Capitalism and Freedom

1. Economic Freedom is Essential for Political Freedom

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.

Intertwined Freedoms. Milton Friedman argues that economic freedom and political freedom are inextricably linked. A free market, characterized by voluntary exchange and private property, is not merely a mechanism for generating wealth but a necessary condition for a free society. Without economic freedom, political freedom is fragile and easily eroded.

Power Dispersion. Competitive capitalism disperses power, preventing its concentration in the hands of the state. When economic activity is controlled by political authorities, dissent becomes difficult, and individual liberty is threatened. The market, on the other hand, allows for diverse viewpoints and independent sources of support, fostering a climate of freedom.

Historical Evidence. Friedman points to historical examples, such as the golden age of Greece and the nineteenth-century Western world, where political freedom flourished alongside free markets. While capitalism is not a sufficient condition for political freedom (as evidenced by Fascist Italy and pre-WWI Russia), it is a necessary one. Without it, the state gains unchecked power, stifling individual expression and limiting the ability to challenge the status quo.

2. Government's Role: Rule-Maker, Not Controller

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.

Limited Government. Friedman advocates for a limited government whose primary function is to protect individual freedom by enforcing contracts, defining property rights, and maintaining law and order. This framework allows voluntary exchange to flourish, minimizing the need for political decisions and reducing the strain on social cohesion.

Market Efficiency. The market, with its decentralized decision-making, is far more efficient at allocating resources and satisfying diverse preferences than centralized government control. Government intervention, while sometimes necessary to address market imperfections like monopolies and neighborhood effects, should be approached with caution, as it inevitably limits individual freedom.

Avoiding Conformity. The great advantage of the market is that it permits wide diversity. It is, in political terms, a system of proportional representation. Each man can vote, as it were, for the color of tie he wants and get it; he does not have to see what color the majority wants and then, if he is in the minority, submit.

3. Monetary Stability Through Rules, Not Discretion

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.

Dangers of Discretion. Friedman critiques discretionary monetary policy, arguing that it gives too much power to a few individuals and leads to instability. He points to the Federal Reserve's actions during the Great Depression as a prime example of how well-intentioned but misguided policies can exacerbate economic downturns.

Rule-Based Policy. To ensure monetary stability and limit government power, Friedman proposes a legislated rule for monetary policy. He suggests targeting a specific rate of growth in the money supply, arguing that this would provide a stable framework for economic activity while preventing the monetary authority from engaging in irresponsible tinkering.

The Money Supply. Friedman advocates for a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money. For this purpose, he would define the stock of money as including currency outside commercial banks plus all deposits of commercial banks.

4. Free Markets in Currency and Trade are Paramount

Unless I am mistaken, however, full-fledged exchange controls and so-called inconvertibility of currencies are an exception and their origin reveals their authoritarian promise.

Exchange Controls. Friedman warns against exchange controls and trade restrictions, viewing them as a path to authoritarianism. He argues that such measures, often implemented to address balance of payments problems, ultimately stifle economic freedom and lead to a spiral of government intervention.

Floating Exchange Rates. The free market solution to international monetary relations is a system of freely floating exchange rates, determined by private transactions without government intervention. This mechanism allows for automatic adjustments to changes in economic conditions, promoting stability and preventing the need for trade restrictions.

Unilateral Free Trade. Friedman advocates for unilateral free trade, arguing that countries benefit from eliminating tariffs and other trade barriers regardless of whether other nations reciprocate. Free trade fosters competition, promotes economic growth, and strengthens political freedom.

5. Fiscal Policy: Stability, Not Manipulation

What we need is not a skillful monetary driver of the economic vehicle continuously turning the steering wheel to adjust to the unexpected irregularities of the route, but some means of keeping the monetary passenger who is in the back seat as ballast from occasionally leaning over and giving the steering wheel a jerk that threatens to send the car off the road.

Limited Fiscal Role. Friedman challenges the Keynesian view that government spending can be used as a balance wheel to stabilize the economy. He argues that fiscal policy is often destabilizing, with government expenditures being the most unstable component of national income.

Tax-Side Adjustments. If fiscal policy is to be used at all, Friedman suggests adjusting taxes rather than expenditures. However, he ultimately favors a stable fiscal policy with expenditure programs determined by societal needs and tax rates set to cover those expenditures, avoiding erratic changes.

Government Spending. For fiscal policy, the appropriate counterpart to the monetary rule would be to plan expenditure programs entirely in terms of what the community wants to do through government rather than privately, and without any regard to problems of year-to-year economic stability.

6. Education: Freedom of Choice, Not State Control

The paternalistic ground for governmental activity is in many ways the most troublesome to a liberal; for it involves the acceptance of a principle—that some shall decide for others—which he finds objectionable in most applications and which he rightly regards as a hallmark of his chief intellectual opponents, the proponents of collectivism in one or another of its guises, whether it be communism, socialism, or a welfare state.

Voucher System. Friedman proposes a voucher system for education, where parents receive government funds to spend at any approved school of their choice. This would promote competition among schools, foster diversity, and empower parents to make decisions that best suit their children's needs.

Limited Government Role. While acknowledging the "neighborhood effects" of education, Friedman argues against government administration of schools. He believes that government's role should be limited to setting minimum standards and ensuring a common core of values, while allowing private institutions to flourish.

Competition and Quality. The injection of competition would do much to promote a healthy variety of schools. It would do much, also, to introduce flexibility into school systems. Not least of its benefits would be to make the salaries of school teachers responsive to market forces.

7. Capitalism Reduces Discrimination

It is a striking historical fact 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.

Market Incentives. Friedman argues that capitalism, with its emphasis on voluntary exchange and profit maximization, creates incentives to reduce discrimination. Businesses that discriminate based on irrelevant characteristics incur higher costs and are at a disadvantage compared to those that focus solely on productivity.

Minority Protection. The market protects minority groups from the prejudices of the majority by providing alternative avenues for economic advancement. In a free market, individuals are judged by their abilities and contributions, not by their race, religion, or other irrelevant characteristics.

Freedom to Contract. The appropriate recourse of those of us who believe that a particular criterion such as color is irrelevant is to persuade our fellows to be of like mind, not to use the coercive power of the state to force them to act in accordance with our principles.

8. Monopoly Harms Freedom and Efficiency

The participant in a competitive market has no appreciable power to alter terms of exchange; he is hardly visible as a separate entity; hence it is hard to argue that he has any “social responsibility” except that which is shared by all citizens to obey the law of the land and to live according to his lights.

Limited Voluntary Exchange. Monopoly, whether in industry or labor, restricts voluntary exchange by limiting the alternatives available to individuals. This reduces freedom and distorts the allocation of resources, leading to inefficiency.

Government's Role. The most urgent necessity is the elimination of government measures that directly support monopoly, whether enterprise monopoly or labor monopoly, and an evenhanded enforcement of the laws on enterprises and labor unions alike.

Tax Reform. A major step toward reducing monopoly power would be tax reform, including abolishing the corporate tax and requiring corporations to attribute undistributed earnings to stockholders. This would invigorate capital markets and promote competition.

9. Occupational Licensure: A Threat to Liberty

Licensure therefore frequently establishes essentially the medieval guild kind of regulation in which the state assigns power to the members of the profession.

Restricted Entry. Occupational licensure, while often presented as a means of protecting the public, is frequently used by professional groups to restrict entry and create a monopoly. This limits individual freedom and raises prices for consumers.

Irrelevant Considerations. In practice, licensure decisions often involve irrelevant considerations, such as loyalty oaths or graduation from specific schools, rather than genuine assessments of competence. This further undermines the purported benefits of licensure.

Alternative Solutions. Friedman argues that certification, where government certifies skills but does not restrict practice, is a less harmful alternative to licensure. He also suggests that private organizations and market forces can provide consumers with information about the quality of services.

10. Income Distribution: Justice vs. Equality

The operative function of payment in accordance with product in a market society is not primarily distributive, but allocative.

Product-Based Distribution. Friedman defends the principle of distribution according to product, arguing that it is necessary for efficient resource allocation in a market society. While acknowledging that this principle can lead to inequality, he views it as instrumental to achieving broader societal goals.

Limited Redistribution. While recognizing the role of private charity, Friedman expresses skepticism about government-led income redistribution. He argues that such measures often distort the market, create unintended consequences, and infringe on individual freedom.

Market Imperfections. A clear justification for social action of a very different kind than taxation to affect the distribution of income. Much of the actual inequality derives from imperfections of the market. Many of these have themselves been created by government action or could be removed by government action.

11. Social Welfare: Private Charity Over State Control

Few trends could so thoroughly undermine the very foundations of our free society as the acceptance by corporate officials of a social responsibility other than to make as much money for their stockholders as possible.

Ineffective Programs. Friedman critiques various social welfare programs, such as public housing, minimum wage laws, and farm price supports, arguing that they often have unintended and adverse consequences. He suggests that these programs are driven by special interests and fail to address the root causes of poverty.

Negative Income Tax. As a more effective and less intrusive alternative, Friedman proposes a negative income tax, which would provide a direct cash subsidy to low-income individuals while preserving market incentives. This approach would alleviate poverty without distorting the market or expanding government control.

Private Responsibility. The most important thing is that the government mend its own fences, that it adopt procedures that will lead to reasonable stability in its own flow of expenditures. If it would do that, it would make a clear contribution to reducing the adjustments required in the rest of the economy.

Last updated: April 1, 2025