Edmund Burke held that some social institutions and social goods should always remain beyond the reach of supply and demand.
A Practice to Justify a Theory of Freedom: Friedman’s Engagement with a Collectivist World
Milton Friedman’s Capitalism and Freedom is a modern classic. Along with F.A. Hayek’s The Road to Serfdom, Friedman’s 1962 book introduced many readers to classical liberal or libertarian ideas. Friedman stated his philosophy of freedom, and filled in the details with many examples and applications. He not only taught the reader the meaning of freedom, but how to apply the freedom philosophy to real-world issues.
For its time, it was a radical book. At the end of the second chapter, he identified 14 activities that could not be justified by classical liberal principles. These included all manner of price, wage and rent controls. But they also included social security, occupational licensure and national parks. It is a gutsy modern-day libertarian who would take on the national parks.
Included on the list of 14 indefensible activities was also peacetime conscription. In 1962, compulsory military service had reflexive and unthinking support. Friedman’s personal campaign against the practice helped lead to its abolition. Martin Anderson helped persuade Richard Nixon on the issue. For those who think the work of academics has no practical impact, Friedman’s work on conscription stands in refutation.
It is no exaggeration to say that two-and-one-half billion people today are enjoying a degree of freedom and prosperity that might not have happened, at least not when it did, but for the work of Milton Friedman and like-minded free-market economists. I am talking here of the opening up of the Chinese and Indian economies (and others in what used to be called the Third World). In the very first chapter, Friedman makes the case for the importance, indeed the primacy, of economic freedom over political freedom.
Friedman argued that political freedom depends on the existence of economic freedom. “I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity.” He was aware that he was reversing the accepted priority between political and economic freedom. In so doing he stimulated a body of research on economic freedom in which Liberty Fund was involved. It eventually led to two indices of economic freedom: one produced by the Fraser Institute and a consortium of think tanks; and the other published by the Heritage Foundation and the Wall Street Journal.
Friedman first visited China in 1980 and advised the Chinese leaders then and on subsequent visits to adopt free markets, pointing to Hong Kong as exemplar. The Chinese leaders certainly did not adopt the Hong Kong model in its entirety, but they implemented enough reforms to produce decades of rapid growth and to lift hundreds of millions of people out of poverty and many into the middle class.
The Chinese leaders have never been able to wean themselves from relying on state-owned enterprises as part of their growth strategy, and have even backslid in recent years. The inability to adopt the free market model has produced numerous problems. Wen Jiabao, the outgoing Premier, has recently pointed to some and called for reforms.
Friedman instructed us that economic freedom was a necessary condition for political freedom. In China’s case, it has certainly not been a sufficient condition, though tremendous pressures are building for more political freedom. China remains a work in progress, but has thus far served as vindication for Friedman’s critique of central planning and preference for free markets to coordinate economic activities.
Capitalism and Freedom shaped my views on occupational licensure. It is an obnoxious practice, which has only grown in the 50 years since the book’s publication. Friedman recognized that requiring an individual to obtain permission of the state in order to work in his chosen occupation inherently infringed on individual freedom. As he observed, “the overthrow of the medieval guild system was an indispensable early step in the rise of freedom in the Western world.” Today, Americans are saddled with a modern guild system. True to form, Friedman chose the most difficult case to defend the principle of free labor markets: medical licensure.
Step-by-step, Friedman demolished the arguments for licensing physicians. Licensing does not guarantee that medicine will be safe, but ensures that it will expensive. Licensure restricts the supply of medical professionals and raises costs. He details how the American Medical Association has stood in the way of innovation in medicine. A fortiori, the case against occupational licensure holds for the absurd list of fields mentioned by Friedman (a list that has only gotten longer and more absurd since 1962).
Today, Friedman’s work to overturn occupational licensure is being carried forward by the Institute for Justice. A good portion of IJs cases are brought against states and localities for raising obstructions against entrepreneurship and work, including hair braiders, casket makers and interior decorators.
In 1962, Friedman presented the case for school vouchers. It was a good idea that has been a long time in coming. Today, there are voucher programs in numerous states and localities. Some are tax-funded; some operate with tax credits; and some, like the Inner-City Scholarship Program in New York City, are funded by private gifts. The latter funds attendance at Catholic schools in the Archdiocese of New York by qualified students (without regard to religion), whose parents would not otherwise be able to afford the schools. Friedman deserves credit for fostering all these efforts.
The last time I saw Milton was at the Western Economic Association meetings in San Francisco in July, 2005. Lee Hoskins, former Cleveland Fed president, and I organized a session on the future of Fed policy after Alan Greenspan. Friedman, Anna Schwartz, Hoskins, then St. Louis Fed president William Poole and I were panelists. The panel played to a packed house. The evening before there was a private dinner. It was clear that school vouchers were a topic near and dear to his heart. His legacy is carried on in the Friedman Foundation for Educational Choice that he and his wife, Rose, founded for the promotion of vouchers.
Monetary economics was his primary field, the area in which he conducted the majority of his research. In 1962, he had already come up with his plan for a rule-based monetary policy. Friedman had accepted a role for government in monetary policy, although in later years he had second thoughts (acknowledging the validity of the case for free-banking). In 1962, he wrote that we need “Rules Instead of Authorities” in monetary policy. He made the case that the Federal Reserve as it then existed was “a bad system.” As he explained it: “Any system which gives so much power and so much discretion to a few men that mistakes – excusable or not – can have such far-reaching effects is a bad system.”
If a bad system in 1962, today’s monetary system is far worse. The Federal Reserve is bound by no rules and scarcely any law. It is a pure system of discretion with little political accountability. The central bank has moved beyond conducting monetary policy into carrying out fiscal policy, the expenditure of resources without congressional appropriations. It picks winners among banks by providing subsidized lending to them. Its policy of near zero short-term interest rates distorts inter-temporal pricing, misallocates capital, creates asset bubbles, and appropriates savings for preferred borrowers. Friedman was prescient in his misgivings about central banking.
Capitalism and Freedom has provided us an enduring legacy. In it, Friedman presented the case for the theory and practice of economic freedom. He advanced the argument for free men and free markets. May his work carry on for another 50 years.