Friedman's theory is that extremely high oil prices are desirable because they would induce behavioral changes that would ultimately decrease demand and force oil prices way down. Here's how the exchange with host Matt Lauer unfolded:
Friedman: "I hope the Iranians get as crazy as they want. My attitude toward the president of Iran is 'you go, girl', because the faster we get to $100 a barrel, pal, the quicker we're going to get back to $20. Because when we go to $100/barrel, then you're going to see all these people change their behavior and their oil-buying habits and their car-buying habits in a fundamental way."
Lauer: "So you're saying in the short term you'd rather see a nuclear Iran and crazy oil prices because in the long term that's going to fix the problem?"
Friedman: "I would like to see crazy oil prices. A nuclear Iran is another question. But from my point of view the sooner we get the price of oil up where we changed everyone's behavior, the sooner the price of oil is going to come down and then we can say to the Iranians, 'hey, do whatever you want, pal.'"
Beyond the tremendous pain that $100 oil would inflict on billons of people in the short run, Friedman's analysis is fundamentally flawed, because he views market reactions as static rather than dynamic.
Let's assume Friedman's right, that $100 crude would quickly bring about huge responses in car-buying habits, etc. that drove prices down to $20. Once that happened, consumers would look around and say, 'hey, why am I sitting in this Yugo [or whatever it would be] with my legs crammed into my chest when gas is 99 cents a gallon? Honey, we're getting that Hummer!' And oil prices would start their climb back upwards.
Markets are dynamic, and find find dynamic equilibriums. There are no permanent shifts. Friedman is tacitly assuming that $100 oil would not only bring about changes driving oil down to $20, but that demand for oil at $20 would remain about the same as it was at $100. That is obviously wrong.
Beyond his flawed economics, Friedman reveals an even more fundamental flaw of elitist liberal thinking: the desire to change people's economic behavior to suit the elites' world view. This is the modern liberal version of central planning. It's the same thinking behind Hillary's famous line: "we're going to take things away from you on behalf of the common good."
Friedman would be better off sticking to his foreign-affairs knitting, leaving the economics to the experts and leaving people to make their own economic decisions about their lives.
Finkelstein lives in the liberal haven of Ithaca, NY, where he hosts the award-winning public-access show 'Right Angle'. Contact him at: mark@gunhill.net
