cover of Capitalism & Freedom and Milton Friedman headshot

Capitalism & Freedom

Is capitalism the cause of differences or the reason why those differences are so small?

Influential Nobel Prize-winning economist Milton Friedman (1912-2006), who is a champion or a scourge depending on your political persuasion, long argued the latter. First published at the height of the Cold War in 1962, Friedman argued in “Capitalism and Freedom” that economic freedom is an essential component of political freedom, and that a capitalist system is the best way to promote both. This book serves as essentially the foundation of his status as a kind of public intellectual, though even his critics must acknowledge he went beyond punditry — he won the 1976 Nobel Prize in economics due to his scholarly work on monetary policy.

Attacks of capitalism often confuse what that economic system causes with what it exposes. As Adam Smith wrote and Friedman quotes: “There is much ruin in a nation.”

I read a 2002 edition, but when it was originally published the book was the beginning of a movement that led to Friedman’s bestselling Free to Choose (first published in 1980 alongside a PBS series of the same name) and is often associated with the Reagan Revolution. Friedman’s work heavily influenced conservative American politics.

In this earlier book, Friedman argues that government intervention in the economy, such as through regulation and redistribution, is detrimental to individual freedom and economic prosperity. He also advocates for the privatization of certain government services, such as education and healthcare.

The book was published during a time of Cold War tensions and the rise of socialist and interventionist economic policies in the United States and around the world. Friedman has lasting influence. For one, his description of monetary policy having “long and variable lags” has been often referenced to this pandemic era. In 1970, his ‘Friedman doctrine’ that companies existed to maximize profit for shareholders came to define the modern era, and experienced a revival 50 yers later.

Read my notes from the book below.

My notes:

  • Friedman was influenced by Hayek and his The Road to Serfdom (Hayek was an intellectual adversary of Keynes)
  • Goldwater to Reagan (similar messages) had very different outcome due to new times, Friedman argues
  • Friedman amends the JFK line, instead ask what can we do through government?
  • “Government should be limited and dispersed.”
  • Friedman argues that his theories are classical liberalism but whereas it was once about freedom it is increasingly about ”welfare and equality.” (The transfer of “liberalism” began with FDR)
  • Argues connection between economics and politics, and these systems fit together
  • “History suggests only that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition.” Fascist countries often used capitalism
  • Two sets of values: those where freedom should be prioritized and those for individuals where philosophy and ethics reign
  • Coordination without coercion: competitive capitalism
  • Government sets the rules and rules on whether they’re being followed
  • Avoid coercion from a “momentary majority”
  • Unlike economic power, there seems to be a fixed amount of political power to distribute
  • Inequality of wealth is a feature of capitalism that allows political freedom but not of say socialism
  • Notes Churchill was kept off government airwaves of BBC with his “controversial” opinions about attacking Nazis
  • “The widespread use of the market reduces the strain on the social fabric by rendering conformity unnecessary with respect to any activities it encompasses.” 24
  • “My freedom to move my fist be limited by the proximity of your chin”
  • Monopolies and neighborhood effects permit a government role
  • Different kinds of monopoly; which should we prefer?: private monopoly, public monopoly or public regulation
  • Friedman likes private monopoly (Henry Simos argues public monopoly; Walter Eucken prefers public regulation) as more responsive to market conditions (technical monopoly like telephone service)
  • Among his 14 examples that government shouldn’t do: minimum wage, social security, occupational licensure, public housing , national parks, publicly owned toll roads
  • “It is desirable that we use government to provide a stable monetary framework for a free economy“ but Friedman argues government caused the depression
  • Two commonly contrasted perspectives on monetary policy: Scylla’s automatic gold standard and Charybdis’-‘s Independent central bank; Friedman argues for the middle
  • “A liberal is fundamentally fearful of concentrated power.”
  • Friedman has criticisms for fractional banking
  • He referenced Bryan’s famous 1896 Cross of Gold speech, in which he argued against the gold standard
  • Bank of United States failure on Dec 11 1930 led many to believe country collapsed even though it was just a commercial bank
  • Great Depression: he argues shows the instability of a few people with so much power
  • FDR’s Banking holiday of 1933, of which Friedman is critical
  • Friedman answers: rules based system overseen by elected officials. Rather than a price stability rule, he wants a rule for stock of money to grow at some number between 3-5% annually
  • Gold is essentially a price supported commodity now in US
  • In 1934, US $35 an ounce gold price flooded in gold because it was above market price at the time ; but federal government forced private holders to hand over their gold. He asks: is nationalizing gold any different than Castro nationalizing land? (60)
  • Friedman argues for his path including dropping gold purchases commitment and free floating exchange rates (predicting other countries would peg to the dollar), remove quotas and tariffs (writing in April 1962)
  • Argues Keynesian is not “necessarily expansionist,” since government investments can displace others. His thoughts are “economic mythology” (84)
  • “Both of the imposition of a minimum required level of schooling and the financing of this schooling by the state could be justified by the “neighborhood effects” of schooling but “nationalizing” the “education industry” is unnecessary, he argues (89)
  • Education: neighborhood effects and “paternalism” of children
  • Friedman likes vouchers, compared to GI bill funding of educational services
  • Some argue for core common values, rather than religious schools or others that would distinguish
  • At the college level, subsidizing institutions rather than individual choice (vouchers) leads to subsidizing that which the government doesn’t want to subsidize (in education, government wants good citizenship and community leadership)
  • Friedman writes of several university financing plans
  • “The southern states after the Civil War took many measures to impose legal restrictions on Negroes. One measure which was never taken on any scale was the establishment of barriers to the ownership of either real or personal property.” Though he argues the efficiencies of markets remove discrimination (I don’t know who made the wheat that I buy), he seems very naïve about the American historical relationship to Black Americans
  • 1957: Gary Becker shows discrimination hurts both sides of the agreement just like trade tariffs
  • He distinguishes between positive harm (a punch or pollution) from negative harm (we couldn’t reach a contract due to racism). He favors government stopping first but not the second but it’s curious he ignores the social pressure of racism (government can be an “excuse” for good-actors navigating toxic environments: “Oh I have to hire a Black employee,” which should give cover to those who want to. He feels there’s resistance because it’s forced, that much is true, since we know forced diversity trainings have negative effects in workplaces from recent research)
  • Is Nazi and southern civil war laws any different than pro black, he writes? Doesn’t the intention matter, is stealing different depending on why?
  • “The ACLU will fight to the death to protect the right of a racist to preach on a street corner the doctrine of racial segregation. But it will favor putting him in jail if he acts on his principles by refusing to hire Negro for a particular job “
  • He opposes FEPC and right to work policies, even though they are politically divergent. He wants no interference
  • Is capitalism the cause of differences or the reason why those differences are so small?
  • He’s opposed to nationalizing education but because governments run education now, it’s either enforced segregation or enforced integration. Given the two choices he says we must pick integration,
  • Virginia had a voucher system and he predicted it would create more competitive and integrated schools did it?
  • G. Warren Nutter ‘s 1951 book: The Extent of Enterprise Monopoly in the United States, 1899-1939: A Quantitative Study of Some Aspects of Monopoly
  • Friedman argued that the influence of monopoly has been overstated
  • He argues labor unions distort markets by making high-wage workers higher wage and reducing low wage employment
  • Friedman asks: John l Lewis and United mine workers: a Union price fixing cartel?
  • Copyright is a property right that has real costs: distorts attention (supermarket was a great invention but not patentable) and not sure about length of time (17 sounds too long)
  • Monopoly caused by one of three reasons: aforementioned technical monopoly; direct and indirect government assistance (like tariffs) and private collusion
  • Capital gains preferential treatment motivates retention of corporate earnings at the expense of reallocating into new investments
  • As Adam Smith wrote in Wealth of Nations: “People of the same trades seldom meet together. But when they do, the conversation often ends in a conspiracy against the public or income contrivance to raise prices.
  • “The corporate tax should be abolished“
  • Stockholders should be taxed on reinvested capital to ensure they only do so productively
  • “Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible. This is a fundamentally subversive doctrine.”
  • In April 1962, US Steel cancelled a price rise due to Kennedy’s pushback on civic good: if private actors must do civic good they should be elected, argues Friedman
  • He doesn’t want a “corporate state” but always a classically liberal defense of the individual. (Companies shouldn’t give donations for tax deductions, they should give to individuals who should determine on their own)
  • The Medieval Guild system is made modern in occupational licensure system
  • Licenses are requested not by members of the public but by the professions themselves
  • Waiter Gelhorn wrote a 1956 book “Individual Freedom and Governmental Restraints” with a chapter “The Right to Make a Living“ which is about licensure
  • He writes “a Texas statute of 1952 requires each applicant for a pharmacist license to swear that “he is not a member of the communist party or affiliated with such party, and that he does not believe in and is neither a member of nor supports any group or organization that believes in, furthers or teaches the overthrow of the United States government by force or any legal or unconstitutional methods;” He says piano tuners in Washington D.C. and veterinarians in Washington state also had non-communist oaths
  • The reason is simple: “it is that a producer group tends to be more concentrated politically than a consumer group”
  • Three levels of control: registration, certification (CPA vs accounting; Realtor, architect) and licensing (can’t do the thing without a license)
  • Why registration? Tracking (ie gun stores), taxing (ie knowing who has sales tax) and protecting against fraud
  • Neighborhood effects of medical field? Incompetence that caused a pandemic that effected those not in contract with that incompetence?
  • Friedman says medical license and the AMA are a cartel and trade Union. We don’t pick doctors by their license exams so it just serves to limit number of doctors to increase wages. Better to use reputations of universities and employers to vet
  • Different occupations have “equalizing differences” to normalize different “net advantages” between salary and flexibility or other perks
  • He suggests one generation sets tax plans for the next, rather than losers chasing winners for their money
  • Argues capitalism lessens income inequality relative to other systems. Social mobility matters more
  • He wants flat tax above an exempted level of income to reduce tax avoidance and tax evasion
  • He didn’t like the politics of social security which gives to everyone to make it politically effective, even if goal is to get money to the poorest. He compares to a”aid to education” which taxes al to give all states education dollars even if it’s better to give to poorest states because some of those students could move elsewhere
  • Social security is not self financing through taxing
  • (He keeps referencing that social security requires people to buy annuities. I don’t know whether this is an older form of social security or if it’s still true but I’m unfamiliar with that terminology)
  • He argues that we should let people be poor in old age but I think he ignores the neighborhood effects of expectations in a rich nation. Social Security is a tool against that
  • “Humility is the distinguishing virtue of the believer in freedom; arrogance, of the paternalist“ (188)
  • He wants to give people cash, not farm subsidies or public housing
  • He’s a fan of a negative income tax
  • Alleviation of poverty efforts have been ineffective
  • “The liberal will therefore distinguish sharply between equality of rights and equality of opportunity, on the one hand, and material equality or equality of outcome on the other.” (195)
  • In the 1920s and 1930s intellectuals decided capitalism was defective. “The conversion of the intellectuals was achieved by a comparison between the existing state of affairs, with all its injustices and defects, and a hypothetical state of affairs as it might be. The actual was compared with the ideal.” (196)
  • Dicey: “ The beneficial effect of state intervention, especially in the form of legislation, is direct, immediate, and, so to speak, visible, whilst its evil effects or gradual and indirect, and lie out of sight… state help kills self help” (201)
  • Adam Smith: “There is much ruin in a nation”

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