Libertarian Experiment in Iceland Fails

"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.

Comments

[antboy]

I DECLARE SHENANIGANS!

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

[Iris Erlingsdottir - Huffpost Blogger]

You will find Cato's ranking of Iceland as #1 in regulation and business regulation in Economic Freedom of the World: 2008 Report on page 11 (http://www.cato.org/pubs/efw/efw2008/efw2008-1.pdf)

[antboy]

Your link is to the same publication as my link, but on a different site (and mine was to the entire 228 page publication). I already noted where you got your #1 ranking on regulation, and pointed out that there were actually 5 broad categories of economic freedom measured in that report, 2 of which received mediocre to poor ratings (compared to other countries in the developed world), and 1 of which was among the worst on earth. The country's poor rating on sound money is directly related to the banking crisis. I urge everyone to go to the link you provided and read the entire row of the table on Iceland on page 11 from which you selected the regulation columns.

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.

[DaleCorner]

Hmm, this post tries to piece together a very shaky narrative that Iceland's economic structure was a direct result of Milton Friedman's ideas and that its collapse was a result of these ideas. It is easy to come to these conclusions if you are already looking to create such a narrative.

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.

[WestNebraskan]

Wow! So Uncle Miltie's ideal society involved clan wars and viking raids! I wondered where you neocons got that "shock and awe" idea!

I guess Gissurarson's admission to the New Yorker that “We were too successful with the free-market philosophy” was just more BS, too.

[DaleCorner]

Do you know what a NeoCon is? There is nothing "NeoCon" about Milton Friedman. And the "NeoCon" core has nothing to do with Free Markets or Capitalism. NeoCon's actually started on the Left.

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.

[Vangel Vesovski]

I found this posting very strange. Obviously many commentators on the left are just looking to make connections that do not exist and were not exactly familiar with the Icelandic history that Friedman was referring to.

[Iris Erlingsdottir - Huffpost Blogger]

"...it's current collapse is a result of his policies and ideas?"

Yes - although Friedman's ideas were aided by greed and stupidity.
Oddsson based his rule as PM on the ideas of MF; his record and words speak for themselves.

It is…important for voters to be able to measure a politician’s ideals against the position he takes on individual issues…nothing is more important than clear and firm ideals.
Thirteen years in the office of Prime Minister have given me a unique opportunity to verify the words of Milton Friedman when he visited Iceland in the nineteen-eighties. Asked what action Iceland needed to take to put its economic affairs in order, he gave a simple answer: “The solution is freedom”.

Oddsson in a 2004 speech to the Icelandic-American Chamber of Commerce.

[Iris Erlingsdottir - Huffpost Blogger]

What is your source for this assertion?: "This quote by Friedman was actually in reference to Iceland in the 10th thru 13th centuries, not Iceland in 1995." ?

Friedman mentions no dates in the interview http://www.reason.com/news/show/29691.html where he made this statement:

"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?"

Nowhere else in the whole interview, except for this one paragraph, does Friedman mention Iceland. I seriously doubt that 10th-13th century Iceland - a tribal society embroiled in clan warfare - had any relevance to his ideas.

Friedman was obviously referring to Iceland in 1995, where his ideological disciples in the Icelandic Independence Party had ruled the country, with David Oddsson at the helm, since 1991.

I look forward to your answer and learning about Friedman's interest in Iceland of the Saga ages.

[montestruc]

Suggest that you look at some of his son's papers that had already been written at that time and that he surely had read. the below referenced paper (a peer reviewed academic paper on 9th - 11th century Icelandic legal institutions) was published in 1979. It is probable that Milton read it before it was published.

http://www.daviddfriedman.com/Academic/Iceland/Iceland.html

[HazelMeade]

until an effective regulatory scheme is enacted, until unbiased regulators are given real power over financial institutions

An unbiased regulator is even more fictional a creature than a perfectly rational market actor.

[doriath22]

What this fiasco demonstrates above all else is that economics is a pseudoscience pretending to be an empirical science. Despite all the assurances given us by supply-siders, flat-taxers, Steve Forbes, Alan Greenspan, et.al., these guys don't know any more about how to form a successful economy than a bunch of 1970's Soviet planners.

[montestruc]

Apparently you were not listening to them very hard. The whole point of capitalistic economics is that
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.

[montestruc]

so you are the grown-up?

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.

[ObjectiveRealist]

Free people are more important than free markets. Milton Friedman and his apostles put the cart before the horse.

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.

[JScott]

So now we have an example of libertarianism....

and IT DOESN'T WORK!

[ObjectiveRealist]

Real liberty for humans works very well for humans. Quirky variations on human liberty, like free markets, free beer, free with purchase of equal or greater value, etc., have an uncanny tendency to go ... not as well as advertised.

[zola77]

I think scott's point was that ron paul style libertarianism, or as they are known "republitarians", would have produced the same results as the Icelandic economic collapse - which is true.

[banker67]

Is stealing billions of dollars irrational? Hmm...doesn't seem like it.

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.

[joebhed]

Milton Friedman.

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.

[ObjectiveRealist]

Very interesting. I have not gotten to the chapter in 'The Shock Doctrine' by Naomi Klein where she credits Friedman for anticipating that flaw in his own plans, and he personally advised Chilean dictator Augusto Pinochet, remember. I suspect such a surprise ending is not in store, but I also don't disbelieve you. In fact, if he had insisted on such a monetary policy, I can imagine his pet projects (and Jeff Sachs') going much better.

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.

[goodog]

Iris Erlingsdottir is one of the Huffington Post's best contributors. She's always got a complex back-story to support the current event she's covering, and she's not afraid to take more than a paragraph to catch the reader up on where Iceland is.

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.

[ObamaSheeple]

Ditto, not to mention her tiny picture is smokin' hot, and I'm queer. It almost makes me want to be traded to the other team.

[MajorKong]

Take a trip to Iceland. The place is full of tall, painfully attractive, blond people.

[Freedom2]

The SEC neglected to investigate Bernie Maddoff and probably less than 30 Icelanders were responsible for taking down their own country and they are still out there waiting to exploit the wasteland they created. Will they ever serve time? Not a chance, when your brother or nephew or cousin or grandson or stepson or sister or....... ad infintum sits on the court. What a country!! If I only had a relative on the court and a criminal mind.... what an opportunity! Like shooting fish in a barrel!

[Merersu]

"... belief that the markets would somehow regulate themselves..."

Now where have we heard that before?!

[redraspberry]

All fiat currencies will fail sooner or later.

[GrahamInCanada]

All currencies fall sooner or later. At the very beginning of US currencies, tobacco was used as a currency in Virginia for over two hundred years. What is your point, that we advance?

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!

[MajorKong]

Except for the frequent 100-car pileups the unregulated "Free Road" is a great system.

[dctackett]

even the road has rules, training, certification, police and witnesses all over...

[tao53nyc]

Icelands fatal flaw was not free market libertarianism. The problem, as you describe it, and as I read between the lines, really stemmed from government-backed "private" central bankers. There was a free market everywhere - except in the most fundamental thing: banking and control of the currency itself. A competing market basket of currencies - including those backed by "hard capital", i.e., gold, silver, platinum, etc. would have mitigated many of the excesses, and the system would truly have "self regulated" - real market competition has a way of doing that. The banks were "privatized", but they still had a de facto monopoly on the money supply, and how "money" itself was defined. Of course, that could lead to disaster.

Don't get me started on the so-called "grownups". That's a subject for another time.

[WestNebraskan]

Engels wrote that the utopian socialists, like Owens, Fourier, and Saint-Simon, failed because they didn't understand the forces operating in socieity, but that if you took those forces into account, you would have a true "scientific" utopia, like the one he and Marx outlined.

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.

[MajorKong]

Silly me. I forgot. Free-market libertarianism can never fail, it can only be failed.

[IsaacKuo]

I'm always amazed at how free market worshipers can so brainlessly makes excuses for every market fiasco no matter how big and no matter how undeniable.

I'm never suprised by it; it's as predictable as the Sun setting in the west.

I'm just amazed by it.

[RoloTomassi]

"Don't get me started on the so-called "grownups". That's a subject for another time."

I don't think you have to worry about that, as it's clear that you aren't one of them. You Free Market Fundies are all the same, and much like communists in your fervent irrational belief that human nature can be ignored.

And increasingly it is becoming clear that you will NEVER grow up and face the very difficult yet solid FACT that you and your ilk were wrong and are complicit in vile actions, oppressive violence and economic pain all over the world.

[GrahamInCanada]

You should try reading, and not reading between the lines.

There is not a competing basket of currencies backed by "hard capital" (usually called a commodity currency, the rest of your spin is propaganda, there is nothing hard or stable about commodity currencies).

It is impossible that Iceland blew its financial brains out by manipulating its money supply. Under the Bretton Woods agreement, the US Dollar was given status as a world reserve currency, not the Icelandic Kronor. Iceland was playing with foreign currencies when it followed Friedman over the cliff, so much so the local residents owe mortgages and car payments not in Kronor, but in foreign currencies.

When the game of musical chairs that Friedman started ended, Iceland owed so much in foreign money that it went kaput!

Iceland's fatal flaw was the fatal flaw at the heart of Friedman's ideas, and if, like a good parrot, you must trot out other usual suspects, at least trot out suspects you might find in Iceland.

Only a few very strong nations in this world are able to operate in and manipulate their own currencies, and very few of those would get away with it long enough to blow their brains out.