Capitalism and Freedom

by Milton Friedman

Friedman’s message is that capitalism is not just an engine of prosperity. It provides people with economic freedom, which he regarded as underappreciated in the debates of his day: in a market economy, people are free to make money as they choose and to spend it as they choose.

While in Washington, Friedman helped design the modern system of withholding taxes from paychecks—ironically, a key tool for the funding of the welfare state.

Friedman’s remedy for discrimination was very different than the antidotes generally embraced by his contemporaries. The civil rights movements of the twentieth century were defined by the pursuit of government protection; Friedman argued that minorities instead should place their faith in markets. “It is a striking historical fact,” he wrote, “that the development of capitalism has been accompanied by a major reduction in the extent to which particular religious, racial, or social groups have operated under special handicaps in respect of their economic activities; have, as the saying goes, been discriminated against.”

Government, Friedman says, is a tool for people to collectively pursue shared goals—and it has to be used in moderation. “Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom.”

At a celebration of Friedman’s ninetieth birthday in 2002—also the fortieth anniversary of the publication of Capitalism and Freedom—Ben S. Bernanke, then a member of the Fed’s board of governors, told Friedman and his frequent coauthor Anna Schwartz, “Regarding the Great Depression: You’re right. We did it. We’re very sorry. But thanks to you, we won’t do it again.” A few years later, Bernanke became chairman of the Fed, and during the financial crisis of 2007 to 2009, he kept his promise to Friedman, flooding the banking system with funding to revive the economy.

Indeed, surveying the rise of developing nations, Friedman wrote, “In all those cases, in accordance with the theme of this book, increases in economic freedom have gone hand in hand with increases in political and civil freedom and have led to increased prosperity; competitive capitalism and freedom have been inseparable.” But, Friedman continued, he was no longer sure political freedom was necessary to secure economic freedom.

If there is one major change I would make, it would be to replace the dichotomy of economic freedom and political freedom with the trichotomy of economic freedom, civil freedom, and political freedom.

Neither half of the statement expresses a relation between the citizen and his government that is worthy of the ideals of free men in a free society. The paternalistic “what your country can do for you” implies that government is the patron, the citizen the ward, a view that is at odds with the free man’s belief in his own responsibility for his own destiny. The organismic “what you can do for your country” implies that government is the master or the deity, the citizen, the servant or the votary.

The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather “What can I and my compatriots do through government” to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect?

First, the scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow citizens: to preserve law and order, to enforce private contracts, to foster competitive markets.

The second broad principle is that government power must be dispersed.

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 power to do good is also the power to do harm; those who control the power today may not tomorrow; and, more important, what one man regards as good, another may regard as harm.

The great advances of civilization, whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government.

Newton and Leibnitz; Einstein and Bohr; Shakespeare, Milton, and Pasternak; Whitney, McCormick, Edison, and Ford; Jane Addams, Florence Nightingale, and Albert Schweitzer; no one of these opened new frontiers in human knowledge and understanding, in literature, in technical possibilities, or in the relief of human misery in response to governmental directives. Their achievements were the product of individual genius, of strongly held minority views, of a social climate permitting variety and diversity.

But in the process, government would replace progress by stagnation, it would substitute uniform mediocrity for the variety essential for that experimentation which can bring tomorrow’s laggards above today’s mean.

Beginning in the late nineteenth century, and especially after 1930 in the United States, the term liberalism came to be associated with a very different emphasis, particularly in economic policy. It came to be associated with a readiness to rely primarily on the state rather than on private voluntary arrangements to achieve objectives regarded as desirable. The catchwords became welfare and equality rather than freedom. 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.

The chief contemporary manifestation of this idea is the advocacy of “democratic socialism” by many who condemn out of hand the restrictions on individual freedom imposed by “totalitarian socialism” in Russia, and who are persuaded that it is possible for a country to adopt the essential features of Russian economic arrangements and yet to ensure individual freedom through political arrangements. The thesis of this chapter is that such a view is a delusion, that there is an intimate connection between economics and politics, that only certain combinations of political and economic arrangements are possible, and that in particular, a society which is socialist cannot also be democratic, in the sense of guaranteeing individual freedom.

itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.

The citizen of Great Britain, who after World War II was not permitted to spend his vacation in the United States because of exchange control, was being deprived of an essential freedom no less than the citizen of the United States, who was denied the opportunity to spend his vacation in Russia because of his political views. The one was ostensibly an economic limitation on freedom and the other a political limitation, yet there is no essential difference between the two.

Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.

Political freedom in this instance clearly came along with the free market and the development of capitalist institutions. So also did political freedom in the golden age of Greece and in the early days of the Roman era.

History suggests only that capitalism is a necessary condition for political freedom.

The liberal conceives of men as imperfect beings. He regards the problem of social organization to be as much a negative problem of preventing “bad” people from doing harm as of enabling “good” people to do good; and, of course, “bad” and “good” people may be the same people, depending on who is judging them.

Fundamentally, there are only two ways of coordinating 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 cooperation of individuals—the technique of the market place.

Exchange can therefore bring about coordination without coercion. A working model of a society organized through voluntary exchange is a free private enterprise exchange economy—what we have been calling competitive capitalism.

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 existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the “rules of the game” and as an umpire to interpret and enforce the rules decided on.

Political freedom means the absence of coercion of a man by his fellow men.

There seems to be something like a fixed total of political power to be distributed. Consequently, if economic power is joined to political power, concentration seems almost inevitable. On the other hand, if economic power is kept in separate hands from political power, it can serve as a check and a counter to political power.

A striking practical example of these abstract principles is the experience of Winston Churchill. From 1933 to the outbreak of World War II, Churchill was not permitted to talk over the British radio, which was, of course, a government monopoly administered by the British Broadcasting Corporation. Here was a leading citizen of his country, a Member of Parliament, a former cabinet minister, a man who was desperately trying by every device possible to persuade his countrymen to take steps to ward off the menace of Hitler’s Germany. He was not permitted to talk over the radio to the British people because the BBC was a government monopoly and his position was too “controversial.”

One may believe, as I do, that communism would destroy all of our freedoms, one may be opposed to it as firmly and as strongly as possible, and yet, at the same time, also believe that in a free society it is intolerable for a man to be prevented from making voluntary arrangements with others that are mutually attractive because he believes in or is trying to promote communism. His freedom includes his freedom to promote communism.

Yet, paradoxically enough, the enemies of the free market—the Socialists and Communists—have been recruited in disproportionate measure from these groups. Instead of recognizing that the existence of the market has protected them from the attitudes of their fellow countrymen, they mistakenly attribute the residual discrimination to the market.

To the liberal, the appropriate means are free discussion and voluntary cooperation, which implies that any form of coercion is inappropriate.

These all reduce to cases in which strictly voluntary exchange is either exceedingly costly or practically impossible. There are two general classes of such cases: monopoly and similar market imperfections, and neighborhood effects.

In practice, monopoly frequently, if not generally, arises from government support or from collusive agreements among individuals.

Along these lines, one could perhaps justify a government post office but not the present law, which makes it illegal for anybody else to carry mail. If the delivery of mail is a technical monopoly, no one will be able to succeed in competition with the government. If it is not, there is no reason why the government should be engaged in it. The only way to find out is to leave other people free to enter.

The historical reason why we have a post office monopoly is because the Pony Express did such a good job of carrying the mail across the continent that, when the government introduced transcontinental service, it couldn’t compete effectively and lost money. The result was a law making it illegal for anybody else to carry the mail.

The consistent liberal is not an anarchist.

the world that a democracy can grow more rapidly than a communist state. These arguments are thoroughly misleading. The fact is that the Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy.

What we urgently need, for both economic stability and growth, is a reduction of government intervention not an increase.

Our task in this and the following chapter is to steer a course between two views, neither of which is acceptable though both have their attractions. The Scylla is the belief that a purely automatic gold standard is both feasible and desirable and would resolve all the problems of fostering economic cooperation among individuals and nations in a stable environment. The Charybdis is the belief that the need to adapt to unforeseen circumstances requires the assignment of wide discretionary powers to a group of technicians, gathered together in an “independent” central bank, or in some bureaucratic body. Neither has proved a satisfactory solution in the past; and neither is likely to in the future.

A liberal is fundamentally fearful of concentrated power. His objective is to preserve the maximum degree of freedom for each individual separately that is compatible with one man’s freedom not interfering with other men’s freedom. He believes that this objective requires that power be dispersed. He is suspicious of assigning to government any functions that can be performed through the market, both because this substitutes coercion for voluntary cooperation in the area in question

There is also widespread recognition that control over money can be a potent tool for controlling and shaping the economy. Its potency is dramatized in Lenin’s famous dictum that the most effective way to destroy a society is to destroy its money.

It should be noted that despite the great amount of talk by many people in favor of the gold standard, almost no one today literally desires an honest-to-goodness, full gold standard. People who say they want a gold standard are almost invariably talking about the present kind of standard, or the kind of standard that was maintained in the 1930s; a gold standard managed by a central bank or other governmental bureau, which holds a small amount of gold as “backing”—to use that very misleading term—for fiduciary money.

My conclusion is that an automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society. It is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist.

But even if the war and immediate postwar years are omitted, and we consider only the peacetime years from, say, 1920 through 1939, and 1947 to date, the result is the same. The stock of money, prices, and output was decidedly more unstable after the establishment of the Reserve System than before.

This crude comparison does not of course prove that the Federal Reserve System failed to contribute to monetary stability. Perhaps the problems that the System had to handle were more severe than those that impinged on the earlier monetary structure. Perhaps those problems would have produced an even greater degree of monetary instability under the earlier arrangements. But the crude comparison should at least give the reader pause before he takes for granted, as is so often done, that an agency as long established, as powerful, as pervasive as the Federal Reserve System is performing a necessary and desirable function and is contributing to the attainment of the objectives for which it was established.

am myself persuaded, on the basis of extensive study of the historical evidence, that the difference in economic stability revealed by the crude comparison is in fact attributable to the difference in monetary institutions. This evidence persuades me that at least a third of the price rise during and just after World War I is attributable to the establishment of the Federal Reserve System and would not have occurred if the earlier banking system had been retained;

As we have seen, one of the major reasons for establishing the Federal Reserve System was to deal with such a situation. It was given the power to create more cash if a widespread demand should arise on the part of the public for currency instead of deposits, and was given the means to make the cash available to banks on the security of the bank’s assets. In this way, it was expected that any threatened panic could be averted, that there would be no need for suspension of convertibility of deposits into currency, and that the depressing effects of monetary crises could be entirely avoided.