Capitalism and freedom by Milton Friedman - Summary

Review

Friedman does an excellent job at explaining that free enterprise/markets are the means to achieve prosperity for everyone in society. Not only that, he brings numerous examples to the table and illustrates with them that more often than not good intentions by governments result in bad outcomes.

Index

Introduction

What can I and my compatriots do through government?

  • The greatest threat to freedom is the concentration of power.

  • Government must be limited in its scope.

  • Dispersement of government is also a must to keep freedom.

  • Great thinkers are the product of being in a minority view while society allowed geniuses to pursue their endeavors.

  • The word liberalism changed its meaning profoundly over the centuries. What once was called libertarian is now called conservative.

The relation between economic freedom and political freedom

  • a socialist country can not be democratic (in the sense of allowing individual freedom)

  • to be forced to contribute to a compulsory federal old age program is an infringement of one’s personal individual freedom

History suggests only that capitalism is a necessary condition for political freedom.

  • To coordinate the economic activity of millions, there is either:
    • a totalitarian state using the army to coerce the people
    • the voluntary cooperation of individuals, i.e. a market place

[..] both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.

  • Monopolies are a threat to this system and are discussed in the following chapter.

  • Winston Churchill was denied to advocate against Hitler’s Germany on the BBC which was a government monopoly and his message was considered too controversial to be aired.

  • In a free market, no one cares if the wheat used in bread comes from a minority group or not.

The role of government in a free society

To the liberal, the appropriate means are free discussion and voluntary co-operation, [..]

  • The lesser the government has to decide on the better.

  • Absolute freedom is impossible because during discrepancies between two parties their needs to be an umpire or mediator.

  • There is a difference in the meaning of “free enterprise” in companies are free to do what they want and everyone is free to setup an enterprise. The first could allow price fixing whereas the second does not.

In practice, monopoly frequently, if not generally, arises from government support or from collusive agreements among individuals.

  • Some monopolies are unavoidable as in the business of telecom providers. Here we have to choose a lesser evil amongst three:
    • private monopoly (Friedman’s choice)
    • public monopoly (Walter Euken on German railroads)
    • public regulation (Henry Calvert Simons on the USA)
  • Excluding private competitors from competing with a public monopoly is bound to fail in the long run. Once, in the USA only the government was allowed to deliver mail to its citizen.

  • So called “neighborhood effects” push costs onto other people even though they do not want to be part of the transaction. For example, the collection of road tolls is economically infeasible at all road entries and exists without having some kind of monopoly or citizen wide gasoline surcharge.

  • In some cases, we have to experiment by trial and error to correctly draw the line where the government is allowed to restrict the freedom of others as in the case of madmen or children.

  • The following cases are not supported by Friedman’s view to allow any public regulation or monopoly due to neighborhood effects:
    • parity price support programs for agriculture
    • tariffs
    • prorationing of oil
    • rent control
    • minimum wage rates
    • regulation of any industry; examples railroads or banking
    • radio and television
    • retirement programs
    • licensure provisions
    • public-housing
    • forcing men to join the military without the appropriate compensation where the joining becomes voluntary on the soldier. except some basic universal military training for the population.
    • national parks
    • prohibiting other mail operators
    • publicly owned and operated toll roads

The control of money

There is also widespread recognition that control over money can be a potent tool for controlling and shaping the economy. Its potency is dramatized in Lenin’s famous dictum that the most effective way to destroy a society is to destroy its money.

  • a gold standard does not work because gold does not automatically grow with the amount of money in circulation

Money is much too serious a matter to be left to the Central Bankers.

– paraphrasing of Clemenceau

  • Friedman is against a stable price level.

Read Friedmans’: A program for Monetary Stability

  • Friedman’s suggestion for the Federal Reserve Bank is to maintain a steady growth of the money supply at the time of writing his book.

International financial and trade agreements

There is much experience to suggest 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 [rates].

  • A shortage of supply can be caused by fixing the price below value. As was the case for rents and housing.

  • Artificially pegging an exchange rate only hides the real problems in the respective economies and produces more problems than they solve.

Instead of making grants to foreign governments in the name of economic aid - and thereby promoting socialism - while at the same time imposing restrictions on the products they succeed in producing - and thereby hindering free enterprise - we could assume a consistent and principled stance. We could say to the rest of the world: We believe in freedom and intend to practice it. No once can force you to be free. That is your business. But we can offer you full co-operation on equal terms to all. Our market is open to you. Sell here what you can and wish to. Use the proceeds to buy what you wish to. Use the proceeds to buy what you wish. In this way co-operation among individuals can be world wide yet free.

Fiscal policy

  • government policies to counter a recession are often enacted after the recession has begun and do rarely counter act the recession itself because by the time the policy is in place, the recession is already over.

  • government expenditures only diverts private expenditures by either having raised taxes or issuing bonds to finance the expenses. the money flow in a sense is only diverted from one end to another.

The role of government in education

  • schooling/education has neighborhood effects as a certain kind of literacy and common values is to be expected of the child in the future.

  • salaries in the education system rely far to much on seniority instead of performance.

Capitalism and discrimination

  • Generally, it is/was more of the minority groups who tended to attribute social injustice to capitalism.

  • Capitalism has allowed during the civil war that black people can own real property even though the discrimination was so high.

  • People who practice discrimination inevitable pay more for goods than people who are more open minded.

  • Fair employment practice commissions are restrictions on one’s free decision to hire whomever one sees fit the most.

Monopoly and the social responsibility of business and labor

  • three kinds of monopoly:
    • monopoly in industry
    • monopoly in labor
    • governmentally produced monopoly
  • Unions are generally more prevalent in high paying industries. By introducing higher wages, they force out people who could be payed more. These people than have to go to other industries where the people have to pay higher prices for the first industry and have more competition for the same job.

  • Unions also help as a kind of intermediary to establish an industry wide price fixing technique that would otherwise be considered highly illegal.

  • corporate taxes should be abolished and the uninvested capital gains should be attributed to each stock holder’s tax report

Occupational licensure

  • having abandoned the medieval guild system of the middle ages, societies retrogress back to restrict the occupations of an individual more and more. in india it was called the cast system.

  • there is a difference between registering, having a certificate or a license for an occupation.

  • Licensure can be justified if the lack thereof could cause harm for a third party not involved in the original transaction. For instance, the spread of an epidemic because of a non trained physician.

  • In America, the schools that are listed on the governmental approval list for a medical license are almost the same as the ones in the medical trade union.

  • As Hitler came to power, numerous professionals emigrated from Germany to America. There, the amount of newly issued medical licenses remained unchanged which begs the question if entry was prohibited on purpose by the trade union.

[..] licensure has reduced both the quantity and quality of medical practice; that it has reduced the opportunities available to people who would like to be physicians, forcing them to pursue occupations they regard as less attractive; that it has forced the public to pay more for less satisfactory medical service, and that it has retarded technological development both in medicine itself and in the organization of medical practice.

The distribution of income

“To each according to what he and the instruments he owns produces.”

  • Socialistic views of “each according to his needs” renders the Marxist view of labor is an act of exploitation invalid.

  • Medicine aside, technological advances have made objects of wealth in the past, mere utilities of the present. For instance, modern plumbing, central heating, automobiles and the likes.

  • Capitalism allows social mobility where socialism produces rigid classes which makes the inequality permanent.

People at the same economic level pay very different taxes depending on the accident of the source of their income and the opportunities they have to evade the tax.

  • Income taxes hinder the accumulation of wealth more than actually taxing the rich and producing more equality.

Social welfare measures

  • poor families are often piled together in special public housing facilities which increases the density of problem children in the local schools instead of distributing them across the city by handing out cash grants so lower income people move to higher income neighborhoods.

  • minimum wages are uneconomically. given this fact, they inadvertently increase unemployment rates which affects the unskilled and poor the most.

Those of us who believe in freedom must believe also in freedom of individuals to make their own mistakes.

Alleviation of poverty

  • introduce a negative income tax instead of the numerous policies and regulation on trade and wages. Meaning, there is a minimum amount of income that everyone has to have and if someone falls below a threshold, a subsidy fills the gap.

Conclusion

  • Friedman list many governmental activities which were well intended but backfired miserably.

  • beneficial state interventions are immediate to see and its evil and bad characteristics are gradual and slow to be noticed (not to mention the corruptness that may arise on the side of the government). the only way to avoid this outcome is to build the public opinion that freedom of ones own fate is of utmost importance instead of having a paternalistic state.

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The mind agrees.