Capitalism and Freedom

Summary

Capitalism and Freedom is Milton Friedman's short, plainly written case for limiting government and relying on competitive markets. It grew out of lectures he gave in 1956 at a series of conferences at Wabash College, and it was prepared for publication with the help of his wife, Rose Director Friedman. The University of Chicago Press published it in 1962. Friedman calls himself a liberal in the nineteenth-century sense: someone who takes the freedom of the individual as the ultimate goal. His first argument is that economic freedom matters both for its own sake and because it is a condition of political freedom. Markets allow people to cooperate without coercion, disperse power that would otherwise be concentrated in government, and make it possible for dissenters to earn a living and publish their views without official permission. He gives government real tasks: keeping law and order, defining and enforcing property rights, providing a stable monetary framework, promoting competition, dealing with genuine neighborhood effects, and caring for those, such as children and the insane, who cannot be treated as responsible individuals. The chapters then apply these principles to specific policies. Friedman argues for a monetary rule under which the money supply grows at a steady rate, rather than for discretionary management by the Federal Reserve. He favors floating exchange rates and free trade. He proposes that government fund schooling through vouchers that parents could spend at approved schools of their choice. He argues that competitive markets tend to reduce discrimination, that occupational licensing often protects practitioners more than the public, and that the social responsibility of business is to increase its profits within the rules of the game. He criticizes many existing welfare programs and suggests replacing them with a negative income tax that would give cash to people with low incomes. Few of these proposals were taken seriously when the book appeared, and it was hardly reviewed in the major newspapers. Over the following decades floating exchange rates, the end of the military draft, school-choice programs and versions of the negative income tax, such as the earned income tax credit, entered public policy, and the book became one of the most influential works of postwar economic and political thought. Critics, including economists in the Keynesian tradition, have challenged its account of markets, money and inequality.

Plot or Argument

• Introduction and Chapters 1–2: principles

  Friedman defines his liberalism, argues that economic freedom is a necessary condition of political freedom, and sets out the proper role of government as rule-maker and umpire.

• Chapters 3–5: money, trade and fiscal policy

  He proposes a fixed rule for monetary growth, defends floating exchange rates and free trade, and questions the use of government spending to stabilize the economy.

• Chapters 6–9: education, discrimination, monopoly and licensure

  He proposes school vouchers, argues that competitive markets penalize discrimination, discusses monopoly and the social responsibility of business and labor, and criticizes occupational licensing.

• Chapters 10–13: income and welfare

  He examines the distribution of income, criticizes several social welfare programs, proposes a negative income tax to relieve poverty, and concludes by contrasting the intentions and results of government programs.

Characters

• Milton Friedman, author

  Chicago economist arguing for competitive capitalism as a safeguard of freedom.

• Rose Director Friedman, collaborator

  Economist credited with helping to turn the lectures into the book.

• John F. Kennedy, foil

  His inaugural appeal to ask what you can do for your country is criticized in the introduction as paternalist in spirit.

• Adam Smith, authority

  His account of voluntary exchange and the invisible hand underlies Friedman's case.

Lessons

• Economic and political freedom

  Friedman argues that a society cannot remain politically free if its economy is centrally directed. Students can test the claim against historical examples.

  • Why does Friedman think a socialist society would find it hard to protect dissent?
  • Can you think of a country that seems to have one kind of freedom without the other?

• Intentions and results

  Friedman repeatedly distinguishes the aims of a policy from its actual effects. This habit of mind is useful in evaluating any proposal.

  • Which of Friedman's examples best shows a policy producing the opposite of its intention?
  • How could you test whether a policy has achieved its goals?

• Proposals that changed policy

  Several of the book's proposals, such as school vouchers and a volunteer army, later shaped real debates. Students can trace an idea from argument to law.

  • Why might an idea ignored in 1962 be adopted decades later?
  • Which of Friedman's proposals do you find most and least persuasive?

Context

The book appeared at the height of postwar Keynesian confidence in government management of the economy, during the Cold War and the early civil rights movement. Friedman was then known chiefly to economists, and the Mont Pelerin Society, which he had helped found with Hayek in 1947, was a small circle.

Composition

The book is based on lectures Friedman gave in June 1956 at conferences at Wabash College in Indiana, sponsored by the William Volker Fund. Rose Director Friedman organized the material, and the University of Chicago Press published it in 1962.

Reception

The book received little attention in major publications at first but sold steadily for decades. Friedman's later fame, his Nobel prize in 1976 and the Free to Choose television series made it a standard text of the free-market revival of the 1970s and 1980s. Fortieth- and later anniversary editions added new prefaces.

Comparisons

• The Road to Serfdom

  Hayek's warning that central planning endangers liberty is the starting point for Friedman's more practical program of limited government.

• The Wealth of Nations

  Smith's account of voluntary exchange, the division of labor and the limited duties of the sovereign is the classical source of Friedman's argument.

• On Liberty

  Friedman shares Mill's view of freedom as the ultimate goal and applies it to economic policy, though he rejects Mill's later sympathies with socialism.

• The General Theory of Employment, Interest and Money

  Keynes argued for active government management of demand; Friedman's chapters on money and fiscal policy are a direct reply to that tradition.

• The Law

  Bastiat's argument that law should protect persons and property rather than redistribute wealth anticipates Friedman's limits on government.

• Freedom and the Law

  Leoni, Friedman's colleague in the Mont Pelerin Society, extends the case for limited government to legislation itself.

• Economics in One Lesson

  Hazlitt's popular primer applies the same habit of tracing the unseen effects of policy to tariffs, price controls and minimum wages.

• Liberalism

  Mises's earlier short book argues, as Friedman does, that private property and markets are preconditions of political freedom.

Quotes

For Students

A reading companion for classical Christian high school students. See the student guide.

Reading Guide

Watch for

• The difference between Friedman's 'liberal' and the twentieth-century American use of the word.
• The tasks Friedman thinks government should perform, not only those it should avoid.
• Where he distinguishes the intentions of a policy from its effects.
• Specific proposals that later became law.

Key terms and names

Classical liberalism

The tradition that makes individual freedom the chief goal of political arrangements and favors limited government.

Neighborhood effect

Friedman's term for what economists now call an externality: an effect of an action on third parties.

Monetary rule

A fixed rate of growth for the money supply, set in advance rather than by discretion.

Voucher

A government payment for schooling that parents can spend at a school of their choice.

Negative income tax

A payment to people whose income falls below a threshold, replacing other welfare programs.

Seminar Questions

1. Comprehension What does Friedman mean by a 'liberal'?
2. Comprehension What functions does Friedman believe government should perform?
3. Interpretation Why does Friedman think economic freedom is a means to political freedom?
4. Interpretation How does Friedman argue that competitive markets tend to reduce discrimination?
5. Interpretation Why does he object to discretionary monetary policy?
6. Big Question Should government provide services such as schooling directly, or only pay for them?
7. Big Question Is there a tension between freedom and equality, and how should it be resolved?

Faith Connections

• 1 Samuel 8:10-18 (Scripture)

  Samuel's warning to Israel about what a king will take from them is an ancient reflection on concentrated power that readers often compare with Friedman's case for limiting government.

• Leo XIII, Rerum Novarum (Great Conversation)

  The encyclical defends private property against socialism while insisting on just wages and the role of the state, a useful point of comparison and contrast with Friedman.

Logic and Rhetoric

Central argument: Because markets coordinate activity through voluntary exchange and disperse power, competitive capitalism is a necessary condition of political freedom, and government should be limited to setting and enforcing rules and doing what markets cannot.

Rhetorical device: argument from consequences. Friedman repeatedly sets the stated aims of programs such as licensing or public housing against their observed effects to argue they should be changed.

Debate: Resolved: Public funding for education should follow the student to the school of the family's choice.

Writing Prompts

Essay: Explain Friedman's argument that economic freedom is a condition of political freedom, and evaluate it with one historical example.

Comparison with The General Theory of Employment, Interest and Money: Compare Friedman's and Keynes's views of what government should do about unemployment. Which do you find more convincing, and why?

Creative Prompts

• Essay

  Choose one of Friedman's proposals, such as school vouchers or the negative income tax, and write an essay explaining his argument and evaluating it with evidence.

• Classroom

  Hold a town meeting on whether a local occupation, such as hair-braiding or tour guiding, should require a license. Assign roles and let students argue from Friedman's chapter and from its critics.

• Dialogue

  Write a debate between Friedman and Keynes on what government should do during a recession.

Further Reading

• Free to Choose, Milton Friedman and Rose Friedman

• A Monetary History of the United States, 1867–1960, Milton Friedman and Anna J. Schwartz

• Two Lucky People: Memoirs, Milton Friedman and Rose D. Friedman

• Milton Friedman: The Last Conservative, Jennifer Burns