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THE WORLD IN 1980

How did the world look in 1980 when Free to Choose was published? Government was large, the Cold War was at its height and the Friedmans’ ideas were still far removed from the mainstream. In the United States, total government expenditures at the federal, state, and local levels accounted for 30 percent of GDP. In other countries, the extent of government involvement in the economy was even greater—large sectors of the economies of the major Western industrial countries were under direct government control. In the United Kingdom, the steel industry, railways, coal mining, and a myriad of other sectors had been nationalized by various postwar governments. The Mitterand government that came to power in France in 1980 marked the last great push for greater government control in a major Western industrial economy.

Much of the high level of U.S. federal government expenditure was devoted to defense. The United States had some half million troops stationed in Western Europe, where it was engaged in a face-off with the Warsaw Pact countries. The Iron Curtain was tightly drawn across the face of Europe. Indeed, military spending was on the increase—the United States was in the process of stationing cruise missiles in Western Europe to counter the Soviet military threat, to much public (European) opposition. In 1979 the Soviet Union had invaded Afghanistan, the latest in a series of Soviet interventions during the postwar era to retain its grip on its satellite states (beginning with East Germany, Hungary, and Czechoslovakia). To many, the Soviet Union and its allies looked invincible.

Around the world, inflation was running at levels not seen since the end of World War II. In the United States, consumer price inflation was 13.5 percent in 1980, its highest level since 1947. Elsewhere in the industrial world, inflation was at or near the highs experienced during the 1970s. In many countries, wage and price controls remained the preferred approach to dealing with inflation. In the eleventh edition of his influential textbook Economics, published in 1980, Paul Samuelson wrote: “An ‘incomes policy’ is needed to supplement fiscal and monetary policy—in order to give the mixed economy a better long-run Phillips curve or natural rate.…Benign neglect, governmental guideposts (voluntary or quasi-voluntary), direct wage–price controls, centralized collective bargaining, stop–go driving of the economy to cool it down, labor retraining programs to lower the natural level and range of structural unemployment—all these need study to retain the humane qualities of the modern order while achieving efficiency and stability” (Samuelson 1980, 781–82). The idea that central banks should be held accountable for inflation and could control it through control of the money stock was still being debated.

But, as the Friedmans noted in the closing chapter of Free to Choose, the tide was turning. Margaret Thatcher was elected prime minister of the United Kingdom in a landslide election in May 1979. With a solid majority in the House of Commons, Thatcher began a program of rolling back state involvement in every aspect of economic life in the UK. Large parts of Britain’s industrial base that had been nationalized under earlier Labour and Conservative governments were privatized, starting with British Telecom in 1984 and followed by British Gas in 1986, British Airways and Rolls Royce in 1987, and a slew of others through British Rail and British Energy in the mid-1990s. The deregulation of the U.S. economy that had begun with airlines in 1977 accelerated under Ronald Reagan, who was elected president in 1980. Reforms had begun in China in 1978 under Deng Xiaoping’s leadership, starting with a revival of private farming. Reforms were beginning in Latin America, with Chile leading the way in a number of areas.

These reforms were not exclusively the province of conservative parties. In New Zealand the Labour government of Roger Douglas embarked on a series of reforms that became a model for many other countries. New Zealand pioneered the idea of inflation targeting as a strategy for monetary policy that would focus central banks’ policy deliberations and hold them accountable for inflation outcomes. This prescription for monetary policy has become increasingly popular in recent years and addresses many (though not all) of the Friedmans’ concerns about discretionary monetary policy.
While inflation was close to a postwar peak in 1980, efforts were under way to bring it under control. In August 1979, Paul Volcker was appointed chairman of the Federal Reserve System, and the Fed embarked on a campaign to bring inflation down. By the time Volcker left office in 1987, inflation had fallen from 13.5 percent to 3.6 percent. Under Alan Greenspan’s leadership, the Fed kept inflation under control and indeed lowered it further, to the point that by the beginning of the twenty-first century most commentators had stopped worrying about inflation and instead started worrying about deflation.

THE WORLD IN 2004

In the two-plus decades since Free to Choose was published, the world has changed dramatically, and in most ways for the better. There is less government involvement in most aspects of economic life than there was twenty-five years ago, inflation is lower, global trade is freer, and by most measures more people enjoy more economic freedom than at any time in the recent past. Living standards have risen for most of the world’s population. The great experiment of the twentieth century has ended: The liberal, free-market, democratic model won. The Soviet Union has ceased to exist, and communism is no longer viewed as a viable alternative to free market capitalism. Russia is in the process of becoming a free market democracy. China, while still ruled by the Communist Party, has opened further to the world and has grown at rates that will make it the world’s largest economy within a couple of decades. In May 2004 the European Union expanded from 15 to 25 members, incorporating many of the former Eastern European vassal states of the Soviet empire and in the process becoming one of the largest free trade blocs in the world.

Living standards around the globe are dramatically higher than they were twenty years ago, helped by the rolling back of the state in many countries and the lifting of restrictions on domestic and international trade (globalization). The fraction of the world’s population living on less than $1 a day has fallen from 31.5 percent to 23.7 percent. While the number of people living in poverty remains large, there is greater acceptance that the surest way out of poverty is the protection of property rights, rule of law, and freedom to transact.

But if there have been great gains around the world, here in the United States progress has been slow in an area desperately needing reform. As Eric Hanushek observes in his paper, it has proven easier to defeat the forces of communism than to overcome the education establishment’s resistance to meaningful reform of the public school system. The idea that school choice is essential to improving school quality is central to both Capitalism and Freedom and Free to Choose. School choice is so important to the Friedmans that their foundation is dedicated to promoting school choice and nothing else.[7] In Free to Choose the Friedmans wrote, “We believe that vouchers or their equivalent will be introduced in some form or other soon. We are more optimistic in this area than in welfare because education touches so many of us so deeply. We are willing to make far greater efforts to improve the schooling of our children than to eliminate waste and inequity in the distribution of relief. Discontent with schooling has been rising. So far as we can see, greater parental choice is the only alternative that is available to reduce that discontent. Vouchers keep being rejected and keep emerging with more and more support” (Free to Choose, 175). In the intervening years, of course, the United States has undertaken a far more radical reform of the welfare laws than has been attempted in education. As Hanushek shows, the performance of U.S. public schools has at best been stagnant, despite a massive increase in the resources available to them. U.S. students continue to perform poorly against students in other countries on standardized tests. This must surely be a source of continued concern in our increasingly integrated global economy.

footnotes

[7] For information on the Milton and Rose D. Friedman Foundation, see
www.friedmanfoundation.org.

[8] See “Can the Kiwi Economy Fly?” The Economist, November 30, 2000.