Friedman’s Folly

Score one for common sense.

Common sense says it’s a bad idea to leave policing complex activities to those who profit more if they don’t follow all the rules, especially if there is no obvious way to see when they take those profitable shortcuts.

Milton Friedman gained his demi-god status by advising Chile how to “get the government off the people’s backs.” Some have even referred to post-Friedman Chile as a “miracle.”

Now the cracks running through the foundations of recently built apartment buildings many miles from the quake epicenter are symptomatic of the cracks in the foundations of the Friedman economic catechism.

I chose the word “catechism” because most Friedmanites I’ve tried debating on the merits of their ideas are just as rigid in their beliefs as anyone in the Catholic church’s middle management.

To them, all government is bad and all private enterprise is good.

What spurs these thoughts was a “boots on the ground” report from Santiago, a city far enough away from the quake that deaths and infrastructure damage are thankfully quite light.

At the end of the interview, the US reporter asked the Chilean correspondent about her personal experience.

That reporter described awakening in the middle of the night and “riding” her house as it bucked like Urban Cowboy’s mechanical bull, fearing that she would end up riding the second floor of her house down to ground level.

Instead, she was fine, and so was her house.  Then she said something I noted with some surprise.  She said her house had been built in the 1960’s, when the government inspected construction and made sure Chile’s strong building codes were followed.

She then pointed out that her friends in newer buildings aren’t nearly so lucky.  A number of owners of apartments in Santiago buildings completed in the last few years are finding themselves locked out of their homes as the buildings are condemned.


I thought building techniques and understanding of earthquake effects had improved over the last 50 years.

Are the Chilean building codes weaker than the past with respect to earthquake safety?


Do Chilean builders have access to improvements developed in the US and Japan following the Kobe and Loma Prieta quakes?


So why are new buildings not safe, while decades old buildings are fine?

Because Chile bought into Friedmanism, and allowed architects and the construction industry to monitor themselves and self-regulate compliance with the building codes.

As the debate heats up over whether we need to toughen regulation or take back self-regulation deals with the financial industry, think about where you want us to be in the next financial earthquake.

As Saint Ronald famously said “Trust, but verify.”



14 Responses to Friedman’s Folly

  1. Bruce Branding says:

    Is the conclusion that government is good at finely tuning things to strike the perfect balance between affordable housing and safe housing? In reality we’re not talking about the potential for perfect outcomes. We’re talking about whether markets or governments do the least amount of harm. When governments get involved in economies, you have distorted, crony capitalism as you do in the United States. Pick your poison.

  2. Tom D says:

    That political hatchet job on Milton Friedman is beneath you.

  3. DonP says:

    Gee, wonder how that works when all it takes in many places is a few bucks in the hand of whatever relevant official you need to look the other way.

  4. […] friend and former Wall St. whiz Howards Hill has an interesting take on Milton Friedman’s role in the Chile ‘economic miracle’ – good thinking […]

  5. Xorthfred says:

    Anybody that thinks that Chile’s economy is a basket case now, should look at how incredibly poor it was before Friedman gave his advice. The country went from being one of the poorest on Earth to being the wealthiest in the region. Compare Chile to the hard core socialism of Cuba or the soft core socialist welfare State of Argentina. Hard to believe, but Chile’s capitalist path puts the country’s citizens on a path to pass the nanny State of America sometime later in this century.

    • hhill51 says:

      Maybe you’re reading something into my opinion that isn’t there. I’m all for capitalism, but with a viable independent regulator. It didn’t pass the smell test of common sense when Greenspan argued that CDS should be self-policed, not reported and completely without capital reserve requirements, any more than our food inspection system makes sense, where the FDA gave up the ability to enforce a recall to the companies that sell the meat. People in Santiago can’t live in their brand-new luxury condos because the government handed over the inspection duties to the people building the condos. In most places on the planet, new construction is safer than the stuff built back in the 60’s.

  6. anton says:

    Homes that built by construction companies with tough internal control should benefit from earthquake because people will turn to them (insurance policy price, etc) according to libertarian theory.

    • hhill51 says:

      How many fortunes can be made by the sleazoids before the next Big One lets their customers know that they cheaped out on the rebar? Problem with pure theoretical market self-regulation is that it leaves the customer who cannot check the quality taking the loss (of life or life savings, in this case), and the corporate organizers happily counting their 30 years of profit while letting the corporate shell go bankrupt after the quake. Unless and until there is full personal liablity for corporate actions, the libertarian “market takes care of it” philosophy has a hole you can drive a world economic crisis through.

      • Tom D says:

        In the last one hundred years the US Government has debased its currency 98%, engaged in rampant militarism, taxed away the wealth of the nation, interfered incessantly in every economic sector and now owns some, and practiced consistent crony regulation wherever it has turned its gaze. Now we are supposed to trust the wisdom of that government to regulate the entire financial and medical systems? Not I.

  7. Robert Groover says:

    Interesting! A pure libertarian polity would require no shielding from personal liability, and perhaps no bankruptcy. Libertarian ideals are a good vanishing point to put politics in perspective.

    The outraged comments show that your points found some some sore spots, but indignation ain’t refutation.

  8. The G says:

    You cite one example of a woman with a house that stood while her friends who lived in newer places had their places condemned. Well I dont have the figures and if you do please feel free to share but to make a broad statement like that I think were going to need a little bit more of a body of evidence. Im sure we can find some evidence of the reverse occuring as well. This statement:”She then pointed out that her friends in newer buildings aren’t nearly so lucky. A number of owners of apartments in Santiago buildings completed in the last few years are finding themselves locked out of their homes as the buildings are condemned.” also shows how little we can truly gather from this. By that I mean after Pinochet exited there were extensive building codes enacted so that means we’re only looking at a window of say 15 years in which the people could be exploited by these so called greedy capitalists. If you have data on the buildings built within this time frame compared with the building built before and after I wouldnt mind taking an objective look at them. Although I am a huge supporter of Friedman I do agree we need a framework within which we can set building safety standards but to what degree we might disagree on.

    • hhill51 says:

      Boy, that sure rolls back some time…. I’m frankly not interested in defending Pinochet or condemning him.
      I am quite sure that pure free markets reward the most greedy and least honest at the expense of competitors with more integrity, especially when the untoward event is infrequent. When entire industries are given over to self-policing, say, like US eggs, then the FDA can just wait until enough people die before the industry decides to use its voluntary recall ability. Why is that?
      Certainly the industry I’ve worked in for 30 years, structured finance, took every advantage it could of the out-of-sight, unregulated swap market, thanks to Phil Gramm and his lovely wife Wendy. What we got was Enron and AIG, to name just the two most egregious cases that have come to light. Or maybe we’d like the free-market capitalism that adds poison to powdered milk so it tests to higher protein content?
      It’s Utopian thinking that a free market will police itself when it comes to consumer or workplace safety or environmental stewardship. Something about being a capitalist made Friedman and his acolytes believe that integrity comes with the profit motive. Hardly. Cheaper production forces out the more expensive. If nobody gets sick from the toxic runoff until decades after the profits are made, which company will dominate? Not the one that doesn’t pollute. If a dirt-poor Appalachian man has a choice of feeding his family today or not working in a mine that might collapse but 1,000:1 won’t collapse today, guess which choice he makes. And of course the companies can simply declare Ch 11, and there’s no recourse to recoup real damages from the management and owners from those years of doing the wrong thing.
      Friedman assumes away human nature in support of his economic polemic, which makes him just as deluded as Marx, for exactly the same reason.

    • hhill51 says:

      By the way, you make a mistake assuming that Pinochet’s policies were reversed just because he left. Right up until the quake, building safety regs were self-certified by builders and architects. If there was smaller diameter rebar inside the concrete columns, who was going to know? It was part of Chile’s economic miracle to get government off the people’s backs, to use a popular phrase.
      Pinochet’s successors no more turned that around than Clinton reversed all the supply-side fantasy economics that Reagan and Bush put in. We’ve had a solid 30 years of rewarding asset stripping, leveraging and re-leveraging, removing watchdogs and removing incentives to reinvest rather vs. taking quick trading profits. We got the debt and economic meltdown as a result of this half-Kondratyev wave of free-market religious fervor. We’ll get even more if we try to fix the problems by following the same policies and doubling down on the bet. But apparently the electorate has an extremely short memory, because it looks like their about to put the same fools in charge of our national purse strings that made the mess in the first place.

      • The G says:

        Ok so the gov played no role in helping leverage those assets? The gov played no role in creating the demand for those leveraged assets? The gov played no role in reducing the percieved risk of taking on massive amounts of personal debt? The policy of the Fed had nothing to do with it? The list goes on and on.

        You act as though somehow gov intervention has only positive effects and the market only negative effects. Somehow self interest doesnt apply to politicians enacting these laws.

        We can go round and round all day about what caused the economic meltdown but were going to be back in the exact same place.

        Now as far as your comment that free market policies somehow made the debt what is today. I mean come on…Really? THE ONLY reason we have the debt is b/c the government spends more than it takes in period. Free market policies are not to be confused with ALL policies put in place by supporters free market policies.

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