CAPITALISM AND FREEDOM 40th Anniversary Edition With a new Preface by the Author MILTON FRIEDMAN WITH THE ASSISTANCE OF ROSE D. FRIEDMAN 2002 [1962] The University of Chicago Press Chicago and London + Contents PREFACE, 2002 VB PREFACE, 1982 Xl PREFACE XV INTRODUCTION I THE RELATION BETWEEN ECONOMIC FREEDOM AND POLITICAL FREEDOM 7 II THE ROLE OF GOVERNMENT IN A FREE SOCIETY 22 III THE CONTROL OF MONEY 37 IV INTERNATIONAL FINANCIAL AND TRADE ARRANGEMENTS 56 V FISCAL POLICY 75 VI THE ROLE OF GOVERNMENT IN EDUCATION 85 VII CAPITALISM AND DISCRIMINATION 108 VIII MONOPOLY AND THE SOCIAL RESPONSIBILITY OF BUSINESS AND LABOR 119 IX OCCUPATIONAL LICENSURE 137 X THE DISTRIBUTION OF INCOME 161 XI SOCIAL WELFARE MEASURES 177 XII ALLEVIATION OF POVERTY 19° XIII CONCLUSION 196 INDEX 2°3 + Preface, 2002 IN MY PREFACE TO THE 1982 edition of this book, I docu­ mented a dramatic shift in the climate of opinion, manifested in the difference between the way this book was treated when it was first published in 1962, and the way my wife's and my subsequent book, Free to Choose, presenting the same philos­ ophy, was treated when it was published in 1980. That change in the climate of opinion developed while and partly because the role of government was exploding under the influence of initial welfare state and Keynesian views. In 1956, when I gave the lectures that my wife helped shape into this book, government spending in the United States-federal, state, and local-was equal to 26 percent of national income. Most of this spending was on defense. Non-defense spending was 12 percent of national income. Twenty-five years later, when the 1982 edition of this book was published, total spending had risen to 39 percent of national income and non-defense spend­ ing had more than doubled, amounting to 3I percent of na­ tional income. That change in the climate of opinion had its effect. It paved the way for the election of Margaret Thatcher in Britain and Ronald Reagan in the United States. They were able to curb Leviathan, though not to cut it down. Total government spending in the United States did decline slightly, from 39 per­ cent of national income in 1982 to 36 percent in 2000, but that was almost all due to a reduction in spending for defense. Vin CAPITALISM AND FREEDOM Non-defense spending fluctuated around a roughly constant level: 3 I percent in 1982, 30 percent in 2000. The climate of opinion received a further boost in the same direction when the Berlin wall fell in 1989 and the Soviet Union collapsed in 1992. That brought to a dramatic end an experiment of some seventy years between two alternative ways of organizing an economy: top-down versus bottom-up; central planning and control versus private markets; more colloquially, socialism versus capitalism. The result of that ex­ periment had been foreshadowed by a number of similar ex­ periments on a smaller scale: Hong Kong and Taiwan versus mainland China; West Germany versus East Germany; South Korea versus North Korea. But it took the drama of the Berlin Wall and the collapse of the Soviet Union to make it part of conventional wisdom, so that it is now taken for granted that central planning is indeed The Road to Serfdom, as Friedrich A. Hayek titled his brilliant 1944 polemic. What is true for the United States and Great Britain is equally true for the other Western advanced countries. In country after country, the initial postwar decades witnessed exploding socialism, followed by creeping or stagnant social­ ism. And in all these countries the pressure today is toward giving markets a greater role and government a smaller one. I interpret the situation as reflecting the long lag between opin­ ion and practice. The rapid socialization of the post-World War II decades reflected the prewar shift of opinion toward collectivism; the creeping or stagnant socialism of the past few decades reflects the early effects of the postwar change of opinion; future desocialization will reflect the mature effects of the change in opinion reinforced by the collapse of the So­ viet Union. The change in opinion has had an even more dramatic effect on the formerly underdeveloped world. That has been true even in China, the largest remaining explicitly communist state. The introduction of market reforms by Deng Xiaoping in the late seventies, in effect privatizing agriculture, dramati­ cally increased output and led to the introduction of addi­ tional market elements into a communist command society. The limited increase in economic freedom has changed the Preface, 2002 IX face of China, strikingly confirming our faith in the power of free markets. China is still very far from being a free society, but there is no doubt that the residents of China are freer and more prosperous than they were under Mao-freer in every dimension except the political. And there are even the first small signs of some increase in political freedom, manifested in the election of some officials in a growing number of vil­ lages. China has far to go, but it has been moving in the right direction. In the immediate post-World War II period, the standard doctrine was that development of the third world required central planning plus massive foreign aid. The failure of that formula wherever it was tried, as was pointed out so effec­ tively by Peter Bauer and others, and the dramatic success of the market-oriented policies of the East Asia tigers-Hong Kong, Singapore, Taiwan, South Korea-has produced a very different doctrine for development. By now, many countries in Latin America and Asia, and even a few in Africa have adopted a market-oriented approach and a smaller role for government. Many of the former Soviet satellites have done the same. In all those cases, in accordance with the theme of this book, increases in economic freedom have gone hand in hand with increases in political and civil freedom and have led to increased prosperity; competitive capitalism and freedom have been inseparable. A final personal note: It is a rare privilege for an author to be able to evaluate his own work forty years after it first ap­ peared. I appreciate very much having the chance to do so. I am enormously gratified by how well the book has withstood time and how pertinent it remains to today's problems. If there is one major change I would make, it would be to replace the dichotomy of economic freedom and political freedom with the trichotomy of economic freedom, civil freedom, and polit­ ical freedom. After I finished the book, Hong Kong, before it was returned to China, persuaded me that while economic freedom is a necessary condition for civil and political free­ dom, political freedom, desirable though it may be, is not a necessary condition for economic and civil freedom. Along these lines, the one major defect in the book seems to me an x CAPITALISM AND FREEDOM inadequate treatment of the role of political freedom, which under some circumstances promotes economic and civic free­ dom, and under others, inhibits economic and civic freedom. Milton Friedman Stanford, California March I I, 2002 Preface, 1982 The lectures that my wife helped shape into this book were delivered a quarter of a century ago. It is hard even for per­ sons who were then active, let alone for the more than half of the current population who were then less than ten years old or had not yet been born, to reconstruct the intellectual cli­ mate of the time. Those of us who were deeply concerned about the danger to freedom and prosperity from the growth of government, from the triumph of welfare-state and Keyne­ sian ideas, were a small beleaguered minority regarded as eccentrics by the great majority of our fellow intellectuals. Even seven years later, when this book was first published, its views were so far out of the mainstream that it was not reviewed by any major national publication-not by the New York Times or the Herald Tribune (then still being published in New York) or the Chicago Tribune, or by Time or News­ week or even the Saturday Review-though it was reviewed by the London Economist and by the major professional journals. And this for a book directed at the general public, written by a professor at a major u.s. university, and destined to sell more than 400,000 copies in the next eighteen years. It is inconceivable that such a publication by an economist of comparable professional standing but favorable to the wel­ fare state or socialism or communism would have received a similar silent treatment. How much the intellectual climate has changed in the past quarter-century is attested to by the very different reception XlI CAPITALISM AND FREEDOM that greeted my wife's and my book Free to Choose, a direct lineal descendant of Capitalism and Freedom presenting the same basic philosophy and published in 1980. That book was reviewed by every major publication, frequently in a featured, lengthy review. It was not only partly reprinted in Book Di­ gest, but also featured on the cover. Free to Choose sold some 400,000 hardcover copies in the u.s. in its first year, has been translated into twelve foreign languages, and was issued in early 1981 as a mass-market paperback. The difference in reception of the two books cannot, we believe, be explained by a difference in quality. Indeed, the earlier book is the more philosophical and abstract, and hence more fundamental.