Capitalism exposes inequality. It doesn’t cause it.
That’s among the big arguments that influential free market economist Milton Friedman (1912-2006) made in his bestselling 1980 book “Free to Choose.” By 1980, Friedman was the best-known economist of his generation; In 1962, he wrote Capitalism & Freedom, in 1970 he introduced his influential case for shareholder value and in 1976 won the Nobel Prize in Economics.
The book was published in a period of increased government intervention in the economy, high inflation and economic stagflation in the United States. Friedman’s ideas were seen as a counterpoint to the dominant Keynesian economic policies of the time, and he was part of a wave that was epitomized by the so-called Regan Revolution. The book was also the basis for a ten-part television series of the same name that aired on PBS in 1980. The series and book were well received by the public and helped to popularize Friedman’s views on economics.
See my notes below.
My notes:
- Adam Smith writes in his 1776 classic Wealth of Nations: “ I have never known much good done by those who affected to trade for the public good.”
- “The very progress of society made the residual evil seem all the more objectionable.” (4)
- Leonard Read’s 1958 essay “I, Pencil” aims to show how no one person can know how to make a pencil because so many parts come together (11)
- Alfred Marshall: the whole of the advantages and disadvantages of an occupation (20)
- Pricing system serves two things: distributing income and transmitting information (like relative needs). Friedman argues you can’t have one without the other (but is all redistribution of income really impossible?)
- An economy is like language, or scientific discovery, complex but fed by many small actors
- Should a central government be used to regulate language (like French) or science?
- Challenges his critics of economic man: ”self interest is not myopic selfishness”
- Philanthropist and missionary are pursuing their interests . But government shouldn’t
- Adam Smith’s three roles for the sovereign:
- Protect from other “independent societies,”
- protection from fellow residents with “an exact administration of justice” and
- “certain public works and public institutions” .. he cites streets necessary for a “great society” , Friedman notes some streets are too expensive to collect tolls so yes public work
- Friedman argues at times “government failure” like market failure is when we know the end of the public works
- “Every government measure bears, as it were, a smokestack on its back.” Whose unintended consequences can dirty another man’s collar
- Friedman’s four government functions: law and order; rules of conduct; “adjucates disputes, facilitate transportation and communication“ and issuance of currency
- Adam Smith and corn laws marks much of modern free market theory
- Alexander Hamilton argued for modest tariffs in his famous 1791 Report on Manufactures to defend “infant industry” but author argues those industries never grow up
- Major wars of side government spending from 1819: 29 did not exceed about 12% of the national income. 2/3 of that was spent by state and local governments, mostly for schools and roads. As late as 1928, federal government spending amounted to about 3% of the national income”
- Adam smith warned of the “Interested sophistry of merchants and manufacturers“
- Principle of comparative advantage: even if a lawyer is twice as good as his secretary at typing he should do the lawyering at which he is five times better
- Governments that subsidize their industries must tax their residents. Other tariffs hurt those who send us cheap goods and so why engage in sadism
- Argues national security case for subsidizing steel has “no basis”
- Forget about national monopoly and allow for more international competition, author argues
- Contrasts India after 1947 independence and Japan after 1867 Meiji restoration use of free market
- Bank of United States Dec 11 1930 collapse: although just a commercial bank, its name confused people into thinking it had failed in an official capacity
- Author argues (and won a Nobel Prize for his research into) The Federal Reserve made the Depression worse by giving false sense of security: would have been resolved like other panics like 1907
- From founding of republic to 1929, government spending never crossed 12% of national income, except in war, and 2/3 was state/local. Since 1933, never been less than 20% and as of book it was over 40%. Even non defense spending since 1946 has always been more than 16%
- Edward Bellamy’s popular 1887 novel “Looking Backward” used the phrase “from cradle to grave “
- Bismarck Germany, Fabian England and Middle Way Sweden all influenced FDR’s New Deal
- “Social Security is, rather, a combination of a particular tax and a particular program of transfer payments” we don’t pay for ourselves but pay for those who need it now. Friedman implies it’s a kind of Ponzi scheme
- “Socialized medicine”
- “New brooms sweep pretty clean”
- He recommends bringing all programs in line with a single cash payment (negative income tax)
- Author wants to wind down Social Security by fulfilling commitments and contributing bonds to those younger
- Martin Anderson writes in 1978 in The Political Economy of Welfare Reform in the United States that “there is no way to achieve all the politically necessary conditions for radical welfare reform at the same time.”
- Equality and liberty were related in the Declaration. Equality before God meant that each man had liberty, but the slavery made this a dark compromise. After the Civil War, equality before the law led the focus became equality of opportunity. That has more recently shifted to a quality of outcome
- In Democracy in America from 1835, Alexis to Tocqueville wrote critically of those men who “prefer equality in slavery to inequality with freedom”
- The French Revolution had a phrase that translates to “a career open to the talents “ une carriere ouverte aux Les talents
- Friedman argues against equality of outcome by criticizing the idea that “everyone should finish the race at the same time,” (Today, advocates talk more about representative percentages)
- Equality of outcome “reduces liberty“ he argues
- From an ethical point of view, is there any difference between the inheritance of property iand inheritance of talent? (My note: I sure think so!)
- Relationship between the surge of 1880s capitalism and ensuing philanthropy that established cultural institutions. Author likes private philanthropy deciding what they want to do, but not government
- William Graham Summer (who wrote “What Social Classes Owe To Each Other” in 1883): B and C deciding what D does for A
- Irving Kristol identified the “new class” in the 1970s as those leading the West toward more government intervention. (This is the movement that the Regan Revolution railed against)
- Quakers: they came to the new world to do good and ended up doing well
- His question to progressives: Why not prove your theory out privately before forcing government to replicate?
- Friedman argues that the popularity of gambling speaks to our preference for equality of opportunity (fair rules) than outcome equality (same results)
- Post Second World War, the United Kingdom increased inheritance and income taxes: it didn’t work, author argues, instead a new class of privilege developed
- “Reshuffling of income and wealth”
- Adam smith: every man works to improve his condition “constant”
- Capitalism has led to more opportunity; it is not the cause of inequality
- Horace Mann championed movement from “common schools” often paid by fees to “free schools” led by government
- In the 1960s, Dr. Max Gammon proposes Gammon’s Law, a theory of bureaucratic displacement, like black holes: “in a bureaucratic system… Increase and expenditure will be matched by a fall in production”
- Education: he cites St. John Chrysostom’s Church in Bronx and Harlem storefront schools like Harlem Prep as good examples of choice working
- Friedman likes a school voucher system
- Subsidized college brings in people who don’t really want the extra schooling: Friedman argues that the social benefits to individuals can’t be counted as accruing to third-parties like public parks
- Equity financing of higher education: give a percentage of your earnings over some threshold, or a voucher plan for higher ed
- Adam Smith: “ it is not from the benevolence of the butcher, the Brewer or the baker that we expect our dinner, but from the regard to their own interest.”
- He challenges the accuracy of Ralph Nader’s book on the Corvair (more attention than deserved)
- Author contrasts automobile (less regulated) and railroad (heavily regulated) industries
- Different kinds of regulatory offices: The Interstate Commerce Commission (ICC) in 1887; Food drug administration from Upton Sinclair’s 1906 book The Jungle were about consumers. EPA and Highway traffic safety didn’t care about the consumer’s pocketbook
- Railroads supported ICC because once reformers moved on, railroad execs owned the ICC and kept profits fat. In 1920s this let trucking expand fast. So railroads got ICC to take over trucking too
- Friedman’s “natural history of government intervention”:
- Real or fancied evil brings demands for change
- Political coalition forms of sincere reformers and insiders
- Coalition gets regulation
- Reformers move on and industry insiders bend the regulation to their monopolistic benefit
- Friedman argues regulation has real harm: FDA causes a drug lag (Is their review worth it?)
- Wanting an FDA or other regulatory body to operate differently is like wanting a “cat that barks.” The biological differences of organisms don’t allow it
- Friedman argues for effluent of carbon tax instead of environmental regulation
- He argues labor unions benefit at expense of other workers because of supply and demand
- Union strength: keep down the number of people who can do a job, enforcing high wage rate , licensure
- Friedman argues the American Medical Association should be seen as a union
- “The minimum wage law requires employers to discriminate against persons with low skills” (237)
- When highly trained refugees from Germany and Austria came to the United States, this did not result in more doctors, because of the AMA, etc., he argues
- Those who lobby for licenses are invariably occupation trade groups not consumers
- Unions are exempt from the Sherman Anti Trust Act (1890); so coal mining example of unions colluding with employers
- Gresham Law: “bad money chases out good”
- Inflation is a monetary phenomenon
- Prices drive money supply but money drives inflation, he argues. (Elsewhere Friedman famously notes the “long and variable lags” of monetary policy)
- “Wage increases in excess of increases in productivity are a result of inflation, rather than a cause.” (262)
- Inflation is “produced by a more rapid increase in the quantity of money than in output.” (264)
- More government spending doesn’t have to increase inflation if financed by taxes or borrowing from public. (Because private sector would have less to spend). But if print more money
- Fight inflation like alcoholism: the good effects come first, then bad effects. Fighting it is reverse: bad effects first and then good (271)
- In the 1970s, Rochester, NY’s Pat Brennan battled the monopoly of the U.S. Post Office and went to Supreme Court
- AV Dicey: “a natural bias” toward government invention because intentions are good and good idea leads but the bad stuff lingers
- John Adams: “Ours is a government of laws and not of men.”
- Friedman introduces his economic bill of rights to limiting government power
- “The special interests prevail at the expense of the general interest.” (301)
- Author champions the idea of states requiring balanced budgets
- His other proposed amendments: no law abridging freedom of sellers and prices (Walter Wriston had called prices a First Amendment); in opposition to occupational licensure; flat tax rate
- Over creating money is an extension of Fifth amendment because bond yields and higher tax brackets deprives People of their property without due process
- “The greatest threat to human freedom is the concentration of power” (309)
