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Tuesday, April 15, 2014

Mt. Pelarin and Milton Friedman -- fighting to make the world safe for Oligarchy since the 1940's


I've been interested in Milton Friedman since his ideas started competing with the "Austrian School" folks as the alternative to Keynesian inspired economic concepts. His critique of Keynesian economics was blown up by his fanatic disciples into a complete "refutation" of what was status quo economics between the 1940's and the 1970's in favor of free markets, laissez faire, and a narrative that reversed the observations about the depression of those who lived it and blamed "government" for the cause of the Great Depression.

This was the 70's when I was exposed to them for the first time. Headlines talked about how false "Keynesian economics" had been. I didn't see it. I never could accept those arguments on their face, but my way is to give ideas the benefit of the doubt and I believe that whenever confronted with new ideas one has to study them critically and not reject them outright. So I was somewhat swayed by them anyway. I studied them and saw no superior arguments. For that reason I couldn't stomach them enough to embrace them. And since no money was going to come from critiques of them. I realized I wasn't going to be able to afford an advanced economic degree challenging them as all the money was going to those who either genuinely believed those ideas or could pretend to. I changed my major to the more "practical" Business Administration. I still regret that decision.

Naturally in Business School they were even more popular than in the Econ department. They were very convenient to business folks because they validated their freebooting natural beliefs. Business folks love the idea is that you can only go wrong if government tries to intervene in the economic system. The business folks I knew gravitated to Libertarianism as ideology and Republicanism as a means to get access to contracts, contacts and pots of money. Compared to the Austrians Friedman made sense. Friedman's math even mapped to Keynesian math. He later acknowledged that.

Mt. Pelarin Society

It turns out that while they argued interminably, Friedman was basically in the same orbit as other Austrians and was a founding member of the Mt. Pelarin Society. It's "about page states" (Taken 4/15/2014)

"After World War II, in 1947, when many of the values of Western civilization were imperiled, 36 scholars, mostly economists, with some historians and philosophers, were invited by Professor Friedrich von Hayek to meet at Mont Pelerin, near Montreux, Switzerland, to discuss the state and the possible fate of liberalism (in its classical sense) in thinking and practice."

Now the major powers had just defeated the Nazis. Capitalism had survived an onslaught of Fascism and while there was an assault going on from the Bolshevik countries (China and Russia) this statement has to be deconstructed. Bolshevism, it turns out was the straw enemy, but they were as much against "social democracy" as they were Bolshevism. And the Mt. Pelarin society seems have been aimed at coming up with an ideology to fight both. Their real target was the New Deal.

"The group described itself as the Mont Pelerin Society, after the place of the first meeting. It emphasised that it did not intend to create an orthodoxy, to form or align itself with any political party or parties, or to conduct propaganda. Its sole objective was to facilitate an exchange of ideas between like-minded scholars in the hope of strengthening the principles and practice of a free society and to study the workings, virtues, and defects of market-oriented economic systems."

So the Mt. Pelarin society was founded as an agency of the Anti-Communist movement. They've been quite open about it in the past. But they've also been an enemy of Republics having too many democratic attributes and it has the stamp of it's founder (Hayek).

"Members who include high government officials, Nobel prize recipients, journalists, economic and financial experts, and legal scholars from all over the world, come regularly together to present the most current analysis of ideas, trends and events."

And Milton Friedman was a founding member

Milton Friedman (in light coat and with hat, in the centre) with friends in an excursion at the first meeting of the Mont Pelerin Society in 1947.

Friedman, Mt. Pelarin and the Austrians

Now you wouldn't think of Milton Friedman as important in 1947. And the Austrians, almost all of them, hated some of his ideas, especially the notion that government can have any role in controlling economics other than staying out of the way of the Free Market or, sometimes, ending the Reserve Banking system. But Friedman gives his credit to the Mt. Pelarin Society in this 1995 interview:

What really got me started in policy and what led to Capitalism and Freedom was, in an indirect way, the Mont Pelerin Society. The first Mont Pelerin Society meeting was in 1947 in Switzerland. Hayek arranged it. It was his idea.

So he gives credit to Hayek, Mont Pelarin and the people he met there.

"Mont Pelerin was the first time that I came into contact with people like Hayek, Lionel Robbins, and the European contingent of that time. That widened my perspective about issues and policy."

He says:

"The Mont Pelerin Society was people who were deeply concerned about issues. It was people with whom you shared a basic common belief, who at home were isolated. Its great contribution was that it provided a week when people like that could get together and open their hearts and minds and not have to worry about whether somebody was going to stick a knife in their back--especially for people in countries where they were isolated." Src: Reason Magazine:

So regardless of how much Austrians, Friedmanista Monetarists, and others fight, they all share a common core belief.

But what is that belief?

Friedman and the Austrians

Friedman wasn't an Austrian Fanatic. He believed that if the government simply controlled the money supply so that enough money, and no more, was available to business and banks everything else would go well. He really believed in Laissez Faire. In that belief he overlapped the Austrians. Both believed that business people would never do crazy things, speculate, or recklessly gamble and so so the only role of Government was to keep the Government out of business. Friedman's monetary ideas received criticism from Austrians because Austrians preferred "hard money" and didn't trust them, but otherwise he and they overlapped a lot.

And Friedman credits the Mt. Pelarin society and the Volker foundation that funded them for his writings:

"The reason the Society ever happened was that Hayek had written The Road to Serfdom, which attracted the attention [of Harold Luhnow who had control of] the Volker Foundation, and it was the Volker Foundation that financed the American participation in the Mont Pelerin Society. A Swiss group financed the Swiss and European participation." ([] added for clarification)

The Volker Foundation may have been founded by William Volker, but it was used after his death by it's trustee Harold Luhnow to fund Right Wing and anti-Communist efforts to provide an alternative to the socialist influenced economics of the Keynesian school and people like John Kenneth Galbraith who were seen as too "socialist". Ostensibly the enemy was communism, but the RW then as now preferred to see anyone championing ordinary citizens or labor as "communists". At the time most academics still remembered the Great Depression and were rightfully skeptical about pure capitalism or laissez Faire. The task of Luhnow was to find and cultivate people like Hayek and Friedman as alternatives to "leftists" and funded them to combat liberalism as it had evolved in the 30's and 40's. Friedman writes:

In the middle '50s, the Volker Foundation undertook a program of summer institutes for junior academics who were favorably inclined toward a free-market point of view or were interested in such issues. Capitalism and Freedom was based on a series of lectures that I gave at one of those seminars.

Read more:

Friedman also writes:

"Those seminars forced me to systematize my thoughts and present them in a coherent way. And they also provided a very good audience because the people who were there were lively, outspoken, didn't hesitate to criticize. It was a very good audience. There was a lot of free time as well for discussions outside of the formal seminar. And I learned a great deal, not only from the students who were there, but also the fellow lecturers."

Murray Rothbard acknowledges that he was recruited and paid by the Volker Foundation at the beginning of his career. Friedman and Hayek were also recruited by Luhnow. He was playing a long game. The goal was to recruit students and future professors to the libertarian and RW cause.

Milton Friedman and the IRS

The Republicans would love to get rid of the IRS, but they wrote it's codes and created it. And Milton Friedman takes credit for creating it when he was an employee of the Democrats he had a lifelong hatred of. An online journal [The Economic Policy Journal] gives him credit for creating the Income tax we live under:

"I was an employee at the Treasury Department. We were in a wartime situation. How do you raise the enormous amount of taxes you need for wartime? We were all in favor of cutting inflation. I wasn't as sophisticated about how to do it then as I would be now, but there's no doubt that one of the ways to avoid inflation was to finance as large a fraction of current spending with tax money as possible."

Apparently Friedman, with like minded colleagues deserves credit for moderating the inflation of World War II by using the Income Tax, not only to finance it, but to ensure that the financing of the war limited the impact on the financier class. He continued during the interview:

"In World War I, a very small fraction of the total war expenditure was financed by taxes, so we had a doubling of prices during the war and after the war. At the outbreak of World War II, the Treasury was determined not to make the same mistake again."

But the problem was that if they increased taxes many people would be unable to pay them "post hoc." So Friedman came up with the brilliant idea that it would be smarter to make the employer withhold those taxes.

"You could not do that during wartime or peacetime without withholding. And so people at the Treasury tax research department, where I was working, investigated various methods of withholding. I was one of the small technical group that worked on developing it."

Essentially the income tax went from being a tax figured up on surplus at the end of the year, to being a rent charged on labor by government and with-held by employers. This became the model for all sorts of taxes, and also for employers making employees pay for employee benefits out of their pay. Friedman stated at the time:

"One of the major opponents of the idea was the IRS. Because every organization knows that the only way you can do anything is the way they've always been doing it. This was something new, and they kept telling us how impossible it was. It was a very interesting and very challenging intellectual task. I played a significant role, no question about it, in introducing withholding. I think it's a great mistake for peacetime, but in 1941-43, all of us were concentrating on the war. I have no apologies for it, but I really wish we hadn't found it necessary and I wish there were some way of abolishing withholding now."

If one thinks of wages as something that ought to be a laborer's personal property and of it as improper to pay labor less than their labor is worth, then this method of raising money to fight a war might seem improper. Further if one thinks that government shouldn't be getting in the way between the master and his absolute right to pay or not pay his slaves (labor) based on their signature with blood on a contract, then income taxes seem an infringement on that absolute property and contractual right as well.

Jonah Goldberg (who is right here for the wrong reasons) notes:

"Withholding numbs workers to the pain of their taxes. As the Treasury Department Web site explained as recently as 2009: Tax withholding “greatly eased the collection of the tax for both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced the taxpayer’s awareness of the amount of tax being collected, i.e. it reduced the transparency of the tax, which made it easier to raise taxes in the future.” (Oddly, that fact sheet no longer appears on Treasury’s Web site)."[Src:]

A friend shared a story that Friedman boasted that this made the IRS less progressive and boasted about saving business from high taxes by instituting it. I can't find the quote, but by inventing with-holding he did make it easier for the income tax to go from being a purely progressive instrument under the tutelage of Henry C. Simons, to a tool of regressive taxation starting during World War II, and becoming more and more obvious each year. Goldberg and Rothbard have other complaints:

But of course Rothbard and his bunch saw the problem differently from me. To me the problem is too much power for business oligarchs. To Rothbard the problem was too much government power to limit business oligarchs.

Further Reading

Capitalism and Freedom at Amaon:
My Previous related articles:
Starve the Beast, Destroy Democracy (a lot about Hayek there)
Fighting Democracy since 1964 (About the Kochs)
The Economics of the Swindle Bubble
Follow up Articles:
Untangling Friedman's Bait and Switch:

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