Friedman, Capitalism and Freedom

This is our reading for September 9th.  You can find the details and location at our meetup.com page.

1. JFK’s famous line, “Ask not what your country can do for you, ask what you can do for your country” produced controversy over its origin, but not over its content.  Friedman thinks neither side of the statement “expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society” (10).  One suggests a paternalistic state, the other suggests the state is a master.

2. To both sides, Friedman says, “To the free man, the country is the collection of individuals who compose it, not something over and above them” (10).  The government is a means, not a master.  There is no national purpose except the consensus of the citizen’s purposes.

3. The free man asks wants to know how government can be used to achieve goals and protect freedoms, and how to stop government from squashing the freedoms it is meant to preserve. Two principles in the American Constitution can help us enjoy the benefits of government while avoiding the threat to freedom.  

4. The first is that the scope of government must be limited; the major function has to be protection against foreign powers and citizens.  It must preserve law and order, enforce private contracts, and foster competitive markets.  Beyond this major function, it may allow us to achieve goals which could not be achieved individually, but any such use of government is dangerous.  We need to rely primarily on the private sector as a check against government power.

5. The second principle is that government must be dispersed: “If government is to exercise power, better in the country than in the state, better in the state than in Washington” (11).

6. There is another reason for limiting and decentralizing government power: the great advances of civilization have never come from a centralized state: “Their achievements were the product of individual genius, of strongly held minority views, of a social climate permitting variety and diversity” (11).

7. Government cannot duplicate individual actions.  While government actions such as uniform housing standards or schooling, government could improve the lives of many, but it would be trading progress for stagnation.  Uniform mediocrity would be substituted for the “variety essential for that experimentation which can bring tomorrow’s laggards above today’s mean” (12).

8. The book’s major theme is the role of competitive capitalism as being a form of economic freedom being a prerequisite for political freedom.  Its minor theme is the role of government in preserving freedom and relying primarily on the market to organize economic activity.

9. Friedman says it would be useful to have a name for the ideas in this book, and he choses liberalism, based on its nineteenth century usage, as opposed to its twentieth century appropriation by leftists.

10. Originally, liberalism emphasized freedom and the individual as the ultimate entity in society.  It supported global free trade, representative government and parliamentary institutions, reduction in the state’s arbitrary power, and the protection of individuals’ civil freedoms.  After 1930, liberalism became associated with a reliance on the state; the slogan ceased to be freedom and became welfare and inequality.  Instead of decentralized government, today’s liberals prefer centralized government.

11. What was once known as liberalism is now called conservatism, but this is not satisfactory.  The nineteenth century liberal was a radical, and modern liberals must also be radicals.

12. It is common to believe that politics and economics are unconnected, that any political system is compatible with any economic system.  One example of this is the idea of “democratic socialism,” which ignores the restrictions on individual freedom by Russia’s “totalitarian socialism.”  They think the Russian economic system can be mixed with individual rights.  This chapter wants to argue this is a delusion.

13. Economic arrangements play two roles in the promotion of freedom.  First, economic freedom is a subset of freedom broadly considered, and so is an end in itself.  Second, economic freedom is a means to gain political freedom.

14. The first role needs special defending because intellectuals tend to have a bias against it.  They express contempt for the material aspects of life and think of themselves as living on a higher plane.  This is not true for the majority of people, however.  

15. Friedman offers some examples.  First, a British person who could not vacation in the US because of government controls on the international movement of currency is no less deprived of freedom than the US citizen who is not allowed to vacation in Russia.  One is an economic limitation, the other is political, but both are limitations.

16. An American citizen who is forced by law to spend 10% of his income to purchase a particular sort of retirement contract, administered by the government, is deprived of that measure of personal freedom.  This deprivation is sometimes connected to religious freedom, as it is with the Amish, who have refused to both pay taxes or collect benefits.  Friedman says, “True, the number of citizens who regard compulsory old age insurance as a deprivation of freedom may be few, but the believer in freedom has never counted noses” (16).

17. Another example is an American citizen who cannot join an occupation without a license, or one who cannot trade with a foreign country because of quotas.  He mentions a Californian who was jailed for selling Alka Seltzer beneath the manufacturer’s set price, and farmers who cannot choose how much wheat to grow.  All these examples indicate that economic freedom is an important part of freedom as such.

18. Friedman uses all this to make his point:

“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.  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.”  (16)

19. Further, “Historical evidence speaks with a single voice on the relation between political freedom and a free market” (16).  There are no examples of societies with a large range of political freedom without a basically free market to go with it.  Since we live in a basically free society, we forget how new and rare freedom actually is; “the typical state of mankind is tyranny, servitude, and misery” (16).

20. Capitalism is a necessary condition for political freedom, but it is not quite sufficient—pre-war Fascist states such as Italy and Spain were hardly politically free, but large parts of their economies were dominated by free enterprise.  Importantly, Friedman says, “It is therefore clearly possible to have economic arrangements that are fundamentally capitalist and political arrangements that are not free” (17).  Even in those societies, there was more political freedom than in the truly totalitarian states such as Nazi Germany or Soviet Russia.

21. The relation between political and economic freedom is complex.  In the nineteenth century, the utilitarian Jeremy Bentham thought political freedom was a means to economic freedom. He thought that if people were given full voting rights, they would vote “rationally,” for laissez faire policies.  He was not wrong about this—the political reforms that followed were accompanied by laissez faire economic reforms.

22. That surge of Benthamite liberalism in England was followed by a reaction in favour of increasing government intervention; this tendency towards collectivism exploded in the post-WWII years: “Welfare rather than freedom became the dominant note in democratic countries” (17).  A minority position, held by people like Hayak, saw this as a threat to individualism and as a “road to serfdom.”  They insisted that economic freedom was a means toward political freedom.

23. Since WWII, there has been a different relation between economic and political freedom.  What he calls “collectivist economic planning” has interfered with individual freedom, but the main issue is the reversal of economic policy.  England is a good example: its “control of engagements” law was seen as necessary for the Labour party’s economic policies, but it was such an onerous imposition on personal liberty that it was hardly enforced and did not last long.  Other democratic countries made attempts at such centralized planning, but they did not last either.

24. They did not last because of their limited success or outright failure to achieve their objectives, not to mention their abrogation of individual freedom.

25. Historical evidence by itself cannot be entirely convincing; it may have been sheer coincidence that the expansion of markets and the expansion of freedom went hand in hand.  Friedman wants to argue there is a logical connection between them.

26. He says, “As liberals, we take the freedom of the individual, or perhaps the family, as our ultimate in judging social arrangements” (18).  Freedom is only valuable in a social context; it means nothing for Robinson Crusoe.  Further, liberalism has nothing to say about what the individual does with their freedom.  Ethics are left up to the individual.

27. Liberalism conceives of humans as imperfect; the problem of social organization is just as much about preventing bad people from doing harm as it is about enabling good people to do good.

28. The basic problem of social organization is the coordination of economic activity.  Even in “backward” societies, a division of labour is required to take advantage of resources.  In advanced societies, this becomes even more complex: “Literally millions of people are involved in providing one another with their daily bread, let alone with their yearly automobiles.  The challenge to the believer in liberty is to reconcile this widespread interdependence with individual freedom” (19).

29. There are two basic ways of coordinating economic activity.  The first is central direction using the coercive force of the state, and the second is voluntary cooperation through the marketplace.  This second option rests on the basic truth that informed and voluntary trade benefits both parties, so exchange sustains coordination without coercion.  This is competitive capitalism.

30. Basically, it is a society of Robinson Crusoes; each household uses its resources to trade goods and services with other households on terms mutually acceptable to both.

31. The division of labour would be too simple if the household were the ultimate productive unit, so companies have developed as the intermediaries between individuals.  The division of labour would also be stymied in a purely barter economy, so money has developed to facilitate exchange.

32. The central characteristic of our actual economy does not involve companies or money; in the simplest model, it is about private individual cooperation.

33. The basic role of institutions is the maintenance of law and order to prevent coercive exchanges.  Friedman explains,

“So long as effective freedom of exchange is maintained, the central feature of the market organization of economic activity is that it prevents one person from interfering with another in respect of most of his activities.  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 of other employers for whom he can work, and so on.  And the market does this impersonally and without centralized authority.”  (20-21)

34. One of the main objections to a free economy is that it does this job too well: “It gives people what they want instead of what a particular group thinks they ought to want.  Underlying most arguments against the free market is a lack of belief in freedom itself” (21).

35. The existence of a free market does not eliminate the need for a government.  A government is still required to determine “the rules of the game,” and to be an umpire to interpret and enforce the decided-upon rules.  The market reduces the number of decisions that must be made politically, and so reduces the government’s role in the game.  The market’s greatest advantage is that it is a system of proportional representation: “Each man can vote, as it were, for the colour of tie he wants and gets it; he does not have to see what colour the majority wants and then, if he is in the minority, submit” (21).

36. This is basically what Friedman means when he says the market provides economic freedom.  Economic strength is allowed to be a check against political power, rather than a reinforcement.  This is basically what Friedman means when he says the market provides economic freedom.  Economic strength is allowed to be a check against political power, rather than a reinforcement.

37. He wants to illustrate this with an example.  Having a free society entails the ability to advocate for a radical change in the structure of the society; it is a mark of a free society that people can advocate for socialism.  Equally, political freedom in a socialist society would allow for the promotion of capitalism.  How could this freedom be preserved in a socialist society?

38. In order to advocate for something, one must be able to earn a living.  This is a problem in a socialist society, since all jobs are under the control of political authorities.  Allowing this would take an act of self-denial on the part of the government.  Assuming the person is not fired, they would have to be able to fund their promotion of capitalism (magazines, etc).  How could this funding be done?  The only people that may have large incomes would be high public officials.  The money would have to come from a large number of minor officials, but in order to tap this resource, many people would already have to be persuaded.  Radical movements have never been funded this way; they have always had wealthy patrons.

39. In a capitalist society, only a few wealthy people need to be convinced of any particular idea in order to fund a campaign.  This is not possible in a socialist state; even if a socialist state offered funds for subversive campaigns, it would have two problems.  First, how could it choose who to fund? And second, if there was enough money in being subversive, the field would explode.

40. A socialist state might find a way to preserve this freedom, but Friedman thinks no socialist has really owned up to this issue.  Friedman gives two examples of government control over media: Winston Churchill was not allowed on the BBC in the 1930s because he was too controversial, and the Hollywood Blacklist of the 1950s.

41. While Friedman believes that communism would destroy all our freedoms, he also thinks “that in a free society it is intolerable for a man to be prevented from making voluntary arrangements with others that are mutually attractive because he believes in or is trying to promote communism” (25).  Freedom also includes the freedom to not enter into arrangements with such people.

42. The people in our culture with the most interest in preserving competitive capitalism are minority groups who can most easily become targets of hatred, because competitive capitalism gives them a variety of ways to earn a living.  Friedman’s shriek of insanity crescendos: “Yet, paradoxically enough, the enemies of the free market the Socialists and Communists have been recruited in disproportionate measure from these groups.  Instead of recognizing that the existence of the market has protected them from the attitudes of their fellow countrymen, they mistakenly attribute the residual discrimination to the market.”  (26)

43. The conclusion of the second chapter summarizes his views on government:

“A government which maintained law and order, defined property rights, served as a means whereby we could modify property rights and other rules of the economic game, adjudicated disputes about the interpretation of the rules, enforced contracts, promoted competition, provided a monetary framework, engaged in activities to counter technical monopolies and to overcome neighborhood effects widely regarded as sufficiently important to justify government intervention, and which supplemented private charity and the private family in protecting the irresponsible, whether madman or child such a government would clearly have important functions to perform.  The consistent liberal is not an anarchist.”  (36)

44. But the government must have limits.  Friedman offers a list of things the government should not do. This is a partial list: tariffs on imports and restrictions on exports; rent control, as well as price and wage controls; minimum wages or maximum legal prices; society security programs, such as old age programs which require people to spend some of their income on the purchase of retirement annuities from a public source.  Finally, public housing and conscription in peacetime.  None of these things should be done by government.

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