The Legacy of MILTON AND ROSE FRIEDMAN’S Free to Choose FEDERAL RESERVE BANK OF DALLAS The Legacy of MILTON AND ROSE FRIEDMAN’S Free to Choose Economic Liberalism at the Turn of the 21st Century Proceedings of a Conference Sponsored by the Federal Reserve Bank of Dallas October 2003 Edited by Mark A. Wynne Harvey Rosenblum Robert L. Formaini With a Foreword by Milton and Rose Friedman Federal Reserve Bank of Dallas Dallas, Texas Proceedings of a conference sponsored by the Federal Reserve Bank of Dallas, October 23–24, 2003 Published December 2004 ISBN 0-9763494-1-8 Articles may be reprinted on the condition that the source is credited and a copy is provided to the Research Department, Federal Reserve Bank of Dallas, P.O. Box 655906, Dallas, TX 75265-5906. Additional copies of this publication can be obtained by calling 214-922-5254. This publication is also available on the Inter- net at www.dallasfed.org. A companion video titled Ideas Matter featuring interviews with conference pre- senters as well as scenes from the original television series Free to Choose is also available from the Federal Reserve Bank of Dallas. The views expressed in this volume are those of the authors and should not be attributed to the Federal Reserve Bank of Dallas or the Federal Reserve System. This book is printed on acid-free paper. Contents Foreword Milton and Rose Friedman..........................................................................vii Preface Robert D. McTeer, Jr. ...................................................................................ix Remarks Alan Greenspan ............................................................................................xi Introduction “Free to Choose” ..................................................................................................... 3 Mark A. Wynne Session 1 The Toughest Battleground: Schools ..................................................................21 Eric A. Hanushek The Theory and Practice of School Choice .........................................................37 Paul E. Peterson Session 2 The Property Rights Path to Sustainable Development .......................................57 Terry L. Anderson and Laura E. Huggins Economic Freedom and Environmental Quality................................................73 Richard L. Stroup Session 3 The Economic Burden of Taxation ....................................................................93 William A. Niskanen The Transition to Private Market Provision of Elderly Entitlements....................99 Liqun Liu, Andrew J. Rettenmaier, and Thomas R. Saving v vi Contents Session 4 Commerce, Culture and Diversity: Some Friedmanesque Themes in Trade and the Arts ..........................................................................123 Tyler Cowen Milton and Rose Friedman’s “Free to Choose” and Its Impact in the Global Movement Toward Free Market Policy: 1979 –2003..............................137 Peter J. Boettke Free to Choose in China ...................................................................................153 Gregory C. Chow Session 5 Financial Markets and Economic Freedom......................................................175 Luigi Zingales Choosing Freely: The Friedmans’ Influence on Economic and Social Policy..............................................................................................191 Allan H. Meltzer Friedman’s Monetary Framework: Some Lessons..............................................207 Ben S. Bernanke Session 6 What Have We Learned from the Measurement of Economic Freedom?...........217 James Gwartney and Robert Lawson Can the Tide Turn? ..........................................................................................239 Raghuram G. Rajan Acknowledgments ..............................................................................................249 About the Contributors .....................................................................................251 Foreword n our 1998 memoir Two Lucky People, we described our participation in the filming of the Free to Choose television program as “the most exciting ven- I ture of our lives.” As Rose wrote: “It all seems like something of a fairy tale. Who would have thought that after retiring from teaching, Milton would be able to preach the doctrine of human freedom to many millions of people around the globe through television, millions more through our book based on the tele- vision program, and countless others through videocassettes.” And who would have thought that nearly a quarter century later, the pro- gram and the book would have enough life to justify the splendid conference that the Federal Reserve Bank of Dallas staged and to bring forth the excellent set of papers reprinted in this volume. The program and the book are still alive because the problems they deal with—free trade, regulation, business cycles, welfare state, inequality, consumer protection, worker protection, inflation—are all still with us, and how we han- dle them will affect both our prosperity and our freedom. One very important thing, however, is different. Thanks largely to the collapse of the Soviet Union, there has been a dramatic change in the climate of opinion around the world. A quarter century ago, most people believed that socialism was a viable system for promoting material prosperity and human freedom; many believed it was the most promising system for doing so. Few people anywhere in the world believe that today. Idealistic faith in socialism still lives on, but only in some ivory tower enclaves in the West and in some of the most backward countries elsewhere. A quarter century ago, many people were convinced that capitalism, based on free private markets, was a deeply flawed system that was not capa- ble of achieving both widely shared prosperity and human freedom. Today it is increasingly recognized that capitalism is the only system that can do so. While the main thesis of Free to Choose has become conventional wisdom, conventional practice, at least in the West, has not changed. Political leaders in vii viii Foreword capitalist countries who cheer the collapse of socialism in other countries con- tinue to favor socialist solutions in their own. They know the words, but they have not learned the tune. The widespread vested interests created by socialist measures retain their political power and continue to resist any major reform. There is a true tyranny of the status quo. And yet, the change in opinion has kept down the growth of government and is widening the role of markets. The most dramatic changes in the past quarter century have come in the formerly communist countries. In those, literally billions of people have come from under despotism and achieved a greater measure of freedom. For many, the freedom is still highly limited—greater economic freedom but still limited civic and political freedom. However, the transition is still in its early stages and cannot be stopped. The change is unprecedented. The essays in this book deal with the same subjects as the TV program and the book Free to Choose, but they do so in tune with today’s conventional wis- dom, not that of a quarter of a century ago. We found them refreshing and informative to hear and to read, and I am sure you will as well. We are very much indebted to Robert McTeer, Jr., president of the Federal Reserve Bank of Dallas, and to his associates, especially Harvey Rosenblum, Mark Wynne, and Robert Formaini, for organizing this splendid conference and persuading so many eminent scholars to present papers. We especially appreci- ate the effort they took to make the experience pleasurable for two nona- genarians. MILTON AND ROSE D. FRIEDMAN Preface n an era of economic transition, rapid technological change, and globaliza- tion, Milton Friedman’s message of economic freedom is more compelling I and relevant than ever. His famous maxim about the impossibility of free lunches reminds us that there are costs and trade-offs in everything we do, and we should look at what the alternatives are and who picks up the tab. Friedman recognizes the power of the invisible hand of free enterprise to create wealth and jobs, while warning that the heavy hand of government will bring nothing but stagnation. He has argued for a monetary policy to stabilize prices and keep inflation low. Most important, Friedman has made economics a moral matter as well as one of productivity, jobs, and growth. Economic freedom, he reminds us, is every bit as precious as the other freedoms we treasure. The papers in this volume were presented at a conference the Federal Reserve Bank of Dallas hosted in 2003 to pay homage to the Nobel laureate’s life and work. We were fortunate that both Milton and Rose Friedman were able to attend and participate in all the sessions. The quality of the speakers and their contributions speaks to the high regard in which the Friedmans are held by all who believe in economic freedom. ROBERT D. MCTEER, JR. President and Chief Executive Officer Federal Reserve Bank of Dallas ix Remarks deas matter. Indeed, the world is ruled by little else. Many years ago, John Maynard Keynes wrote that “practical men, who believe themselves to be I quite exempt from intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distill- ing their frenzy from some academic scribbler of a few years back.” Milton and Rose are indeed academic scribblers, though hardly defunct, and not surprisingly, their views