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Key insights from
Capitalism and Freedom
By
Milton Friedman
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What you'll learn
Milton Friedman (1912-2006) was an American public
intellectual who specialized in economics, public policy, and statistics.
He is among the most prominent American economists and statesmen of the
20th century, alongside John Maynard Keynes. Friedman is famous for
championing what would commonly be called conservative political and
economic views, though he would prefer the older term “classical liberal.”
Friedman wrote and taught economics with the goal of preserving the liberty
of Americans from the overreach of the federal government. In Capitalism
and Freedom, he articulates a classical liberal theory of economics,
and applies it to numerous public policy issues, such as education,
monopolies, social welfare, and the draft.
Read on for key insights from Capitalism and Freedom.
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1. There is a
direct connection between political and economic freedoms.
In sketching out the claims of classical liberalism,
Friedman dispenses with a false assumption that was and still is very
popular amongst Americans. People view politics and economics as distinct
and often disconnected spheres of society. This leads people to conclude
that a nation may have any combination of political and economic
arrangements without any fundamental incoherence.
Thus, arrangements such as democratic socialism exist, which
claims that a nation’s political structure may be democratic and free while
its economic structure is centralized and controlled. Such an arrangement
is actually a mismatch, because politics and economics are intimately
connected. According to Friedman, care must be taken regarding how a
nation's political and economic structures are to coalesce and function
together. If America’s economic arrangements do not promote political
freedom, then the liberty our nation prizes will be threatened and diminished.
Capitalism, as the economic structure that nurtures a free
market, provides both economic and political freedom. Economic freedom for
the individual composes a significant part of his or her overall freedom.
For example, the government restrains a person’s ability to pick one’s own
line of work by requiring a license for some occupations. This restraint
upon a person’s economic freedom overlaps with a restraint on political
freedom. By placing an obstacle to their work, such legislation also bars
the individual from becoming the kind of citizen he or she wants to be in
that society.
The point here is that economic freedom is significantly
connected to political freedom. Under the classical liberal framework,
capitalism is a necessary condition for political freedom. While the latter
needs the former in order to exist, political freedom does not stand solely
on the presence of the free market. History affords a few examples, such as
Fascist Italy and Spain, where totalitarian governments had private enterprise,
and yet were not free societies.
Overall, the relationship between these two spheres of
freedom is close, but they do remain distinguishable. Economic freedom is a
prerequisite of political freedom, but its presence does not guarantee the
flourishing of a free society. Inversely, the decline in economic freedom
does always lead to a subsequent withering of individual political liberty.
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2. Monetary policy
must be dependent on rules, not government agents.
Classical liberalism champions a much smaller federal
government than presently operates in the United States, but it does
recognize that some duties do not belong to the free market and require a
responsible government agency. One role for the government is in the sphere
of monetary policy. Monetary policy is concerned chiefly with the provision
of a stable and valid currency for business and banking.
Unfortunately, due to oversights, ignorance, and fear,
America’s current federal government has been given numerous additional
powers to regulate money and control economic growth. Though this seems
helpful and appropriate, history has shown—most clearly in the Great
Depression—that governmental intervention worsens market conditions.
Relying on the discretionary powers of government agency technicians is a
shallow and idealistic solution. A small group of government agents pulling
the levers of monetary mechanisms cannot possibly manage the entire
national economy with sufficient depth or care.
On the flipside, letting the markets work on their
own—without any government responsibility or intervention—is also
unhelpful. Without oversight, the free market is still liable to
contractions and economic downturn. We saw this at the beginning of the
Depression era. Consumer worries and institutional ineptitude made the
original problem worse. While market contractions began the Depression,
poor planning and inactivity by the newly established Federal Reserve
amplified the Great Depression, making it an era of poverty.
Rather than relying on governmental oversight such as we are
currently subject to, or letting the market operate without any constraint
or aid, society should pursue a middle path. When contractions or surges
occur in the economy, the concerns of individuals and their families often
motivate radical alterations in saving and spending. These can create
further economic instability. The way forward in such a quandary is not
in-the-moment decisions by government technicians, but rather adherence to
set laws governing monetary policy.
These monetary laws need not be fixed for every moment, so
long as they reflect the actual status of America’s money. Rather, it is
essential that they reflect the citizenry whose habits drive the market,
not an external minority of government agents who try to manage it.
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3. Government can
support important public services without administering them.
As opposed to an extended federal government that exerts
influence over the United States through numerous agencies, a smaller
federal government with less oversight could still significantly serve the
general public. Two crucial distinctions in the classical liberal position
can be made here: (1) Government funding need not be tied to government
administration; (2) Government has a responsibility in certain situations
that have “neighborhood effects.” A neighborhood effect is a set of
circumstances that make voluntary exchange impossible, either through a
severe liability or benefit that accumulates outside of an individual’s
choice. A good example of this is river pollution. If one person pollutes a
communal river, then everyone else in the neighborhood who uses that river
has to deal with the consequences of that person’s actions.
Because a neighborhood effect has sweeping consequences for
entire communities, the government is obligated to step in as an arbiter to
ensure that exchanges can be conducted fairly between all parties. The
specific nature of the government’s procedure will vary somewhat depending
on the situation in question. One important neighborhood effect that the
government is obligated to mitigate is education.
An important aim of education is to form stable, responsible
people who will contribute to the health and security of the nation and its
values. The education of a child has untold effects on their choices as an
adult, with clear impact on their local community. Of course, tracing out
all of these benefits and tying them to specific families or individuals is
impossible, and thus the responsibility for the neighborhood effects of
education lies with the government.
The government has two key responsibilities in education.
The first is imposing a minimum level of schooling for all citizens, to
ensure an elementary set of values is commonly shared. Second, financing
this minimum level of schooling is essential to ensure an equal
contribution from every household in that neighborhood, rather than a
disproportionate contribution by some. The key here is that the government
ensures the lowest possible education to provide the necessary knowledge
and training for raising citizens. What is not essential is the
nationalization of these schools and their subsequent administration by the
government. This would be an overextension of its responsibility to provide
financial stability so that a community can meet its educational
requirements. In handling neighborhood effects, the government tries to
provide stability for people, not control in place of individual action.
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4. Conventional
plans to solve income inequality are short sighted.
One form of governmental overreach that many people seem to
favor lately is redistribution of income. Because some people never accrue
wealth and move beyond their economic position, a government sometimes
takes on the task of collecting a percentage of income from the wealthier
and giving it to the poorer.
This is accomplished primarily through a graduated income
tax, which increases the tax contribution of the wealthy, freeing up some
money for the government to then give to the poor, who are taxed less. Many
assume that such a plan will significantly reduce inequality by improving
the economic status of some people without damaging the economic status of
those who already had wealth.
Unfortunately, such a plan is an oversimplified response to
a complex problem. Redistributing income treats a symptom, not the core
problem. No matter the skill of any government agency, at the end of the
day, it is composed of flawed people with limited knowledge who are tasked
to exercise control over a national economy. Even those who work at the
Federal Reserve are not omniscient about the American economy, which is dynamic,
living and constantly changing through millions of daily decisions made by
consumers and corporations. When it comes to resolving poverty, simply
redistributing wealth will not eliminate it. Moreover, it further ignores
the economic conditions that created an impoverished area in the first
place.
Trying to balance the total amount of money each person has
access to mistakes inequality of outcomes for inequality of opportunity.
The strength of a free market economy is not that everyone can make the same
amount of money, but rather that everyone can have access to greater
opportunities to move up the economic ladder. Improving one person’s lot in
life promotes long-term development and prosperity more than a stipend of
redistributed wealth can.
This does not mean the poor cannot receive any governmental
financial assistance. It does mean that the aid cannot come from a coerced
group of wealthy individuals. To aid people by coercively taking from
others violates the principle of individual liberty the government was
formed to protect.
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5. Poverty
alleviation should minimize financial need, not simply equalize wealth.
Rather than coerce a monetary gift from wealthier people to
redistribute to the poor, the government should oversee a voluntary
arrangement that provides financial relief. It is the responsibility of a
community to come together and agree to a specific donation, taken up by
the government, for alleviating poverty.
The government can then exercise its authority, not in
coercing money from some for others, but in maintaining a proper form of
financial aid for those in need. Some important characteristics for this
aid are as follows: (1) This relief program cannot select recipients on any
basis other than the fact that they are poor. Age, occupation, gender and
race have no bearing, since the goal of this program is solely to alleviate
poverty. (2) This relief program cannot impact the ordinary operations of
the free market, which restricts the kind of program that it can be.
One popular solution under these two conditions is a
negative income tax. Essentially, such a tax is a subsidy or stipend, paid
to people who make less than a certain income. This income floor is
specific to each community and determined by its unique economy. People
with an income above the income floor pay taxes like normal. The amount of
financial assistance given to people receiving the subsidy is determined in
part by their participation in the free market, not merely by their
poverty.
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6. Government
agencies ultimately replace the will of the people with the will of a few.
In summary, the centralized plans of government agencies
pale in comparison to the movements of the free market in the creation of
prosperity. Because relatively small groups of people run government
agencies, the total knowledge within these groups is severely limited. Even
in an ideal government agency, protected from corruption and selfishness,
the good intentions of otherwise well meaning government agents does not
mean they achieve what they are trying to accomplish. It is unrealistic to
expect a group of government workers to control or solve economic issues that
reflect millions of citizens.
A free market society such as ours needs the input and plans
of the many, not of the few. Given our country’s commitment to the
principles of individual liberty and representation, we must acknowledge
the coercive practices of our overextended government. Regardless of the
intentions of those in the halls of power, it is the centralization of
economic decision making that threatens the long term prosperity, health,
and values of our country. Recognizing the subtle, often unseen effects of
government interference is essential if we are to renew effective
constraints and seek after national flourishing and prosperity.
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Endnotes
These insights are
just an introduction. If you're ready to dive deeper, pick up a copy of
Capitalism and Freedom here. And since we get a commission on
every sale, your purchase will help keep this newsletter free.
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