Free to Choose: A Personal Statement - essential readings

 
essential readings
              FOR THE MODERN CONSERVATIVE

      A Condensation of
   Milton & Rose Friedman’s

   Free to Choose:
A Personal Statement

                         Reprinted 2012 by
                      Alabama Policy Institute
                       Birmingham, Alabama

 Permission to reprint in whole or in part is hereby granted, provided
   the Alabama Policy Institute and the author are properly cited.
About This Series

The Alabama Policy Institute commissioned
“Essential Readings for the Modern
Conservative” to provide busy conservative-
minded individuals with a way to acquaint
themselves with at least the rudiments
of conservatism. A work like Milton &
Rose Friedman’s Free to Choose: A Personal
Statement might seem too large to be worked
into the corners of our schedule, but a
condensed version could be read in a weekend
or on a long flight. With such an abridged
version, conservatives of all education levels
will be able to read swiftly and concisely what
the best minds in American conservative
thought have had to say. This series is an
attempt to capture the central message of
the various authors and to express it in fewer,
simpler words. We believe there are still men
and women in sufficient numbers today who
take their values seriously and who consider
themselves to be of conservative principle
but might be hard pressed to explain their
political philosophy. This series is for them.

It is certainly true that these condensations
were written in hopes of providing a
rough familiarity with the ideas of leading
conservative thinkers, but they were also
written to whet the appetite enough to
motivate the reader to tackle the main text
as well. It is the nature of a summary to
touch upon the main points of a text and
omit the full beauty of the original prose;
all of the illustrations and the humor — the
personality of the author must be left behind
in the primary source. These smaller versions
of great works are far better reading than
nothing at all, but who is satisfied with the
appetizer when he can have the main course?
TABLE OF CONTENTS

Chapter One     The Power of the Market          1

Chapter Two     The Tyranny of Controls          7

Chapter Three   Anatomy of a Crisis              13

Chapter Four    Cradle to Grave                  17

Chapter Five    Created Equal                    21

Chapter Six     What’s Wrong with Our Schools?   25

Chapter Seven   Who Protects the Consumer?       31

Chapter Eight   Who Protects the Worker?         35

Chapter Nine    The Cure for Inflation           39

Chapter Ten     The Tide Is Turning              43
A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement                         1

Chapter One                                          for society to know freedom and prosperity,
The Power of the Market                              but it is certainly necessary.

Friedman begins by drawing a line between            Friedman fleshes out his conception of
two opposing principles of organization in           voluntary cooperation by recounting Leonard
society. Usually, he observes, when someone          Read’s story about the common pencil.
goes to the store, the goods he wants to buy         The production of the schoolboy’s writing
are there waiting for him. And, for a price, he      instrument involves many different people in
can purchase whatever he wishes. We can also         various parts of the world working together
usually expect those goods to be there every         in just the right way. Not all of them even
time we return.                                      know what is being made with what they do.
                                                     Loggers in Oregon require massive equipment
Friedman notes that coordinating the large           to cut down and haul away the trees needed
number of people necessary to make such              for the wood, and the equipment itself must
a system possible is called the command              be produced in an even more complicated
principle. Everyone receives their orders from       process. The logs must also be milled down
a higher authority and gives orders to their         and made into pencil form. There is also the
subordinates. But even in a small organization,      lead to consider, which really is not lead at all,
such as a family, some amount of voluntary           but graphite from Ceylon. That bit of brass at
cooperation and discretion is necessary for          the end — the ferrule — has to be made with
the work to be done. Everyone’s every move           zinc and copper and must be fashioned just so,
cannot be dictated by another.                       and the eraser is a product of Indonesia. The
                                                     amazing thing about it all is that the pencil is
The Soviet Union is the classic example of an        ever made in the first place, because there is no
economy supposedly structured in command             one sitting in a central office giving orders to all
fashion (this book was last published in 1979,       those involved in the making of a pencil. These
just before the downfall of the Communist            people of different lands and tongues work
regime). Self-motivated people do a little           together to produce countless products out of
business on the side to make life a little easier.   countless materials, and they do so without
In this way Friedman illustrates that no society     being told to do so. How?
operates entirely on the command principle;
human nature will not allow for it. Neither          Friedman gives us the answer: Adam Smith, the
is there a society based wholly on voluntary         father of modern economics and the author of
cooperation, for there will always be a need         Wealth of Nations. If an exchange between two
for laws limiting actions for the sake of safety.    parties is voluntary, it will only take place if both
(Friedman mentions drug laws). In the end,           parties benefit. Very well, but how does this
the issue is what the mix between free will          principle account for the complex interaction
and authoritarianism is in a given society —         of a worldwide economy? Friedman writes that
whether free exchange is secretive and illegal,      the answer is the price system. Smith’s great
though it keeps the command economy                  insight was that prices could coordinate the
from collapse, or whether it is the dominant         activity of millions of people because economic
principle. Voluntarism by itself is insufficient     order emerges spontaneously as everyone
                                                     pursues his own interest. The price system

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2                       A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement

performs three specific functions in organizing        The same process holds true with crude oil.
economic activity: first, it transmits information;    Friedman notes that the (unconstitutional)
second, it provides an incentive for people to         establishment of the Department of Energy
use the most profitable methods of production          as a response to the development of the
for the most highly-valued purposes; and third,        Organization of the Petroleum Exporting
it determines the distribution of income.              Countries (OPEC) oil cartel, quadrupled
                                                       petroleum prices in 1973 and prevented the
If, for instance, there is a baby boom, and            price system from communicating the actions
suddenly the population of young children              of the cartel, ultimately worsening the situation.
rises appreciably, it follows that there will be a     United States consumers were not motivated
great demand for school supplies. Stores will          to economize on their use of gasoline because
be selling more pencils, and so they will order        the government mandated price controls. As a
more from their suppliers, who will order more         result, the OPEC cartel was strengthened and
from the manufacturer, who will order more             the federal government grew in size and waste.
wood, graphite, brass, erasers, and so on. For the
stores to induce producers to make more, they          Inflation, too, can introduce “static” into the
will have to offer higher prices for the pencils,      information flow of the price system. If the
and will in turn charge higher prices for them.        price of wood goes up, for instance, producers
Higher demand has a ripple effect from the             do not know whether the rise is due to inflation
retail store to the reaping of raw materials. The      or to greater demand/lower supply. Inflation
price system tells the logging company that            makes it hard for the relevant people to know
someone is willing to pay more for wood, and           the relative price of one good to other goods;
will buy more of it, for a long enough time to         what they need to hear is drowned in static.
make it worthwhile to meet the demand. The
price system also ensures that only those who          The clearest communication of information in
are involved in the process will be bothered with      the world, however, will do the economy no good
the information. The people in the system are          if the right people lack an incentive to act. The
motivated to seek out others who can use the           producer of wood needs to find the motivation
information and complete the chain. Stores look        to respond to the news that the demand for
for good deals from wholesalers, who look for          wood has increased. The price system, thankfully,
the best suppliers, and so on it goes. The process     provides that motivation. This second function
can also work the other way. Suppose a forest          of the system is closely tied to the third, the
fire consumes thousands of acres of land, or a         distribution of income. If the price of wood had
liberal federal government decides to declare          not risen, the producer would have had every
huge tracts of timber-rich land a national park        reason not to make more of it, since his profit
or a wildlife preserve. All of a sudden, wood          margin will decrease as he incurs more expense
is less available, and the price of it goes up         in producing more wood. A higher price shifts
accordingly. The producer of wood will use less        this margin, offering as much or perhaps more
wood and make fewer pencils, and the store             profit than before, if he will produce more wood.
will have to charge higher prices for them, and        He now has the incentive to hire more workers
the poor little student will realize it will benefit   and buy more machinery. Prices also provide an
him to use his pencil down to a shorter stub or        incentive to act with regard to efficiency. If one
consider the switch to a mechanical pencil.            type of wood becomes more expensive or less

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A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement                        3

available, the producer is motivated to economize     his discussion of bureaucratic ineptitude to
or use cheaper sources so as to keep his costs low.   chapter five. He is quite clear here, however, that
Friedman also explores how the price system           prices cannot transmit information and provide
provides incentive to workers and owners of           incentive to action without also affecting, if
resources. A higher demand for wood will tend         not completely determining, the distribution
to create a higher wage for loggers, since there      of income. If what a person receives does not
is now greater demand for their labor. Workers        depend on the price of his goods or services, why
who are not loggers but might have considered         should he act on prices at all? Why work hard if
logging earlier now have more reason to learn         it makes no difference in your paycheck? Why
those skills and to benefit from the higher           save? If prices do not affect income, they will be
wages. Young people entering the job market           impotent for other purposes as well; “The only
have more incentive to choose the logging             alternative is command.”1
industry. Here, too, however, the government can
interfere, through the setting of minimum wages,      After this small lesson in economics,
cooperation with trade unions, or regulation,         Friedman devotes most of the rest of the book
distorting the information being shared or            to how the role of American government
preventing individuals from acting freely.            vis-à-vis the economy has changed in recent
                                                      decades. Before he can go on to document the
The third role of the price system is to manage       errors of politicians, however, he provides a
the distribution of income in the market. Each        norm for comparison. Just what is the proper
person’s income is determined by the price his        role for government? Leaning on Smith,
labor brings or, if he is an entrepreneur, by the     Friedman comes up with four duties. The
profit resulting from the market value of his         first two are straightforward: the protection
ownership of human and material capital and           of individuals from coercion from within
by his ability to organize a business and meet        the country and from without and the
a demand. Through a combination of chance             administration of justice, which for Friedman
and choice, writes Friedman, the market sets          certainly includes the protection of property
a price on goods and services. We may inherit         rights and other rules that are needful for a
great wealth, and we may choose to live in a          free market to flourish. The third duty is the
community with a high cost of living. Frank           most troublesome. Although Smith thought
Sinatra might not have been so prosperous             it had a narrow application, the duty of
had he been born in 20th-century India. A             government to preserve and strengthen a free
blacksmith today will likely not command              society has been given wide interpretation in
the economic resources he might have had a            recent times. Highways and city streets, for
few centuries past. The price system inevitably       instance, are too costly for an individual to
leads to inequality of income, which leads to         build, but they are good for society, and so
dissatisfaction with the distribution of income,      government may undertake their creation.
which can in turn lead to attempts to separate        (Government is defined as the collection
this last function of the price system from its       of individuals who seek to accomplish a
other two. These attempts are doomed to failure.      common goal.) A more subtle example of
Modern governments, including our own, have           the state’s duty here is the third party effect.
denied this fact in recent years. Friedman delays
                                                      1	Friedman, p. 23.

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4                      A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement

Sometimes, a voluntary exchange between                Even on the loosest interpretation of his duties
two parties has an unintended effect on a              for government, Friedman notes that much
third party, a fact that becomes problematic           existing government intervention is ruled out.
when that effect is met with negative reaction.        He looks for a modern, concrete example of
This is called a “market failure,” because the         limited government and finds it in Hong Kong.
third party has something imposed on him               (It is helpful to remember that Friedman was
involuntarily. Government may be required              writing well before the United Kingdom gave
to determine what compensation, if any, is             Hong Kong to China). With a population
owed to the affected third party. This might           density 185 times that of the United States,
justify almost any government action, since            Hong Kong’s residents enjoy one of the highest
almost every exchange has at least some effect         standards of living in all of Asia. In contrast to
on a third party. But it must be remembered            the mother country, Hong Kong, though under
that government measures also have third               the titular authority of the Crown, has followed
party effects. Government failure can occur            policies allowing for free trade and low taxation.
as easily as market failure. It is just as difficult   Another shining example of what the market
for the government to determine who is                 can do if left alone is Japan following the Meiji
owed benefits or restitution, and the remedies         Restoration of 1867. (Friedman discusses this
employed may be worse than the problem.                time period in the next chapter.) Two more
Moreover, government must raise taxes to               examples are Great Britain and the United
finance its activities — another third party           States in the 19th century. Trade was free and
effect. The lesson Friedman would have us              economic growth was rapid in both countries
draw from this third duty of government is             until World War I.2 He dismisses the lore that
that the burden of proof should lie on the             tells of this age as one of robber barons and
proponents of government action. A very                economic exploitation of the masses. If this
clear balance of benefits over costs should            were true, he asks, why did immigrants keep
be evident in any proposal for governmental            flooding in, one wave after another? Why did
response to a problem.                                 the number of farmers increase? The price of
                                                       their products declined, but this was due to
The fourth duty, one Smith did not mention,            new machinery and more land cultivation. In
is that of government for the protection of            fact, the price of farmland rose steadily. And
members of the community who cannot be                 as for the heartless wealthy, Friedman points
regarded as being responsible for themselves.          to the explosion of charitable organizations
(Friedman has in mind madmen and children.)            and philanthropic foundations that took place
He of course recognizes the uncomfortable              in the 19th century. Magnates of industry
ambiguity introduced by this idea and the care         gave millions to fund education, hospitals,
that must be taken in defining what constitutes        orphanages, missionaries, and the like. Art
a “responsible” individual. Children in the first      museums, opera houses, symphonies, and public
instance will be the responsibility of the parents,
as the family is the building block of society, but
                                                       2	Friedman makes the mistake of viewing the Corn
children are not property, and so have rights in          Laws’ repeal in Britain in 1846 as a good thing.
and of themselves that must be guarded.                   At least, Kirk would disagree with him. Friedman
                                                          is looking through green lenses, while Kirk paid
                                                          attention to culture and lifestyle. He tried to see
                                                          with his “moral imagination.”

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A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement   5

libraries sprang up everywhere. Government
spending was in check, not exceeding about 12
percent of the national income from 1800 to
1929, and two-thirds of that was spent by state
and local governments. Friedman contends that
American success was not due to open lands
and abundant resources, nor to the sparsely-
settled conditions of the time. Rather, it was due
to the free trade and limited government that
prevailed. Modern society does not necessitate
a large bureaucracy any more than did the
industrial age. We have proof that government
can, if limited carefully, serve a society reliant on
voluntary cooperation and economic freedom.

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A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement                       7

Chapter Two                                          The next argument in favor of tariffs is more
The Tyranny of Controls                              complex and has greater emotional appeal: don’t
                                                     we need to protect the high standard of living of
In chapter two, Friedman more closely                American workers from the unfair competition
examines the consequences of restrictions on         of Mexican or Japanese workers who accept
international trade and economic freedom.            a much lower wage? The fallacy here is the
He begins by opposing the special interests          use of “high” and “low” to characterize wages.
of manufacturers and merchants to what is            The key is that American workers are paid in
good for the great body of the people. Many          dollars, Mexicans in pesos, and Chinese in yuan.
companies have lobbied for tariffs, duties, and      What determines the exchange rate between
limitations on foreign trade in order to protect     these currencies? Just how many of each is high
themselves from international competition. But       or low relative to the others? Let us suppose
Friedman believes that we as a country lose far      that 360 yen equal one dollar. At that rate, the
more, on the whole, from catering to special         Japanese yen can produce everything cheaper
interests than we may gain from meeting the          in Japan. All of our goods, from televisions and
consumers’ needs. He begins his examination of       automobiles to ice cream, are made at a lower
the controls that have been placed on economic       cost in Japan, so naturally we would try to buy
activity with a look at international trade.         all of our goods from them. This seems to be
                                                     a nightmare, since we would be flooded with
Friedman notes the ubiquity of arguments             Japanese goods and could sell nothing to them,
favoring “protective” tariffs and “voluntary         because they could get everything cheaper at
agreements” to limit imports of certain goods        home. But, Friedman says, we must keep going.
with an eye toward the bottom line of domestic       We would pay the Japanese in dollars, but they
manufacturers. He notices that one voice not         would neither buy anything from us with those
heard in the battle over trade controls is that of   dollars because they can get it all cheaper at
the consumer’s. He proceeds to consider and          home or be willing to burn the bills. They would
refute the common arguments advanced in favor        want something real in return for their goods.
of tariffs, beginning with the contention that       But they could not exchange those dollars for
jobs are what are needed. More jobs or safer         yen, because what is true for them would be
jobs for the American worker are good in and         true for everyone. Who would want to buy
of themselves, so the reasoning goes. No, says       those dollars at 360 yen to the dollar if the yen
Friedman; our real objective ought not to be just    could buy more in Japan than the dollar could
jobs but productive jobs that will create more       in the U.S.? So the exporters, upon discovering
goods and services to consume. Another fallacy       their dilemma, become willing to accept fewer
is the balance-of-trade argument: imports are        yen for their dollars, and the price of a dollar in
bad, exports are good. We cannot eat, wear, or       terms of yen will decline. As that price declines,
use what is sent abroad, Friedman observes, only     the price of Japanese goods in terms of dollars
what we keep, or receive. Our gain is what we        will increase while the cost of American goods
import, and we want to pay as little as possible     in terms of yen will decrease, making them
in exports to import what we want. In a private      more attractive to Japanese consumers. The
household, we would surely want to pay less          process would continue, says Friedman, until
for more rather than the other way around; the       the dollar value of goods the U.S. buys from
same holds true on the national scale.

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8                     A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement

Japan roughly equals the dollar value of goods      suffer a lower standard of living than we do
the Japanese buys from the U.S.                     because of this subsidy. It is true that if such a
                                                    subsidy is introduced suddenly, U.S. industries
Of course, real life is more complicated, but       will suffer. But that is one of the ordinary
the principle is the same: “In the real world, as   risks of doing business. A measure to ease the
well as in that hypothetical world, there can       adjustment period may be desirable, as noted
be no balance of payments problem so long           above, but they would need to be evenly applied.
as the price of the dollar in terms of the yen      Furthermore, such disturbances are likely to
or the mark or the franc is determined in a         be short-lived. If Japanese steel were suddenly
free market by voluntary transactions.”3 The        heavily subsidized, its price would drop, and
system will, in the end, work out the inequality.   much more of it would be imported. Domestic
Though particular American workers may be           steel would fall in price and put steelworkers
harmed if an imported good is offered at a          out of a job, for a time. But the price of things
lower price than they can offer, the situation      made from steel would also decline, freeing
is no different in Friedman’s eyes than             up income to spend on other items, raising the
competition by another American firm. That          demand for those items, and creating a demand
is how the market works. It may be desirable        for jobs in those fields accordingly. There would
to ease the adjustments that would need to          be, in the end, no net loss of employment.
be made, but we must be evenhanded with
respect to foreign and domestic trade.              Friedman moves on to an even more appealing
                                                    argument — in the interest of national
The advantage to letting the market work is that    security, certain industries, like domestic
productivity increases. If the Japanese can make    steel, ought to be safeguarded. He disagrees,
toothpaste more efficiently than American           replying that only a small fraction of the
workers, we ought to buy it from them and let       steel used in the U.S. is needed for defense.
our own workers do what they do best. A lawyer      Furthermore, it is inconceivable that free trade
may be somewhat better than his secretary at        in steel would completely destroy the domestic
typing, but he is likely far better than she at     steel industry. But if it became cheaper to
law, and so he should be a lawyer and leave the     buy all of our steel abroad, we could always
typing to the secretary.                            stockpile steel, which is not perishable and
                                                    takes relatively little space. We could keep
Another complaint against free trade is             some steel plants in mothballs, as we do ships.
that it is not really free trade when foreign       This alternative is but one in providing for
governments subsidize their producers. These        national defense needs rather than legislating
subsidies enable the foreign producers to sell      tariffs to protect the U.S. steel industry.
their wares in the U.S. below cost. Friedman
contends that actually it is we who benefit.        Friedman dismisses as an artificial problem the
Other governments must tax their citizens to        idea that the value of the dollar ought to be kept
pay for the subsidies, and we get to buy their      up relative to other currencies. Exchange rates
goods at a lower price as a result. Why complain    settle at whatever level the market will bear if
about reverse foreign aid? Foreign citizens         they are determined by the free market. The
                                                    price system works in the exchange rate
3	Ibid. p. 44.

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A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement                       9

business. Information is transmitted, and            demand sufficient, the producer must sell at a
incentives to act are provided. The furor that       low price. In practice, such approaches are likely
has been raised in the past over the “weakness”      to promote retaliation by other countries, and
of the dollar was caused by government               the actual political pressures for tariffs do not
interference with exchange rates, not because        take advantage of such situations. The fourth
of the market. From 1973 to 1979, the U.S.           argument, one made by Hamilton, is that free
government managed to lose nearly $2 billion by      trade is all well and good, except that other
trying to manipulate the price of the dollar. This   countries do not play fair, and as long as they
manipulation was an attempt to hide inflation        cheat, so must we. Friedman retorts that their
that was a result of incompetent domestic policy.    restrictions may hurt us, but they will also hurt
Friedman is critical of government intervention      them; if we impose our own tariffs, we hurt
in the market, and repeats this sentiment            ourselves even more. Retaliatory action, he
throughout the rest of the book.                     believes, will only lead to escalation. We should
                                                     instead assume a steady, principled stance of
In all the literature on the subject of free         free trade with the nations of the world that
trade and protectionism, Friedman says, only         will promote the freedom we value and will
four arguments of any validity have been             encourage American prosperity.
brought forward in favor of tariffs or subsidies.
The first is the national security argument,         So much for the economic arguments
which was discussed above. The second                supporting restrictions on international free
is the “infant industry” argument, such as           trade. What then is to be made of the political
Alexander Hamilton’s as used in his Report on        case for or against it? Friedman believes free
Manufactures. The idea is that a new industry        trade is good for political harmony since
ought to be assisted by government until it is       transactions will not take place unless both
firmly established and able to compete with          parties benefit. Cooperation, not conflict,
foreign companies. But the consumer does             becomes the rule. When governments
not benefit unless he gets a lower price from        intervene, however, private disputes become
the domestic industry; this fact would defeat        public. Every trade negotiation becomes a
the purpose of the tariff of the subsidy. Do         political matter, frictions develop, and conflict
not businesses normally incur initial losses         is the rule. Friedman looks back to the century
for a few years anyway? Friedman thinks that         from Waterloo to the first World War as an
this argument is a smoke screen, because true        example of the peace and prosperity that can
infants have no advocates. Once imposed, tariffs     be had if governments will leave off tampering
are seldom eliminated, and the so-called infant      with the operations of the market. The use of
industries never grow up.                            trade as a political weapon makes the inevitable
                                                     tensions of foreign policy even more difficult.
The third argument is the “beggar-thy-
neighbor” argument. A country that is a major        Our author concludes his consideration of
producer of a product can charge an export           international trade by turning to its relationship
tax on it, hurting other nations. Conversely, a      with internal competition. He notes that
country that is the primary purchaser of a good      monopolies can seldom be established within
can force unduly low prices on the producers         a country without government assistance
by imposing a tariff on its importation. To keep     hampering free trade. General Motors, Ford, and

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10                      A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement

Chrysler would not have a chance of establishing      modern world. Besides the lapse of 80 years, the
monopolistic prices among them if they had to         circumstances of the two nations are very similar.
compete with all the automakers of the world.         Both had ancient civilizations, sophisticated
The OPEC cartel is an example of monopoly             cultures, and highly structured populations; both
power relying on the collusion of government —        had experienced major political change; and
in this case several of them. Even OPEC does          both countries had an able group of dedicated
not have long, Friedman believes, in the face of      leaders who took power. The major differences
international competition.4                           between them, Friedman notes, favored India.
                                                      India had enjoyed considerable economic
The next section in this chapter focuses on           growth prior to World War I, had not been
central economic planning. Friedman gives             isolated from the West as had Japan, had leaders
historical examples to prove his point that free      trained in other countries, had an excellent
trade is best for the common man on the street.       railroad system and a British-trained civil
Prosperity is spread more widely, opportunities       service, and possessed modern factories. Japan
to advance are more abundant, and individual          could boast of none of the above. India could
freedom flourishes in countries that abstain          call upon far greater physical resources than
from controlling their economies. East and            Japan, had far more land, and benefited from
West Germany furnish obvious examples.5               an enormous volume of foreign investment and
Russia and Yugoslavia are also good examples,         gifts. Japan was on its own.
even though the contrast there is less extreme.
Under Tito, Yugoslavia broke with Russia and          So what happened? Japan grew wealthy, and
began to decentralize and promote market              India languished in poverty. Why? Japan
forces. While still communist, it is a paradise       dismantled its feudal structure6 and extended
when compared to Russia. Israel is yet another        social and economic opportunity to all its
example of the salutary effects of a market           citizens. The lot of the common man improved,
economy. Though the government intervenes in          and progress was made toward full political
the economy and holds to socialist philosophy,        freedom. India, on the other hand, paid lip
there is a vigorous market sector in Israel, and      service to the elimination of the caste system
its citizens enjoy more political freedom and a       but did little to eliminate it. Therefore, in India
higher standard of living than in Egypt, where        the gap between rich and poor grew wider,
control of economic activity is much more rigid.      and while, like Japan, the population exploded,
                                                      economic per capita output could not. What
The example dearest to Friedman’s heart,              could explain the disparity between the two
however, is the comparison and contrast               nations? Why did Japan prosper, while India,
provided by India and Japan. India gained             with all of its advantages, did not? Friedman
independence in 1947, while Japan, in the             dismisses the idea that the Japanese were
first 30 years of the Meiji Restoration of 1867,      industrious and enterprising while the Indians
found itself similarly confronted with the            were slothful and fatalistic. Another important
                                                      fact is that every country has a minority of
4	And yet, here we are, nearly thirty years after
   Friedman wrote, with OPEC still bedeviling us.
   Let us hope he is soon proved correct.
5	We remember again that Friedman was writing        6	Not a conservative thing to do, but Friedman is
   before the collapse of the Berlin Wall.               primarily concerned with economics, not culture.

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A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement                       11

leading individuals that set the pace for the        Further, as consumers, we are not entirely free
masses. There are certainly Indians in other         to spend our taxable income as we wish. Some
countries that shame the natives for their           products are forbidden to us. We are not free to
diligence and entrepreneurship. The real reason      buy an automobile without seat belts, for instance,
for Japan’s success and India’s failure is that      and since Friedman’s time, we are not free to
Japan relied on the model of Britain in 1947,        choose whether to buckle up. The great issue
a model of voluntary cooperation and free            here is that we are not free to use our resources
markets, while India relied on the model of          in accordance with our own values. We cannot
Britain in 1867, a model of central economic         enter any occupation or buy and sell from anyone
planning. The Meiji government of Japan              else on a voluntary basis. Our freedom to own
imported experts, sent citizens abroad for           property is also diminished, as government is a
technical training, and gave industries a jump       46-percent owner of all corporations in America
start with pilot plants and subsidies. It did        (in 1979, that is). The federal corporate income tax
not attempt, however, to control the amount          on all income over $100,000 makes Washington a
or direction of investment, and Japan was            burden on every stockholder in the country.
prohibited by treaty from imposing tariffs for
30 years after the Restoration.                      Restrictions on economic freedom have a way
                                                     of spilling over to affect other freedoms, like
India, by contrast, embarked on a series of          the freedom of speech and of the press. The oil
Russian-style five-year plans outlining detailed     industry is an example that Friedman uses. In
programs of investment. Government made the          the late 1970s, oil executives were threatened
decisions, allocated resources, owned the capital,   with tougher regulation and anti-trust activity
and controlled wages and prices. In short,           if they did not support the administration’s tax
India did not rely on the effects of the free        on crude oil. There is an old adage that he who
market to spread prosperity through voluntary        has the gold (or can take it) makes the rules. In
cooperation. But Japan, which did not coddle its     Britain the unions had been belligerent with
own industry, grew strong through competing          newspapers that intended to publish stories
with the worldwide market.                           against them. The government now grants these
                                                     unions immunity, and government has the
Friedman concludes the chapter by noting that        power to shut down the presses. Amish farmers
restrictions on trade carry graver consequences      had their religious freedom undermined when
than a weaker bottom line. Economic freedom,         their property was seized due to their refusal
the freedom to dispose of our income as we           to pay Social Security taxes – or to receive the
wish, has been eroded little by little in America.   benefits – on religious grounds.
When Friedman wrote this book, over 40
percent of America’s income was taken from           These examples, Friedman believes, demonstrate
us and disposed of by all levels of government.      the interdependence of one freedom on others;
Though we vote for those in power, we have           “…freedom is one whole, that anything that
to choose a package deal in the voting booth,        reduces freedom in one part of our lives is likely
as Friedman puts it, rather than choose the          to affect freedom in other parts.”7 The need
candidates we want, and if we are in the             today is to reclaim the freedoms we have lost.
minority, we simply have to endure.
                                                     7	Ibid. p. 69.

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A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement                        13

Chapter Three                                         the rest, or buy a security, to profit from the
Anatomy of a Crisis                                   interest earned. Banks are, after all, businesses.
                                                      The system works as long as depositors remain
In this chapter, Friedman analyzes the Great          confident they can withdraw their money
Depression, a tragic event that unfortunately         when they want it. If too many withdraw their
persuaded many that capitalism is an unstable         cash, the bank comes up short. It can borrow
system needing government intervention. The           from other banks or call in loans to meet the
resulting rapid growth of central government has      shortfall, but if a run spreads to other banks, the
endured to this day. The Depression was caused        problem is multiplied. One method of stopping
not by a failure of the market but by a failure       such a panic is the restriction on payments
of the government to properly perform one of          by the banks. Banks stay open, but instead of
its oldest duties — the regulation of currency.       paying out cash for withdrawals, they make
Examining this historical crisis will shed light on   bookkeeping entries to honor checks written
the present-day ineptitude of our government in       from their bank or others. This method is
discharging the same responsibility.                  severe, but it is effective in stopping a panic.

Our author relates the story of how the Federal       Another method is to enable sound banks to
Reserve System came to be. In 1907, during a          convert their assets into cash quickly through
recession, the Knickerbocker Trust Company,           the availability of additional cash; that is, an
the third largest bank in New York City, had to       emergency printing press makes more dollar
close because of a run on the bank. This event        bills to meet the demand. It is at this point
precipitated runs on other banks in the city and      that the Federal Reserve Board comes in. The
in other parts of the country. The banking panic      Board is a supervisory power overseeing 12
was met with announcements by numerous                regional Reserve banks that serve as “lenders
banks of a “restriction of payments.” There was       of last resort” to commercial banks short of
a refusal by the banks to pay out currency to         cash. The regional Reserve banks can make
depositors who demanded a withdrawal. This            loans in Federal Reserve Notes (which they
cut caused the bank runs, but the panic and the       can print) or they can record deposit credits
shortage of currency that followed turned the         in their books with a flourish of the pen. A
recession into one of the most severe the U.S.        process called “open market operations” has
had ever experienced. This event resulted in the      become the prevalent method of adding or
passage of the Federal Reserve Act in 1913; the       subtracting to the money supply. In this way, a
Federal Reserve System that emerged from the          Reserve bank buys or sells government bonds,
administration of President Woodrow Wilson            paid for by the Reserve bank in Reserve Notes,
has been ever since the key monetary authority        to the commercial bank, or vice versa. In this
for the country.                                      way, the amount of currency in circulation can
                                                      be manipulated. A Reserve bank buying bonds
The idea of the System was to bolster the             from a commercial bank increases the money
“fractional reserve banking system” in the            supply; a commercial bank buying a bond
United States. In practice, a bank does not           decreases it. The Federal Deposit Insurance
simply take the monies deposited and store            Corporation (FDIC) was established in 1934
them in a vault until they are withdrawn. Banks       to insure deposits upon failure of the Reserve
keep a fraction of the deposit and lend out           System to do what it was originally intended to

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14                    A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement

do in the early 1930s. Fortunately, there have      ordinary bank, the Bank of United States’ name
not been any serious bank panics since the          was highly regarded, and its failure was a serious
advent of the FDIC, but Friedman proposes to        blow to consumer confidence. The agreement
examine one of the great failures of the system     among other banks and associations to save
prior to the establishment of this safety net.      the bank fell through, and 352 banks failed
                                                    in December alone. Had the Federal Reserve
The end of World War I saw the United States        System never existed, another restriction of
replacing Britain as the center of the financial    payments would have been the likely response
world. The Federal Reserve System had become        to the crisis, and the panic might have been
a major player in shaping the global monetary       over by early 1931. But the System lulled the
structure and had learned how to use the            entire banking community into a false sense of
printing press to increase subtly the quantity      security. The security was a sham, because the
of money without alerting the public to the         System twiddled its thumbs and let the crisis
danger of inflation. The system enjoyed its         take its course rather than engage in large-scale
high tide throughout the rest of the decade,        open market purchases of government bonds
after plunging the country into a brief but         to increase the cash supply of the strapped
sharp recession in 1920 to correct the wartime      commercial banks. The System was idle again in
inflation. This was in no small part because of     the second banking crisis during the spring of
Benjamin Strong, the first head of the Federal      1931. In September, when Britain abandoned
Reserve Bank of New York. With his passing,         the gold standard, the Fed raised the interest rate
the Board in Washington, D.C., began to             for banks more sharply than ever before. The
struggle for power over the other banks, power      Fed feared its gold reserves would be drained by
that had been in Strong’s capable hands. The        foreign holders of dollars after what Britain did,
System was mired in deadlock and indecision.        but the domestic effect of its action was to put
It was the eve of the Great Depression.             further pressure on banks and businesses. Once,
                                                    in 1932, the Fed did begin to undertake open
The stock market crash of October 29, 1929,         market purchase under strong pressure from
“Black Tuesday,” spread uncertainty among           Congress. But when Congress adjourned, the
businessmen and consumers alike and whetted         Fed terminated its program.
their appetite for currency, the most liquid
of assets. Unfortunately, the behavior of the       The final episode of this sad story was the
Reserve System exacerbated the effects of           banking panic of 1933, which was also initiated
the crash. The Board, in a move to impose its       by bank failures. At this point, the System itself
authority on New York City, allowed the money       panicked. President Herbert Hoover, in his
supply to decline from 1930 to early 1933,          last days in office, refused to declare a banking
despite the commercial banks’ desperate need for    holiday, and his successor, Franklin Roosevelt,
currency. Still, the whole thing might have been    waited until March 6 to proclaim one. In
nothing more than a severe recession until the      mid-1929, at the peak of business, there were
autumn of 1930, when a series of bank failures      almost 25,000 commercial banks in business
in the Midwest and the South spread fear and        in the U.S. When the banking holiday ended
led to massive withdrawals that culminated          10 days after it began, fewer than 12,000 were
in the closure of the Bank of United States in      permitted to open. The total stock of money
December of that year. Though it was just an        equaled this drastic decline: for every three

                                                                               Alabama Policy Institute
A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement                     15

dollars of deposits in public hands in 1929, less   is evidence that the Depression began here.
than two dollars remained in 1933. It was a         Had the Fed reacted properly, it would have
monetary collapse without precedent.                increased the quantity of money to match the
                                                    inflow of gold. Instead, it did the opposite.
Friedman contends that the monetary collapse
was a cause before it was an effect of the          What was the effect on the Reserve System’s
economic collapse, and the monetary collapse        “perverse” monetary policy? A complete victory,
was itself caused by the Federal Reserve            Friedman replies; the Reserve Board cemented
System’s incompetence.                              its dominance over the New York and other
                                                    Reserve Banks. The resultant increases in
  The evidence is by now all but conclusive that    power and prestige for the Board have sadly
  the System not only had a legislative mandate     not been accompanied by an improvement
  to prevent the monetary collapse, but could       in performance. Since 1935, the System has
  have done so if it had wisely used the powers     presided over — and greatly contributed to —
  that had been granted to it in the Federal        a major recession in 1937-38, a wartime and
  Reserve Act…The System not only had the           immediate postwar inflation, and a roller coaster
  power to prevent the monetary collapse, it        economy since. The System has not made the
  also knew how to use that power.8                 same mistake that it made in 1929-33, but it
                                                    has made the opposite mistake of fostering an
The System was urged repeatedly to engage           unduly rapid growth in the quantity of money
in open market purchases, “the key action the       and so promoting inflation. In one respect, the
System should have taken but did not.”9 The         System has remained completely consistent
struggle for power made the Board unwilling         throughout. It blames all problems on external
to accept the call by the New York Reserve          influences beyond its control and takes credit
Bank for those purchases. The alternative was       for any and all favorable occurrences. It
confusion and indecision, even in the face of       thereby continues to promote the myth that
outside voices, like that of Illinois Congressman   the private economy is unstable, while its
A.J. Sabath, who called for the Board to act.       behavior continues to document the reality
Friedman also points out that the Depression        that government is today the major source of
started here in the United States and spread        economic instability.10
to the rest of the world rather than the other
way around, robbing the Fed of the alibi that
its actions were a response to pressures from
abroad. The fact that the U.S. gold stock rose
from August 1929 to August 1931 indicates
that holders of U.S. dollars used less of them
abroad and more of them in this country,
because such a shift would have produced an
inflow of gold into the U.S. The rise in U.S.
gold in the first two years of the contraction

8	Ibid. p. 85.
9	Ibid. p. 86.                                     10	Ibid. p. 89 f.

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A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement                        17

Chapter Four                                        survived and has taken the form instead of
Cradle to Grave                                     welfare programs and regulatory activities.
                                                    Instead of socializing the means of production,
With his fourth chapter Friedman takes              the government now seeks to socialize the
a closer look at the massive entitlement            results of production. Lyndon Johnson’s “War
programs that came about as responses to the        on Poverty” added Medicare, Medicaid, food
widespread poverty of the Great Depression.         stamps, and a host of other welfare benefits to
President Franlin D. Roosevelt’s New Deal, as       the scene. Though they, like the New Deal, have
it was called, enlarged the budget and power        been failures, and expensive ones at that they,
of the federal government to unprecedented          too, have become political sacred cows.
proportions in an effort to control what
was then perceived as an unstable capitalist        Social Security is the first of several of
economy and to alleviate the damage it had          the larger programs Friedman chronicles.
caused. Roosevelt was a fresh face, offering        Enacted in the 1930s to enable working
hope to the masses and promising, ironically, to    people to provide for their retirement and
cut government waste and balance the budget.        for temporary unemployment, the program’s
His election to the presidency in 1932 was a        cost has skyrocketed. In 1978, more than 40
watershed in American history, for it marked        million recipients received payments under
a major change in the public perception of the      the program totaling more than $130 billion.
role of government and the actual role assigned     Friedman castigates the bureaucrats for
to government. Roosevelt’s “brain trust” of         the false advertising and labeling of Social
advisors was a group of intellectuals devoted to    Security: the “contributions” are payroll taxes,
a centralized, powerful government that could       paid by employee and employer alike under
protect individuals from the dangers of fortune     compulsion and the “trust fund” is a joke,
and could direct the economy in the name of         amounting, in 1978, to less than half a year’s
the “general interest.” World War II interrupted    outlays. The value of promised benefits to those
the New Deal, but the war’s effect on the public    covered by the program is in the trillions of
attitude toward capitalism and government           dollars. No trust fund exists that can begin to
was a mirror image of the effect of The Great       cover such an obligation.12 Workers paying
Depression. “The depression convinced the           taxes today can have no faith in a trust fund
public that capitalism was defective; the war,      to cover their benefits after retirement. Their
that centralized government was efficient.”11       only hope is that future generations of workers
Some of the socialist programs enacted under        will be as willing as they were to pay taxes in
Roosevelt have affected the American economy        support of their parents’ benefits. “Nine out of
to this day. Though the experience of other         ten working people in the United States are
countries’ experiments with socialism convinced     earning protection for themselves and their
Americans that detailed central economic            families under the social security program.”13
planning and nationalization of industry were       Friedman retorts bluntly: “More doublethink.
failures, the push for bigger government
                                                    12	Interested readers can find up-to-date information
                                                        on the state of Social Security and Medicare in
                                                        The Coming Generational Storm by Kotlikoff and
                                                        Burns.
11	Ibid. p. 94.                                    13	Ibid. p. 104.

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18                     A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement

What nine out of ten working people are now            programs was in 1978 about $90 billion a year.
doing is paying taxes to finance payments to           If the estimates of the Census are used, this
persons who are not working.”14 Social Security        amounts to about $14,000 per family of four,
is a wealth transfer program, pure and simple,         which was twice the 1978 poverty level. Clearly,
from the young and working to the old and              our author comments, much of this money is
retired. He also notes that the payroll tax is         not going to the poor.
regressive, weighing most heavily on those with
low incomes because it is a flat rate on wages         Government housing subsidies have also
up to a maximum. Workers who earn over                 swelled since their humble beginnings in the
the maximum are not taxed on the surplus;              New Deal years. A whole new department,
workers with very little income pay at the same        the Department of Housing and Urban
rate as the wealthy. “It is a tax on work, which       Development, was created in 1965. When
discourages employers from hiring workers              Friedman wrote, it had a staff of nearly 20,000
and discourages people from seeking work.”15           persons and disbursed more than $10 billion
Friedman does not advocate changing the                annually. Its urban renewal programs have been
tax structure to drain more from the wealthy,          failures. More houses are being destroyed than
however. He will give his proposal later.              built, and many lower-class families are losing
For now, he sums up the long-run financial             their homes to middle- and upper-class tenants.
problems of Social Security in this simple fact:       Even worse, public housing units often became
the number of people receiving payments has            slums, rife with crime and juvenile delinquency.
grown to overbalance the number of workers             Friedman recounts several anecdotes to support
paying taxes. Friedman also notes that such a          his point that urban renewal programs have
compulsory system of support to the elderly            not met their stated objectives. “The program
weakens the family bonds that once would have          well deserves the names ‘slum removal’ and
served much the same function voluntarily. This        ‘Negro removal’ that some critics gave it.”16
program also diminishes the financial resources        The beneficiaries of the program were not the
of those in the workforce with indigent parents,       poor, as was intended, but property owners
thereby making the program a moral as well as          and developers, the occupants of the shopping
a social and financial failure.                        centers that were constructed, and the
                                                       institutions that used the program to improve
Friedman’s next target is welfare, listing its flaws   their neighborhoods. Low-priced rental
immediately: the relief rolls have grown despite       housing was renewed out of existence.
increasing affluence; there is a large bureaucracy
devoted to shuffling paper rather than serving         Medicare is the latest site of government
people; it is difficult to motivate people to get      blundering. After Medicare and Medicaid
off the dole once they are on it; relief payments      were introduced in 1965, spending on health
vary widely in different parts of the country,         care mounted, reaching $68 billion by 1977,
thereby encouraging migration; and there is            which was 4.5 percent of national income.
widespread corruption and cheating. Leaving            The government’s share of total spending
aside Social Security, the expenditure on these        on medicine reached 42 percent, and the

14	Ibid.
15	Ibid. p. 105.                                      16	Ibid. p. 111.

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A Condensation of Milton & Rose Friedman’s Free to Choose: A Personal Statement                      19

clamor for more coverage continues.17 The             Legislators, and, indirectly, the voters who elect
cost of private health care has also increased        them, feel that they are spending someone
apace, causing the government to respond by           else’s money, that somebody else is footing
regulating medical procedures and trying to           the bill for welfare. Bureaucrats administering
hold down medical fees, a trend Friedman              the programs are also spending someone else’s
fears could end in socialized medicine. He cites      money, so it is small wonder that the dollar
the growing problems of the British National          amounts explode. There is little incentive for
Health Service as evidence that such a system         efficiency or honesty. Moreover, the poor tend
is inherently flawed. The two major arguments         to lack the skills necessary to get funds in the
offered in favor of socializing medicine are          political scramble, a disadvantage explanatory
likewise unsound. The first, that medical costs       of the tendency of many programs to benefit
are beyond the means of most Americans, is            the well-off. Another consequence, Friedman
meaningless, since the people of this country         explains, is that the net gain to the recipients
will have to pay for the costs one way or the         is less than the total amount transferred.
other. The only question is whether an expensive      The cost of lobbying regulatory authorities
bureaucratic middleman should be involved.            and legislators, and of donating to political
The second argument, that socialization will          campaigns, is a waste of money that must be
somehow reduce costs, Friedman dismisses              subtracted from the gross transfer to get the
out of hand, until someone can find an activity       net gain. In the end, this may not be a gain
conducted more economically by government             at all. The creation of a dependent class by
than by private enterprise. In any case, the cost     compulsion — by threat of force — is a harmful
of health care is well within the means of most       consequence of government meddling. “The
American families; 90 percent of all hospital         use of force is…at the very heart of the welfare
bills are paid through third-party arrangements.      state.”19 Such programs threaten our freedom, as
“There is no case whatsoever for socialized           well as our wallets.
medicine. On the contrary, government already
plays too large a role in medical care.”18 Modern     It is our author’s belief that most of these
medical costs have only reinforced Friedman’s         programs should never been established. But
point that government intervention would only         now that they are entrenched, they cannot
increase our tax burden tremendously.                 be abolished overnight. He proposes instead
                                                      a transitional program that would provide a
Having looked into the murky depths of                direction for future welfare reform efforts and
government largesse, our author steps back            a vision to guide what changes are possible.
a few paces to consider why all these noble-          His program has two main components, the
minded programs have been such abysmal                first more complex than the second. First
failures. His proposal is simple and convincing:      of all, reform must begin with the current
welfare programs involve either spending              jumbled welfare system by replacing the various
someone else’s money on oneself or spending           specific programs with one method of income
someone else’s money on someone else.                 supplements — a negative income tax. In brief,

17	Even as recently as the Clinton administration,
    universal health care has been a recurring pipe
    dream for liberals.
18	Ibid. p. 115.                                     19	Ibid. p. 119.

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