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Free to Choose
Open Republic: July / August / September
2005
Mark Wynne. Federal Reserve Bank of Dallas. This is paper is taken from proceedings of a conference on the legacy of Milton and Rose Friedman’s Free to Choose published by the Federal Reserve Bank of Dallas in January 2005
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In 1962 Milton Friedman published Capitalism and
Freedom, one of the most influential arguments for economic liberalism
to appear in the second half of the twentieth century. Capitalism
and Freedom has been in print for the past forty years and has been
translated into no fewer than eighteen languages. At the time it was published,
the book was not widely reviewed outside of the main academic journals.
[1] But with the book’s publication,
Milton Friedman staked his claim as a champion of economic liberalism
at a time when the ideas of liberals (in the traditional sense) were distinctly
unfashionable.[2]
Some twenty years later, in 1980, Milton and Rose Friedman made the case
for economic freedom to a broader audience with the PBS television series
and book Free to Choose. This book was highly successful, becoming
the best-selling nonfiction book of 1980, and presented their agenda for
reform. In the preface to the 1990 (Harvest) edition of Free to Choose,
the Friedmans wrote of how surprised they were at the dramatic turning
of the tide that had occurred in the 1980s. They were prompted to wonder
whether the ideas in Free to Choose had become so much part of
the conventional wisdom that the book was no longer relevant.
In 2003 the Federal Reserve Bank of Dallas organized a conference to take
a retrospective look at Free to Choose. A large part of the motivation
for holding the conference, over and above the desire to honor one of
the twentieth century’s greatest American economists, was a concern
that the United States and the world were possibly at another turning
point, but this time away from small government and freer markets. Protesters
against globalization have become increasingly strident in their denunciations
of market capitalism and free trade. In some regions of the world, voters
are asking whether market reforms of recent years have paid off. And the
trend toward freer trade seems to have stalled as governments have chosen
to put narrow domestic interests ahead of principle.
This essay provides an overview of some of the issues discussed in the
papers that follow. I begin with a summary of some of the central ideas
in Capitalism and Freedom and Free to Choose. Next I examine
how the world looked in 1980 and how it has changed since then, paying
particular attention to areas where the ideas expressed in Free to
Choose have been influential. I then consider some threats to economic
freedom that may lead to a rolling back of some of the advances of the
past two decades.
THE BASIC MESSAGE OF CAPITALISM AND FREEDOM AND FREE TO CHOOSE
Free to Choose is probably best summarized
by this statement toward the end of the book: “Reliance on the freedom
of people to control their own lives in accordance with their own values
is the surest way to achieve the full potential of a great society”
(Friedman and Friedman 1980, 309–10). In the economic sphere, this
means relying on free private markets as the primary means of organizing
production and exchange, with a minimal role for government. At a time
when many were still in the thrall of state planning, the Friedmans took
the distinctly unfashionable stance of arguing for minimal government
involvement in the economy.
Both books make three key points. First, free competitive markets are
the most effective way to organize production and exchange and to ensure
that the wants of the people are met. The power of competitive markets
to deliver desirable outcomes was Adam Smith’s great insight and
remains as relevant today as it was when first articulated in 1776. Second,
when the government intervenes to rectify a case of market failure, often
the cure is worse than the disease. Many of the so-called failures of
capitalism, especially the Great Depression of the 1930s, were due to
misguided government policies rather than inherent weaknesses in the capitalist
system. Third, free markets in conjunction with equality of opportunity
allow individuals to attain standards of living previously thought unattainable.
The gap between the rich and the poor tends to be greatest in societies
where the free market is suppressed. Putting equality ahead of freedom
will cost a society both; putting freedom ahead of equality is the surest
guarantor of both.
The opening chapter of Free to Choose, titled “The Power
of the Market,” provides the basic framework used to address a variety
of issues. Competitive free markets consistently deliver what consumers
want, at lower cost, than any other mechanism known to man. This is true
whether the market is for breakfast cereal, cars or educational services.
In his contribution to this volume, Paul Peterson reviews the evidence
on school choice and shows that, along almost every dimension, schools
are better at delivering what parents want when there is an element of
competition in the provision of education. The exact form of competition—school
vouchers or charter schools—is less important than the presence
of competition. Markets for education work just as well as markets for
agricultural commodities or foreign exchange. Speaking at the conference
dinner, Gary Becker reiterated the key point of the power of competition.[3]
Arguing that competition is probably the most important social contrivance
of the last thousand years, Becker pointed out the key characteristics
of competition: It drives down costs; it fosters innovation; it drives
up quality; and most important, it economizes on information. Just as
competition displays these characteristics when allowed to work in the
market for consumer goods, so too will it lower costs, foster innovation,
improve school quality and economize on information if allowed to work
in primary and secondary education. Becker noted that it was no accident
that the United States has the best third-level education system in the
world, attributing this to the greater degree of competition in this segment
of the education system.
The potential of free markets to raise living standards is only realized
when individuals are free to specialize in doing what they do best and
trade for their other needs. Trade through the medium of money is most
efficient, and fiat monetary standards economize on the resource costs
of monetary exchange. But fiat monetary standards come at a cost, that
of inflation.[4] Through the 1970s
and 1980s, inflation accelerated to rates that had not been seen in many
countries. Friedman argued early that the government need only set some
predetermined growth rate for the stock of money, thereby eliminating
all discretion from the conduct of monetary policy, to control inflation
and the real instability associated with discretionary monetary policy.
In recent years, Friedman has come to accept that his preferred policy
prescription of strict monetary targeting would not have worked very well
if it had been widely implemented, and Ben Bernanke notes in his paper
that this is the only part of Friedman’s monetary framework that
has not become part of the contemporary conventional wisdom on best practices
in monetary policy. But Friedman has also noted that many central banks
seem to have adopted his key policy prescription (and the central message
of chapter 9 of Free to Choose) that control of the money stock
is the key to control of inflation.[5]
Bernanke states that Milton Friedman’s monetary framework “has
been so influential that…it has nearly become identical with modern
monetary theory and practice.” One of Friedman’s key insights
was that while money may influence real activity in the short run, it
has no effect in the long run. Monetary policymakers’ failure to
appreciate that insight contributed to the Great Inflation of the 1970s,
which Bernanke describes as the second great monetary mistake of the twentieth
century. The first, of course, was the Great Depression. In chapter 3
of Free to Choose, the Friedmans examine the Great Depression
and restate the argument first developed in Friedman and Schwartz (1963)
that the Depression was fundamentally due to errors on the part of the
Federal Reserve System. Bad monetary policy turned what otherwise would
have been a run-of-the-mill recession into a major depression.[6]
As testimony to how well the current Federal Reserve System has learned
this lesson, in a panel discussion on the Great Depression at a University
of Chicago event held in 2002 to mark Friedman’s ninetieth birthday,
Bernanke concluded with the confession: “You’re right, we
did it. We’re very sorry. But thanks to you, we won’t do it
again.”
The Friedmans argue that the greatest threat to economic freedom comes
from the government. Government intervention in the economy comes in many
forms, from regulation of some economic activities to prohibition of others,
to monopolization of yet others and appropriation of resources through
taxes and other levies. One of the most pernicious such levies in the
United States for a long time was the draft of young men into the military,
which Friedman campaigned against vigorously until its repeal in 1973.
The draft is mentioned in chapter 2 of Capitalism and Freedom as one of
fourteen activities undertaken by the U.S. government that was inconsistent
with liberal economics. By the time Free to Choose was written,
the draft had been abolished, due in no small part to the efforts of the
Friedmans, but the presence or absence of conscription is one of the key
components of the economic freedom indexes that have been developed in
response to the Friedmans’ work. James Gwartney pioneered the construction
of indexes of economic freedom, and in his paper he documents the tight
relationship between economic freedom and economic growth. Gwartney shows
that those countries that maintain institutions and policies consistent
with greater economic freedom also tend to have higher per capita GDP.
Economic freedom enhances productivity both directly and indirectly by
boosting investment. Gwartney finds that increases in economic freedom
during the 1980s seem to have a statistically significant positive effect
on long-run growth: specifically, a one-unit increase in the index of
economic freedom during the 1980s enhanced long-term growth by 0.71 percentage
point.
In Capitalism and Freedom, Friedman devoted a chapter to exploring the
relationship between economic and political freedom. As interest in this
relationship has developed in subsequent years, it has become apparent
that a third category of freedom needs to be added to the mix, namely
civil freedom. Friedman himself has argued this need in a number of venues
in recent years and again at the Dallas conference. Hong Kong under British
rule was the prime example of a society that enjoyed a high degree of
economic freedom and civil freedom (freedom of speech and freedom of association),
but limited political freedom: The colony was essentially run as a benevolent
dictatorship by the British Foreign and Commonwealth Office. A major challenge
for the economic freedom project, in Friedman’s view, will be to
integrate measures of economic freedom with measures of political freedom
and reconcile the two where they conflict.
When Capitalism and Freedom and Free to Choose were written,
equality was one of the thorniest issues the Friedmans grappled with.
It remains a difficult issue today. As the Friedmans note in Free
to Choose, “A society that puts equality—in the sense
of equality of outcomes—ahead of freedom will end up with neither
equality nor freedom….[but] a society that puts freedom first will,
as a happy by-product, end up with both greater freedom and greater equality”
(148). Equality of opportunity is not directly addressed in any of the
conference contributions but runs through many of them as a leitmotif.
Perhaps the easiest way to improve equality of opportunity in the United
States would be to promote competition in the K–12 education system,
which would improve school quality and the range of educational opportunities
available to all children. In his paper, Raghurum Rajan notes that elites
in many societies tend to undermine equality of opportunity by opposing
widespread access to markets, often by limiting access to finance. One
of the keys to ensuring the political viability of free markets and the
greater opportunities they create for all is to get the elites behind
markets.
But free markets come with important prerequisites. In his paper, Luigi
Zingales also emphasizes the importance of access to finance in allowing
individuals to realize their full potential under the capitalist system.
Zingales starts with the story of Sufiya Begum, a stool maker in an impoverished
Bangladeshi village, to illustrate how a lack of access to finance can
hinder the ability of individuals to advance even with free markets. For
want of access to finance, Begum is effectively indentured to a single
middleman who exploits his position of monopoly and monopsony power to
limit her income. Zingales argues that access to finance is crucial to
promoting competition and ensuring maximum economic freedom. An important
corollary is that legislation limiting access to finance, whether intentionally
or not, can have detrimental effects on the ability of individuals to
realize the full benefits of free markets.
Critics of free market capitalism like to dismiss it as being too concerned
with material things and detrimental to the development of culture. In
1993, the prime minister of France, Eduard Balladur, asked rhetorically,
“What is the market? It is the law of the jungle, the law of nature.
And what is civilization? It is the struggle against nature.” This
summarizes the view of many critics of free market capitalism, especially
European critics. Many of these critics believe that capitalism is detrimental
to the finer things in life. Yet as Tyler Cowen argues in his paper, the
wealth and freedom that capitalism makes possible are a boon for the arts.
Indeed, periods of greater globalization also tend to be periods of greater
cultural diversity and creativity. The greater wealth that capitalist
societies generate supports a greater range of cultural products and makes
it easier to preserve the pasts of their own and other societies. While
it may be too early to say how much of the art produced in twentieth century
capitalist societies will be deemed great by future generations, it is
noteworthy that much of the art that has survived the test of time was
funded by private patrons living in wealthy societies. Cowen cites Renaissance
Italy, the Dutch Golden Age, and the blossoming of French culture in the
nineteenth century as examples. The antiglobalization protestors who pose
such a threat to the liberal economic order rail against the McDonaldization
of the world. They see the spread of American culture overseas but overlook
the spread of foreign culture to the United States. As Cowen acknowledges,
free trade may indeed reduce diversity across societies, but it invariably
increases diversity within societies.
footnotes
[1]Capitalism and Freedom was reviewed by John Hicks in Economica, Paul Baran in Journal of Political Economy, and Abba Lerner in American Economic Review.
[2] In 1972 a group of Friedman’s former students organized a conference at the University of Virginia to re-examine the ideas in Capitalism and Freedom to celebrate Friedman’s sixtieth birthday. The conference proceedings were subsequently published as Capitalism and Freedom: Problems and Prospects. Proceedings of a Conference in Honor of Milton Friedman, ed. Richard T. Selden, University Press of Virginia, 1975. Two of the participants in that earlier conference also participated in the Federal Reserve Bank of Dallas conference thirty years later (William Niskanen and Gary Becker).
[3] Becker’s speech is not included in this volume.
[4] Friedman (1986) provides an interesting perspective on the resource costs of fiat monetary standards.
[5] See also Friedman’s
interview with the Financial Times, June 5, 2003, and his opinion piece
in the Wall Street Journal, August 19, 2003.
[6] It is interesting to reread some of the Friedmans’ commentary on the run-up to the Great Depression in the light of recent economic history: “The high tide of the [Federal Reserve] System was undoubtedly the rest of the twenties. During those few years it did serve as an effective balance wheel, increasing the rate of monetary growth when the economy showed signs of faltering, and reducing the rate of monetary growth when the economy started expanding more rapidly. It did not prevent fluctuations in the economy, but it did contribute to keeping them mild. Moreover, it was sufficiently evenhanded so that it avoided inflation. The result of the stable monetary and economic climate was rapid economic growth. It was widely trumpeted that a new era had arrived, that the business cycle was dead, dispatched by a vigilant Federal Reserve System” (Free to Choose, 78).
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