Naomi Klein's The Shock Doctrine - The Liberal Chapter

We here at Running of the Bulls spend most of our time thinking about financial markets.  (We're boring people.)  Occasionally, we also like to ponder ideas in economics and geopolitics.

I quite like politics though I shy away from it on this blog as this is meant to be a forum on asset markets, particularly stocks.  However, economic policy greatly influences asset prices, and since we want to make a whole lot of money in the asset markets, we have to understand how economics and politics effect the world around us.

I tend to fall onto the center right of the political spectrum, at least on economic policy.  I consider myself to be a pragmatic classical liberal, or perhaps a quasi-libertarian.  If that sounds to you like a strange amalgam of competing philosophies, you would be correct.

My own belief is that markets create the most wealth for the most people most of the time.  Markets, however, do not create all the wealth for all the people all the time.  Markets usually work.  However, they do not always.  Markets fail on occasion. 

Markets are not the only force in wealth creation.  Government plays a critical role.  Nor is wealth creation the only goal of society, as it should not be.   Government is vital in both the creation of the wealth and the organization of civil society.

Thus, by "pragmatic classical liberal," I mean that the market should be allowed to work without government interference. But when markets break down, the government should be actively involved to get the market working again. Governments should also be involved in facilitating better functioning markets.

This is different from modern conservatism which says that market should take care of everything, and from modern liberalism which postulates that government should be a driving force in wealth creation through industrial policy and government intervention in the economy.

An example of good government intervention when the market fails - apart from the glaringly obvious example of the massive government involvement in the current financial collapse - is the government mandating increased information to consumers. 

In neoclassical economic theory, individuals are always attempting to maximize utility.  In theory, perfect equilibrium between supply and demand assumes that individuals have perfect knowledge.  However, individuals never have perfect knowledge, and at times have very little knowledge.  (Like when you take your car into the shop for example. - ed.)  Thus, government mandating producers to disclose information to consumers should increase utility for individuals since it allows them to make better choices.  It should also make markets more efficient since information asymmetry between producers and consumers is reduced.  Think SEC financial disclosures or the nutritional content now provided on packages of food.

So what has this all got to do with the title of this post?  Well, nothing really, other than to set the premise that I am not attacking liberals or the Democrats.  I supported Obama for President.  Heck I even predicted it at the beginning of the year!  (Yeah, you get one right. Big deal. - ed.) I consider myself to be an Independent the United States - neither Republican nor Democrat - tending to be more conservative on economic policy and more liberal on social policy.

Rather, I am attacking the basis for Naomi Klein's argument in her book, The Shock Doctrine, which I discuss here, here, here and here. 

Klein postulates that dastardly free marketeers such as Milton Friedman exploit crises to advance their agenda.  It seems that it ain't just the evil Chicago School fellows who exploit crises, as The Cato Institute points out (via Johan Norberg).

Paging Naomi Klein. In her book The Shock Doctrine, the left-wing polemicist claimed that right-wing governments — which she defined very broadly — take advantage of crises, or “shocks,” to implement their dastardly policies of free trade, privatization, and tax cuts. Well, one government has now announced its intention to take advantage of an economic crisis to implement “things you could not do before.” And since this government no doubt includes a lot of people who have read Naomi Klein, she may very well be able to take credit for giving them the idea.

According to the Wall Street Journal, President-elect Obama’s first and most central appointee is excited at the opportunities presented by the current economic shock:

Obama Chief of Staff Rahm Emanuel, speaking to a Wall Street Journal conclave of business leaders Tuesday, said the economic crisis facing the country is “an opportunity to do things you could not do before.”

“You never want a serious crisis to go to waste,” Mr. Emanuel said.

“You never want a serious crisis to go to waste.” Klein’s fans would be all over that if a Republican had said it. Instead, Paul Krugman praises that very line. Maybe he’s learned a few things from Naomi Klein, too.

In Crisis and Leviathan, Robert Higgs demonstrated that government growth in the United States has not been slow and steady, year in and year out. Rather, its scope and power tend to shoot up during wars and economic crises. Occasionally, around the world, there have been instances where a crisis led to free-market reforms. Generally, though, governments seek to expand their power, and they take advantage of crises to do so. But they rarely spell their intentions out as clearly as Rahm Emanuel did.

Comments

[The Observer]

Toro: You sound semi-apologetic:

"I tend to fall onto the center right of the political spectrum, at least on economic policy. I consider myself to be a pragmatic classical liberal, or perhaps a quasi-libertarian. If that sounds to you like a strange amalgam of competing philosophies, you would be correct."

While I consider myself a centrist economically and left of center in terms of "social" policy, I also consider myself to be a "pragmatic classical liberal, or perhaps a quasi-libertarian". I don't find this "strange" at all. You are in good and "normal" company!

P.S. Your recent posts have been nothing short of superb. Dense (in a good sense), insightful, actionable... You Rock! Thanks!

[Leo Petr]

I connected that line to Klein's book too when I saw it.

Really, crises are a catalyst for great political change. The direction of that change is determined by who has power or who can seize it. There's no need to engineer crises -- typical incompetence will ensure that one will come along sooner or later

[Greg Harris]

Toro, for some reason this post made me think you might like this video:

http://www.youtube.com/watch?v=rzO_Fvok7Ns

How our society reacts from this will be an interesting thing. I hope people realize the biggest problem is that it was an asset bubble and that the Fed needs to intervene if it suspects an asset bubble, because asset bubbles have very real consequences. But we don't need a referendum on everything to do with the economy, which is where some people seem to be uncomfortably heading.