Cleaning Up the Drafts File: Brad Setser: Inequality in America
The Curse of Milhous Continues...

Milton Friedman: Economic Freedom, Human Freedom, Political Freedom

I find Milton Friedman's take on the big issues of history and moral philosophy to be... inadequate... and filled with bizarre blind spots. But if you do not feel the force of his grand argument, you need to think again:

The Smith Center: Milton Friedman's lecture: Pinochet and the military in Chile were led to adopt free market principles after they took over only because they did not have any other choice. They tried for a while to have military officers run the economy.... When rates of inflation reached 700 to 1,000% they had to do something. By accident, the only group of economists in Chile who were not tainted by a connection with the Allende socialists were the so-called Chicago boys... [who] consisted almost entirely of economists who had studied at the University of Chicago.... They were untainted because the University of Chicago was almost the only institution in the United States at the time in which the economics department had a strong group of free-market economists. So in desperation Pinochet turned to them.

I have nothing good to say about the political regime that Pinochet imposed. It was a terrible political regime.... [But in the economic sphere the] military junta was willing to go against its principles and support a freemarket regime designed by principled believers in a free market. The results were spectacular. Inflation came down sharply. After a transitory period of recession and low output that is unavoidable in the course of reversing a strong inflation, output started to expand, and ever since, the Chilean economy has performed better than any other South American economy.

The economic development and the recovery produced by economic freedom in turn promoted the public's desire for greater degree of political freedom.... [T]he drive for political freedom... generated by economic freedom and the resulting economic success ultimately resulted in a referendum that introduced political democracy. Now, at long last, Chile has all three things: political freedom, human freedom, and economic freedom. Chile will continue to be an interesting experiment to watch to see whether it can keep all three or whether... political freedom will tend to be used to destroy or reduce economic freedom.

In order to understand the paradox that economic freedom produces political freedom but political freedom may destroy economic freedom, it is important to recognize that free private markets have a far broader meaning than the usual restriction to narrowly economic transactions. Literally, a market is simply a place where people meet, where people get together to make deals.... A private market is one in which the people making deals are making them either on their own behalf or as agents for identifiable individuals rather than as agents of governments.... In a free private market, all the deals are strictly voluntary.... You have a private market in India, but it is not a free private market because many voluntary deals are not permitted. An individual can deal with another to exchange a good or service only if he has the permission of the government. I may say a completely free private market exists nowhere in the world....

A free private market is a mechanism for achieving voluntary cooperation.... It applies to any human activity, not simply to economic transactions. We are speaking a language. Where did that language come from? Did some government entity construct the language and instruct people to use it?... No, the language we speak developed through a free private market.... Take another example, science. How did we develop the complicated structure of physics, economics, what will you? Again, it was developed and continues to develop as a result of a free private market in which scientists communicate with one another, exchange information with one another, because both parties to any exchange want to benefit.

A characteristic feature of a free private market is that all parties to a transaction believe that they are going to be better off.... A free private market is a mechanism for enabling a complex structure of cooperation to arise as an unintended consequence... involves the absence of coercion. People deal with one another voluntarily.... [T]he essence of a free private market is that it is a situation in which everybody deals with one another because he or she believes he or she will be better off....

That makes clear, l think, why free private markets are so closely related to human freedom. It is the only mechanism that permits a complex interrelated society to be organized from the bottom up rather than the top down. However, it also makes clear why free societies are so rare. Free societies... make it very hard for bad people to do harm, but they also make it very hard for good people to do good. Implicitly or explicitly, most opponents of freedom believe that they know what is good for other people better than other people know for themselves, and they want the power to make people do what is really good for them....

I ask you, what is our problem in the United States today? We have a relatively free system. This is a great country and has a great deal of freedom, but we are losing our freedom. We are living on our capital in considerable measure. This country was built up during 150 years and more in which government played a very small role. As late as 1929, total government spending in the United States never exceeded about 12% of the national income--about the same fraction as in Hong Kong in recent years.... Total government spending [today], as I said, is 43% of national income, and two-thirds of that is federal.... [I]n addition to what government spends directly, it exercises extensive control over the deals that people can make.... [I]t forces you to pay twice the world price for sugar. It forces enterprises to meet all sorts of requirements about wages, hours, antipollution standards, and so on.... Many of these may be good, but they are government dictation of how the resources shall be used. To put it in one word that should be familiar to us by now, it is socialist.

The United States today is more than 50% socialist in terms of the fraction of our resources that are controlled by the govern ment. Fortunately, socialism is so inefficient that it does not control 50% of our lives.... The really fascinating thing is that our private sector has been so effective, so efficient, that it has been able to produce a standard of life that is the envy of the rest of the world on the basis of less than half the resources available to all of us.

The major problems that face this country all derive from too much socialism... our educational system.... Schooling at the elementary and secondary level is the largest socialist enterprise in the United States next to the military. Now why should we be better at socialism than the Russians?... If you consider medical care... total spending on medical care has gone from 4% of the national income to 13%, and more than half of that increase has been in the form of government spending.... I challenge anybody to name a major problem in the United States that does not derive from excessive government.

Crime has been going up, our prisons are overcrowded, our inner cities are becoming unlivable all as a consequence of good intentions gone awry, the good intentions in this case being to prevent the misuse of drugs. The results: very little if any reduction in the use of drugs but a great many innocent victims. The harm which is being done by that [war on some drugs] program is far greater than any conceivable good. And the harm is not being done only at home. What business do we have destroying other countries such as Colombia because we cannot enforce our laws?

It is hard to be optimistic about how successful we can be in preserving our relatively free system.... [W]e did not learn the lesson that [Eastern Europe] had to teach us, and that lesson is that government has very real functions, but if it wanders beyond those functions and goes too far, it tends to destroy human and economic freedom.

I am nonetheless a longterm optimist.... We are being misgoverned... not because of bad motives or bad people. The people who run our government are the same kind of people as the people outside it.... [W]e in our private lives and they in their governmental lives are all moved by the same incentive: to promote ourown selfinterest.... In the private economy, so long as we keep a free private market, one party to a deal can only benefit if the other party also benefits. There is no way in which you can satisfy your needs at the expense of somebody else. In the government market, there is another recourse.... [Y]ou can say, "Oh, the only reason it is a failure is because we haven't done enough. The only reason the drug program is a failure is because we haven't spent enough money on it."... If you are persuasive enough, or if you have enough control over power, you can increase spending on your program at the expense of the taxpayer. That is why a private project that is a failure is closed down while a government project that is a failure is expanded....

I want to close on a slightly optimistic note. About 200 years ago, an English newspaper wrote: "There are 775,300,000 people in the World. Of these, arbitrary governments command 741,800,000 and the free ones ... Only 33 1/2 million... On the whole, slaves are three and twenty times more numerous than men enjoying, in any tolerable degree, the rights of human nature" [cited in Forrest McDonald, Novus Ordo Seclorum (Lawrence: University Press of Kansas, 1985), p.9].... I estimate that, while slaves still greatly outnumber free people, the ratio has fallen in the past two centuries from 23 to 1 to about 3 to 1. We are still very far from our goal of a completely free world, but, on the scale of historical time, that is amazing progress--more in the past two centuries than in the prior two millennia. Let's hope and work to make sure that that keeps up.