Lies, Damned lies and Naomi Klein

Cato's Johan Norberg has a detailed rebuttal on Naomi Klein's superficial claims about Milton Friedman and free-market policies made in her book, The shock doctrine. Here's a video of Norberg explaining how Ms Klein misrepresents what Friedman said:




Also see this follow up video.

I have leafed-through Klein's book. No one who has actually read Milton Friedman, will take Klein's claims seriously.

Klein's main ammunition is in the from a out-of-context quote by Friedman, who said that real change happens on a crisis, and that it will be led by ideas that are lying around at the time will be implemented. Friedman said this to emphasis the importance of working towards ideas which doesn't seem plausible right now, but might be some day, when people are looking for new ideas, such as in a financial crisis. He didn't mean this in the sense of a natural disaster nor did he advocate disaster.

This is clearly an ideologically neutral statement. If in the current financial mess in the U.S., ideas of more regulation holds sway, that will be implemented. In the face of high commodity prices, if someone is able to convince policymakers that price-controls are a good way of handling the 'crisis' there is a chance of that happening. The former is already sort of happening, the latter doesn't seem to be, thankfully.

It is also true that most important market-reforms did happen in financial crisis, like that of Sri Lanka in 1977, when the economy was squeezed through central-planing by the previous socialist government, or in the case of Indian reforms in the early '90's. Thanks to those reforms millions today are out of poverty. But if a different set of ideas were on the table, things might have gone in another direction.

Obviously, the likes of Klein doesn't have the cognitive power needed to understand this. See Norberg's full rebuttal and also see, Tyler Cowen's take.

Creative Capitalism

Inspired by Bill Gates' speech at the World Economic Forum, someone has created a creative capitalism blog with an impressive list of contributors, ranging from Gates to Buffet to this latest piece from Jagdish Bhagwati. Even the late Milton Friedman makes a reappearance. Do Check it out.

The Milton Friedman Institute is launched

Here's an excerpt from the News Release from University of Chicago.

The University of Chicago is establishing a center for path-breaking research in economics to build upon the strengths of economists throughout the University and to honor the contributions of Milton Friedman, considered by many to be the leading economist of the 20th century.

The University’s investment in facilities will be about $200 million, with half of that amount establishing an operating endowment and the remainder allocated for facilities and other start-up costs. The majority of the funds will be raised in donations from alumni and business leaders around the world.

“The goal of the Institute is to build on the University’s existing leadership position and make the Milton Friedman Institute a primary intellectual destination for economics by creating a robust forum for engagement of our faculty and students with scholars and policymakers from around the world,” said President Robert J. Zimmer. “The Milton Friedman Institute will continue Chicago’s extraordinary tradition of creating new ideas that stimulate the academic world and innovative approaches that influence policy.” [Read More]

Go see the website. Yet another outpost fighting for liberty. Excellent.

Free lunch and Freeconomics

Chris Anderson, the editor-in-chief of Wired Magazine wrote this very interesting piece based on his forthcoming book "FREE" where he argues that following the pattern of the Web that $0.00 will be the future of business. My beef with the article at the time was this section,

Milton Friedman himself reminded us time and time again that "there's no such thing as a free lunch.

"But Friedman was wrong in two ways. First, a free lunch doesn't necessarily mean the food is being given away or that you'll pay for it later — it could just mean someone else is picking up the tab. Second, in the digital realm, as we've seen, the main feedstocks of the information economy — storage, processing power, and bandwidth — are getting cheaper by the day. Two of the main scarcity functions of traditional economics — the marginal costs of manufacturing and distribution — are rushing headlong to zip. It's as if the restaurant suddenly didn't have to pay any food or labor costs for that lunch.

Surely economics has something to say about that?

It does. The word is externalities, a concept that holds that money is not the only scarcity in the world. Chief among the others are your time and respect, two factors that we've always known about but have only recently been able to measure properly. The "attention economy" and "reputation economy" are too fuzzy to merit an academic department, but there's something real at the heart of both. [link]

In fact, the word isn't externalities. Chris is really missing the point about the phrase "there ain't no such thing as free lunch. Friedman didn't mean you won't get to have free lunch in the literal sense. What Friedman meant had more to do with opportunity costs rather than "externalities". Any economist would tell you that "cost" is simply what you have to give up to get something (reputation economy, etc. like Chris suggests) and not necessarily monetary. Even if your aunt invites you for lunch, there's still the cost of the time which you could have used to say, read something (opportunity cost) and of course your aunt, or at least someone along the line is footing the bill. So no, there ain't no such thing as a free lunch.

I've blogged about this in the past. Chris is featured this week on EconTalk with Russ Roberts in which he discusses the no free lunch concept, which Russ rebuts, quite accurately. Do listen to the podcast, it's interesting overall.

I'd be sure to pick up Chris' book when it arrives, especially since it's priced at $0.00. More on freeconomics and the economics of "free" later.

SEZs for Sri Lanka?

I was in India when the Nandigram incidents took place, it was around March and I was traveling all over North India. At the centre of the disputew were land acquisitions meant for a Special Economic Zone(SEZ), initiated by the West Bengal State Government (controlled by the Communist Party of India - Marxist, no less) for a chemical hub by a private company. The SEZ required the acquisition of 14,000 acres (57 km²) of land mostly from Nandigram. On this particular day (March 14, 2007) there was a standoff between policemen (some of whom were CPI(M) cadres in police uniform) and the villagers, ultimately resulting in 14 people being killed from police gunfire.

My work in India required me to be away from the TV most of the time, but I did manage to catch glimpses of the unfolding story and ever since I've kept a close-eye on news about SEZs.

Now, "Export Processing Zones" is hardly anything new , even Sri Lanka has what’s known as Free Trade Zones (FTZs). They are basically a designated area where the trade barriers are relaxed – tariffs lowered, duty slashed, etc. The area generally benefits from good infrastructure and what’s called an 'enabling environment' to promote exports and attract Foreign Direct Investment.

However SEZs, experimented quite extensively in India, China and elsewhere is a bit of a different animal. First of all they tend to be huge. Shenzhen – China’s first SEZ – spreads over a land area of about 334 km², that’s roughly about 9 times the city of Colombo. India, which now has approved nearly 400 SEZs in all of its states, has allowed for sites the size of 50km² for SEZs . So I repeat, they are HUGE, often covering the size of modern day cities. SEZs, like Free Trade Zones have relaxed trade rules, except they are more relaxed...much more relaxed. SEZs in India have been declared "foreign territory" for purposes of trade, duties and tariffs. They are exempt from customs, excise, service, Sales and local taxes. Most of them are run by private companies, including some foreign-owned ones. They have duty concessions on some imports, relaxed labor laws and the state government provides such services as electricity and water. I've seen some of them, they do look really pretty. So much so that Sri Lankan companies such as Brandix have invested in some of them.

On paper SEZs looks perfect - it would increase employment, help exports, encourage investment and provide a way for companies to escape illogical tariffs and taxes imposed on them and step into the world of free enteprise. Everything is great, except for the fact that setting up a SEZ involves land acquisitions, often forced on people not willing to move out from their property. This is where it gets messy, forcible land acquisitions creates a whole host of problems - displacement, inadequate compensation, loss of livelihood for the people involved to mention a few.

These issues have made SEZs a subject of much criticism from across the political spectrum. For the people on the left, this is part of the latest Capitalist conspiracy to satisfy their greedy lust for money at the expense of the poor. For the people to the right, its a violation of private property rights (see Shruti Rajgopalan's excellent critique here)- the one thing that's so critical to the effective function of the free-market system, that people like Hernando De Soto have written books about it.

Being a student of the subject I have met many people falling into both these camps, with one the one unified conclusion - SEZs are just bad. Except of course many people I've not met, including the Times of India columnist, Swaminathan Aiyar who has argued (here and elsewhere) that SEZs could be good thing, if handled properly. He recommends leaving the residential areas intact when developing the SEZs, and making affected people equity holders of the new projects, making the villagers landlords and companies their tenants. Quite a transformation.

Although, I'd principally defend property rights, I can back Aiyar's suggestions. So can the model be replicated in Sri Lanka ? Absolutely. Especially for a president, who like to harp on development and seems to want (genuinely or not I don't know) to develop both the South (primarily Hambantota) and the Eastern province, SEZs should definitely be a development tool which needs to be explored. Both provinces have natural ports and certainly the Eastern province can use a bit of accelerated growth.

Personally, I'd prefer Free Economic Zones, that is large designated areas with much like the rules of SEZs but not necessarily a privately managed chunk of land, a Hong-Kong experiment of sorts. Designated SEZs can still exist, of course. The East (in a world where a degree of rule of law is established) would be a perfect candidate for something like this. Trincomalee port can be made into a privately owned freeport. But now I'm just taking it a bit too far.. or is it?

Related Articles :

• How not to displace people (S. Aiyar)
• Indian Property Wrongs (Shruti)
• Free Cities
• The Hong Kong Experiment (Milton Friedman)
• SEZ FAQ