Capitalism.and.Freedom - MILTONFRIEDMAN .FRIEDMAN PhoenixBooks 1962 TO JANETandDAVID ONITSNEXTLAP Contents PREFACE INTRODUCTION I II III IV V VI VI

Capitalism.and.Freedom - MILTONFRIEDMAN .FRIEDMAN...

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Unformatted text preview: CAPITALISM AND FREEDOM MILTON FRIEDMAN WITH THE ASSISTANCE OF ROSE D. FRIEDMAN Phoenix Books THE UNIVERSITY OF CHICAGO PRESS 1962 TO JANET and DAVID AND THEIR CONTEMPORARIES WHO MUST CARRY THE TORCH OF LIBERTY ON ITS NEXT LAP Contents PREFACE INTRODUCTION I. II. III. IV. V. VI. VII. VIII IX. X. XI. XII. XIII THE RELATION BETWEEN ECONOMIC FREEDOM AND POLITICAL FREEDOM THE ROLE OF GOVERNMENT IN A FREE SOCIETY THE CONTROL OF MONEY INTERNATIONAL FINANCIAL AND TRADE ARRANGEMENTS FISCAL POLICY THE ROLE OF GOVERNMENT IN EDUCATION CAPITALISM AND DISCRIMINATION MONOPOLY AND THE SOCIAL RESPONSIBILITY OF BUSINESS AND LABOR OCCUPATIONAL LICENSURE THE DISTRIBUTION OF INCOME SOCIAL WELFARE MEASURES ALLEVIATION OF POVERTY CONCLUSION See Andrew Chrucky, "Milton Friedman's Hidden Anarchism in Capitalism and Freedom," Ditext, Aug. 8, 2008. Milton Friedman, Capitalism and Freedom, 1962. Preface This book is a long­delayed product of a series of lectures that I gave in June, 1956 at a conference at Wabash College directed by John Van Sickle and Benjamin Rogge and sponsored by the Volker Foundation. In subsequent years, I have given similar lectures at Volker conferences directed by Arthur Kemp, at Claremont College, directed by Clarence Philbrook, at the University of North Carolina, and directed by Richard Leftwich, at Oklahoma State University. In each case I covered the contents of the first two chapters of this book, dealing with principles, and then applied the principles to a varied set of special problems. I am indebted to the directors of these conferences not only for inviting me to give the lectures, but even more for their criticisms and comments on them and for friendly pressure to write them up in tentative form, and to Richard Cornuelle, Kenneth Templeton, and Ivan Bierly of the Volker Foundation who were responsible for arranging the conferences. I am indebted also to the participants who, by their incisive probing and deep interest in the issues, and unquenchable intellectual enthusiasm, forced me to rethink many points and to correct many errors. This series of conferences stands out as among the most stimulating intellectual experiences of my life. Needless to say, there is probably not one of the directors of the conferences or participants in them who agrees with everything in this book. But I trust they will not be unwilling to assume some of the responsibility for it. I owe the philosophy expressed in this book and much of its detail to many teachers, colleagues, and friends, above all to a distinguished group I have been privileged to be associated with at the University of Chicago: Frank H. Knight, Henry C. Simons, Lloyd W. Mints, Aaron Director, Friedrich A. Hayek, George J. Stigler. I ask their pardon for my failure to acknowledge specifically the many ideas of theirs which they will find expressed in this book. I have learned so much from them and what I have learned has become so much a part of my own thought that I would not know how to select points to footnote. I dare not try to list the many others to whom I am indebted, lest I do some an injustice by inadvertently omitting their names. But I cannot refrain from mentioning my children, Janet and David, whose willingness to accept nothing on faith has forced me to express technical matters in simple language and thereby improved both my understanding of the points and, hopefully, my exposition. I hasten to add that they too accept only responsibility, not identity of views. I have drawn freely from material already published. Chapter i is a revision of material published earlier under the title used for this book in Felix Morley (ed.), Essays in Individuality (University of Pennsylvania Press, 1958) and in still a different form under the same title in The New Individualist Review, Vol. I, No. 1 (April, 1961). Chapter vi is a revision of an article by the same title first published in Robert A. Solo (ed.), Economics and the Public Interest (Rutgers University Press, 1955). Bits and pieces of other chapters have been taken from various of my articles and books. The refrain, "But for my wife, this book would not have been written," has become a commonplace in academic prefaces. In this case, it happens to be the literal truth. She pieced together the scraps of the various lectures, coalesced different versions, translated lectures into something more closely approaching written English, and has throughout been the driving force in getting the book finished. The acknowledgment on the title page is an understatement. My secretary, Muriel A. Porter, has been an efficient and dependable resource in time of need, and I am very much in her debt. She typed most of the manuscript as well as many earlier drafts of part of it. Milton Friedman, Capitalism and Freedom, 1962. Introduction In a much quoted passage in his inaugural address, President Kennedy said, "Ask not what your country can do for you ­­ ask what you can do for your country." It is a striking sign of the temper of our times that the controversy about this passage centered on its origin and not on its content. Neither half of the statement expresses a relation between the citizen and his government that is worthy of die ideals of free men in a free society. The paternalistic "what your country can do for you" implies that government is die patron, the citizen the ward, a view that is at odds witli the free man's belief in his own responsibility for his own destiny. The organismic, "what you can do for your country" implies diat government is the master or the deity, the citizen, die servant or die votary. To the free man, die country is die collection of individuals who compose it, not something over and above them. He is proud of a common heritage and loyal to common traditions. But he regards government as a means, an instrumentality, neither a grantor of favors and gifts, nor a master or god to be blindly worshipped and served. He recognizes no national goal except as it is the consensus of the goals that the citizens severally serve. He recognizes no national purpose except as it is the consensus of the purposes for which the citizens severally strive. The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather "What can I and my compatriots do through government" to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect? Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of­good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp. How can we benefit from the promise of government while avoiding the threat to freedom ? Two broad principles embodied in our Constitution give an answer that has preserved our freedom so far, though they have been violated repeatedly in practice while proclaimed as precept. First, the scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow­citizens: to preserve law and order, to enforce private contracts, to foster competitive markets. Beyond this major function, government may enable us at times to accomplish jointly what we would find it more difficult or expensive to accomplish severally. However, any such use of government is fraught with danger. We should not and cannot avoid using government in this way. But there should be a clear and large balance of advantages before we do. By relying primarily on voluntary co­operation and private enterprise, in both economic and other activities, we can insure that die private sector is a check on die powers of the governmental sector and an effective protection of freedom of speech, of religion, and of thought. The second broad principle is that government power must be dispersed. If government is to exercise power, better in die county than in die state, better in the state than in Washington. If I do not like what my local community does, be it in sewage disposal, or zoning, or schools, I can move to another local community, and diough few may take diis step, die mere possibility acts as a check. If I do not like what my state does, I can move to another. If I do not like what Washington imposes, I have few alternatives in this world of jealous nations. The very difficulty of avoiding the enactments of the federal government is of course die great attraction of centralization to many of its proponents. It will enable them more effectively, they believe, to legislate programs diat ­­ as diey see it ­­ are in the interest of the public, whether it be the transfer of income from the rich to die poor or from private to governmental purposes. They are in a sense right. But diis coin has two sides. The power to do good is also the power to do harm; those who control die power today may not tomorrow; and, more important, what one man regards as good, another may regard as harm. The great tragedy of the drive to centralization, as of die drive to extend the scope of government in general, is diat it is mostly led by men of good will who will be die first to rue its consequences. The preservation of freedom is the protective reason for limiting and decentralizing governmental power. But diere is also a constructive reason. The great advances of civilization, whedier in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government. Columbus did not set out to seek a new route to China in response to a majority directive of a parliament, though he was partly financed by an absolute monarch. Newton and Leibnitz; Einstein and Bohr; Shakespeare, Milton, and Pasternak; Whitney, McCormick, Edison, and Ford; Jane Addams, Florence Nightingale, and Albert Schweitzer; no one of these opened new frontiers in human knowledge and understanding, in literature, in technical possibilities, or in the relief of human misery in response to governmental directives. Their achievements were the product of individual genius, of strongly held minority views, of a social climate permitting variety and diversity. Government can never duplicate the variety and diversity of individual action. At any moment in time, by imposing uniform standards in housing, or nutrition, or clothing, government could undoubtedly improve the level of living of many individuals; by imposing uniform standards in schooling, road construction, or sanitation, central government could undoubtedly improve the level of performance in many local areas and perhaps even on the average of all communities. But in the process, government would replace progress by stagnation, it would substitute uniform mediocrity for the variety essential for that experimentation which can bring tomorrow's laggards above today's mean. This book discusses some of these great issues. Its major theme is the role of competitive capitalism ­­ the organization of the bulk of economic activity through private enterprise operating in a free market ­­ as a system of economic freedom and a necessary condition for political freedom. Its minor theme is the role that government should play in a society dedicated to freedom and relying primarily on the market to organize economic activity. The first two chapters deal with these issues on an abstract level, in terms of principles rather than concrete application. The later chapters apply these principles to a variety of particular problems. An abstract statement can conceivably be complete and exhaustive, though this ideal is certainly far from realized in the two chapters that follow. The application of the principles cannot even conceivably be exhaustive. Each day brings new problems and new circumstances. That is why the role of the state can never be spelled out once and for all in terms of specific functions. It is also why we need from time to time to re­examine the bearing of what we hope are unchanged principles on the problems of the day. A by­product is inevitably a retesting of the principles and a sharpening of our understanding of them. It is extremely convenient to have a label for the political and economic viewpoint elaborated in this book. The rightful and proper label is liberalisrn. Unfortunately, "As a supreme, if unintended compliment, the enemies of the system of private en terprise have thought it wise to appropriate its label",1 so that liberalism has, in the United States, come to have a very different meaning than it did in the nineteenth century or does today over much of the Continent of Europe. As it developed in the late eighteentli and early nineteenth centuries, the intellectual movement that went under the name of liberalism emphasized freedom as the ultimate goal and the individual as the ultimate entity in the society. It supported lais sez faire at home as a means of reducing die role of the state in economic affairs and thereby enlarging the role of the individual; it supported free trade abroad as a means of linking the nations of die world together peacefully and democratically. In political matters, it supported die development of representative government and of parliamentary institutions, reduction in die arbitrary power of the state, and protection of the civil freedoms of individuals. ­ ­ Beginning in the late nineteenth century, and especially after 1930 in the United States, the term liberalism came to be associated with a very different emphasis, particularly in economic policy. It came to be associated widi a readiness to rely primarily on the state rather than on private voluntary arrangements to achieve objectives regarded as desirable. The catchwords became welfare and equality rather than freecTom. The nineteenth­century liberal regarded an extension of freedom as the most effective way to promote welfare and equality; the twentieth­century liberal regards welfare and .equality as either prerequisites of or alternatives to freedom. In die name of welfare and equality, the twentieth­century liberal has come to favor a revival of the very policies of state intervention and paternalism against which classical liberalism fought. In the very act of turning the clock back to seventeenth­century mercantilism, he is fond of castigating true liberals as reactionary! The change in the meaning attached to the term liberalism is more striking in economic matters than in political. The twentieth­century liberal, like the nineteenth­century liberal, favors parliamentary institutions, representative government, civil rights, and so on. Yet even in political matters, there is a notable difference. Jealous of liberty, and hence fearful of centralized power, whether in governmental or private hands, the nineteenth­century liberal favored political decentralization. Committed to action and confident of the beneficence of power so long as it is in the hands of a government ostensibly controlled by the electorate, the twentieth­century liberal favors centralized government. He will resolve any doubt about where power should be located in favor of the state instead of the city, of the federal government instead of the state, and of a world organization instead of a national government. Because of the corruption "ofthT term liberalism, the views that formerly went under that name are now often labeled conservatism. But this is not a satisfactory alternative. The nine­teenth­century liberal was a radical, both in the etymological sense of going to the root of the matter, and in the political sense of favoring major changes in social institutions. So too must be his modern heir. We do not wish to conserve the state interventions that have interfered so greatly with our freedom, though, of course, we do wish to conserve those that have promoted it, Moreover, in practice, the term conservatism has come to cover so wide a range of views, and views so incompatible with one another, that we shall no doubt see the growth of hyphenated designations, such as libertarian­conservative and aristocratic­conservative. Partly because of my reluctance to surrender the term to proponents of measures that would destroy liberty, partly because I cannot find a better alternative, I shall resolve these difficulties by using the word liberalism in its original sense ­­ as the doctrines pertaining to a free man. 1 Joseph Schumpeter, History of Economic Analysis (New York: Oxford University Press, 1954) p. 394T Milton Friedman, Capitalism and Freedom, 1962. Chapter I The Relation between Economic Freedom and Political Freedom It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem; and that any kind of political arrangements can be combined with any kind of economic arrangements. The chief contemporary manifestation of this idea is the advocacy of "democratic socialism" by many who condemn out of hand the restrictions on individual freedom imposed by "totalitarian socialism" in Russia, and who are persuaded that it is possible for a country to adopt the essential features of Russian economic arrangements and yet to ensure individual freedom through political arrangements. The thesis of this chapter is that such a view is a delusion, that there is an intimate connection between economics and politics, that only certain combinations of political and economic arrangements are possible, and that in particular, a society which is socialist cannot also be democratic, in the sense of guaranteeing individual freedom Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom. The first of these roles of economic freedom needs special emphasis because intellectuals in particular have a strong bias against regarding this aspect of freedom as important. They tend to express contempt for what they regard as material aspects of life, and to regard their own pursuit of allegedly higher values as on a different plane of significance and as deserving of special attention. For most citizens of the country, however, if not for the intellectual, the direct importance of economic freedom is at least comparable in significance to the indirect importance of economic freedom as a means to political freedom. The citizen of Great Britain, who after World War II was not permitted to spend his vacation in the United States because of exchange control, was being deprived of an essential freedom no less than the citizen of the United States, who was denied the opportunity to spend his vacation in Russia because of his political views. The one was ostensibly an economic limitation on freedom and the other a political limitation, yet there is no essential difference between the two. The citizen of the United States who is compelled by law to devote something like 10 per cent of his income to the purchase of a particular kind of retirement contract, administered by the government, is being deprived of a corresponding part of his personal freedom. How strongly this deprivation may be felt and its closeness to the deprivation of religious free...
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