Free to Choose: A Personal Statement

by Milton Friedman

Economic freedom is an essential requisite for political freedom. By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised. In addition, by dispersing power, the free market provides an offset to whatever concentration of political power may arise. The combination of economic and political power in the same hands is a sure recipe for tyranny.

To Smith and Jefferson, government’s role was as an umpire, not a participant. Jefferson’s ideal, as he expressed it in his first inaugural address (1801), was “[a] wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement.”

The view that government’s role is to serve as an umpire to prevent individuals from coercing one another was replaced by the view that government’s role is to serve as a parent charged with the duty of coercing some to aid others. These views have dominated developments in the United States during the past half-century.

The key insight of Adam Smith’s Wealth of Nations is misleadingly simple: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it.

Prices perform three functions in organizing economic activity: first, they transmit information; second, they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product—the distribution of income. These three functions are closely interrelated.

In every society, however it is organized, there is always dissatisfaction with the distribution of income. All of us find it hard to understand why we should receive less than others who seem no more deserving—or why we should be receiving more than so many others whose needs seem as great and whose deserts seem no less. The farther fields always look greener—so we blame the existing system. In a command system envy and dissatisfaction are directed at the rulers. In a free market system they are directed at the market.

When everybody owns something, nobody owns it, and nobody has a direct interest in maintaining or improving its condition. That is why buildings in the Soviet Union—like public housing in the United States—look decrepit within a year or two of their construction, why machines in government factories break down and are continuously in need of repair, why citizens must resort to the black market for maintaining the capital that they have for their personal use.

Self-interest is not myopic selfishness. It is whatever it is that interests the participants, whatever they value, whatever goals they pursue.

Experience shows that once government undertakes an activity, it is seldom terminated. The activity may not live up to expectation but that is more likely to lead to its expansion, to its being granted a larger budget, than to its curtailment or abolition.

The family, rather than the individual, has always been and remains today the basic building block of our society, though its hold has clearly been weakening—one of the most unfortunate consequences of the growth of government paternalism.

The century from Waterloo to the First World War offers a striking example of the beneficial effects of free trade on the relations among nations.

As a result, the century from Waterloo to the First World War was one of the most peaceful in human history among Western nations, marred only by some minor wars—the Crimean War and the Franco-Prussian Wars are the most memorable—and, of course, a major civil war within the United States, which itself was a result of the major respect—slavery—in which the United States departed from economic and political freedom.

In the modern world, tariffs and similar restrictions on trade have been one source of friction among nations. But a far more troublesome source has been the far-reaching intervention of the state into the economy in such collectivist states as Hitler’s Germany, Mussolini’s Italy, and Franco’s Spain, and especially the communist countries, from Russia and its satellites to China.

John Maynard Keynes, one of the great economists of the twentieth century, offered an alternative theory. The Keynesian revolution not only captured the economics profession, but also provided both an appealing justification and a prescription for extensive government intervention.

Much of the success during the twenties can be credited to Benjamin Strong, a New York banker who was the first head of the Federal Reserve Bank of New York and remained its head until his untimely death in 1928.

Strong’s death unleashed a struggle for power within the System that was fated to have far-reaching consequences. As Strong’s biographer puts it, “Strong’s death left the System with no center of enterprising and acceptable leadership.

This struggle for power proved to be—as no one could have foreseen at the time—the first step in a greatly speeded-up transfer of power from the private market to government, and from local and state government to Washington.

Since 1935 the System has presided over—and greatly contributed to—a major recession in 1937–38, a wartime and immediate postwar inflation, and a roller coaster economy since, with alternate rises and falls in inflation and decreases and increases in unemployment.

The System has not made the same mistake that it made in 1929–33—of permitting or fostering a monetary collapse—but it has made the opposite mistake, of fostering an unduly rapid growth in the quantity of money and so promoting inflation. In addition, it has continued, by swinging from one extreme to another, to produce not only booms but also recessions, some mild, some sharp.

In one respect the System has remained completely consistent throughout. It blames all problems on external influences beyond its control and takes credit for any and all favorable occurrences. It thereby continues to promote the myth that the private economy is unstable, while its behavior continues to document the reality that government is today the major source of economic instability.

The election of 1932 was a watershed in narrowly political terms. In the seventy-two years from 1860 to 1932, Republicans held the presidency for fifty-six years, Democrats for sixteen. In the forty-eight years from 1932 to 1980, the tables were turned: Democrats held the presidency for thirty-two years, Republicans for sixteen.

The members of FDR’s brain trust were drawn mainly from the universities—in particular, Columbia University. They reflected the change that had occurred earlier in the intellectual atmosphere on the campuses—from belief in individual responsibility, laissez-faire, and a decentralized and limited government to belief in social responsibility and a centralized and powerful government. It was the function of government, they believed, to protect individuals from the vicissitudes of fortune and to control the operation of the economy in the “general interest,” even if that involved government ownership and operation of the means of production.

World War II interrupted the New Deal, while at the same time strengthening greatly its foundations.

and, in effect, enacted Keynesian policies into law.

The depression convinced the public that capitalism was defective; the war, that centralized government was efficient. Both conclusions were false. The depression was produced by a failure of government, not of private enterprise. As to the war, it is one thing for government to exercise great control temporarily for a single overriding purpose shared by almost all citizens and for which almost all citizens are willing to make heavy sacrifices; it is a very different thing for government to control the economy permanently to promote a vaguely defined “public interest” shaped by the enormously varied and diverse objectives of its citizens.

Nationalized industries proved so inefficient and generated such large losses in Britain, Sweden, France, and the United States that only a few die-hard Marxists today regard further nationalization as desirable.

As W. Allen Wallis put it in a somewhat different context, socialism, “intellectually bankrupt after more than a century of seeing one after another of its arguments for socializing the means of production demolished—now seeks to socialize the results of production.”

The Department of Health, Education and Welfare, established in 1953 to consolidate the scattered welfare programs, began with a budget of $2 billion, less than 5 percent of expenditures on national defense. Twenty-five years later, in 1978, its budget was $160 billion, one and a half times as much as total spending on the army, the navy, and the air force.

More than one out of every 100 persons employed in this country worked in the HEW empire, either directly for the department or in programs for which HEW had responsibility but which were administered by state or local government units. All of us were affected by its activities. (In late 1979, HEW was subdivided by the creation of a separate Department of Education.) No one can dispute two superficially contradictory phenomena: widespread dissatisfaction with the results of this explosion in welfare activities; continued pressure for further expansion.

It may seem paradoxical that an essentially autocratic and aristocratic state such as pre-World War I Germany—in today’s jargon, a right-wing dictatorship—should have led the way in introducing measures that are generally linked to socialism and the Left. But there is no paradox—even putting to one side Bismarck’s political motives. Believers in aristocracy and socialism share a faith in centralized rule, in rule by command rather than by voluntary cooperation.

Social Security was enacted in the 1930s and has been promoted ever since through misleading labeling and deceptive advertising. A private enterprise that engaged in such labeling and advertising would doubtless be severely castigated by the Federal Trade Commission.

Federal housing programs have been supplemented by state and city government programs, especially in New York State and New York City. The programs started with government construction of housing units for low-income families.

The public housing units themselves have frequently become slums and hotbeds of crime, especially juvenile delinquency. The most dramatic case was the Pruitt-Igoe public housing project in St. Louis—a massive apartment complex covering fifty-three acres that won an architectural prize for design. It deteriorated to such an extent that part of it had to be blown up. At that point only 600 of 2,000 units were occupied and the project was said to look like an urban battleground.

Physicians are fleeing the British Health Service. About one-third as many physicians emigrate each year from Britain to other countries as graduate from its medical schools. The recent rapid growth of strictly private medical practice, private health insurance, and private hospitals and nursing homes is another result of dissatisfaction with the Health Service.

Category IV spending tends also to corrupt the people involved. All such programs put some people in a position to decide what is good for other people. The effect is to instill in the one group a feeling of almost God-like power; in the other, a feeling of childlike dependence. The capacity of the beneficiaries for independence, for making their own decisions, atrophies through disuse. In addition to the waste of money, in addition to the failure to achieve the intended objectives, the end result is to rot the moral fabric that holds a decent society together.

A very different meaning of equality has emerged in the United States in recent decades—equality of outcome. Everyone should have the same level of living or of income, should finish the race at the same time. Equality of outcome is in clear conflict with liberty. The attempt to promote it has been a major source of bigger and bigger government, and of government-imposed restrictions on our liberty.

When the law interferes with people’s pursuit of their own values, they will try to find a way around. They will evade the law, they will break the law, or they will leave the country. Few of us believe in a moral code that justifies forcing people to give up much of what they produce to finance payments to persons they do not know for purposes they may not approve of. When the law contradicts what most people regard as moral and proper, they will break the law—whether the law is enacted in the name of a noble ideal such as equality or in the naked interest of one group at the expense of another. Only fear of punishment, not a sense of justice and morality, will lead people to obey the law.

A society that puts equality—in the sense of equality of outcome—ahead of freedom will end up with neither equality nor freedom. The use of force to achieve equality will destroy freedom, and the force, introduced for good purposes, will end up in the hands of people who use it to promote their own interests.

The establishment of the school system in the United States as an island of socialism in a free market sea reflected only to a very minor extent the early emergence among intellectuals of a distrust of the market and of voluntary exchange. Mostly, it simply reflected the importance that was attached by the community to the ideal of equality of opportunity. The ability of Horace Mann and his associates to tap that deep sentiment enabled them to succeed in their crusade.

Before the Great Depression the situation was already changing. School districts were consolidated, educational districts enlarged, and more and more power was granted to professional educators. After the depression, when the public joined the intellectuals in an unbridled faith in the virtues of government, and especially of central government, the decline of the one-room school and the local school board became a rout. Power shifted rapidly from the local community to broader entities—the city, the county, the state, and more recently, the federal government.

We know of no government program that seems to us so inequitable in its effects, so clear an example of Director’s Law, as the financing of higher education. In this area those of us who are in the middle- and upper-income classes have conned the poor into subsidizing us on the grand scale—yet we not only have no decent shame, we boast to the treetops of our selflessness and public-spiritedness.

As the campaign against the railroads mounted, some far-sighted railroad men recognized that they could turn it to their advantage, that they could use the federal government to enforce their price-fixing and market-sharing agreements and to protect themselves from state and local governments. They joined the reformers in supporting government regulation. The outcome was the establishment of the Interstate Commerce Commission in 1887.

The railroad story was repeated for trucking. It was cartelized, rates were fixed, routes assigned. As the trucking industry grew, the representatives of the truckers came to have more and more influence on the commission and gradually came to replace railroad representatives as the dominant force. The ICC became as much an agency devoted to protecting the trucking industry from the railroads and the nonregulated trucks as to protecting the railroads against the trucks. With it all, there was an overlay of simply protecting its own bureaucracy.

The evidence confirms what general reasoning strongly suggests. It is no accident that the FDA, despite the best of intentions, operates to discourage the development and prevent the marketing of new and potentially useful drugs.

The difference is that a private firm that makes a serious blunder may go out of business. A government agency is likely to get a bigger budget.

Inflation is not a capitalist phenomenon. Yugoslavia, a communist country, has experienced one of the most rapid rates of inflation of any country in Europe; Switzerland, a bastion of capitalism, one of the lowest. Neither is inflation a communist phenomenon. China had little inflation under Mao; Italy, the United Kingdom, Japan, the United States—all largely capitalist countries—have experienced substantial inflation in the past decade. In the modern world, inflation is a printing press phenomenon.

Inflation occurs when the quantity of money rises appreciably more rapidly than output, and the more rapid the rise in the quantity of money per unit of output, the greater the rate of inflation. There is probably no other proposition in economics that is as well established as this one.

We know no example in history in which an inflation has been ended without an interim period of slow economic growth and higher than usual unemployment. That is the basis in experience for our judgment that there is no way to avoid side effects of a cure for inflation.

Though the tide toward Fabian socialism and New Deal liberalism has crested, there is as yet no clear evidence whether the tide that succeeds it will be toward greater freedom and limited government in the spirit of Smith and Jefferson or toward an omnipotent monolithic government in the spirit of Marx and Mao.

The high-level bureaucrats who have been assigned these functions cannot imagine that the reports they write or receive, the meetings they attend, the lengthy discussions they hold with other important people, the rules and regulations they issue—that all these are the problem rather than the solution. They inevitably become persuaded that they are indispensable, that they know more about what should be done than uninformed voters or self-interested businessmen.