Friedman on Capitalism and Freedom - Online Library of Liberty
In his popular work, Capitalism and Freedom, in a chapter titled “The Relation between Economic Freedom and Political Freedom,” Friedman. Capitalism and Freedom by Milton Friedman - Chapter 1, The Relation between Economic Freedom and Political Freedom summary and analysis. Milton Friedman's accomplishments and ideas, particularly in therealm of economic liberty, continue to transform the world today.
The relation between political and economic freedom is complex. In the nineteenth century, the utilitarian Jeremy Bentham thought political freedom was a means to economic freedom.
He was not wrong about this—the political reforms that followed were accompanied by laissez faire economic reforms. That surge of Benthamite liberalism in England was followed by a reaction in favour of increasing government intervention; this tendency towards collectivism exploded in the post-WWII years: Since WWII, there has been a different relation between economic and political freedom.
England is a good example: Other democratic countries made attempts at such centralized planning, but they did not last either. They did not last because of their limited success or outright failure to achieve their objectives, not to mention their abrogation of individual freedom. Historical evidence by itself cannot be entirely convincing; it may have been sheer coincidence that the expansion of markets and the expansion of freedom went hand in hand. Friedman wants to argue there is a logical connection between them.
Freedom is only valuable in a social context; it means nothing for Robinson Crusoe. Further, liberalism has nothing to say about what the individual does with their freedom.
Ethics are left up to the individual. Liberalism conceives of humans as imperfect; the problem of social organization is just as much about preventing bad people from doing harm as it is about enabling good people to do good. The basic problem of social organization is the coordination of economic activity. In advanced societies, this becomes even more complex: There are two basic ways of coordinating economic activity.
The first is central direction using the coercive force of the state, and the second is voluntary cooperation through the marketplace. This second option rests on the basic truth that informed and voluntary trade benefits both parties, so exchange sustains coordination without coercion. This is competitive capitalism. Basically, it is a society of Robinson Crusoes; each household uses its resources to trade goods and services with other households on terms mutually acceptable to both. The division of labour would be too simple if the household were the ultimate productive unit, so companies have developed as the intermediaries between individuals.
The division of labour would also be stymied in a purely barter economy, so money has developed to facilitate exchange. The central characteristic of our actual economy does not involve companies or money; in the simplest model, it is about private individual cooperation.
The basic role of institutions is the maintenance of law and order to prevent coercive exchanges. The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal.
The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because of other employers for whom he can work, and so on. And the market does this impersonally and without centralized authority.
The existence of a free market does not eliminate the need for a government. This is basically what Friedman means when he says the market provides economic freedom.
Economic strength is allowed to be a check against political power, rather than a reinforcement.
Friedman, Capitalism and Freedom: Introduction and Ch. | Philosophical Notebooks
Indeed, a major aim of the believer in freedom is to leave the ethical problem for the individual to wrestle with. There are thus two sets of values that a liberal will emphasize—the values relevant to relations among people which is the context in which he assigns first priority to freedom; and the values that are relevant to the individual in the exercise of his freedom, which is the realm of individual ethics and philosophy. Fundamentally there are only two ways in which the activities of a large number of people can be co-ordinated: The possibility of voluntary co-operation in its turn rests fundamentally on the proposition that both parties to an exchange can benefit from it.
If it is voluntary and reasonably well informed, the exchange will not take place unless both parties do benefit from it.
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Let the households come into contact with one another. The possibility of trade now emerges. What is it that gives them an incentive to trade? The answer clearly is that if each household concentrates on a small range of activities, producing things for itself indirectly, by trade, rather than doing everything for itself, everybody can be better off.
This possibility arises for two reasons: Even if everyone were identical in all his capacities and abilities, there would still be a gain from division of labor which would make a larger total return possible because each individual could concentrate on a particular activity.
Why Milton Friedman’s Capitalism and Freedom is still relevant today – Acton Institute PowerBlog
But in addition, diversity among people becomes a source of strength because each individual can concentrate on doing those things that he can do best. So the incentive for the households to engage in trade and to specialize is the possibility of a greater total output.
The protection to Household A is that it need not enter into an exchange with Household B unless both parties benefit. If exchange is voluntary, it will take place if, and only if, both parties do benefit.
Each individual always has the alternative of going back to producing for himself what he did before so he can never be worse off; he can only be better off. In a modern society, we have gone much farther.
We have introduced enterprises which are intermediaries between individuals in their capacities as suppliers of services and as purchasers of goods. And similarly, specialization of function and division of labor could not go very far if we had to continue to rely on the barter of product for product. In consequence, money has been introduced as a means of facilitating exchange and of enabling the act of purchase and of sale to be separated into two parts. The introduction of enterprises and the introduction of money raise most of the really difficult problems for economics as a science.
But from the point of view of the principles of social organization, they do not fundamentally alter the essential character of economic arrangements. In a modern complex society using enterprises and money it is no less true than in the simple idealized world that co-ordination through the markets is a system of voluntary co-operation in which all parties to the bargain gain.
So long as effective freedom of exchange is maintained, the essential feature of the market is that it enables people to co-operate voluntarily in complex tasks without any individual being in a position to interfere with any other. Many of the difficult technical problems that arise in applying our principles to actual economic arrangements are concerned with assuring effective freedom to enter or not to enter into exchanges.
But so long as people are effectively free to enter into an exchange and are reasonably well informed the essential feature of the market remains that of our ideal example. It provides for co-operation without coercion; it prevents one person from interfering with another. The employer is protected from being interfered with or coerced by his employees by the existence of other employees whom he can hire.
The employee is protected from being coerced by his employer by the existence of other employers for whom he can work; the customer by the existence of other sellers, and so on.
Of course, it is partly this feature of the market that leads many people to be opposed to it. What most people really object to when they object to a free market is that it is so hard for them to shape it to their own will. The market gives people what the people want instead of what other people think they ought to want.
At the bottom of many criticisms of the market economy is really lack of belief in freedom itself. The essence of political freedom is the absence of coercion of one man by his fellow men.
The fundamental danger to political freedom is the concentration of power. The existence of a large measure of power in the hands of a relatively few individuals enables them to use it to coerce their fellow man. Preservation of freedom requires either the elimination of power where that is possible, or its dispersal where it cannot be eliminated. It essentially requires a system of checks and balances, like that explicitly incorporated in our Constitution.
One way to think of a market system is as part of a broader system of checks and balances, as a system under which economic power can be a check to political power instead of an addition to it.
If I may speculate in an area in which I have little competence, there seems to be a really essential difference between political power and economic power that is at the heart of the use of a market mechanism to preserve freedom. With respect to political power, there is something like a law of conservation of energy or power.
The notion that what one man gains another man loses has more applicability in the realm of politics than in the realm of economic arrangements.
One can have many different small governments, but it is hard to think of having many different small centers of political power in any single government. It is hard for there to be more than one really outstanding leader, one person on whom the energies and enthusiasms and so on of his countrymen are centered. If the central government gains power, it is likely to do so at the expense of local governments. While I do not know how to formulate the statement precisely, there seems to be something like a fixed total of political power to be distributed.
There is no such fixed total, no law of conservation of power, with respect to economic power. You cannot very well have two presidents in a country, although you may have two separate countries, but it is perfectly possible to have a large number of additional millionaires. You can have an additional millionaire without there being any fewer millionaires anywhere else. If somebody discovers a way to make resources more productive than they were before, he will simply add to the grand total of economic wealth.
Economic power can thus be more readily dispersed than political power.Milton Friedman - Poverty and Equality
There can be a larger number of independent foci of power. Further, if economic power is kept in separate hands from political power, it can serve as a check and an offset to political power.
This is a very abstract argument and I think I can illustrate its force for our purpose best by turning to some examples. I would like to discuss first a hypothetical example that helps to bring out the principles involved and then an actual example from recent experience that also illustrates the way in which the market works to preserve political freedom. I think that most of us will agree that an essential element of political freedom is the freedom to advocate and to try to promote radical changes in the organization of society.
It is a manifestation of political freedom in our capitalist society that people are free to advocate, and to try to persuade others to favor socialism or communism. I want to contemplate for a moment the reverse problem. It would be a sign of political freedom in a socialist society that people in that society should be free to advocate, and try to persuade others to favor capitalism. I want to ask the hypothetical question: I shall assume that the leading people and the public at large seriously wish to do so and ask how they could set up the institutional arrangements that would make this possible.
Since in a socialist society all persons get their incomes from the state as employees or dependents of employees of the state, this already creates quite a problem. It is one thing to permit private individuals to advocate radical change. It is another thing to permit governmental employees to do so. Our whole post-war experience with un-American activities committees and the McCarthy investigations and so on shows how difficult a problem it is to carry over this notion to governmental employees.
This, as well as the New Dealwas supported by most intellectuals with the justification of Keynesian economics. Capitalism and Freedom introduces the idea of how competitive capitalism can help to achieve economic freedom. Friedman opts for the continental European, rather than American, definition of the term.
The Relation between Economic Freedom and Political Freedom In this chapter, Friedman promotes economic freedom as both a necessary freedom and also as a vital means for political freedom. He argues that, with the means for production under the auspices of the government, it is nearly impossible for real dissent and exchange of ideas to exist.
Additionally, economic freedom is important, since any "bi-laterally voluntary and informed" transaction must benefit both parties to the transaction. Friedman states that economic freedom protects minorities from discrimination since the market is apathetic to, "their views or color. The Role of Government in a Free Society According to the author, the government of a liberal society should enforce law and order and property rights, as well as take action on certain technical monopolies and diminish negative "neighborhood effects.
Far from acting as a stabilizer, the Federal Reserve failed to act as it should have in several circumstances. International Financial and Trade Arrangements This chapter advocates the end of the Bretton Woods system in favor of a floating exchange rate system and the end of all currency controls and trade barriers, even "voluntary" export quotas.
Friedman says that this is the only true solution to the balance of trades problem. Fiscal Policy Friedman argues against the continual government spending justified to "balance the wheel" and help the economy to continue to grow.
On the contrary, federal government expenditures make the economy less, not more stable. Friedman uses concrete evidence from his own research, demonstrating that the rise in government expenditures results in a roughly equal rise in GDP, contrasting with the Keynesian multiplier theory.
Many reasons for this discrepancy are discussed. The Role of Government in Education The policy advocated here is vouchers which students may use for education at a school of their choice.