It is a short and sweet piece addressing the Pinochet regime, the Chicago boys, and Naomi Klein’s “Shock Doctrine” myth. Stephens suggests that the implementation of Friedman’s economic ideas in Chile led to better building codes and fewer fatalities than January’s 7.0 Haitian earthquake:

In “The Shock Doctrine,” Ms. Klein titles one of her sub-chapters “The Myth of the Chilean Miracle.” In her reading, the only thing Friedman and the Chicago Boys accomplished was to “hoover wealth up to the top and shock much of the middle class out of existence.” Actual Chileans of all classes—living in the aftermath of an actual shock—may take a different view of Friedman, who helped give them the wherewithal first to survive the quake, and now to build their lives anew.

And what happened? Did the Republican administration summon up the spirit of Milton Friedman and cut government spending? Did it deregulate and privatise?

No.

It did what governments actually do in a crisis – it seized new powers over the economy.

Obama’s plan to do the same thing, his shiny new stimulus plan, was discussed by University of Chicago economists last month . The video is available here.  It’s a fascinating and occasionally humorous look at the real economics of the stimulus plan, and in particular our audience may be interested in Robert Lucas’s mentions of Milton Friedman at approx. 33:00 and 37:30.

It shouldn’t come as any surprise that policy makers and pundits are now falling right into the trappings of the belief that “if only the government were to [fill in the blank].”

catallaxia recently sent me an article from Bloomberg.com, which discusses the Chicago School’s reaction to the recent spurt in government intervention in the economy. It’s worth a read in its entirety, but I want to highlight a particular section that demonstrates a small degree of the “fatal conceit:”

Robert Lucas, a Chicago economist who won a Nobel in 1995 for a theory that argued against governments trying to fine-tune consumer demand, says deregulation may have gone too far.

Depression-era laws that separated commercial and investment banks helped depositors decide if they wanted secure accounts or riskier investments. Today, without these distinctions, people can’t be sure if their investments, or those of their customers, are safe.

“I’m changing my views on bank regulation every week,” Lucas, 71, says. “It was an area I saw as under control. Now I don’t believe that.” 

Far be it for me to criticize a Nobel laureate, however, I would love to ask Mr. Lucas what kind of investments he believes are “safe.” Just how can government go about ensuring (and insuring) “safe” investments? A CD is relatively safe, but the depositor is taking a risk whenever he or she invests money anywhere–it’s how the game is played.

An investment will always be a risk–you have to take a risk to succeed, and sometimes you fail. That’s exactly what’s NOT being allowed to happen now with banks, financial firms, automobile manufacturers and even steel mills and artists. 

And as to Lucas’s comment that he believed that regulation was “under control” I’ll only say that a vibrant, wealth-creating economy should never be “under control.” It should always be changing, evolving and recreating itself. Again, the cycle of never-ending bailouts appear to be perpetuating the bad at the expense of the good that we may never know.

(To read up regulation and the myth of deregulation in the past few years, take a look at John Stossel’s piece here.)