Update: Adam Smith Still Spinning
As expected, Greenspan (in his Adam Smith lecture) warmed the hearts of the ASI's vulgar libertarians by bloviating on the wholesome effects of Thatcherism and Reaganism (which he passed off, of course, as "free market reforms").
In the process, though, he got in some real howlers:
Finally, classical economists, who battled the rear guard of mercantilism in their days, would certainly recognize the assault on their paradigm in the anti-capitalist, anti-free-trade rhetoric currently prevalent in some contemporary discourse.Smith, Ricardo and Mill could probably get their minds around that. What I suspect they'd have a hard time adjusting to, Alan, is the utter gall of today's real mercantilists, the ones sitting on the boards of large corporations and central banks, in appropriating Smith's "free market" mantle for themselves and twisting the term "free trade" 180 degrees from its original meaning.
While we're on the subject of mercantilism, by the way, let's just take a look at the sort of "laissez-faire" activities Greenspan carries out on his day job. As most of us know, in Fedspeak "inflationary pressure" is just another way of saying "bargaining power of labor." When unemployment gets too low and jobs start competing for workers instead of the other way around, work discipline declines and upward pressure on wages increases. Workers start getting uppity and are willing to take a lot less crap off the boss when they know they can find another job just as good the next day. That's when the Fed comes to the rescue by raising interest rates and throwing a few million people out of work. Knowing that people are lined up waiting for their jobs, workers get their minds right again.
Until the '90s, the Fed viewed 6% as the "natural" rate of unemployment, below which the danger of "inflationary pressure" (read "worker uppityness") was likely to become unacceptably high. But unemployment dipped below this "natural" level during the high-tech boom of the Clinton years, and kept dipping, and dipping, and dipping. Some members of the Fed began murmuring about the need to step in with higher interest rates. But good ol' Alan persuaded them that the situation was unique. As he testified before the Senate Banking Committee in 1997, the increased job insecurity in the high-tech economy was resulting in "atypical restraint on compensation increases." Even with a tight labor market, he reassured them, 46% of workers at large firms were still afraid of layoffs (compared to only 25% in 1991, when unemployment was considerably higher).
The reluctance of workers to leave their jobs to seek other employment as the labor market tightened has provided further evidence of such concern, as has the tendency toward longer labor union contracts. For many decades, contracts rarely exceeded three years. Today, one can point to five- and six-year contracts--contracts that are commonly characterized by an emphasis on job security and that involve only modest wage increases. The low level of work stoppages of recent years also attests to concern about job security.Well, ain't that grand! In other words, job insecurity is great! Keeping wages down is job one! So long as workers are scared of the unemployment lines, we can leave interest rates alone. Of course, we can always raise them again if those nasty old wages start going back up. Funny--skyrocketing CEO pay never seems to send the Fed scurrying to raise interest rates, for some reason.
It's a good thing Greenspan's an Objectivist. Otherwise he might be afraid of going to hell.