and a Bloomberg business columnist, has something else in mind, that is, a "theory of economic crisis that Friedman came forward with in 1964 when his ideas were revered in board rooms and some economics departments but had little real influence on public policy:"the economy may be thought of as a plucked string. The further you pluck it, the more forcefully it comes back. The analogy gave the Friedman idea its name the 'plucking model.' '

I can think of other names myself, but Hassett goes on to say that "if the economy is going into decline, its good news to find out that it has been plucked That means a snap back is imminent." But how can you discover if you are dealing with a big pluck or a little pluck (even though Friedman's ideas would seem to suggest that the bigger the downward pluck, the stronger will be the bounce back)? Hassett then puts forward a complimentary "butterfly analogy." The economy is like a butterfly in a room with an upwardly sloping ceiling. The butterfly is always moving upward and sometimes flutters down a bit, but that only means it will move upward again because upward is its only direction. Hassett then quicks Tara Sinclair, an econometrician and apparent follower by the Friedman "pluck" who has looked at post WWII "recessions" in terms of that "theory." Sinclair, according to Hassett, suggest that "my updated results show that the 'pluck part' of the latest recession began in the fourth quarter of 2008" and that "plucks" usually last one year. From that, Hassett conjectures that "recovery may well be rapid and begin later this year," although he is quite worried about the lateness of the "pluck" and wonders if the revival will leave us with the high unemployment, seven percent, which preceded the financial collapse. He concludes that "Sadly, from where we are sitting 7 percent unemployment looks pretty good and the news that we have been plucked provides some comfort as more awful news arrives."

Those who are increasingly uneasy with Geithner's policy and wish President Obama would move more quickly in challenging finance capital (and I am one of those people) might stop and think about where we would be if Hassett were the Secretary of the Treasury or the Chair of the Council of Economic Advisors in a McCain administration. But the ideas expressed here, their shallowness and silliness, give us some insight into what we are struggling to overcome.

While "string theory" is an important new development in Physics, Friedman's "pluck theory" is an ornamental twist on the capitalist business cycle moving upward, ever upward. In some respects it is a reverse of Marx's view of a structural general crisis, with greater and deeper depressions over time with the concentration of capital, overproduction on a global scale, and the ensuing falling rate of profit. Although here, the crisis, if one takes the idea seriously (which I don't of course) would suggest that the bigger the negative "pluck," the stronger the positive pluck will be. As a historical guide, Hassett quotes Sinclair on postwar recessions which of
course are largely irrelevant to the present crisis, except of course in the longterm stagnation of real wages, the spectacular rise in consumer, state and business debt fueled by deregulation and the "high" formal rates of employment produced by creating millions of low wage service jobs to replace the high wage jobs lost by concentration and the export of capital.

Hassett appears ready to accept longterm high rates of unemployment and connect that to his plucking string and rising butterfly, the way some theologians discussed such vital questions as how many angels can dance on the head of pin as the rise of capitalism shook the clerical foundations of feudal society.

But these ideas, along with Friedman's general monetary theory, are irrelevant to the present crisis, which they helped to bring about in providing a rationale for anti-regulatory and anti-public sector social spending policies. They are a more arcane way of saying what Herbert Hoover said in the early 1930s, that "the economy is fundamentally sound" and that what was needed was to restore "confidence." Hoover at one point said privately that he wished someone could write a great song to restore confidence. That would not have helped too much (Yip Harburg's "Brother Can You Spare A Dime," which was a great song, wasn't quite what Hoover meant.). Hassett's contention that the jobless can find hope in Friedman's "pluck model" makes Hoover over seventy years ago seem like a realist. The jobless and many millions of others seeking to make ends meet in the face of mortgage payments, credit card debt, threatened income decline and job loss, understand that they have been "plucked," but in a very different way than Hassett and Sinclair.