Free to Choose: A Personal Statement - essential readings
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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
www.alabamapolicy.org2 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
Alabama Policy InstituteA 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.
www.alabamapolicy.org4 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.”
Alabama Policy InstituteA 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. www.alabamapolicy.org
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.
www.alabamapolicy.org8 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.
Alabama Policy InstituteA 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
www.alabamapolicy.org10 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.
Alabama Policy InstituteA 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.
www.alabamapolicy.orgA 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
www.alabamapolicy.org14 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 InstituteA 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.
www.alabamapolicy.orgA 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.
www.alabamapolicy.org18 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.
Alabama Policy InstituteA 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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