Capitalism and Freedom

by Milton Friedman

If I do not like what my local community does, be it in sewage disposal, or zoning, or schools, I can move to another local community, and though few may take this step, the mere possibility acts as a check. If I do not like what my state does, I can move to another. If I do not like what Washington imposes, I have few alternatives in this world of jealous nations.

The great tragedy of the drive to centralization, as of the drive to extend the scope of government in general, is that it is mostly led by men of good will who will be the first to rue its consequences.

The nineteenth-century liberal regarded an extension of freedom as the most effective way to promote welfare and equality; the twentieth-century liberal regards welfare and equality as either prerequisites of or alternatives to freedom.

In the name of welfare and equality, the twentieth-century liberal has come to favor a revival of the very policies of state intervention and paternalism against which classical liberalism fought. In the very act of turning the clock back to seventeenth-century mercantilism, he is fond of castigating true liberals as reactionary!

The turning point was perhaps the “control of engagements” order which, despite great misgivings, the Labour party found it necessary to impose in order to carry out its economic policy.

Fundamentally, there are only two ways of co-ordinating the economic activities of millions. One is central direction involving the use of coercion—the technique of the army and of the modern totalitarian state. The other is voluntary co-operation of individuals—the technique of the market place.

Indeed, a major source of objection to a free economy is precisely that it does this task so well. It gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.

The only recourse for funds would be to raise small amounts from a large number of minor officials. But this is no real answer. To tap these sources, many people would already have to be persuaded, and our whole problem is how to initiate and finance a campaign to do so. Radical movements in capitalist societies have never been financed this way. They have typically been supported by a few wealthy individuals who have become persuaded—by a Frederick Vanderbilt Field, or an Anita McCormick Blaine, or a Corliss Lamont, to mention a few names recently prominent, or by a Friedrich Engels, to go farther back. This is a role of inequality of wealth in preserving political freedom that is seldom noted—the role of the patron.

“My freedom to move my fist must be limited by the proximity of your chin.”

The Great Depression in the United States, far from being a sign of the inherent instability of the private enterprise system, is a testament to how much harm can be done by mistakes on the part of a few men when they wield vast power over the monetary system of a country.

One reason is that each person feels much more strongly about being deprived of his right to free speech when he is in a minority than he feels about depriving somebody else of the right to free speech when he is in the majority.

There are few measures we could take that would do more to promote the cause of freedom at home and abroad. Instead of making grants to foreign governments in the name of economic aid—and thereby promoting socialism—while at the same time imposing restrictions on the products they succeed in producing—and thereby hindering free enterprise—we could assume a consistent and principled stance. We could say to the rest of the world: We believe in freedom and intend to practice it. No one can force you to be free. That is your business. But we can offer you full co-operation on equal terms to all. Our market is open to you. Sell here what you can and wish to. Use the proceeds to buy what you wish. In this way co-operation among individuals can be world wide yet free.

But let a poor family in a slum have a gifted child and let it set such high value on his or her schooling that it is willing to scrimp and save for the purpose. Unless it can get special treatment, or scholarship assistance, at one of the very few private schools, the family is in a very difficult position. The “good” public schools are in the high income neighborhoods. The family might be willing to spend something in addition to what it pays in taxes to get better schooling for its child. But it can hardly afford simultaneously to move to the expensive neighborhood.

With respect to teachers’ salaries, the major problem is not that they are too low on the average—they may well be too high on the average—but that they are too uniform and rigid. Poor teachers are grossly overpaid and good teachers grossly underpaid. Salary schedules tend to be uniform and determined far more by seniority, degrees received, and teaching certificates acquired than by merit. This, too, is largely a result of the present system of governmental administration of schools and becomes more serious as the unit over which governmental control is exercised becomes larger.

The parent or local community comes to exercise little control. In any area, whether it be carpentry or plumbing or teaching, the majority of workers favor standard salary scales and oppose merit differentials, for the obvious reason that the specially talented are always few. This is a special case of the general tendency for people to seek to collude to fix prices, whether through unions or industrial monopolies. But collusive agreements will generally be destroyed by competition unless the government enforces them, or at least renders them considerable support.

If one were to seek deliberately to devise a system of recruiting and paying teachers calculated to repel the imaginative and daring and self-confident and to attract the dull and mediocre and uninspiring, he could hardly do better than imitate the system of requiring teaching certificates and enforcing standard salary structures that has developed in the larger city and state-wide systems.

If capital were as readily available for investment in human beings as for investment in physical assets, whether through the market or through direct investment by the individuals concerned, or their parents or benefactors, the rate of return on capital would tend to be roughly equal in the two fields. If it were higher on non-human capital, parents would have an incentive to buy such capital for their children instead of investing a corresponding sum in vocational training, and conversely. In fact, however, there is considerable empirical evidence that the rate of return on investment in training is very much higher than the rate of return on investment in physical capital. This difference suggests the existence of underinvestment in human capital.

If men turn cars over, or destroy property, out of sheer wickedness or in the course of exacting private vengeance, not a hand will be lifted to protect them from the legal consequences. If they commit the same acts in the course of labor dispute, they may well get off scot free. Union actions involving actual or potential physical violence or coercion could hardly take place if it were not for the unspoken acquiescence of the authorities.

3. Private Collusion The final source of monopoly is private collusion. As Adam Smith says, “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”3 Such collusion or private cartel arrangements are therefore constantly arising. However, they are generally unstable and of brief duration unless they can call government to their assistance. The establishment of the cartel, by raising prices, makes it more profitable for outsiders to enter the industry. Moreover, since the higher price can be established only by the participants’ restricting their output below the level that they would like to produce at the fixed price, there is an incentive for each one separately to undercut the price in order to expand output. Each one, of course, hopes that the others will abide by the agreement. It takes only one or at most a few “chiselers” who are indeed public benefactors—to break the cartel. In the absence of government assistance in enforcing the cartel, they are almost sure to succeed fairly promptly.

The corporate tax should be abolished. Whether this is done or not, corporations should be required to attribute to individual stockholders earnings which are not paid out as dividends. That is, when the corporation sends out a dividend check, it should also send a statement saying, “In addition to this dividend of——cents per share, your corporation also earned——cents per share which was reinvested.” The individual stockholder should then be required to report the attributed but undistributed earnings on his tax return as well as the dividend. Corporations would still be free to plough back as much as they wish, but they would have no incentive to do so except the proper incentive that they could earn more internally than the stockholder could earn externally. Few measures would do more to invigorate capital markets, to stimulate enterprise, and to promote effective competition.

“Seventy-five per cent of the occupational licensing boards at work in this country today are composed exclusively of licensed practitioners in the respective occupations. These men and women, most of whom are only part-time officials, may have a direct economic interest in many of the decisions they make concerning admission requirements and the definition of standards to be observed by licensees. More importantly, they are as a rule directly representative of organized groups within the occupations. Ordinarily they are nominated by these groups as a step toward a gubernatorial or other appointment that is frequently a mere formality. Often the formality is dispensed with entirely, appointment being made directly by the occupational association—as happens, for example, with the embalmers in North Carolina, the dentists in Alabama, the psychologists in Virginia, the physicians in Maryland, and the attorneys in Washington.”

It is clear that licensure is the key to the medical profession’s ability to restrict the number of physicians who practice medicine. It is also the key to its ability to restrict technological and organizational changes in the way medicine is conducted. The American Medical Association has been consistently against the practice of group medicine, and against prepaid medical plans. These methods of practice may have good features and bad features, but they are technological innovations that people ought to be free to try out if they wish. There is no basis for saying conclusively that the optimum technical method of organizing medical practice is practice by an independent physician. Maybe it is group practice, maybe it is by corporations. One ought to have a system under which all varieties can be tried.

Despite the lip service that we all pay to “merit” as compared to “chance,” we are generally much readier to accept inequalities arising from chance than those clearly attributable to merit. The college professor whose colleague wins a sweepstake will envy him but is unlikely to bear him any malice or to feel unjustly treated. Let the colleague receive a trivial raise that makes his salary higher than the professor’s own, and the professor is far more likely to feel aggrieved. After all, the goddess of chance, as of justice, is blind. The salary raise was a deliberate judgment of relative merit.

There is every reason to adjust the rules of the game so as to eliminate these sources of inequality. For example, special monopoly privileges granted by government, tariffs, and other legal enactments benefiting particular groups, are a source of inequality. The removal of these, the liberal will welcome. The extension and widening of educational opportunities has been a major factor tending to reduce inequalities. Measures such as these have the operational virtue that they strike at the sources of inequality rather than simply alleviating the symptoms.

Another gain its proponents expected from public housing was the reduction of juvenile delinquency by improving housing conditions. Here again, the program in many instances had precisely the opposite effect, entirely aside from its failure to improve average housing conditions. The income limitations quite properly imposed for the occupancy of public housing at subsidized rentals have led to a very high density of “broken” families—in particular, divorced or widowed mothers with children. Children of broken families are especially likely to be “problem” children and a high concentration of such children is likely to increase juvenile delinquency. One manifestation has been the very adverse effect on schools in the neighborhood of a public housing project. Whereas a school can readily absorb a few “problem” children it is very difficult for it to absorb a large number. Yet in some cases, broken families are a third or more of the total in a public housing project and the project may account for a majority of the children in the school. Had these families been assisted through cash grants, they would have been spread much more thinly through the community.

the people who are pressed ever closer together in the spreading slums that seem to be rather a sign of the need for more public housing than a consequence of the existing public housing.

LIBERALISM AND EGALITARIANISM The heart of the liberal philosophy is a belief in the dignity of the individual, in his freedom to make the most of his capacities and opportunities according to his own lights, subject only to the proviso that he not interfere with the freedom of other individuals to do the same. This implies a belief in the equality of men in one sense; in their inequality in another. Each man has an equal right to freedom. This is an important and fundamental right precisely because men are different, because one man will want to do different things with his freedom than another, and in the process can contribute more than another to the general culture of the society in which many men live. The liberal will therefore distinguish sharply between equality of rights and equality of opportunity, on the one hand, and material equality or equality of outcome on the other. He may welcome the fact that a free society in fact tends toward greater material equality than any other yet tried. But he will regard this as a desirable by-product of a free society, not its major justification. He will welcome measures that promote both freedom and equality—such as measures to eliminate monopoly power and to improve the operation of the market. He will regard private charity directed at helping the less fortunate as an example of the proper use of freedom. And he may approve state action toward ameliorating poverty as a more effective way in which the great bulk of the com...

Concentrated power is not rendered harmless by the good intentions of those who create it.