Capitalism And Freedom By Milton Friedman Review

In 2006, the world lost Milton Friedman, one of the foremost monetary theorists, a distinguished economist, and a fierce proponent of classical liberalism.  The Economist has praised him as “…the most influential economist in in the second half of the 20th century…possibly of all time.” Capitalism and Freedom is the book that put him on the map, at least in terms of the broader public.

A Classical Liberal

The term “liberal” has changed its meaning over the years.  These days, it means “progressive,” especially on social issues.  It’s taken on a bit of a negative connotation to outsiders, connoting one who makes decisions borne out of emotion, not logic, and one “out of touch” with reality.  That’s not what Friedman means when he uses the term “liberal.”

A classical liberal is somebody who champions the cause of freedom of the individual, even at a net cost to society;  who is a fierce advocate of the ideals of free trade;  who believes in limited government;  who promote strong property rights;  who holds the individual higher than the state.  Milton Friedman was by far the most visible classical liberal of his day, and defended his beliefs with clarity, eloquence, and grace.

Capitalism And Freedom

Originally published in 1962, Capitalism and Freedom is a product of its time.  It is divided into 12 chapters, each tackling a distinct  topic from the perspective of a 1960’s liberal economist at a time when protectionism and collectivism were gaining steam.  Almost five decades have passed, but Friedman’s lessons remain as potent as ever.

Chapter 1: The Relation Between Economic Freedom And Political Freedom

Friedman equates economic freedom, the ability of individual citizens to make whatever economic decisions he deems most likely to improve his own lot and the lot of his family, with political freedom.  Without economic freedom, Friedman argues, political freedom is impossible.  To Friedman, true democracy is impossible without capitalism.

Chapter 2:  The Role Of Government In A Free Society

While classical liberals like Friedman advocate a limited central government, they do admit that government plays an enormously-important role in a capitalist system.  Indeed, free trade is impossible without government regulation because of what he calls “neighborhood effects.”  In an unregulated economy certain entities, be their corporate or individual, sometimes make economic decisions that have negative effects on innocent third parties.  One example would be a power company dumping nuclear waste into a river.  The individuals downstream must pay part of the price for the company’s decision even though they bear none of the benefits and had no say in the outcome.  The government’s responsibility, according to Friedman, is to ensure the entities involved in any economic transaction bear the full cost of their decision, either through taxation, fines, regulation, or some other means.  The government also has the more obvious responsibilities of protecting property rights, keeping the peace, and maintaining an adequate infrastructure for private industry to build on.

Chapter 3:  The Control Of Money

Friedman was a fierce proponent of the Federal Reserve System, which isn’t a particularly popular position these days.  He lays out his case in clear, concise fashion in this chapter.  Critics won’t be convinced, but this chapter is a good introduction to the pro-Fed argument.

Chapter 4:  International Financial And Trade Agreements

Friedman advocates ending the Bretton Woods System, which subsequently happened in the early 70’s.  The jury is still out on whether or not he was right on this one, but I think he was probably more right than wrong.

Chapter 5:  Fiscal Policy

Friedman argues against the Keynesian policy of the government running a budget deficit during recessionary periods in an attempt to stimulate growth.  He backs his arguments up with a mountain of empirical research, much of which has since been confirmed independently.  Nonetheless,  the last several presidents have gone down that path anyway.

Chapter 6:  The Role Of Government In Education

Friedman promotes a school voucher program, but one that doesn’t bear a lot of resemblance to most such modern proposals.  For starters, Friedman advocates school vouchers instead of the current system, not as a supplement to.

Chapter 7:  Capitalism And Discrimination

Friedman argues against the policies of affirmative action, citing data that economic inequality has decreased the quickest when economic freedom was greatest.  Discrimination, argues Friedman, is expensive.  This is undoubtedly the most controversial chapter on this book.

Chapter 8:  Monopoly And Social Responsibility Of Business And Labor

There are three alternatives to monopoly:  public monopoly (such as the USPS), private monopoly, and public regulation.  None are desirable, but of the three Friedman holds private monopoly to be the least evil because market pressures tend to erode monopoly positions eventually, whereas public monopolies are nearly impossible to break, being immune to market forces.  The author also argues that the idea of “corporate responsibility” is subversive to the very notion of a free society and should not be an overriding goal.

Chapter 9:  Occupational Licensure

By far the most eye-opening for me is the chapter on occupation licensure.  Simply put, requiring all lawyers, doctors, and other professionals to meet such strict licensing standards actually reduces the average quality of care, decreases supply, and increases price.  He argues the American Medical Association holds a dangerous monopoly over medical school admissions.  Likewise, the American Bar Association’s monopoly of law-school admission is inefficient, discriminatory, and harmful to society.  I don’t quite buy it, although Friedman does make some very persuasive arguments.  An interesting read, to say the least.

Chapter 10:  The Distribution Of Income

Friedman details a negative graduated flat tax he thinks is better than the current progressive tax system.  Some of his ideas have been adopted into law over the years, although in severely diluted form.  There’s probably no chance his system will be implemented anytime soon, which is unfortunate since I think it has real potential.

Chapter 11:  Social Welfare Measures

Friedman argues not so much against the social security system, but against the government’s monopoly of the system.  He argues private industry could provide the same benefit far more efficiently and at lower cost.  He does, however, admit some sort of social security system is probably justified, if only from a “neighborhood effect” perspective.

Chapter 12:  Alleviation Of Poverty

No surprise here, Friedman believes free trade is the best cure for poverty.  He also proposes a negative income tax for those under the poverty line, guaranteeing everybody a minimum level of income.  He criticizes most welfare efforts as being ineffective money pits.

Conclusion

Capitalism and Freedom isn’t perfect.  Milton Friedman was not always right.  His theories were often the subject of intense academic scrutiny and were sometimes proven wrong.  But Friedman always took his failures in stride.  What’s more, in edition to being a respected economist he was a singularly-talented writer, a very rare combination.  He had a knack for explaining the most complicated of situations in straightforward, easy-to-understand language.  His most famous work is flawed, oft-dogmatic, and sometimes maddeningly naive, but it is also a work of genius.  If today’s society has worked out the solutions to some of these devilishly difficult social problems, it is only because we have stood on the shoulders of giants like Friedman.  This book is well worth a read.

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