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A review by jasonfurman
Capitalism and Freedom: Fortieth Anniversary Edition by Milton Friedman
5.0
I last read Capitalism and Freedom as a teenager. Rereading it I was surprised about how contemporary and undated it is, even if the lectures it is based on were delivered more than 60 years ago. The lack of being dated is partly because much of the world has not changed (e.g., we still have occupational licensing—in fact more of it—and farm supports), Milton Friedman was prescient (e.g., the shift to floating exchange rates and lower top marginal tax rates), Friedman helped shape our thinking (see the previous), and many of the same often wrong ways of thinking and canards Friedman are still alive and well (e.g., a larger welfare state will make us unfree politically).
Friedman’s book is a combination of a normative worldview and a set of positive statements all applied to a variety of areas of economic policy. The normative worldview is one of “liberalism” in the classical sense, the idea that people should have maximum freedom from coercion by the state—or “negative liberty” to use Isaiah Berlin’s terminology (as compared to “positive liberty” which is more like the right to an education, healthcare and the like). He argues: “Government is necessary to preserve our freedom, it is an instrument through which we exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom.”
Friedman argues that the genius of the market is to let everyone express their own views and tastes through what they purchase while government requires a majority to impose its views on all. The problem of government, her argues, is compounded by the lack of a mechanism to correct problems—it is hard to move cities, even harder to move states, and harder still to move countries—as compared to the market where you can simply stop buying the offending product.
Friedman makes two sets of positive claims. The first is quite broad: “a system of economic freedom” is a “necessary condition for political freedom.” He is arguing that the more the government interferes with economic choices, the more likely it is to become like the Soviet Union without political freedoms. His two arguments for this proposition are: (1) a thought experiment about how if the government owns all of the means of production it is impossible for dissenters to, for example, hire a printer to print their dissenting newspaper and (2) a set of syllogisms of the form “the Soviet Union is not a market economy, the Soviet Union is a dictatorship, therefore if you are not a market economy you are a dictatorship.”
This broad claim may well be true in the limit, the situation that both the thought exercise and syllogism apply to. But sixty years of data have proven very unkind to it absent that limiting case. The National Health Service in the UK, for example, may be a good or a bad idea but by moving some fraction of the way to nationalization it has not exactly impeded freedom and liberty. The Scandanavian countries have much larger governments but also do not display systematically less freedom. There are arguments for and against larger state involvement in the economy but to say it is The Road to Serfdom (as Friedman, drawing on Friedrich Hayek, argues) is not helpful.
(Friedman’s views about the links between economic policies and political freedom reach an almost self parodying extreme when he argues that any form of exchange rate management is “the most serious short-run threat to economic freedom” and that “the most effective way to convert a market economy into an authoritarian economic society is to start by imposing direct controls on foreign exchange.”)
The second set of positive claims that Friedman makes are around a lot of specific economic policies arguing that in almost every case good intentions have perverse results and even judged by the moral standard he attributes to intellectuals (a sort of paternalistic, equal outcomes, interventionists mindset) they are failures. He argues this is true of countercyclical macroeconomic (it introduces instability and worsens the business cycle), anti-monopoly legislation (it can entrench monopolies), progressive taxation (in some ways it increases income inequality, housing projects (it destroys the housing supply), and the minimum wage (it increases unemployment and makes the poor worse off).
No doubt some of these are right, like housing projects where the emphasis of policy has appropriately shifted towards housing vouchers and reducing barriers that complain housing supply—ideas that are along the lines of what Friedman is arguing. Some of these are almost certainly wrong, the increased stability of the macroeconomy—including the fact that the Great Recession was much milder than the Great Recession—is thanks to the fact that policymakers, especially in Central Banks, have ignored Friedman’s mechanistic and disastrous proposal for monetary policy to simply increase the growth of the money stock with no regard to anything else in the economy.
What I find suspicious is that that contrary to the rigorous, hard-headed thinking Friedman claims to espouse much of this reads more like wishful thinking. Friedman essentially wants to have his cake (a classical liberal view of justice) and eat it to (if you follow his normative philosophy you’ll get better outcomes even measured on your different normative philosophy). For example, progressive taxation isn’t just a violation of liberty, it also can make the distribution of income even worse. This is the type of too-good-to-be-true wishful thinking that he would rightfully decry in other circumstances. And it means he avoids some of the tough tradeoffs one would have to consider about whether one prioritizes liberalism as a philosophy or outcomes because they will not both line up.
In Friedman’s defense, he does have a reason—other than pure coincidence—that his normative and positive views line up so closely. Specifically, he argues that public policies are not done randomly or by wise policy mandarins but instead systematically shaped by self-interested parties. These policies can persist because they have a small number of highly visible winners and many invisible losers. He would argue the minimum wage has this feature, being pushed by labor unions to help their members, creating a bunch of visible winners receiving higher wages, and many more people without jobs who may not even realize it was because of the higher minimum wage. (I am not endorsing his view, just describing it—the evidence since his book has, at the very least, cast substantial doubt on this particular argument.)
All of that said, anyone who cares about public policy should think very hard about the imperfections of government, the distortions of rent seekers and regulatory capture, the role of incentives, and unintended consequences. You do not need to agree with Friedman’s every prescription to benefit from better understanding all of these issues and factoring them in to your evaluation of public policy going forward.
Friedman’s book is a combination of a normative worldview and a set of positive statements all applied to a variety of areas of economic policy. The normative worldview is one of “liberalism” in the classical sense, the idea that people should have maximum freedom from coercion by the state—or “negative liberty” to use Isaiah Berlin’s terminology (as compared to “positive liberty” which is more like the right to an education, healthcare and the like). He argues: “Government is necessary to preserve our freedom, it is an instrument through which we exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom.”
Friedman argues that the genius of the market is to let everyone express their own views and tastes through what they purchase while government requires a majority to impose its views on all. The problem of government, her argues, is compounded by the lack of a mechanism to correct problems—it is hard to move cities, even harder to move states, and harder still to move countries—as compared to the market where you can simply stop buying the offending product.
Friedman makes two sets of positive claims. The first is quite broad: “a system of economic freedom” is a “necessary condition for political freedom.” He is arguing that the more the government interferes with economic choices, the more likely it is to become like the Soviet Union without political freedoms. His two arguments for this proposition are: (1) a thought experiment about how if the government owns all of the means of production it is impossible for dissenters to, for example, hire a printer to print their dissenting newspaper and (2) a set of syllogisms of the form “the Soviet Union is not a market economy, the Soviet Union is a dictatorship, therefore if you are not a market economy you are a dictatorship.”
This broad claim may well be true in the limit, the situation that both the thought exercise and syllogism apply to. But sixty years of data have proven very unkind to it absent that limiting case. The National Health Service in the UK, for example, may be a good or a bad idea but by moving some fraction of the way to nationalization it has not exactly impeded freedom and liberty. The Scandanavian countries have much larger governments but also do not display systematically less freedom. There are arguments for and against larger state involvement in the economy but to say it is The Road to Serfdom (as Friedman, drawing on Friedrich Hayek, argues) is not helpful.
(Friedman’s views about the links between economic policies and political freedom reach an almost self parodying extreme when he argues that any form of exchange rate management is “the most serious short-run threat to economic freedom” and that “the most effective way to convert a market economy into an authoritarian economic society is to start by imposing direct controls on foreign exchange.”)
The second set of positive claims that Friedman makes are around a lot of specific economic policies arguing that in almost every case good intentions have perverse results and even judged by the moral standard he attributes to intellectuals (a sort of paternalistic, equal outcomes, interventionists mindset) they are failures. He argues this is true of countercyclical macroeconomic (it introduces instability and worsens the business cycle), anti-monopoly legislation (it can entrench monopolies), progressive taxation (in some ways it increases income inequality, housing projects (it destroys the housing supply), and the minimum wage (it increases unemployment and makes the poor worse off).
No doubt some of these are right, like housing projects where the emphasis of policy has appropriately shifted towards housing vouchers and reducing barriers that complain housing supply—ideas that are along the lines of what Friedman is arguing. Some of these are almost certainly wrong, the increased stability of the macroeconomy—including the fact that the Great Recession was much milder than the Great Recession—is thanks to the fact that policymakers, especially in Central Banks, have ignored Friedman’s mechanistic and disastrous proposal for monetary policy to simply increase the growth of the money stock with no regard to anything else in the economy.
What I find suspicious is that that contrary to the rigorous, hard-headed thinking Friedman claims to espouse much of this reads more like wishful thinking. Friedman essentially wants to have his cake (a classical liberal view of justice) and eat it to (if you follow his normative philosophy you’ll get better outcomes even measured on your different normative philosophy). For example, progressive taxation isn’t just a violation of liberty, it also can make the distribution of income even worse. This is the type of too-good-to-be-true wishful thinking that he would rightfully decry in other circumstances. And it means he avoids some of the tough tradeoffs one would have to consider about whether one prioritizes liberalism as a philosophy or outcomes because they will not both line up.
In Friedman’s defense, he does have a reason—other than pure coincidence—that his normative and positive views line up so closely. Specifically, he argues that public policies are not done randomly or by wise policy mandarins but instead systematically shaped by self-interested parties. These policies can persist because they have a small number of highly visible winners and many invisible losers. He would argue the minimum wage has this feature, being pushed by labor unions to help their members, creating a bunch of visible winners receiving higher wages, and many more people without jobs who may not even realize it was because of the higher minimum wage. (I am not endorsing his view, just describing it—the evidence since his book has, at the very least, cast substantial doubt on this particular argument.)
All of that said, anyone who cares about public policy should think very hard about the imperfections of government, the distortions of rent seekers and regulatory capture, the role of incentives, and unintended consequences. You do not need to agree with Friedman’s every prescription to benefit from better understanding all of these issues and factoring them in to your evaluation of public policy going forward.