Capitalism And Freedom

“Government can never duplicate the variety and diversity of individual action.”

Friedman believes that humankind’s most important achievements, from scientific innovations to advances in industry, agriculture, and the arts, “have never come from centralized government” (3). In his view, the market plays a much larger role in this progress. For starters, a free market encourages individual genius and creativity to thrive. In contrast, government tends to impose uniform standards in areas such as schooling and sanitation. While this may raise the average quality of these activities, it does not help the most talented individuals reach their full potential. Friedman says government “would substitute uniform mediocrity for the variety essential for that experimentation which can bring tomorrow’s laggards above today’s mean” (4).

Uniform standards can also limit the range of approaches and activities individuals use in addressing problems and creating products. Friedman thinks this pressure to standardize can squelch the type of variety-rich environments that helped great innovators such as Einstein, Edison, and Ford thrive. A free market encourages such variety. As Friedman puts it, “The great advantage of the market [...] is that it permits wide diversity. It is, in political terms, a system of proportional representation” (15).

“A society which is socialist cannot also be democratic, in the sense of guaranteeing individual freedom.”

In the first few sentences of Chapter 1, Friedman states his intention to show that proponents of democratic socialism are wedded to a delusion. He says they think a society can adopt many of the economic features of a totalitarian socialist system like the one in Russia without also adopting the limitations on freedom found in this system. Friedman argues that this misguided viewpoint stems from a belief that politics and economics are unconnected, and that “any kind of political arrangements can be combined with any kind of economic arrangements” (7).

Friedman also uses this discussion of socialism to introduce his own thoughts about the relationship between political and economic freedom, stating that economic freedom is a worthy goal on its own and an important tool in the pursuit of political freedom. He explains the later point in greater detail: “Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power” (9).

“The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.”

Competitive capitalism doesn’t require a person to have political clout to start a business, make and sell a product, trade with others, or turn a profit. In theory, a person with political clout has few advantages in the economic sphere of a competitive capitalist system. Friedman argues that maintaining separation between these two types of powers allows each to function most effectively. When the two become intertwined, individual freedom will suffer and the market may suffer as well. For example, if political authorities tell a farmer he must grow a certain amount of wheat, they exert control over his income and the price of wheat.

Friedman also points to examples in which the mixing of the political and the economic is linked to concentration of power. For instance, in a communist country, where the government controls the means of production and the amount of money each person receives, it can coerce people into advocating its political messages. People know that if they don’t comply, they may be stripped of their economic resources.

“The possibility of co-ordination through voluntary co-operation rests on the elementary—yet frequently denied—proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed. Exchange can therefore bring about co-ordination without coercion.”

Friedman’s concept of freedom rests on the notion that individuals are not forced or lured into economic arrangements: their participation is entirely voluntary. In a standard market transaction, cooperation doesn’t require either party to agree on anything but the terms of the transaction itself and their commitment to following the law. They don’t need to agree or compromise about their customs, political persuasions, or cultural preferences.

Throughout Capitalism and Freedom, Friedman shows much confidence in the free market’s arsenal of anti-coercive powers. He summarizes them as such: “The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because there are other employers for whom he can work, and so on” (14-15).

“Underlying most arguments against the free market is a lack of belief in freedom itself.”

At several points in Capitalism and Freedom, Friedman notes that his opponents lack faith in the market’s ability to function effectively with only minimal intervention, its capacity to address social ills, or the desirability of its outcomes. In Chapter 1, he explains that the free market’s ability to guard against coercion impersonally and without a centralized authority is a major reason some people oppose it. As he puts it, the free market “gives people what they want instead of what a particular group thinks they ought to want” (15). In other words, some people have a persistent desire to control others or foist their own beliefs upon them, but that should not keep a society from having a free market. By pointing out this desire, Friedman also shows his support for the liberal belief that individuals are inherently imperfect.

“These then are the basic roles of government in a free society: to provide a means whereby we can modify the rules, to mediate differences among us on the meaning of the rules, and to enforce compliance with the rules on the part of those few who would otherwise not play the game.”

Here, Friedman describes how government plays the important roles of rulemaker and umpire in a capitalist system. He says government intervention is necessary in these areas because “we cannot rely on custom or on [...] consensus alone to interpret and to enforce the rules” (25). Sometimes, one individual’s freedom will impinge on that of another individual. The parties involved may not be able to resolve the conflict, or one they may each try to get their way by coercing the other. Coercion could easily enter the picture if regular citizens were allowed to modify the rules. Plus, the rules might be changed so often that no one was able to follow them, altered in ways that make them illogical or inconsistent, revised to favor specific people or interests, or scrapped entirely.

“Freedom is a tenable objective only for responsible individuals. We do not believe in freedom for madmen or children.”

Friedman believes that certain individuals, namely children and people with severe mental or psychological disabilities, are not capable of handling the responsibilities that come with freedom. He recognizes that this perspective is a paternalistic one, and that he rejects paternalistic viewpoints elsewhere in the book. However, he believes that paternalism is warranted for the aforementioned groups. One justification is that allowing these groups to fend for themselves is likely to expose others to a host of undesirable effects. Friedman suspects that charity work and other voluntary efforts won’t curb these effects because they won’t meet enough of the needs of the mentally and psychologically disabled. Therefore, the government must provide for their care. Friedman says children are precursors to responsible individuals and thinks they have a degree of freedom. Though parents are usually best equipped to care for their children and guide their brood toward responsibility, they should not be able to impinge upon others’ freedom. Thus, it may be acceptable for the government to get involved if a parent is interfering with another person’s autonomy. This notion meshes with Friedman’s larger point about the government serving as an umpire in situations where “one man’s freedom must be limited to preserve another’s” (26).

“The paternalistic ground for governmental activity is in many ways the most troubling to a liberal; for it involves the acceptance of a principle—that some shall decide for others—which he finds objectionable in most applications and which he rightly regards as a hallmark of his chief intellectual opponents, the proponents of collectivism in one or another of its guises, whether it be communism, socialism, or a welfare state.”

Friedman says liberals despise the arrogance inherent in paternalism and support the notion that individuals can decide for themselves, even though they know individuals sometimes won’t make the best choices. In other words, preserving freedom—in particular, the freedom to choose for oneself—is more important than achieving the “best” outcome. Predictions about outcomes are merely predictions, and even when an outcome has occurred, deciding if it is the “best” is typically a subjective matter. Additionally, when people choose anticipated outcomes over freedom to choose, they create a slippery slope: The less often freedom gets defended, the less freedom there will ultimately be, no matter what the issue at hand may be. And when paternalism is the default, as Friedman argues it is in systems such as communism, there are few opportunities for people to make their own decisions. To liberals like Friedman, this is the ultimate insult to individuals because it robs them of dignity and self-determination.

“The consistent liberal is not an anarchist.”

Time and again, Friedman states that government should be limited and that the concentration of power is a major threat to freedom. He recognizes that some readers might take these two assertions to an extreme conclusion and assume that no government is ideal, but this would be anarchism, not liberalism. Anarchy would result in a reduction of freedom, the very thing a liberal wants to avoid. One reason is because some activities are exceedingly difficult without a central organizing force such as a government.

To further differentiate liberalism from anarchism, Friedman stresses that reasonable liberals envision several essential roles for government. These include dealing with technical monopolies, promoting competition, establishing a monetary framework, and preserving law and order. A true anarchist would see a role for government in any of these areas.

“Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality.”

This statement flanks Friedman’s argument that the Fed turned a manageable economic downturn into the disaster known as the Great Depression. It also supports the overarching theme that concentration of power is a threat to freedom that liberals should fight, as well as Friedman’s assertions that “[t]he liberal conceives of men as imperfect beings” (12). Furthermore, the quote sets the stage for Friedman’s proposal that the Fed be governed by a set of rules that minimize the effects of decision-makers’ personalities, biases, and arbitrary notions.

“It is not too much to say that the most serious short-run threat to economic freedom in the United States today—aside, of course, from the outbreak of World War III—is that we shall be led to adopt far-reaching economic controls in order to ‘solve’ balance of payments problem.”

The controls Friedman disputes in Chapter 4 are often used to address issues involving differences among various countries’ currencies, such as the challenges associated with converting American dollars into Canadian dollars or Japanese yen. Friedman stresses that government control of any price is “inconsistent with a free economy” (59). This is one reason he hopes to persuade readers to adopt a liberal perspective: Liberals are inherently suspicious of government intervention and expansions of government power, since they view these things as threats to freedom.

“We could say to the rest of the world: We believe in freedom and intend to practice it. No one 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.”

Friedman worries that the United States supports socialism by giving “economic aid” grants to the governments of foreign countries, then curtail their efforts to participate in the free market by imposing tariffs and other restrictions on the products they make (74). It would be clearer, fairer, and more consistent to simply proclaim United States’ support for the free market and back up these words with logical actions, such as removing tariffs and quotas on imports and establishing a system of floating exchange rates. Friedman also thinks the federal government should stop giving grants in the name of economic aid, which sends a mixed message about whether to pursue free enterprise. This supports a larger point he raises earlier in the chapter: that American policy about foreign trade is incoherent and inconsistent, which can be confusing to international trading partners and encourage them to create policies that are just as incoherent and inconsistent.

“[T]he philosophy of the welfare state [...] has found a useful ally in the balance-wheel theory; it has enabled governmental intervention to proceed at a faster pace than would otherwise have been possible.”

Friedman disputes the idea that federal spending is needed to end unemployment, a key rationale for the New Deal programs that launched the American welfare state. He says discussions of government spending often rely on a “balance wheel” theory, the notion that when private spending goes down, government spending should go down, and when private spending goes up, government spending should go down. Friedman argues that in practice, the government doesn’t tend to decrease its expenditures when private expenditures increase. When recessions occur, it introduces more federal spending programs, including more welfare-state programs designed to promote the well-being of specific populations. However, many of the programs don’t begin until the recession ends and private spending rises again. Friedman complains that these programs are often kept when they should be cut, making the welfare state grow even larger. In other words, “the balance wheel is unbalanced” (76).

Friedman acknowledges some forces that motivate the government to maintain a high level of spending when it should be doing the opposite. One is the fear of suffering through another Great Depression. Another is “widespread acceptance by intellectuals of the belief that government should play a larger role in economic and private affairs” (77).

“A stable and democratic society is impossible without a minimum degree of literacy and knowledge on the part of most citizens and without widespread acceptance of some common set of values. Education can contribute to both. […] The education of my child contributes to your welfare by promoting a stable and democratic society.”

Here, Friedman establishes that education is a public good and produces an important neighborhood effect. If a community wants to reap the benefit of this effect, government involvement may be warranted to do so. As Friedman explains, “It is not feasible to identify the particular individuals (or families) benefited and so to charge for the services rendered” (86). He says an appropriate government intervention in this situation is the establishment of minimum schooling requirements each child in a community must meet. That way, all children in the area will receive an education and as many people as possible will experience the positive benefit that comes along with it.

This quote also relates to Friedman’s point about the importance of consensus. It is difficult to achieve consensus, or even have a productive discussion, when some members of the group cannot understand what’s being discussed or see no value in the topic at hand. Education can promote a common set of knowledge and values that facilitate fruitful conversation, consensus-building, and civic participation.

“[T]he preserves of discrimination in any society are the areas that are most monopolistic in character, whereas discrimination against groups of particular color or religion is least in those areas where there is the greatest freedom of competition.”

Friedman argues that the free market decreases discrimination by keeping many irrelevant factors out of economic transactions. Markets with the greatest degrees of freedom also have the greatest amount of variety and competition. Markets where participants discriminate suffer. When consumers reject certain types of producers, for instance on the basis of prejudice, competition decreases. This reduction leads to fewer choices and higher prices for them. Markets with highly discriminatory consumers will create monopolies, which offer no choices and, in most cases, the highest prices. Producers that won’t sell to certain types of consumers make it more likely that they won’t be able to sell an adequate amount of their products. By discriminating, they limit their incomes and may find it harder to keep up with competitors who don’t discriminate.

“Indeed, can a free market in ideas long be maintained if a free market in goods and services is destroyed?”

This question returns to the idea that economic and political freedom support one another, a concept Friedman explores in Chapter 1. However, it approaches it from a different angle. It’s one thing to say that economic freedom aids political freedom; it’s another to say that economic freedom is a condition for political freedom. Friedman suspects that it may be a requirement, rather than an aid. He says he can’t think of a single historical example of a society with limited economic freedom and extensive political freedom.

In the economic realm of employment, Friedman finds it problematic that one set of laws and precedents protects an individual’s right to shout racially-motivated hate speech in the streets while another might imprison the same person for refusing to hire a racial minority when an FEPC law says he must. Friedman says it’s just as harmful for “momentary majorities to decide what characteristics are relevant to employment,” an economic concern, as it is for them to decide what kinds of political speech are allowed (114). Further, in the pre-Internet era, when Friedman wrote this book, restricting someone’s ability to earn a living also restricted his ability to disseminate his views to a wide audience. This point appears in Chapter 1, when Friedman discusses the cost of advocating unpopular opinions.

“The essence of a competitive market is its impersonal character.”

Friedman argues that several benefits of the free market stem from the fact that no single person has too much influence on its behavior. A single person can’t dictate how others get certain goods or jobs, nor can he shape the market’s prices to a great degree. This is largely because the market isn’t an individual human being; it doesn’t make decisions based on personal preferences or biases, and it has no friends or family it feels obligated to help.

By being impersonal, the market also aids competition. Anyone who wants to buy or sell a product can enter the market. For sellers, success is not dependent on their race, their hobbies, their high school grades, or any other factor irrelevant to the act of buying and selling. In this way, a market limits discrimination and allows a great variety of individuals to compete for the business of consumers. The more free and open the market is, the more variety and competition it is likely to have. In general, more variety and competition means more choices and better prices for consumers. When a monopoly exists in a segment of the market, there’s an absence of competition and choices. The monopolist holds more power than the consumer and could deny individuals with certain characteristics from accessing his goods and services. In such a scenario, the market’s activities have become personal. A liberal would view this as a threat to individual freedom.

“The most obvious social cost is that any one of these measures, whether it be registration, certification, or licensure, almost inevitably becomes a tool in the hands of a special producer group to obtain a monopoly position at the expense of the rest of the public.”

Though registration and certification do not restrict freedom as much as licensure does, Friedman believes they make members of a profession more likely to ultimately pursue licensure, the option that is most likely to create a monopoly. When the pool of producers becomes too small due to any of these methods, supply will not meet consumer demand and prices will go up. Consumers’ needs may not be met if they can’t get access to the right type of producer. Their freedom to choose also suffers when there is inadequate competition. Friedman says producers are well aware of this reality when they push for registration, certification, or licensure, and that they use all three to obtain wages higher than those the free market would award them.

“The ethical principle that would directly justify the distribution of income in a free market society is, ‘To each according to what he and the instruments he owns produces.’”

Friedman introduces this liberal, capitalist concept in response to the Marxist slogan “[T]o each according to his need, from each according to his ability" (167). By emphasizing the differences between the two statements, he lays the groundwork for an argument that equal distribution of income is not necessary or desirable in a competitive capitalist system. According to Friedman, the liberal recognizes that individuals bring different skills, abilities, and resources to the market, and that not all products are created equal. Some of skills and products are in higher demand, so the free market assigns them greater value. Therefore, some people will amass more income and wealth than others. Friedman says it’s important not to interpret this fact as evidence that capitalism promotes greater levels of inequality than other systems. In fact, he sees evidence that capitalism produces less inequality than the alternatives.

According to Friedman, the government tends to do more harm than good in the way it tries to reduce income disparities. He suggests addressing “imperfections of the market” to deal with this issue, rather than trying to address it through taxation (176). Friedman feels that many of these imperfections stem from government intervention that could be eliminated; for example, tariffs that benefit particular groups and create monopolies.

“The great achievement of capitalism has not been the accumulation of property, it has been the opportunities it has offered to men and women to extend and develop and improve their capacities.”

This assertion supports a point Friedman emphasizes often in Capitalism and Freedom: that the free market is an effective tool for helping a society’s best and brightest achieve their full potential as creators and innovators, students and thinkers, citizens and community members. It also provides a springboard for criticizing his opponents’ claims about “capitalism’s materialism” (169). Friedman says that compared to developing nations, capitalist countries spend a smaller percentage of their income on capital such as property and spend a greater percentage on human services, which seems to suggest that they invest more in people than in things.

The quote also provides an opening for Friedman to make an argument about inequality. Friedman acknowledges that capitalism tends to be “characterized by considerable inequality of income and wealth” but argues that this inequality does not result in long-lasting inequities (168). He advocates a broader view of inequality, one that is “measured by differences in levels of living between the privileged and other classes” and says that “such inequality may […] be decidedly less in capitalist than in communist countries” (169). He then points to the relative inequality of different Western countries, suggesting that the less capitalistic the society, the greater the inequality. However, he presents no evidence about communist countries, claiming that the information available is scarce and questionable at best.

“The chief characteristic of progress and development over the past century is that it has freed the masses from backbreaking toil and has made available to them products and services that were formerly the monopoly of the upper classes, without in any corresponding way expanding the products and services available to the wealthy.”

Friedman argues that capitalism has brought progress to every socioeconomic class, and that non-wealthy individuals have benefited the most. According to Friedman, even poor people have access to products that reduce the amount of pain, struggle, and drudgery in their lives, as well as products that simply wouldn’t have been within reach in the pre-capitalist past. These points bolster his arguments that capitalism mitigates inequality and promotes freedom. However, some might say that these points undermine his effort to refute critics’ notion that capitalism promotes materialism.

“Those of us who believe in freedom must believe also in the freedom of individuals to make their own mistakes. [...] Humility is the distinguishing virtue of the believer in freedom; arrogance, of the paternalist.”

This quote builds upon Friedman’s point that liberals see individuals as flawed beings. It also supports the recurring theme that paternalism is almost always undesirable in decision-making. Friedman believes that, in most cases, making decisions for others is an insult to their dignity and an instance of one person assuming he is smarter, wiser, or in some way better at figuring out what is best for another. As Friedman notes in Chapter 1, most individuals make some good choices and some bad ones, just as they tend to have some appealing personal qualities and some unappealing ones. It is not the government’s job to protect them from themselves.

One can also think of the freedom to fail as the flipside of a benefit Friedman ascribes to capitalism: giving talented individuals the freedom to thrive. Friedman seems to recognize that innovation doesn’t happen overnight, and that it often emerges after a series of missteps or failed experiments. If people are constantly shielded from making mistakes, this part of the innovation process will be stymied.

“The liberal will [...] distinguish sharply between equality of rights and equality of opportunity, on the one hand, and material equality or equality of outcome on the other.”

This statement is part of Friedman’s effort to highlight differences between liberals and egalitarians. He takes a look at some ways the two groups’ philosophies, values, and priorities diverge. Friedman says liberals recognize that each individual has a different set of strengths, weaknesses, beliefs, and motivations; as such, “one man will want to do different things with his freedom than another” (195). The liberal approves of actions that foster freedom and equality, but if he has to choose, he will always choose freedom. The egalitarian will choose equality. The liberal sees material equality as a pleasant side effect of capitalism, not an end in itself, as an egalitarian would. And the liberal’s preferred method of addressing poverty is through voluntary contributions to private charities. The egalitarian will typically advocate government intervention to alleviate poverty. The liberal tends to eschew this approach because it will typically “substitute compulsory for voluntary action” (195).