CAPITALISM AND FREEDOM Milton Friedman October 1st, 1962

OVERVIEW: In Capitalism And Freedom, former University of Chicago economist Milton Friedman argues for economic freedom as a precondition for political freedom. He defines “liberal” in European Enlightenment terms, contrasting the title with American usage that he contends has been corrupted. ------ECONOMIC AND POLITICAL FREEDOM: At the outset of the book, Friedman outlines his primary thesis that there is an “inescapable connection between capitalism and democracy.” In this meaning, not only do the two customs of decentralized public control have an elective affinity as forms of democratic empowerment, but also as a counter to unconstrained governmental power, which displaces the free market, weakens democracy, and eventually leads to a dictatorship. Thus, capitalism is a prerequisite for freedom. He criticizes the notion that politics and economics can be regarded separately and that any combination of political and economic system is possible. He calls this view “a delusion,” holding that there is “an intimate connection between economics and politics.” Though Friedman concedes the possibility of an economically free and politically repressed society, the opposite is completely impossible. Furthermore, that economic freedom is a crucial element of individual freedom in its own right, but is also critical for supporting political freedom. As he writes, “Political freedom means the absence of coercion of a man by his fellow men. The fundamental threat to NOTABLE QUOTE freedom is power to coerce, be it in the hands of a monarch, a dictator, an oligarchy, or a “A society that puts equality momentary majority… By removing the organization of economic activity from the control of before freedom will get neither. A political authority, the market eliminates this source of coercive power. It enables economic strength to be a check to political power rather than a reinforcement.” The goal of the liberal society that puts freedom before then is to promote and ensure both economic and political freedom. One achieves this by equality will get a high degree of engaging in free discussion and voluntary cooperation. There is no room for coercion in this both.” process. Ensuring an open environment of free discussion and voluntary cooperation allows ------“The great virtue of a free market “unanimity without conformity.” However, there still exist values with which agreements cannot be resolved. Friedman asserts the only way to decide on these differences is through system is that it does not care conflict. He believes the government’s role is to minimize these differences by aiding markets. what color people are; it does not ------care what their religion is; it only THE ROLE OF GOVERNMENT: As Friedman writes, “[A]n impersonal market separates cares whether they can produce economic activities from political views and protects men from being discriminated against in their economic activities for reasons that are irrelevant to their productivity.” But this is not to something you want to buy. It is suggest that there is no role for government. Rather, Friedman argues that there are areas the most effective system we have that government intervention is required to support personal freedom. Its major functions discovered to enable people who must be to preserve law and order, enforce private contracts, and foster competitive markets. hate one another to deal with one Beyond these major functions, he suggests that government may enable society at times to another and help one another.” accomplish jointly what would be challenging to accomplish individually. However, any such use of government is fraught with danger and should be weighed by greater advantage than intercession of societal freedom . As he writes, “By relying primarily on voluntary co-operation and private enterprise, in both economic and other activities, citizens can insure that the private sector is a check on the powers of the governmental sector and an effective protection of freedom of speech, of religion, and of thought.” Moreover, government power must be dispersed. If government is to exercise power, better in the county than in the state, better in the state than in Washington: “If I do not like what my local community does… I can move to another local community, and though few may take this step, the mere possibility acts as a check… If I do not like what Washington imposes, I have few alternatives in this world of jealous nations.”

Accordingly, there are two classes of cases which should call for government action: technical monopoly and neighborhood effects. For the former, comprised in it are unacceptable activities in which the market supports only single enterprises. Specific to technical monopoly, costs decrease over such wide ranges of output that the competitive process, if allowed to function, would drive out all but a single seller and leave the market vulnerable to private exploitation. But for Friedman, government operation or regulation may create almost as many problems as it solves. The second category, neighborhood effects, is best described for Friedman through a water pollution example: “The man who pollutes the stream is in effect forcing others to exchange good water for bad. These others might be willing to make the exchange at a price. But it is not feasible for them acting individually to make the exchange...” In this example, a large number of people are involved. Therefore the costs of handling the problem through the free market are large. Neighborhood effects provide prominence to problems of public control involving an imposition of impact on others in which their producer bears limited costs. In either case, he stresses the political pressures of government without a market competing check: “One of the great mistakes is to judge policies and programs by their intentions rather than their results.” ------MONETARY POLICY: Friedman contends the extent to which government should be involved in the regulation of money is only to provide a stable framework for private individuals and groups to engage in free exchanges. Yet government control of money creates the issue of what measure should determine its value. Friedman discusses the relative merits of standard money of the time of writing, the value of which was backed by commodities like gold, versus fiduciary money, the value of which is determined by societal confidence that it will be accepted. He argues against a total commodity standard and in favor of a mixed standard that heavily features government-managed fiduciary money. He supports this by noting the numerous liquidity crises caused by the gold-standard in the United States from 1879 to 1913, including several financial crises. Friedman continues by explaining how the Federal Reserve Bank of the United States contributed to the severity and duration of the Great Depression. The Federal Reserve Bank was created in response to the problems arising from the gold standard. Yet as Friedman argues, the power given to the Federal Reserve was squandered. The Great Depression is proof of the problems that can occur when a group of men in the highest reaches of government “wield vast power over the monetary system of a country.” To counter, Friedman contends institutions should be governed by fixed rules that specify protocols and action. These rules should be monitored and revised as new insight on monetary systems is better comprehended. To this, he suggests that one such mandate should be to grow the money supply by 3-5% per year.