Posted on 03/22/2016 1:41:27 PM PDT by Uncle Miltie
How the free market protects
Historically, political freedom has followed the emergence of free markets and capitalist institutions. This is because, Friedman notes, a healthy private economy naturally provides a check on the power of the state.
For instance, even though they were officially persecuted, in medieval times Jews still thrived because they could operate as merchants. The Puritans and Quakers were only able to relocate to America because they had built up funds in the comparatively free markets of Britain, despite being lumbered with other restrictions.
Where monopolies and trading restrictions are rife, so is special treatment of one social, racial or religious group over another; the ability to ‘keep people in their place’ remains. In a genuinely free market, economic efficiency is separated from irrelevant characteristics such as skin color or faith. “[The] purchaser of bread”, Friedman remarks, “does not know whether it was made from wheat grown by a white man or a Negro, by a Christian or Jew.” Further, a businessman who favors one group over another will be at a market disadvantage to a businessman who does not, and one who is blind to differences among his suppliers will have more choice from whom to buy and hence lower costs.
During the period of ‘blacklisting’ of Hollywood actors and screenwriters as the result of Senator McCarthy’s anti-communist witch hunts, many writers continued to work anyway, often under assumed names. Without an impersonal market which created a demand for their services, they would have lost their livelihood. In a communist society, Friedman notes, such a thing is impossible since all of the jobs are controlled by the state. Winston Churchill was prohibited from speaking out against Hitler on BBC radio in the years after Hitler came to power, because the matter was deemed too controversial. It is unlikely this would have happened had the BBC not been a government monopoly. Friedman’s message: government often seeks to protect citizens from all sorts of things, failing to see that the ‘invisible hand’ operating in free and open markets – for goods, labor and information – somehow manages to offer much greater protections of personal liberty.
The idea that free markets do this was the exact opposite of what intellectuals were saying through most of the 20th century. The individual was seen to be vulnerable in the face of corporate power, and to need governmental protection. This view evolved out of the horrors of the Great Depression, which was considered to be a terrible failure of the markets. In fact, as Friedman argues in the book, the Depression was largely a governmental failure.
Meddling in the market
Both ‘full employment’ and ‘economic growth’ have been put up as reasons why governments should have more control over the economy. The Great Depression, people invariably say, is surely evidence of the inherent instability of markets left to their own.
In fact, Friedman says, the Depression was caused by government mismanagement. The US government’s Federal Reserve System, through clumsy use of the levers of the monetary system – specifically, not increasing the money supply in the wake of bank collapses - turned what would have been a contraction lasting a year or two into a catastrophe. The ‘mistakes of a few men’ caused untold misery to millions which could have wholly been avoided if the market was truly left to itself. Though he accepts that it is the role of government to create a stable monetary system, the responsibility is a grave one and should be severely limited.
Progress via people, not governments
There is never any shortage of ‘good reasons’ why government should get involved in curing market or social ills. Sometimes, the good intentions are matched with impressive achievements. Friedman applauds, for example, the creation of a US national freeway system, the building of major dams, its public school system, and some public health measures.
However, most of the advances in the American people’s standard of living have arisen from their ingenuity and have nothing to do with government. Prosperity has come despite all the laws and ‘projects’, not because of them. Generally, excess regulations “…force people to act against their immediate interests in order to promote a supposedly general interest”.
Friedman famously includes a list of areas of government intervention which he believed were not justifiable. These include tariffs and import quotas, subsidies to farmers, rent controls, minimum wages, regulation of industries including banks, transport and radio/TV, social security programs making people put aside a certain amount of money for retirement, public housing, licensing of occupations, and conscription in peacetime. While all these policies sound good in theory, in truth they often have the reverse effects that were intended.
For instance, the minimum wage was partly aimed at alleviating poverty of African-Americans; what actually happened was that the unemployment rate of teenage blacks shot up. Public housing was designed to alleviate poverty; instead, it concentrated poverty in pockets. ‘Social security’ policies were intended to provide a safety net for those unable to work, but instead created dependents who might otherwise have contributed to the economy. Friedman’s damning conclusion: “Concentrated power is not rendered harmless by the good intentions of those who create it.”
There are really only two ways a society can organize economic activity, Friedman writes: * Through centralization and coercion; * Through facilitating a marketplace for the trade of goods and services.
The drive towards centralization usually begins in a spirit of good will, but before too long power becomes more important, and ‘the ends justify the means’. Coercion and violence are considered a small price to pay for a glorious dream of equality.
In a free country, however, free discussion and voluntary cooperation are the means towards achieving anything. This may be a slower way to achieve ends, but is a surer and less dangerous. The beauty of markets is the way they allow unanimity without conformity; a direction emerges, but no one has been made to do anything.
Friedman accepts that after World War Two the United States had to centralize and enlarge its military spending in order to defeat the USSR, but dealing with this danger created a back door for a large increase in government’s share of national spending and control. A bigger threat than Russia was the erosion of freedoms and free institutions at the expense of the growing power of ‘the nation’.
Freedom first, equality second
Friedman argues that inequality is always less in capitalist countries. Many will disagree with this, pointing to the vast gaps between say, a corporate executive earning $10,000 a day, and someone who works in a shop earning $20,000 a year. Yet even a low paid person in a capitalist economy, he points out, is better off than the privileged classes were a century ago: They do not have to engage in backbreaking labor, medical care is vastly improved, they have at least basic education, live with modern plumbing and heating, have cars, television, radio, phones and entertainment, all of which the rich and royal of previous times could only have dreamed about. Even if an individual does not seem to do well out of capitalism, he or she still benefits in many ways. In contrast, with stratified social systems and socialism, the ‘goodies’ always seem to go only to those at the top.
The heart of liberal philosophy, Friedman writes, is people having equal rights and equality of opportunity. It does not mean there should be equality of wealth. If all people grow richer in a capitalist system, this is a welcome by-product of freedom, but it is not its purpose. The purpose of a free, capitalist system is the freedom of the individual. What they do with that freedom is their business.
Ping, please.
I agree with everything you say here. But you left out an important factor -- the explanation of which may be Adam Smith's most important contribution to our understanding of how an economy prospers. That factor is specialization.
For example, if every family had to make their own shoes, we'd all be the poorer, due to the lack of specialization. We'd spend maybe a quarter or more of our time making shoes.
Therefore, we all are led by the invisible hand of the market to specialize at what we do best, and we buy our shoes from somebody else.
Ditto for every product and service. And ditto for international trade. All trade, whether domestic or international, is about specialization -- a factor that in the long run will make everybody and every country more prosperous than they would otherwise be.
To MJP —
Here’s an addendum to my post no. 22:
I should have acknowledged that you did mention “division of labor,” which indeed is one type of specialization. My apology.
On the other hand, there’s a lot more to specialization than just the division of labor, as analyzed so well by Adam Smith.
In particular, trade between/among regions and countries will increase overall productivity thanks to various “non-labor” differences among trading partners, such as varying natural resource endowments; climatic differences; cultural differences in regard to the propensities to work, save and consume; different legal and political systems; inequalities in accrued capital stock; education, health, and skill of the labor force; and so forth.
Anyway, while Adam Smith didn’t analyze each of these factors the way he analyzed the division of labor, I’m confident he’d appreciate all of them!
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.