"Milton [Friedman] is the embodiment of the truth that ideas have consequences."Donald Rumsfeld, in a speech at Milton Friedman's 90th birthday party in 2002, held by the Bush White House to honor Friedman's legacy.
In autumn 1984, the Icelandic Libertarian Association arranged for American economist Milton Friedman to visit Iceland. During this visit, Friedman gave a lecture at the University of Iceland on the "Tyranny of the Status Quo," and debated the country's leading socialist intellectuals--including current president Ólafur Ragnar Grímsson. This visit made a great impact on several young members of the Independence Party, including Davíð Oddsson, Hannes Hólmsteinn Gissurarson, and Geir Haarde.
Mr. Gissurarson, right, in happier times, with Milton and Rose Friedman at a Mont Pelerin conference in Tokyo in 1988.
Not content to sit on the sidelines, these men took action to break the government's total control over Iceland's media, fisheries, and banks. Hannes Hólmsteinn operated an illegal radio station, to protest against the government monopoly of broadcasting, and wrote an influential book advocating the privatization of Iceland's main resource, its fisheries.
Davíð was made head of the Independence Party and became Prime Minister in 1991. He began a radical program of monetary and fiscal stabilization, privatization, and tax rate reduction. Corporate taxes were reduced from 50% to 18%, and the net wealth tax was abolished. The fishing quotas were given free of charge to the owners of fishing vessels. In 2002, Hannes Hólmsteinn published a new book--"How Can Iceland Become the Richest Country in the World?"--in which he set forth a plan for Iceland to become an international financial center. In 2003, the country's main commercial banks were privatized.
Friedman saw Iceland as his utopia. "I would like to be a zero-government libertarian [but] I don't think it's a feasible social structure. I look over history, and outside of perhaps Iceland, where else can you find any historical examples of that kind of a system developing?"
At first, the policies appeared to be very successful. The economy grew at a strong pace, rising until Iceland achieved one of the highest per capita GDPs in the world. In 2007 it also topped the score for the United Nation's Human Development Index.
Iceland rocketed to the top 10 in the indexes of economic freedom. The Cato Institute praised the "Nordic Tiger" for its flat taxes, privatization and economic freedoms, and rated it as the least regulated country in the world.
Unfortunately, it has become evident that these libertarian policies were not the panacea that Friedman claimed they were. In fact, economists are already using Iceland as a textbook case of how to ruin a nation's economy. As Paul Krugman recently noted, there is an "almost eerie correlation between conservative praise two or three years ago and economic disaster today."
Although respectable economists were pointing out the fundamental weaknesses in Friedman's paradise as early as 2006, it is remarkable that Iceland's Financial Supervisory Authority (FSA) does not appear to have found a single securities or antitrust violation during the entire period of spectacular growth, despite the fact that nearly all of Iceland's wealth is controlled by a very small group. The Central Bank--led by Davíð Oddsson--took no steps to rein in the banks or to accumulate the reserves of foreign currency required to back their overseas commitments.
Any attempt to restrain the banks and businesses was met with contempt. The Iceland's parliament--the Althingi--was bullied into to implementing "globally competitive policies," with the implied threat that the investors would otherwise flee the country. Which they did anyway, with the banks setting up hundreds of shell corporations in Tortola.
It is an unfortunate characteristic of utopias that they never work as planned. Reality has a way of making a mockery of political and social constructs that are based on theory. Friedman's belief that the markets would somehow regulate themselves didn't take into account the predictably irrational character of human nature. In Iceland's case, the investors' irrational exuberance was matched only by the bank executives' irrational belief that they were the best at everything.
Certainly, no rational foreign investor would take a chance on Iceland now. It should be obvious now that regulation by disinterested parties is essential to the functioning of the markets. Until the entire affair is investigated and made public, until an effective regulatory scheme is enacted, until unbiased regulators are given real power over financial institutions, Iceland is dead in the water.
It is time for the grownups to take over again.
Iceland didn't even rank in the Top 10 in the most recent Economic Freedom of the World ranking (which Cato co-sponsors), let alone number 1. It barely cracked the Top 10 in 2003 and 2004, then dropped out again. In all 7 of the Cato listings this decade, it ranked below
Hong Kong
Switzerland
Singapore
New Zealand
United Kingdom
United States
Canada
Ireland
Australia
In fact, in the 2 most recent reports, it ranked below both Chile and Estonia.
So where does the author find Iceland ranked number 1? Well, in the most recent EFW report, there are 5 categories, of which 1 is regulation (where Iceland ranked first). But the same report ranks Iceland 5th in legal system and property rights (certainly excellent), 51st in government spending (because of an expensive welfare state), only 62nd in sound money (which produced the disaster that befell it), and 116th in freedom to trade internationally (making it one of the least globalized developed nations on earth).
It was a classic example of a country ruined by excessive government spending, government manipulation of the money supply, and an horrendous policy of trade restrictions worthy of Herbert Hoover and the Smoot-Hawley Tariff of 1930.
Libertarian experiment? Puh-leese.
Here's the link to the Cato study for those who are interested in verifying my statements.
http://www.freetheworld.com/2008/EconomicFreedomoftheWorld2008.pdf
No country whose government spending is more than 40% of the entire country's spending is a libertarian paradise, or anything remotely close. You could write a great article on the contradiction between Iceland's reputation for economic freedom and the reality, using the same Cato study you cited as your primary source. In fact, Iceland was guilty of massive amounts of pro-business intervention, especially in the areas of monetary policy and international trade. Perhaps your real complaint is against those "free market" advocates who turn a blind eye to pro-business intervention. In that case, I'm with you completely.
You know a post is suspect with the author downright takes one of Friedman's quotes out of context to create a narrative.
"I would like to be a zero-government libertarian [but] I don't think it's a feasible social structure. I look over history, and outside of perhaps Iceland, where else can you find any historical examples of that kind of a system developing?"
This quote by Friedman was actually in reference to Iceland in the 10th thru 13th centuries, not Iceland in 1995.
So because Milton Friedman visited Iceland in 1984 and gave a speech, made a remark about Iceland in 1995 refering to 10th century Iceland, it's current collapse is a result of his policies and ideas?
Just as The US's financial crisis is not as black and white as "it was all the governments fault" or "it was free markets run amoke", Iceland's problems are complicated and shouldn't be used to try and make a ideological point about "a libertarian experiment failing."
I am pretty moderate politically, but even I can see thru this post.
I guess Gissurarson's admission to the New Yorker that “We were too successful with the free-market philosophy” was just more BS, too.
So I would suggest reading up on your political classifications before you try to make a witty comment. Its kind of sad if Naomi Klein, the great thinker, doesn't know the distinction either.
An unbiased regulator is even more fictional a creature than a perfectly rational market actor.
problem of economics is very hard and historically just does not work well at all with top down management.
As in that people should be left alone as much as possible as NOBODY has figured out economics well enough to do detailed planning for a whole nation, let alone the global economy.
According to YOU --"At first, the policies appeared to be very successful. The economy grew at a strong pace, rising until Iceland achieved one of the highest per capita GDPs in the world. In 2007 it also topped the score for the United Nation's Human Development Index."
So you think that bade economic and monetary policies in other nations has absolutely nothing to do with Iceland's current problems?
So even though according to you significant economic progress was seen for much of a decade, one significant setback means the socialists are the grownup and have to take charge again.
Somehow that does not seem very grown up to me.
quote:
Not content to sit on the sidelines, these men took action to break the government's total control over Iceland's media, fisheries, and banks. Hannes Hólmsteinn operated an illegal radio station, to protest against the government monopoly of broadcasting, and wrote an influential book advocating the privatization of Iceland's main resource, its fisheries.
/quote
If "fish" are considered a public trust, and all fishermen had the legal guarantee of equal access to any and all fisheries, then the most talented (in economist jargon, "efficient") fishermen would be the most profitable and the least talented would have the greatest incentive to try another profession. That would be the ideal competitive fishing market. By contrast, ownership of natural resources allows monopolization and other anti-competitive behavior which undermines the theoretical value to society of capitalism.
Collective ownership of natural resources is more capitalist.
and IT DOESN'T WORK!
It may appear kind of nuts if you believe thieves ever have the slightest care for the misery their crimes cause.
But I've seen not a hint that these vermin care about anything except themselves.
The men who stole trillions from taxpayers worldwide surely never gave a thought to anything other conjuring new ways to fill their private jets with lucre and flying the loot to a secret foreign bank.
No one asks a masked convenience-store robber if he or she carefully considered the effect of the theft on the neighborhood economy.
So why assume that thieves in $40,000 busines suits care a fig if their crimes destroy an entire nation? After all, only the individual matters!
The people who destroyed Iceland's ecomony are vermin, no diffferent in any important way from lowest cutpurse on the darkest alley of the sleaziest neighborhoods on earth.
Acknowledging the character of common thieves can help when academics counter-attack with vast rationalizations for their slavish worship of thieves with MBAs, and idiots with doctorates in economics.
One of the most hated men of the times.
From HUFFPO to the Misesblog, he can do nothing right.
In reality, this results from our own failure to understand and implement his recommended MONETARY system framework.
Please read: A Monetary and Fiscal Framework for Economic Stability.
In every case of fiscal and monetary failure, especially Iceland, we can see that his monetary theories were ignored.
Milton Friedman's money theories can be boiled down to this.
The government (not private bankers) should create ALL the nation's monies, debt-free at issue, and the banking system should operate on a 100 percent reserve basis.
In issuing the nation's debt-free money, the government should limit that increase via indexing to actual increases in the productive capacity of the economy.
This is essentially the same as the Chicago Plan that was prepared for FDR in response to the 1929 Crash. The most PROGRESSIVE economists in the country, if not the world, developed what is essentially the same plan as Milton Friedman proposed in this paper years later.
There is no Chicago Plan and no QTM factor to what went on in Iceland.
There is none throughout our international system of fractional-reserve banking.
The debt-money system is insolvent.
It is based on an unsustainable escalation of too little money chasing too many debt-service payments.
We have ignored Friedman and the Chicago Plan authors at our own peril.
And, here we all are.
Personally, though, I have no vested interest in Friedman's legacy so I'll advocate against charging interest on money before it's put into circulation, as the U.S. "Federal" Reserve does, purely on the merits of Congress' Constitutional authority not including delegating to private parties, the consent of the governed, no taxation without representation, etc.
It's not that she isn't ideological; she seems unabashedly progressive. But she takes the time to explain a matter in adult details instead of cookie cutter sayings.
Never mind that Milton Friedman might be evil. She leaves that judgment to the facts as they happened.
Her writing is lucid and serious, well informed and friendly, and she doesn't spoiling any of that by settling philosophical differences with snarky comments. I love snarky comments in the right context, but her content aims to inform, not to insult.
Now where have we heard that before?!
Whatever it's symbolic form in the real world, money only exists in the human imagination. Currencies are just symbols of imagined value, whatever form they come in... and you know, have been advancing every since the Sumar civilization formalized money eight thousand years ago, compounded by the formalization of banks four thousand years ago.
Things don't stay the same. Gasp!
Don't get me started on the so-called "grownups". That's a subject for another time.
That worked out about as well as Friedman's libertarian utopia.
I think the point of Iris's article is that all utopias are doomed, and that we should base our governments on reality instead of fantasy. Responsible impartial regulation is necessary to avoid the inevitable excesses brought on by human nature.