"He was perhaps the most intellectually honest person I have ever known... [I]n his policy papers and discussions he used the same economics as he did in his academic work. ...As is well known, Friedman was a strong supporter of competitive market economies, but this was not defended by ideology. He used economic analysis to argue that this was the most effective way to raise the living standards of the world's poor. I strongly agree with him, and so do the great majority of economists in different parts of the world. To be sure, one can argue against this and other policy positions he took, but that is how intellectual progress is made on crucially important economic questions."

 -Gary Becker, 26 October 2008*


Before Nudge, before Discover Your Inner Economist and Freakonomics, before Simple Rules for a Complex World, there was Milton Friedman's Capitalism and Freedom. While undoubtedly not the first work of prescription and explanation written by a modern (post-neoclassical-synthesis) mainstream economist, it's the earliest that has had any staying power. It's not too great a stretch to say that the four books listed above probably wouldn't have appeared were it not for Capitalism and Freedom, which cleared the way for them in at least three ways: by widening the audience for serious popular-economics books, by (re-)introducing the broad case for liberalism to the modern audience, and by effecting a change in the state of affairs to the point where the advice of Epstein in Simple Rules or Thaler and Sunnstein in Nudge doesn't seem like ivory-tower idealism.

The historic importance of Capitalism and Freedom in the English-speaking world is clear. Omitting it from the required reading list for a serious high-school history class would simply be a mistake, and if you didn't read it in high school, either for class or on your own, now is as good a time as any to fill in the gaps. Understanding the liberalizations during the Carter and Reagan administrations in the U.S. and under Thatcher in the U.K. is difficult without first understanding this text and the movement it helped to create.  (While he takes no credit for this himself, the change brought about by liberalization is noted positively by Friedman in his preface to this, the 2002 edition of Capitalism and Freedom.)  Here also is the place the cases for school choice, the ending of restrictive licensing laws, more-or-less automatic monetary policy, and flatter taxes were first made in a non-ideological way to a mass audience. Moreover, in Capitalism and Freedom is a clear, from-the-basics explanation of what was wrong with the Bretton Woods system.

One wonders, however, whether or not a book so old that it devoted most of a major chapter to Bretton Woods is still relevant for anything but understanding history. One route to "yes" is to consider that, not long after Friedman's 2006 death, a Canadian red-diaper baby turned polemicist (who doesn't deserve to be named) made the best-seller list (and, as an unintended side-effect, exposed Joseph Stiglitz as a scoundrel) by re-interpreting quotes from this book in a fashion that makes zero sense in context, so as to turn Friedman into a folk-demon and argue that the thesis of Capitalism and Freedom was that ideologically-based reforms should be imposed during times of crisis. Even were Capitalism and Freedom not to have contemporary relevance, such a treatment would have brought it back to life, if only as an answer to the question "What do they really advocate?"

But Capitalism and Freedom would have relevance even were the late Friedman not to have become the bogeyman of the radical Left.  It is a book of large ideas, largely but not entirely prescriptive, grounded in microeconomics and day-to-day facts.  Where those ideas have been adopted, Capitalism and Freedom is a compelling case for the present; where they have not been adopted, the reforms suggested are still sound, and in the few places where Friedman was wrong, he was wrong in interesting ways that brought about positive developments in political economy and economic science.  Chapter-by-chapter, a reader will find:

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Chapter 1:   "It is widely believed that politics and economics are separate"; the main text of Capitalism and Freedom opens with the most dated pronouncement of all.  Tullock and Buchanan's Calculus of Consent was published the same year; Public Choice at the time was the obscure realm of eccentrics trespassing on what was considered the rightful territory of sociologists and political scientists.  In what could be a standalone essay, Friedman makes the qualitative hypothesis that economic liberty will cause and enable demand for political liberty, and that restrictions of economic liberty often amount to restrictions of political liberty.  We've seen this play out in the positive sense partly in China and Vietnam and before that in the Soviet bloc, and in the negative sense under Mugabe and Chavez and also in the creation by Social Democrats in Europe of captive, riot-prone voting blocs whose sustenance would seem to depend solely on the State; witness Greece last month.

In 1962 the case still had to be made that economic liberty was truly liberty and not just nicety, and that its abridgement was oppressive.  With judicious appeal to both real and hypothetical example, Friedman explains just how and in what ways capitalism is liberating.

Chapter 2:  In a very short chapter, the second setting the stage for the rest of the text, Friedman sketches his view of the role of government as "rule-maker and umpire" in a free society, plus as the regulator of "technical" or natural monopolies that markets simply cannot handle.  Externalities, which Friedman calls "neighborhood effects", are discussed, with Friedman not giving any hard-and-fast rules (what vulgar libertarians would call "principles") and making the implicit case that such matters do not lend themselves to hard-and-fast rules.

At the chapter's end is a list of policies that cannot be justified in a free society.  The number we still see today, despite almost half a century more of evidence against them, is amazing: among those on Friedman's list are agriculture subsidies, import tariffs, rent control, minimum wages and price controls, "detailed regulation" of industry (which we see much less than in his day, but consider what insurance products Congress just told us we can no longer buy or sell!), the Social Security intergenerational transfer, restrictive occupational licensure, national parks (overstated by association with the rest of these, but it makes sense in the chapter's context), and publicly owned and operated toll roads.

Chapter 3:  Thus begins the "meat" of the book.  Here Friedman addresses the topic that earned him most acclaim as a scholar: money.  While it would take another decade for the monetary situation to get truly bad, the money supply and its effect on the price level was already a cause for concern in 1962.  In plain language Friedman summarizes monetary history,makes the case for the monetary supply to be governed by rules and not soothsayers, and sets forth what came later to be called the "k-percent" rule. 

Admitting that this should not be a for-all-time rule, he is optimistic that better, more subtle rules will be developed.  While the Federal Reserve never adopted a formal monetary rule, the appointment of monetarists to the Fed and the adoption of rule-like behavior brought us into the period of low, steady inflation we now enjoy.

Chapter 4:  Here Friedman makes the case for free trade in the context of an explanation of the mechanism of the Bretton Woods system's failing. Triffin's Dilemma.  This is largely of historical interest; we find ourselves, given how often such a system is proposed by ideologues, wishing that Friedman would have expounded more on his remark that an automatic gold standard would have been unworkable.

Chapter 5:  The Keynesian multiplier theory is discussed here.  At the time arguments against it were largely hokey--think the "Treasury argument" that we still hear.  Friedman takes a cautious and scholarly approach, presenting the then-cutting-edge finding that the fiscal multiplier is, on average, approximately 1, and thus that government spending doesn't smooth out economic downturns.  A reference to the paper he published with a student on the subject is one of the few footnotes in the book. 

The discussion of why, despite whatever theoretical arguments could be made for it in the ideal case, fiscal stimulus usually doesn't work in the real world, has largely been forgotten except by economists.  Witness how seriously "stimulus" was discussed in 2008-2009 and how few commentators or reporters bothered to ask its proponents "just what makes you think that this is stimulus and not merely a spending program?"; Capitalism and Freedom could have spared us a good deal of silly talk and perhaps even some government waste.

Chapter 6:  In what is the chapter of Capitalism and Freedom that had the most clearly discernible practical impact, Friedman makes the case for school choice, in the form of a voucher program.  He also speculates that student loans will become available for higher education, but the terms he draws up for such an hypothetical loan are amusingly draconian!

Chapter 7:  "It is a striking historical fact that the development of capitalism has been accompanied by a major reduction in the extent to which particular religious, racial, or social groups have operated under special handicaps."  Here Friedman returns to the liberating nature of capitalism, explaining why this is so, before turning to address pending "Fair Employment" legislation. 

This matter, and the arguments made here, have been brought back to public attention due to Rand Paul's recent publicly-voiced misunderstandings of history.  Friedman disapproves of discrimination and recommends that people be voluntarily more active in bringing it to an end, but at the same objects to such legislation because it will involve the second-guessing by public commissions of fundamental business decisions.  While in the long run this second-guessing has proved to be a problem--the justification of such laws ended when systematic discrimination did--it was probably necessary at the time for reasons recently explained by David Bernstein and others.†  Friedman is probably wrong here, but understanding why he's wrong is important.

Chapter 8:  Two topics are tied together inexplicably: monopoly, which Friedman recommends eliminating wherever possible, preferably by doing away with bad policies that cause monopolies to form in the first place, and the social responsibility of business.  Best undersood in the context of Friedman's views on the proper role of government, he argues that the social role of business is to earn profit for the shareholder, that "corporate social responsibility" divorces shareholder ownership from shareholder control.  Much of this is tied to the contemporary concern about the money supply and the balance of trade and is thus obsolete; it was in a later essay (in the New York Times Sunday Magazine) that Friedman made the full case against CSR and voluntary corporate restrictions on their own profit-earning behavior and in favor of the government doing its job to govern.

Chapter 9:  The Institute for Justice to this day fights against occupational licensure laws the sort of which Friedman discusses here; 48 years after Friedman made them look ridiculous, and 48 years without a single solid argument against that, license laws are still on the books.  He explains that they serve as a price support for some, to the detriment of others, including consumers and new entrants to the marketplace.  This is one of the more misunderstood or misquoted sections of Capitalism and Freedom.  For example, Friedman is often stated as claiming that licensing exams restrict the supply of MDs and thus drive up the price of medical treatment, which is empirically false, as few graduates of medical schools fail to earn a license.  But the argument actually made in the text is that the medical schools' accrediting body limits the number of students who can be accepted.  Still true: this is why pre-med students beg to get their "B"s in physics changed to "A"s.

Chapters 10-12:  The chapter begins with a statement of sociological truth that, despite its triviality would be a great provocation to the many more doctrinaire "libertarians" who believe property to be separate from and prior to government.  If any who meet that description read this, I leave them to look up the passage.  Onward to matters of more general interest.

In what could be taken as an intellectual prelude to Nozick's thorough intellectual demolition of pattern theories of justice, Friedman begins a discussion of supposed ethical concerns about the distribution of wealth and income by proposing a rule theory, explaining both the material benefits of the rule theory (private, voluntary speculation and risk-taking), then briefly even taking on the Marxists (which we wouldn't have to do today, so discredited is their theory of justice) before turning back to empirical matters, setting straight some misconceptions about the sources of inequality in free society.  The ways in which the leveling goals of progressive taxation were defeated in practice are discussed.  Strangely, Friedman makes no mention of compliance costs.  However, the remedy is the same: a flat tax; in 1962 a flat tax with no loopholes, set to the tax rate of the lowest bracket, would have worked. 

Moving on, Friedman takes up the subject of the Social Security pension system, that we're still stuck with today in unchanged form, and measures that supposedly help the poor but don't measure up.  His proposal for alleviation of poverty, one that we would be wise to accept today, is to change the question from "how much" and "who pays" to "how".  A guaranteed minimum income, in the form of a universal negative income tax, is proposed here to a mass audience for the first time.  Its supposed superiority comes from its simplicity--it would replace a "grab bag" of programs, some which work and some which do not"--and its lack of the disincentive to betterment that has come to be called the "welfare trap".  Hayek didn't advocate something too dissimilar, but Mises Institute glibertarians will scream as though Friedman was advocating eating babies.

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If any themes emerge in this sea of solutions to policy problems, some of them of the past and some of them still ours, they are that capitalism per se is liberating and in many ways radically equalizing, that most of its supposed injustices come from faulty policy, that people would be made better off and more materially equal were isonomy to replace the privileges granted by monopolies, price supports, and licensing, that well-intended government programs can fail and even cause harm, and that through reforms, markets can be made to work or work better.  In Friedman's view, most good things are or can be produced in the voluntary, private sector and the government should only intervene when necessary and proper.

The only real deficiency is Capitalism and Freedom's near total lack of footnotes or endnotes.  While this can enforce a sort of discipline against burying explanations in footnotes instead of incorporating them into the main text, it makes it difficult for the reader who would like to use Capitalism and Freedom as a leaping-off point to the more thorough academic literature that supported it at the time, and it creates the illusion--or at least gives the enemies of liberty a way to claim--that Friedman was merely speculating or making things up not just in the truly speculative passages (easily discerned by tone) but also in places where his position was and largely is still grounded by economic science.

Always intellectually engaging and never scolding or pedantic, Friedman's arguments, translated, by his own acknowledgement, into "written English" and assembled from notes and fragments into a coherent whole--one could almost say "ghost-written"--by his wife Rose, herself a trained economist, are a true joy to read.   Few texts that could serve as effectively as a primer for the liberal way of thinking have been written between 1962 and of those, none more enjoyable, none which so effectively combine wit, rigor, grace, intellectual graciousness, and daring come to mind.  In its approach to the problems of its time, which in many cases remain the problems of our time, it is an example of clear, effective, yet concise writing. Were the financial-sector implosion of 2008 to be explained as clearly as Friedman explains the troubles with Bretton Woods, and would the case for market-based health care reform to be made as well as Friedman makes the case for ending licensure or floating currencies, we'd have been spared a lot of silly talk and harmful policy.

As that Canadian red-diaper baby so emphasized, in the preface to the 1982 edition of Capitalism and Freedom Friedman notes that change only comes in times of crisis.  What is missed in that discussion is where Friedman goes from there: "When that crisis occurs, the actions that are taken depend on the ideas that are lying around."  The liberalism presented in Capitalism and Freedom, to the extent that it has been tried, has stood the test of time, and to the extent that it hasn't, presents a powerful and empowering--liberating--way of thinking of the world's problems.  These are the ideas you want to have lying around.  If you own a copy, share it.  Give one to an 8th-grade or high-school graduate this year.  If the local school library doesn't have a copy, buy them one.  And if you haven't read Capitalism and Freedom yet, buy a copy and read it.


* www.becker-posner-blog.com/archives/2008/10/observations_on.html


† E.g.  volokh.com/2010/05/20/bruce-bartletts-attack-on-libertarians/

Recommended: Yes