Freedom and Society: Classical Liberalism in the Twentieth Century
A Course with Professor Thomas Patrick Burke
If Ludwig von Mises provided the most powerful economic formulation of classical liberalism, arguing that economic progress demands a free society and especially free markets, and Friedrich Hayek secured for this message a serious hearing among the political classes, buttressing it with arguments from the nature of law and morality, Milton Friedman took it out of the scholarly closet and made it a popular philosophy which attracted millions of adherents around the globe. Not that he was merely a popularizer: he made original contributions to economic theory, and through his students and disciples in several countries (Chile, Iceland, Estonia) was influential in introducing government polices that have had dramatic success in increasing not only freedom but also prosperity.
Milton Friedman was born in Brooklyn and grew up in Rahway, New Jersey . He studied at Rutgers University there under Arthur Burns, later to become chairman of the Federal Reserve, and went on to study at the University of Chicago and at Columbia where he eventually completed a doctorate in economics. He was unable, however, to find a teaching position, this being during the Depression, and, somewhat ironically in light of his later views, went to Washington, DC to work for the federal government. At this time he accepted many Keynesian ideas, such as the job-creation programs of the Roosevelt administration, though he was critical of others, such as the price- and wage-fixing measures of the National Recovery Administration and the Agricultural Adjustment Administration.
In 1946 he accepted a position at the University of Chicago, where he remained for thirty years. It was during this time that he abandoned the remnants of his Keynesianism and came to be a fervent advocate of the free market, describing himself as a “classical liberal.” This philosophy came to be a hallmark of the group of faculty and students known as “the Chicago School .” In 1976 he won the Nobel Prize in Economics. In 1977 he retired from Chicago and moved to the Hoover Institution at Stanford University. He died last year.
His main professional works in economics are:
Essays in Positive Economics (Phoenix Books, 1953)
A Theory of the Consumption Function (National Bureau of Economic Research, Princeton, N.J., 1957)
A Monetary History of the United States, 1867-1960, (National Bureau of Economic Research, 1963) co-authored with Anna Schwartz, an economic historian at the Bureau.
Price Theory (Phoenix Books, 1962), a college textbook.
The Optimum Quantity of Money: And Other Essays (Aldine, 1976).
To the public at large he is best known by two books written for them:
Capitalism and Freedom (University of Chicago Press, 1962), and especially
Free to Choose: A personal statement, with Rose Friedman, (Harcourt Brace Jovanovich, 1980).
Milton Friedman is generally considered the father of monetarism. This is a theory that emphasizes the role that the quantity of money plays in the economy. For example, he argues that inflation (a general rise in prices) is caused mainly by the action of government in creating an excessive supply of money in relation to production. From this it follows that the remedy for inflation consists in the adoption by government of a policy of increasing the money supply only in proportion to increases in production. Inflation typically follows wars because governments typically finance wars by printing money, and the inflation will only subside when they cease this practice.
In the Monetary History, Friedman and Schwartz argue persuasively that the Great Depression was caused in large part by the action of the newly created (1913) Federal Reserve Bank in limiting the supply of money just when, because of the run on the banks occasioned by the crash of the stock market, they should have been increasing it. This was especially ironical because the chief purpose for which the Federal Reserve was founded was to increase the money supply when it contracted in times of crisis. Friedman calls the Great Depression the Great Contraction.
In A Theory of the Consumption Function Friedman argues for the “permanent income hypothesis,” which makes a distinction between consumers’ current income and their longer-term income expectations, arguing that it is the latter rather than the former that determine their consumption patterns. People’s longer-term income expectations depend on their assets and are relatively stable. This has implications for government policy: for example, before elections governments may give a sizeable tax cut to stimulate the economy, but typically consumers do not expand their consumption to take advantage of it. This, together with his monetarist theory, was the work that chiefly won him the Nobel Prize.
Unlike Mises and Hayek, Friedman did not write a large, systematic exposition of his philosophy. His Monetary History is just what it claims to be, a history, though it argues for the monetarist thesis.
His overall philosophy is best expressed in the two books mentioned above that were written for the general public. These are sometimes said to be essentially two versions of the same book, the later one, Free To Choose, being an updated form of the earlier one. In fact, however, they argue different theses. Capitalism and Freedom argues mainly that political freedom and economic freedom go together: a society that wishes to have political freedom must also grant its citizens economic freedom. Socialism is incompatible with political freedom. Free To Choose, on the other hand, argues mainly that economic freedom is necessary in order for a society to make economic progress. Socialism is the enemy of prosperity. In this lecture we will discuss some of the main ideas of both books. It is generally agreed that the later book is easier to read.
In Capitalism and Freedom, Friedman is addressing a viewpoint that was very common among American intellectuals during the 1920s and 30s, and is still widespread today. In his classic work A Theory of Justice (1971), for example, John Rawls assumes that political justice can be entirely independent of whether the society chooses to adopt a capitalist or a socialist form of economy. In his view, the fundamental degree of freedom a society possesses is not necessarily affected by having a socialist system. But Friedman had already argued that this was fallacious.
“…there is an intimate connection between economics and politics…only certain combinations of political and economic arrangements are possible, and in particular…a society which is socialist cannot also be democratic, in the sense of guaranteeing individual freedom.”
This is so because the concentration or dispersion of power in general in a society is affected by the concentration or dispersion of economic power. Competitive capitalism separates economic power from political power and in this way enables one to offset the other. As a result it promotes political freedom.
Friedman points out that the role of the economy in relation to freedom is twofold. On the one hand, economic freedom, the freedom to earn one’s own living in one’s own way and to dispose of one’s income as one sees fit, is important directly and for its own sake, because it is a part, and a very important part, of freedom as such. On the other hand, economic freedom is particularly important indirectly, because it is indispensable for political freedom. For this latter thesis, Friedman offers two kinds of argument, one based on history, the other on the logical relationship between the two species of freedom. His thesis is not that economic freedom is a sufficient condition of political freedom, but that it is a necessary one.
The historical evidence is unequivocal: history “speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity.” In the long span of human history, political freedom has been rare. It has existed in ancient Greece and early Rome, and again in Western society during the last two centuries. Otherwise the typical condition of society has been tyranny, servitude and misery. When political freedom has existed, it has always been in conjunction with economic freedom.
The causation, however, can work in both directions. Benthamite liberals in early nineteenth century England wanted political freedom as a means to gain economic freedom: they believed the masses were kept in poverty by artificial governmental restrictions, and if they had the vote they would vote for laissez-faire. With the growth of the socialist movement as the century wore on, however, the desire for freedom was replaced by a desire for welfare and redistribution. The heirs of Bentham, including Mises and Hayek, warned that this development giving government control of the economy placed political freedom also in danger. They desired economic freedom as a means to preserve political freedom. Since the Second World War, economic planning at first led to heavy infringements on individual liberty, but eventually this became too much, and the desire to preserve personal freedom led to a partial roll-back of socialist measures in England and other countries.
Friedman recognizes, however, that arguments from history, valuable though they are, have only limited weight, and he goes on to make an argument based on the logical links between market freedom and political freedom. The basic problem of social organization is how to co-ordinate the activities of large numbers of people. Fundamentally there are only two ways of doing this: through voluntary cooperation or through coercion. Freedom consists in the absence of coercion. Therefore the free society will be one that minimizes coercion and maximizes voluntary cooperation.
The marketplace is a system of voluntary cooperation. It rests on the proposition that both parties to an economic transaction, an exchange, will benefit from it on condition that it is voluntary and informed on both sides. (Here it should be noted that in including “informed” in these conditions, Friedman takes a more restricted view than many who otherwise agree with him. In the broader view, individuals are responsible for informing themselves, and for actions that they take when they have not done that. See my discussion of the Principle of Mutual Benefit in No Harm, Ch.2, p. 39.)
Friedman also evinces an unusual conception of coercion, among defenders of market freedom. The traditional conception of coercion is that it consists in the use or threat of force, and this is usually what defenders of free markets emphasize against the socialist view that there is little difference between coercion and other kinds of pressure. Friedman uses the traditional conception, but also extends the meaning of coercion to the absence of competition. He writes
“The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because of other employers for whom he can work, and so on.”
There can be no doubt that the presence of alternative partners adds greatly to the exercise of freedom in the marketplace. But in my opinion it is a mistake to imagine that employees are coerced by the fact that there may be only one employer offering jobs in a particular region.
The fundamental threat to freedom in a society comes from the concentration of coercive power in one or a few individuals. The preservation of freedom requires the elimination of such concentrations and the wide dispersion of power in the society. To the extent that economic activity is removed from the control of government and left to the decisions of individuals, economic power is dispersed very effectively throughout the society.
Friedman illustrates this thesis by asking the reader to imagine how, in a socialist society in which the economy is controlled by government, but which otherwise claims to be free, an individual could go about the process of publicly advocating capitalism. To do that, he must first earn a living, which it would require a good measure of self-denial on the part of the socialist authorities who give him a job to allow. But then he must be able to finance his cause, hold public meetings, publish books and pamphlets, newspapers and magazines, etc. Friedman concludes this would be very difficult if not impossible. He gives the example of Winston Churchill, who though a member of the British Parliament and former cabinet minister, was not permitted to talk over the radio from 1933 to 1939 because the BBC, owned and controlled by the government, had a monopoly on British radio, and deemed his position was too controversial. Through other examples (Hollywood, McCarthyism,etc.), Friedman argues that time and again it has been the freedom of the market that has prevented encroachments on political liberty.