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September 2012 Policy Study, Number 12-9


A Short History of Economic Theory


Milton Friedman: Rebirth of Liberty



“Underlying most arguments against the free market is a lack of belief in freedom itself.”[102] Milton Friedman, founder of the monetarist school of economics, was undoubtedly one of the greatest advocates of liberty in the Postwar Era.[103] Underlying his entire philosophy of government was a simple premise in the vein of Adam Smith: benevolent self-interest leads to positive economic consequences.[104] In Capitalism and Freedom, Milton Friedman explained the connection between economic and political freedom, described the role of government in a free society, developed monetary economics, critiqued fiscal policy, defined the role that capitalism played in developing society, examined monopolies, and analyzed the effects of social welfare.[105]


Friedman began his work by inextricably linking economic freedom to political freedom, binding them together in his societal model.[106] Friedman rejected the modern definition of a progressive “liberal” and identified himself as a classic, 18th and 19th century liberal.[107] Economic freedom was an end to itself, Friedman believed, and did not require any other justification.[108] Freedom leaves the classical liberal to solve ethical problems, which are not the concern of the State, but are in the jurisdiction of the individual.[109] According to Friedman, mutually beneficial exchange was the key to a successful free-market economic system.[110] However, he still believed that government must determine the “rules of the game” and then enforce them.[111] In the larger scheme of national power, economic freedom checked political ambition, similar to the way that the three branches of federal government balance each other to prevent unconstitutional actions.[112] Having defined the connection between economic freedom and political freedom, Friedman moved on to the role of government in society.[113]


Opposed to a collectivist community, Friedman sought limited government that maximized individual freedom.[114] Imposing conformity is not possible without conflict, so Friedman asserted that the free market eases the problem by promoting self-interest, rather than forced change.[115] Absolute freedom is impossible because of human nature, so the government needs to set and enforce the rules of the market.[116] Paternalistic government, however, was unjustified in Friedman’s view, since it created a sense of dependency rather than self-worth.[117] General education for citizenship was required to maintain a free, productive, and efficient society that was grounded in certain values.[118] Friedman backed the view that competitive choice efficiently meets consumer demand for education, no differently than any other part of the free market.[119] Registration, certification, and licensure, most of which are unwarranted, represent increasing loss of freedom for producers in an economy.[120] According to Friedman, very few licensure processes are justified at all, since they represented barriers to entry in a free market.[121] Based on the same classically liberal ideology, Friedman advocated a government monetary policy to affect the economy.[122]


Friedman, the father of monetary policy, emphasized the quantity of money in the economic system, seeking to end inflation and promote growth.[123] Friedman identified the gold standard and fractional reserve system in banking as the chief roots of economic ills.[124] According to Friedman, the Great Depression did not signal problems in the free market, as Keynes had thought, but was actually a symptom of governmental problems.[125] Above all, Friedman stressed the need for rules instead of authorities in the economic system.[126] Friedman advocated floating exchange rates rather than a fixed gold standard, which he felt would make the implementation of changes in the quantity of money far easier.[127] Elimination of trade restrictions was another key point of Friedman’s, since it encouraged competition and efficient allocation of resources.[128] Friedman’s development of monetary economics was a direct confrontation to Keynesian fiscal policy.[129]


Fiscal policy was, in Friedman’s eyes, a tool to expand government, which he opposed as a classical liberal.[130] President Franklin Roosevelt’s New Deal justified intervention on the grounds of full employment, a policy inspired by Keynes.[131] However, Friedman argued that rather than helping to stabilize the economy, the federal budget has been a source of instability.[132] The balanced-wheel theory was defective and counter-productive, according to Friedman.[133] Friedman even attacked the sanctum sanctorum of fiscal policy, when he claimed that the multiplier effect of federal spending was deeply flawed.[134] Friedman’s attack on Keynesian economics led to his belief in capitalism as a force for good in the world.[135]


Continuing some of the main historical themes in Capitalism and Freedoms, Friedman examined the role of capitalism in reducing discrimination.[136] Friedman wrote about how the market had opened up opportunities for discriminated-against minorities from the Middle Ages to the post-Civil War South.[137] Capitalism encouraged cooperation and circumvented political attempts to block freedom.[138] Friedman believed that fair employment practices harm the economy, since they force uneconomic decisions to be made.[139] Right-to-work laws are no different from fair employment laws, according to Friedman, and if businesses are allowed to hire as they wish, employees should be allowed to unionize if they wish.[140] From the perspective of 1962, Friedman saw individual choice as the answer to solve segregationist practices.[141] Dovetailing from his arguments in favor of maximum choice, Friedman derided monopolies as generally damaging to the economy.[142]


Friedman went to great lengths to oppose monopolies, which he saw as limiting free choice and competition.[143] The issue of social responsibility, according to Friedman, was only raised when a monopoly controlled a large portion of the market, but in free competition, the individual bore little responsibility other than to live by the law of the land.[144] Industrial monopolies were unimportant and manufacturing was overemphasized, stated Friedman, but the misstatement occurs because of societal image of these firms.[145] Friedman saw that labor monopolies in unions harmed the public at large as well as workers by distorting the value of labor away from its true, market worth.[146] Governmentally supported monopolies arbitrarily limited free choice, and Friedman opposed them since they represented a government-backed cartel.[147] Friedman believed that the only social responsibility of business is to increase profits within the “rules of the game.”[148] Friedman’s views on monopoly power connected to his aversion to governmental social welfare programs.[149]


Redistributionist social welfare was the antithesis of the free market according to Friedman, who emphasized free choice and competitiveness.[150] Friedman cited public housing, minimum wage laws, and farm price supports as causing the opposite of the intended effect.[151] Social Security redistributes income on an illegitimately paternalistic basis that “the government knows best,” asserted Friedman, ever the antagonist of “big government.”[152] Attacking the foundation of government redistribution, Friedman declared that any earned income redistribution is fundamentally unfair.[153] Looking at the Soviet Union during the mid-1960s, Friedman saw that capitalism produced less income inequality than communism did.[154] Friedman believed that the poor should be helped because they are poor, not because of their particular occupation.[155] In his denouement, Friedman explained the difference between equality of rights and opportunity and equality of outcome.[156] Friedman saw the free market as the ultimate source of wealth and increases in material well-being.[157]


Milton Friedman’s Capitalism and Freedom studied the effects of social welfare, inspected monopolies, explained the role that capitalism played in developing society, evaluated Keynesian economics, developed monetary policy, ascertained the role of government in a free society, and showed the connection between economic and political freedom.[158] His short, simple work revived the long-crippled classical economic theory.[159] His powerful debate style brought down the Keynesian colossus.[160] Milton Friedman has certainly secured his place in the history of economic thought.




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