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But there has been some progress. The first major voucher program in the United States started in Milwaukee in 1990, and by the end of the decade some 10,000 students were participating in the program. The only other major school voucher program began in Cleveland in 1996–97. In 2002 the Supreme Court upheld the constitutionality of the Cleveland program, but there is still considerable opposition to expanding such programs to other school districts. An alternative means for promoting school choice is the charter school movement. Since the first charter school was authorized in Minnesota in 1991, some 2,700 charter schools have been opened in 36 states. And the No Child Left Behind Act of 2001 will contribute to greater school accountability and transparency and further the cause of reform, not least by making more and better information available to parents.

None of the constitutional amendments offered by the Friedmans in the concluding chapter of Free to Choose have been adopted in the United States. In his contribution, Allan Meltzer counts some twenty-five specific policy proposals in Capitalism and Freedom and Free to Choose, some of which have been adopted and many of which have not. The unequivocal successes are the ending of the draft, the floating of the dollar, and the abolition of interest rate ceilings on bank deposits. There have also been partial successes in the lowering of tariff barriers around the world, deregulation of various industries, and the introduction of an element of competition in education. The Earned Income Tax Credit can be viewed as a step toward the negative income tax the Friedmans proposed as an alternative to the various welfare programs. Meltzer argues that free market solutions to various problems are more likely to be adopted if they have been articulated in advance of any crisis that might precipitate a major reform. This allows proponents of the policies to respond to criticisms and allows officials to acquire familiarity with proposals to the point of believing that they might work. And therein lies one of the most enduring contributions of Capitalism and Freedom and Free to Choose.

In the wake of 9/11, defense and security spending has increased significantly in the United States. Airport security, once the province of private firms, is now in the hands of a federal agency, the Transportation Security Administration. Just how big should government be? The Friedmans have always accepted that there is some limited role for government. In Free to Choose, they quote from Adam Smith’s Wealth of Nations to define the appropriate tasks of government as being first, the duty of protecting the society from the violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions, which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expense to any individual or small number of individuals, though it may frequently do much more than repay it to a great society. (Free to Choose, 28–29, quote from Wealth of Nations).

Indeed, as Raghurum Rajan emphasizes, the absence of government can be just as anticompetitive and detrimental to free markets as too much government. Governments today perform a much wider array of functions than those listed by Adam Smith. Government is intimately involved in the education system, in the provision of health care, and in the provision of income security through unemployment and social security programs. A key argument in Free to Choose was that government had grown well beyond the size necessary for the protection of liberties and needed to be scaled back. William Niskanen takes up the issue of the appropriate size of government in his paper. Niskanen’s primary focus is on the economic burden of taxation, but as an aside he calculates that the optimal size of government relative to GDP in the United States is about 10 percent. At present, government expenditures account for more than 30 percent of GDP.

I have already alluded to the widespread belief in the 1930s that capitalism had failed as justification for greater government involvement in the economy. The response in the United States came in the form of the New Deal, which included the creation of the Social Security (Old Age and Survivors Insurance) program. This program is now the largest single item in the federal budget and accounts for more than a fifth of all federal spending. The changing demographics of the United States (falling birthrate and rising life expectancy) have made the system unsustainable in its current form. For a long time the issue was regarded as the third rail of U.S. politics, but there are signs that more politicians are willing to address the issue of the Social Security system’s long-term solvency. In his paper, Thomas Saving and his co-authors document the size of the funding problem and analyze the costs and benefits of a transition from the current system to the Friedmans’ preferred system of private accounts. Transitioning from the current publicly funded system to a privately funded one would make the country as a whole better off by enhancing the nation’s capital stock. But such a transition will come at a cost in the form of lower consumption during the transition period.

By far the most dramatic development internationally since the publication of Free to Choose has been the collapse of almost all communist regimes in place in 1980. In his paper, Peter Boettke discusses the importance of the Friedmans’ ideas in the reform process in the former communist societies. Many of the leading reformers had studied Friedman’s work. The mass privatizations that took place in many of the former communist countries were inspired by Friedman’s ideas. President Vaclav Klaus of the Czech Republic has acknowledged the importance of Friedman’s ideas and intellectual courage to the reformers in Eastern Europe and has credited him with providing them “a clear vision where to go and a pragmatic strategy how to get there.”

The expansion of economic freedom in China over the past quarter century is the subject of Gregory Chow’s paper. Chow documents the growth of economic freedom in China since the reform process started in 1978 and argues that this has contributed to an increase in political freedom as well. Government is still present in many areas of economic life, but its role is much diminished. Social insurance that was previously provided through guaranteed jobs in communes or state enterprises or health care through the same has been replaced by explicit programs providing unemployment, health, and old age insurance. Chow claims that there is probably a greater degree of freedom of choice in education in China than there is in the United States. He cites figures showing that some 40 percent of all spending on education in China comes from private sources versus an average of 12 percent for all Organization for Economic Cooperation and Development countries. Chow argues that “there appears to be no serious infringement of economic freedom in China, with the exception of the one-child policy,” although according to the most recent report of the Economic Freedom Network (Gwartney, Lawson, and Emerick 2003), China ranked 100th out of 123 countries considered, with a score of 5.5 out of a possible 10. Hong Kong has consistently ranked at or near the top of all rankings of economic freedom. Chow comments on inflation’s role in the Nationalist government’s downfall in 1949 and in the unrest that culminated in the Tiananmen Square protests in 1989. One aspect of Friedman’s thinking influenced policymakers in China even before the 1978 reforms: Apparently even the Marxian economics textbooks used in China’s universities contained the quantity equation.

Green economics was just on the horizon when Free to Choose was published. In their autobiography, the Friedmans write that they had contemplated including “Pollutions” as one of the topics to be addressed in the TV series on which the book is based. Chapter 7 of Free to Choose, titled “Who Protects the Consumer?”, has a brief discussion of environmental issues, and the Friedmans observe that the environmental movement has been behind a lot of the growth in government intervention in the economy. In the years since, the environmental movement has gathered strength, and environmental issues usually top the list of concerns of antiglobalization protesters. In their papers, Terry Anderson and Richard Stroup address environmental issues from a free market perspective. Anderson points out that countries with greater economic freedom and rule of law tend to have higher environmental standards (as measured by water pollution and so on) than countries in which the rule of law is weak. Indeed, the great level of wealth that economic freedom makes possible is itself a contributor to better environmental standards. There appears to be a Kuznets curve relationship between environmental quality and per capita GDP: At low levels of output, environmental quality deteriorates as countries trade off environmental quality for faster growth, but as output rises, societies demand and can afford cleaner environments. Contrary to the beliefs of many environmentalists, it is not necessary to have the government involved to ensure a better environment. Well-defined property rights and rule of law are all that is necessary to protect the environment from “tragedy of the commons” outcomes. Stroup explains why government regulation to achieve environmental objectives typically does worse than private property rights and free markets. To begin with, regulators typically will not have access to the information generated by and available to participants in free markets. And regulators will have little incentive to obtain that information by other means. Second, Coasian bargaining will generally ensure that a property right will flow to the highest-value user, but such exchange is often prohibited in a regulatory setting. Third, decisions made in the public sector are public goods, and there is limited accountability. Finally, competition leads to better quality goods, whether in education, as we have already seen, or in the environment. Public-sector entities that are not subject to competitive pressures will be less inclined to innovate than private-sector entities producing the same goods.

IS THE TIDE TURNING AGAIN?

The last chapter of Free to Choose is titled “The Tide Is Turning,” and there is no doubt that the last quarter of the twentieth century saw a significant increase in economic freedom around the world. But many are now wondering if the tide is turning yet again, this time toward less economic freedom. Above, we noted that New Zealand was one of the first countries to fully embrace the idea of the need to roll back government intervention in the economy. Despite widespread pro-market reforms, since 1984 New Zealand has experienced one of the slowest growth rates of per capita GDP in the developed world. The sense that the market reforms had failed to deliver contributed to the election of a government that in 1999 started to roll back some of the previous decade’s reforms. Trade unions have been given more power in wage negotiations, and the top income tax rate has been increased.[8]

In the decade following the publication of Free to Choose, U.S. government purchases as a percentage of GDP hovered in the 20–21 percent range. However, following the collapse of the Berlin Wall in 1989, government purchases as a fraction of GDP began a steady decline and bottomed out at 17.4 percent in 1998. Since then, the fraction of aggregate output absorbed by the government has increased each year, rising to 18.4 percent by 2003. Government expenditures as a fraction of GDP (which include transfer payments in addition to spending on consumption and investment) displayed stronger growth over the entire postwar period, peaking at 32.4 percent in 1992 before beginning a steady downward trend for much of the 1990s. However, this trend was also reversed in 2000. These are but two very crude measures of the government’s overall impact on the U.S. economy. Other measures tell a similar story: The number of pages in the Federal Register, which Friedman has often used to gauge the extent of government involvement in the U.S. economy, reached an all-time record of 75,606 pages in 2002, an increase of about 9 percent over 2001.

Signs indicate that the enthusiasm of some countries for market-friendly reforms is waning, especially in Latin America. After a decade of significant rollbacks of the state in many Latin American countries, recent years have seen a backlash against so-called neo-liberalism. Brazil, Latin America’s largest democracy, elected an avowed populist in 2002, as did the electorate of Argentina. The collapse of the convertibility plan in Argentina is seen as discrediting many of the reforms pioneered by former President Carlos Menem and his erstwhile finance minister Domingo Cavallo. Many in Latin America now talk of “reform fatigue.” In some cases this is because the reforms were in name only, carried out less to spread private property as widely as possible than to enrich established interests.

The success of some countries that have grown rapidly as they have become more integrated into the global trading system has begun to provoke a backlash in the more developed countries. In recent years, there has been a growing outcry against outsourcing of jobs from the United States and Europe to countries such as China and India. Large sectors of the economies of the advanced industrial countries were previously thought immune to foreign competition because their products were nontradable across national borders. As more countries open to trade and as technology makes many services internationally tradable, workers are finding that employment in these sectors is less secure. Increasingly, white-collar workers are joining blue-collar workers in questioning the benefits of free trade.

In short, we cannot take for granted the progress toward greater economic freedom that we have seen over the past two decades. There is nothing inevitable about such progress, and history teaches us that the process can be reversed, with dire consequences. The liberal economic order that existed in most of the world before World War I was destroyed in the turmoil of the interwar years, and it took decades for markets to be reopened.[9] While goods, services, and capital can now flow between countries with the same ease as in the pre-World War I period, the same is not true of people. There are still large barriers to international migration (except within the European Union), due in part to the postwar creation of welfare states in most of the advanced economies. The voices of the critics of economic liberalism grow louder every day, and in his paper, Raghurum Rajan notes the need to “engage dissident economists and demagogic activists in fruitful dialogue, instead of letting them dominate the public arena.” Unfortunately, few contemporary academic economists are willing to take up this challenge.

CONCLUSION

In his remarks to the conference, Alan Greenspan repeated the famous quotation from John Maynard Keynes’ General Theory on the power of ideas: “The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed, the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” The influence of Milton and Rose Friedman on the course of the late twentieth century is testimony to the power of ideas and the ability of two individuals to make a difference. Friedman was the dominant figure in the University of Chicago’s economics department for thirty years, and to many he is the figure most closely identified with what came to be known as the Chicago school.

But his influence extends well beyond economics. Former Secretary of State George Shultz has described Milton Friedman as the individual who has had the most impact on the modern world. Friedman’s enormous influence on public policy stemmed not just from the quality of the scientific work for which he was awarded a Nobel Prize in 1976, but also from the fact that he was willing to go out and argue in public forums for the benefits of free market capitalism at a time when it was distinctly unfashionable to do so. Milton and Rose Friedman describe themselves in their autobiography as two lucky people. They were on the right side of the great debate of the twentieth century, and they had the good fortune to see their arguments vindicated by the course of experience.

footnotes

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

[9]A good reference is James (2001).

references

Friedman, Milton. 1986. “The Resource Cost of Irredeemable Paper Money.” Journal of Political Economy 94: 642–47.

— with the assistance of Rose D. Friedman. 1962. Capitalism and Freedom. Chicago: University of Chicago Press.

Friedman, Milton, and Rose D. Friedman. 1980. Free to Choose: A Personal Statement. New York: Harcourt Brace Jovanovich.

—1998. Two Lucky People. Chicago: University of Chicago Press.

Friedman, Milton, and Anna J. Schwartz. 1963. A Monetary History of the United States, 1867–1960. Princeton: Princeton University Press.

Gwartney, James, and Robert Lawson, with Neil Emerick. 2003. Economic Freedom of the World: 2003 Annual Report. Vancouver, BC: The Fraser Institute.

James, Harold. 2001. The End of Globalization: Lessons from the Great Depression. Cambridge, MA: Harvard University Press.

Keynes, John Maynard. 1936. The General Theory of Employment, Interest and Money. New York: Harcourt, Brace and Co.

Samuelson, Paul A. 1980. Economics, 11th ed. New York: McGraw-Hill.