Prosperity Classics

Capitalism and Freedom
(1962)
Milton Friedman

Capitalism and Freedom, a major work of 20th century economics and political philosophy, opens controversially.

Milton Friedman asserts that John F Kennedy’s famous statement in his inaugural address as United States president - “Ask not what your country can do for you – ask what you can do for your country”, was not worthy of the role of an individual in a free society.

Government, he writes, should neither be the patron of an individual, nor should that person consider themselves a servant of the government. In a real democracy, the nation exists only for the will of the people; governments are a means towards an end, and nothing more.

Capitalism and Freedom is a reiteration of what Scottish economist Adam Smith had said less than two centuries before – that, left to their own devices and free of excessive government control, people prosper and create civilized communities. Yet in the 20th century, in the face of the various socialist experiments and growing state intervention in Western countries, Friedman’s reminder became an urgent one. Making a clear connection between economic freedom and political freedom, he showed that free markets were not a luxury but the very basis of personal and political liberty.

How the free markets protects

Historically, political freedom has followed the emergence of free markets and capitalist institutions. This is because, Friedman notes, a healthy private economy naturally provides a check on the power of the state.

For instance, even though they were officially persecuted, in medieval times Jews still thrived because they could operate as merchants. The Puritans and Quakers were only able to relocate to America because they had built up funds in the comparatively free markets of Britain, despite being lumbered with other restrictions.

Where monopolies and trading restrictions are rife, so is special treatment of one social, racial or religious group over another; the ability to ‘keep people in their place’ remains. In a genuinely free market, economic efficiency is separated from irrelevant characteristics such as skin color or faith. “[The] purchaser of bread”, Friedman remarks, “does not know whether it was made from wheat grown by a white man or a Negro, by a Christian or Jew.” Further, a businessman who favors one group over another will be at a market disadvantage to a businessman who does not, and one who is blind to differences among his suppliers will have more choice from whom to buy and hence lower costs.

During the period of ‘blacklisting’ of Hollywood actors and screenwriters as the result of Senator McCarthy’s anti-communist witch hunts, many writers continued to work anyway, often under assumed names. Without an impersonal market which created a demand for their services, they would have lost their livelihood. In a communist society, Friedman notes, such a thing is impossible since all of the jobs are controlled by the state. Winston Churchill was prohibited from speaking out against Hitler on BBC radio in the years after Hitler came to power, because the matter was deemed too controversial. It is unlikely this would have happened had the BBC not been a government monopoly. Friedman’s message: government often seeks to protect citizens from all sorts of things, failing to see that the ‘invisible hand’ operating in free and open markets – for goods, labor and information – somehow manages to offer much greater protections of personal liberty.

The idea that free markets do this was the exact opposite of what intellectuals were saying through most of the 20th century. The individual was seen to be vulnerable in the face of corporate power, and to need governmental protection. This view evolved out of the horrors of the Great Depression, which was considered to be a terrible failure of the markets. In fact, as Friedman argues in the book, the Depression was largely a governmental failure.

Meddling in the market

Both ‘full employment’ and ‘economic growth’ have been put up as reasons why governments should have more control over the economy. The Great Depression, people invariably say, is surely evidence of the inherent instability of markets left to their own.

In fact, Friedman says, the Depression was caused by government mismanagement. The US government’s Federal Reserve System, through clumsy use of the levers of the monetary system – specifically, not increasing the money supply in the wake of bank collapses - turned what would have been a contraction lasting a year or two into a catastrophe. The ‘mistakes of a few men’ caused untold misery to millions which could have wholly been avoided if the market was truly left to itself. Though he accepts that it is the role of government to create a stable monetary system, the responsibility is a grave one and should be severely limited.

In his chapter on fiscal policy, Friedman observes that Keynesian government spending to kick-start stagnant or depressed markets is simply ‘economic mythology’ not proven by empirical studies. For every $100 spent there may be a $100 effect, but the real consequence is a growth in government spending, and however well intentioned most of it is inefficiently allocated.

Progress via people, not governments

There is never any shortage of ‘good reasons’ why government should get involved in curing market or social ills. Sometimes, the good intentions are matched with impressive achievements. Friedman applauds, for example, the creation of a US national freeway system, the building of major dams, its public school system, and some public health measures.

However, most of the advances in the American people’s standard of living have arisen from their ingenuity and have nothing to do with government. Prosperity has come despite all the laws and ‘projects’, not because of them. Generally, excess regulations “…force people to act against their immediate interests in order to promote a supposedly general interest”.

Friedman famously includes a list of areas of government intervention which he believed were not justifiable. These include tariffs and import quotas, subsidies to farmers, rent controls, minimum wages, regulation of industries including banks, transport and radio/TV, social security programs making people put aside a certain amount of money for retirement, public housing, licensing of occupations, and conscription in peacetime.

While all these policies sound good in theory, in truth they often have the reverse effects that were intended. For instance, the minimum wage was partly aimed at alleviating poverty of African-Americans; what actually happened was that the unemployment rate of teenage blacks shot up. Public housing was designed to alleviate poverty; instead, it concentrated poverty in pockets. ‘Social security’ policies were intended to provide a safety net for those unable to work, but instead created dependents who might otherwise have contributed to the economy. Friedman’s damning conclusion: “Concentrated power is not rendered harmless by the good intentions of those who create it.”

There are really only two ways a society can organize economic activity, Friedman writes:

  • Through centralization and coercion;
  • Through facilitating a marketplace for the trade of goods and services.

The drive towards centralization usually begins in a spirit of good will, but before too long power becomes more important, and ‘the ends justify the means’. Coercion and violence are considered a small price to pay for a glorious dream of equality.

In a free country, however, free discussion and voluntary cooperation are the means towards achieving anything. This may be a slower way to achieve ends, but is a surer and less dangerous. The beauty of markets is the way they allow unanimity without conformity; a direction emerges, but no one has been made to do anything.

Friedman accepts that after World War Two the United States had to centralize and enlarge its military spending in order to defeat the USSR, but dealing with this danger created a back door for a large increase in government’s share of national spending and control. A bigger threat than Russia was the erosion of freedoms and free institutions at the expense of the growing power of ‘the nation’.

Freedom first, equality second

Friedman argues that inequality is always less in capitalist countries. Many will disagree with this, pointing to the vast gaps between say, a corporate executive earning $10,000 a day, and someone who works in a shop earning $20,000 a year. Yet even a low paid person in a capitalist economy, he points out, is better off than the privileged classes were a century ago: They do not have to engage in backbreaking labor, medical care is vastly improved, they have at least basic education, live with modern plumbing and heating, have cars, television, radio, phones and entertainment, all of which the rich and royal of previous times could only have dreamed about. Even if an individual does not seem to do well out of capitalism, he or she still benefits in many ways. In contrast, with stratified social systems and socialism, the ‘goodies’ always seem to go only to those at the top.

The heart of liberal philosophy, Friedman writes, is people having equal rights and equality of opportunity. It does not mean there should be equality of wealth. If all people grow richer in a capitalist system, this is a welcome by-product of freedom, but it is not its purpose. The purpose of a free, capitalist system is the freedom of the individual. What they do with that freedom is their business.

Final word

In the Preface to the 1982 edition, Friedman noted that, although there were signs of change, America and other Western countries still had a long way to go in reducing the weight of government. Ronald Reagan and Margaret Thatcher were among his admirers and sought to keep government small, but neither actually managed to reduce the level of government spending. Today, farm protection is still high, free trade is still an aim rather than a reality, and in most countries government spending as a share of Gross Domestic Product has remain the same or grown. Despite endless evidence to the contrary, it seems governments still believe they know what is best for the people.

The Economist described Friedman as ‘the most influential economist of the second half of the 20th century…possibly all of it”. His influence was not just in what he said, but in the fact that he was able to say it to non-economists. Until Capitalism and Freedom he was little known outside the academic world, but the book (which has sold over half a million copies) raised his public profile, as did his 300 columns in Newsweek magazine and his popular Free To Choose television series.

When he died in 2006, tributes from the mainstream media (which had chosen to ignore Capitalism and Freedom when it was published) flowed. Yet for most of his career his ideas about the power of the individual and free markets caused him to be painted as a right-wing ideologue who did not appreciate ‘reality’. In fact, it is the socialist/strong government view that has proven Utopian.

Capitalism and Freedom may shift your beliefs about economic morality. You may have assumed that the government which intervenes to ‘help’ people the most is morally superior, but Friedman showed us how free economic and political systems ensure the dignity of the individual in a myriad of often unforeseen ways.

Countries fashioned after Adam Smith and Friedman should in theory be monsters of selfish consumerism. But as Friedman pointed out, people wish to be free not just so they can get rich, but to live according to deeply held values. Prosperity is not just about making money, but the freedom to live the way you want.

 

 

Source: 50 Prosperity Classics: Attract It, Create It, Manage It, Share It by Tom Butler-Bowdon (London & Boston: Nicholas Brealey)

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Milton Friedman

Born in 1912 in Brooklyn, New York, Friedman was the youngest child of Jewish immigrants from what is now the Ukraine. They moved to New Jersey when he was still a baby and ran a dry goods store. He graduated from high school before he was 16, winning a scholarship from Rutgers University where he studied mathematics and economics, then another scholarship for a Master’s degree at the University of Chicago, received in 1933. At Chicago he met his future wife and collaborator, Rose Director, and studied under distinguished economists Jacob Viner and Frank Knight.

Unable to find an academic job during the Depression, Friedman worked as an economist in the Roosevelt administration. At this time he believed in Keynesian economics, but later came to the view that government fixing of wages and prices only hampered America’s recovery. During World War Two he worked at the Division of War Research at Columbia University, receiving his PhD in 1946. In the same year he accepted a teaching position at the University of Chicago, where for the next 30 years he formed the center of the Chicago School of libertarian economics.

In 1964 Friedman was an adviser to Barry Goldwater in his campaign for the US Presidency, and later to President Nixon. His ideas were influential in the acceptance of fluctuating exchange rates and the floating of the dollar. In 1966 he began writing a regular column for Newsweek, which continued until 1984. His Free To Choose television series aired on US television in 1980 and 1990. Friedman won the Nobel Prize for Economics in 1976, and the Presidential Medal of Freedom from Ronald Reagan in 1988.

Other works include his magnum opus, A Monetary History of the United States, 1867-1960 (with Anna Schwartz, 1963) and Free To Choose: A Personal Statement (with Rose Friedman, 1980).

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