Free To Choose

Economies run by commands from the top require at least some voluntary exchanges to keep from stagnating altogether. In Soviet Russia, small private plots are permitted to farmers, and though these take up only 1% of the land, they produce up to one-third of the food. Economies that are mostly voluntary, on the other hand, have “the potential to promote both prosperity and human freedom” (11).

The Friedmans mention the book I, Pencil, which proves that no one on Earth knows how to make a pencil. Instead, thousands of workers all over the world perform small parts of the pencil’s assembly: loggers in California cut the trees for the pencil’s wood, machinists make the mill equipment, teamsters drive the materials to the factory, miners in Ceylon unearth the graphite for the pencil lead, chemists combine the materials for the eraser, and brass makers shape the ferrule that holds the eraser to the pencil. None of these workers know how to do all of it, and none worked simply to get a pencil, yet that vast system of voluntary exchanges brings pencils to the local store for people to buy.

This process is self-actuating and requires no central authority. Prices may go up, but this encourages suppliers to bring more product to market. If, on the other hand, a government steps in and interferes with the process, it becomes disrupted. In the 1970s, the price of gasoline was restricted, and supplies moved by command; in some areas, gas quickly sold out and long lines of customers formed at filling stations.

The price system transmits information, creates incentives to make better use of resources, and affects distribution of income, and “[t]hese three functions are closely interrelated” (14).

Prices provide information that makes markets more efficient: “The price system transmits only the important information and only to the people who need to know” (15). If a product’s price rises, vendors will produce more of it, while buyers will conserve what they have. Noise can be introduced into the pricing system if the government imposes price controls or inflates the currency or institutes trade restrictions or minimum wages, and so forth. Price noise makes it harder for people to make smart decisions in the marketplace, which causes waste.

Prices also carry incentives. Businesses will produce more of a product as long as they make more money than it costs. The more they produce, the harder it is to find raw materials cheaply, but when the price of their product goes up, “the higher price enables him to bear these higher costs and so provides both the incentive to increase output and the means to do so” (18). Likewise, if the price drops, the firm will produce less. When a cost goes up, whether for a raw material or finished product, buyers—manufacturers or consumers—will search for less costly alternatives or more efficient ways to use the item.

Prices affect the distribution of income. Sometimes this causes outcomes deemed unfair, and governments often try to fix this by ordering that income be redistributed. One result is that people who would go to great lengths to provide high-end services—for example, Red Adair’s company that caps oil well fires—may not do so when their price is restricted: “If your income will be the same whether you work hard or not, why should you work hard?” (23) Without that incentive, the other functions of the price system become moot: “The only alternative is command” (23).

In communist countries, buildings and land are generally owned by the government and have no price. As such, no one has any incentive to maintain them, so they quickly become decrepit.

The Friedmans list other areas where spontaneous and voluntary cooperation leads to complex and sophisticated results, including the evolution of language, the development of scientific knowledge, and the growth of musical genres. These “cultures developed without anyone’s ‘planning’ them that way” (26).

Of all the cultures, economic activity is commonly considered to be a realm of selfishness. The Friedmans protest: “Self-interest is not myopic selfishness” (27). People who pursue their own interests usually do so by cooperating with others.

What is the proper function of government in an economy? Adam Smith asserts that governments should protect people from being robbed or invaded, provide a “court of last resort” (29) to adjudicate disputes, and erect public works too big for private parties to undertake. This last duty is where most of the mischief of government overreach occurs. Many activities cause “third-party effects,” such as pollution, that impose costs on others that the marketplace cannot easily adjust. When a government steps in to remedy these “market failures,” its efforts in turn often cause third-party effects: “a government attempt to rectify the situation may very well end up making matters worse […] The lesson […] is not that government intervention is never justified, but rather that the burden of proof should be on its proponents” (32).

The Friedmans propose a fourth duty of government: to protect those who are incapable of protecting themselves, such as children and the mentally incompetent. This duty does, however, raise the potential for abuse.

Is there a place that limits governance to these principles? Hong Kong, a densely packed city with limited, low-tax government that largely stays out of business affairs, enjoys one of the world’s highest living standards. Great Britain removed nearly all restraints on economic activity and imposed low taxes between 1846 and 1914, and it became one of the wealthiest nations. The US similarly thrived under minimal government interventions.

Nations whose citizens live in freedom, and who enjoy the resulting prosperity, tend to limit governance, “keeping it our servant and not letting it become our master” (37).

A chief problem that distorts economies is special interests. Sadly, most of us are complicit: “We rail against ‘special interests’ except when the ‘special interest’ happens to be our own” (38). Furthermore, “[w]e are all capable of persuading ourselves that what is good for us is good for the country” (47).

Special interests hold sway in foreign trade. The effect is insidious: “Controls on foreign trade extend to domestic trade. They become intertwined with every aspect of economic activity” (39).

Some argue that a nation ought to protect its workers from competition by cheap overseas labor. An example refutes this: if the US bought most everything it needed at low cost from Japan, that country would be flooded with dollars, which would make the dollar’s value drop there, and US products would become cheaper and thus more desirable to them, while Japanese exports would go up in cost. Thus, prices even out over time. Foreign competition, like domestic competition, tends to benefit all trading partners in the long run.

Another argument floated by special interests is that exports are better for a country than imports. This is like asserting that it’s better to spend than receive: “Exports are the price we pay to get imports” (41).

Some governments subsidize exports, hoping for an advantage. Foreign importers do benefit, though it causes the exporting country’s citizens to suffer tax burdens. If Japan were to subsidize cheap steel to the US, buyers would have extra money to spend on other things, and “workers no longer needed to produce steel would be available to produce something else” (46).

The Friedmans state that “[t]he price of the dollar, if determined freely, serves the same function as all other prices” (47). In 1979, the dollar is weakened by inflation at home as the government adds dollars to the economy; the US tries to protect the currency by buying back overseas dollars. This is cosmetic, wasteful, and further distorts trade.

Should a country protect, for example, the steel industry as a matter of national security? There is no need to backstop steel at the expense of other industries: steel is cheap, easy to store, and mothballed furnaces can be re-opened as needed.

Can tariffs insulate infant industries from foreign competition? If so, why not tax the citizenry to pay for all start-ups? In fact, “[t]he so-called infants never grow up. Once imposed, tariffs are seldom eliminated” (49).

Should a nation protect with tariffs an industry that has a worldwide monopoly? This can, in the short run, force a better price, but other countries are likely to retaliate with their own levies. Tariffs have the effect of hurting both parties: “this kind of retaliatory action simply leads to further restrictions” (50).

When people trade freely, “[c]ooperation, not conflict, is the rule” (51). Europeans in the 19th century were largely free to trade and travel, and “the century from Waterloo to the First World War was one of the most peaceful in human history” (52). But when governments initiate trade negotiations, many “citizens of every country are disappointed at the outcome and end up feeling they got the short end of the stick. Conflict, not cooperation, is the rule” (52).

Fears of monopolies and trusts have inspired domestic remedies with mixed results, but worldwide monopolies are almost impossible to maintain for long. Free trade would speed the dissolution of such cartels.

The notion that government control creates prosperity is widely popular but belied by the evidence. One example is Germany, separated into a “gray and pallid” communist East (55) and a thriving capitalist West by a wall that prevents Easterners from escaping. The Friedmans wonder at the irony that citizens of the East “are willing to risk their lives to leave their communist paradise for the capitalist hell on the other side of the wall” (55).

Yugoslavia broke with Russian-style communism to permit small businesses and private farms; though it has “a much lower standard of living than the inhabitants of neighboring […] countries,” it is “a paradise by comparison” to Russia (56). Market-based economies in Asia are quickly prospering: “An economic explosion is underway in these countries” (57), but centrally-planned India, Indonesia, and Communist China have fallen behind.

Japan in 1867 and India in 1947 are economically backward and primed for upheaval: “Japan relied primarily on voluntary cooperation and free markets […] India relied on central economic planning” (61). Thirty years later, 1897 Japan becomes a world power, while 1977 India has stagnated: “Reliance on government controls in India frustrates initiative or diverts it into wasteful channels” (62).

In the past fifty years, the US has seen a vast but gradual growth in government involvement in the economy: “It is hard to appreciate how great the cumulative effect has been” (65). Freedom to spend as people see fit has been curtailed by increasing taxation: “Currently, more than 40 percent of our income is disposed of on our behalf by government at federal, state, and local levels combined” (65). Voters may express their wishes on how that tax money is spent, but “[t]he ballot box produces conformity without unanimity” (66).

Regulations increasingly prevent Americans from buying what they want in the way of medicines, automobiles, artificial sweeteners, and the like. They must obtain permits before they may conduct many types of business. Corporations stifle their own views on public policy lest they be subjected to extra scrutiny by government officials. Scholars squelch their political opinions as universities become dependent on state and federal grants. A private school student sitting in class may be marked truant if the school office fails to provide proof of conformity to state requirements.

These losses of freedom become intertwined: “anything that reduces freedom in one part of our lives is likely to affect freedom in the other parts […] The urgent need today is to eliminate restrictions, not add to them” (69).