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Capitalism and Freedom

Amazon.com Capitalism and Freedom Fortieth Anniversary Edition Books Milton Friedman

This book probably should not be treated as "capitalist manifesto" a la Marx but more like an attempt to present a position opposite to famous Galbraith "The Affluent Society" (1958). Reading the book without reading Galbraith first creates an impression of cheap advocacy of capitalism and unrestricted market almost in best libertarian (anarcho-capitalist) style. But as a polemic with Galbraith vision of post-capitalism (post-industrial society) the book looks like an interesting historical document.

In his book Galbraith stressed that to become successful, post-WWII America should invest heavily in infrastructure (highways, phone infrastructure, etc) as well as education using funds from general taxation and government intervention. At the same time he felt that the government power should be balanced against the power of capitalists using some countervailing forces (he mistakenly assumed that unions can play such a role). He also noted that large companies are actually exempted from competition on a national level because they are closely linked with the state and competition is limited to small companies (and most of their profits are expropriated by banks, landlords and state). In essence he argued that the USA society is no longer a capitalist society but some different dualistic social organization that combines elements of socialism (planning) for the largest firms and government (macroeconomics) with limited "free market" capitalism for small fish (microeconomics). Many argues that GM troubles proved that Galbraith was wrong. But if you look at GM problems it's clear that it was not national competitors who squeezed Detroit.

Friedman definitely was the most intellectually astute opponent of Galbraith post-industrial society vision. He pointed out that the great virtue of the market is that it enables people who hate each other to cooperate economically. But most of the content of the book is detached from reality and looks like a draft of yet another utopia. Sometimes the level of radicalism of this advocate of "free market" suggests that he is closer to socialists (especially Trotskyites) then conservatives and from defender of "status quo" turned into promoter of a new and dangerous social utopia, a new economic messiah who preached that free market + fiat money used with a specific rule of money stock expansion (3-5% per year ) will save mankind. Freidman's libertarian-style absolutization of the market ("In Goldman Sacks we trust" using Galbraith catch phase) as well as advocacy of fiat money (he played a role in the USA unilateral withdrawal from gold standard) in a way makes Friedman's views very similar to Marxists (extremes meet), although his utopia proved to be definitely less costly for mankind. It's funny that the latest administration that proclaims "market, markets" and praise Friedman actually behaves more like "Military Keynesians" then "free market" advocates. The same was true for Reagan. Still it was during Reagan's years when conservatism had grown into more and more dangerously utopian social vision ready for dangerous experiments with society.

Freidman's arguments that planning is unnecessary and that market forces have built-in checks and balances and can do wonders if they are freed from any and all government intervention can be understood seriously only in context of polemics with the representative of the opposite extreme views (statists). For readers in 2006 and especially European readers it's clear that Friedman's views of the market are anti-historic and "free market" described in the book never existed and probably will never exist in human history. Market never exists in vacuum and always is intrinsically connected and always experience significant level of control by the government (level greater then roles of an arbiter of disputes and the provider of the currency presuppose). The opposite is also true and market tend to influence government in many ways, especially dangerous if there are large national firms which depends by-and-large on government contracts (military industrial complex). Some proposed in his book "solutions" like eliminating medical profession licensing in the name of free market are pretty bizarre.

It looks like the main problem with Friedman's book is that unlike Galbraith he did not understand the importance of balancing government power with the freedom for market forces. Extreme positions that proclaim advantage of a single social force always look extremely dangerous. For example if everything is just a "free market" why buying politicians should be prohibited ? Is not this a discrimination against free market? (the same question is applicable to judiciary). What about the danger of natural creation of heredary elite by market forces and resulting "natural" conversion of parliamentary democracy into oligarchy (like "Iron law of oligarchy" presuppose) ?

Failing to address those problems makes his book mostly irrelevant for the reader in 2006, but still important as a historical document that criticized Galbraith views (it was Galbraith who coined the term "countervailing power".) Today we face the fundamental question: at which point "laissez-faire" capitalism/"unrestricted market" and associated with it corruption of government should be stopped (and some too hot and/or crooked practitioners probably jailed) and where and when unchecked state powers expansion should be stopped (preferably with similar type of punishment) to prevent sliding of society into also stagnant and completely corrupt version of "well developed socialism, Brezhnev's style."

Society probably needs to deal with the market the way tennis players deal with tennis racket: if player holds it too tightly his game suffer, but is he/she holds it too loose he cannot play well either. In this respect "former socialist countries" were not so much socialist (the famous joke in the USSR was that any "capitalist" European country contains more communists then the whole USSR) but countries with too powerful and unbalanced by any other forces government. And it was probably the internally grown oligarchy and not initiated by Reagan arm race (" military keysianism") that eventually defeated communist party control of the state, the oligarchy the was naturally created by the state after WWII and consisted to a large extent of party members in high positions. They were direct beneficiaries of the system collapse that happened with blessing (and probably financial help) of those oligarchs under the weight of economic problems and siege of nationalist forces. In a way we can believe in the "theory of convergence": both unrestricted "free market forces" and unrestricted government control eventually lead to the rule of oligarchy.

I am not an economist but it looks very strange that an avid advocate of "free market" is at the same time a proponent of demonetarization of gold and usage of fiat currencies. In this sense his Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (often incorrectly called Nobel Prize in Economics) looks somewhat strange. With fiat currencies  all businesses are hostages of the government.  And the ability to switch money printing press to full speed any time the government finds convenient (usually to cover war expenses) provides an easy way of confiscation of wealth of people by government without any communist coup d'état. How stable is the world of fiat currencies remain to be seen.

It should be noted that lately  himself abandoned his "monetarist views" (and that makes chapter III, one of the central chapters of the book just a historical curiosity). But unfortunately Britain already serves as a guinea pig for his utopia. As for implementing his and other economic utopias I like the quote attributed to German Iron Canceller Otto von Bismarck about suggestion of one of German parliamentarians to implement socialism; I do not remember exact wording but it sounded like this: "OK let's do it, but let's first choose for this experiment a country, that we do not care about".

Real conservatism should respect the status quo, not try to change the economic landscape in arbitrary untested ways. The level of radicalism demonstrated in this book of this advocate of "free market" (free as in "absence of regulation" which is equal to dominance of financial oligarchy) suggests that he is closer to socialists (especially Trotskyites) then conservatives and from defender of "status quo" he logically turns into promoter of a new, radical and rather dangerous social utopia.
 

Supplement

Selected Amazon Reviews

Friendman's ideas discredited by who?, November 8, 2003
 
Reviewer: MR NC SHACKLEY (London, England) - See all my reviews
(REAL NAME)   
"The use of quantity of money as a target has not been a success. I'm not sure that I would as of today push it as hard as I once did."
Milton Friedman, Financial Times (UK) June 2003
There you are, the ideas of this book have been repudiated by the man himself. What more evidence do you need to show they are wrong?

33 of 70 people found the following review helpful:

Skepticism, January 24, 2002
 

Reviewer: Steve (Las Vegas) - See all my reviews
Probably all scientists have political biases they would like to see proven, but a persistent theme among Friedman's critics is that he is unusually willing to cut corners to prove his points.

Paul Krugman writes: "I think it is fair to say that up until the late 1960s Friedman and his followers, while influential, were regarded by many of their colleagues as faintly disreputable." (2)

Edward Herman writes: "Friedman's methodology in attempting to prove his models have set a new standard in opportunism, manipulation, and the abuse of scientific method." (3)

 Paul Diesing lists six tactics Friedman uses to support a pet hypothesis called "Permanent Income" (or PI). These are:
"1. If raw or adjusted data are consistent with PI, he reports them as confirmation of PI...
2. If the fit with expectations is moderate, he exaggerates the fit...
3. If particular data points or groups differ from the predicted regression, he invents ad hoc explanations for the divergence...
4. If a whole set of data disagree with predictions, adjust them until they do agree...
5. If no plausible adjustment suggests itself, reject the data as unreliable...
6. If data adjustment or rejection are not feasible, express puzzlement. 'I have not been able to construct any plausible explanation for the discrepancy...'" (4)


Monetarism reached the peak of its popularity during the 1970s. In the 80s, however, it suffered a sudden reversal of fortune, and today economists generally agree that "monetarism is dead." Friedman stands virtually alone now among top economists in his belief that it contains any merit.

What happened? Monetarism was tried in Great Britain during the 80s, under Margaret Thatcher, and it proved to be a disaster. For almost seven years, the Bank of England tried its best to make it work. According to monetarist theory, the British economy should have enjoyed low inflation and high stability. But in fact, it went berserk. The economy sank into a deep recession, while lead economic indicators zigged and zagged. Although inflation came down, this was at the price of rising unemployment, which soared from 5.4 to 11.8 percent. Between 1979 and 1984, manufacturing output fell 10 percent, and manufacturing investment fell 30 percent. (5) Eventually production recovered to a respectable 2.8 percent growth, but it became clear that high unemployment was a permanent feature of the British economy. Eventually, the Bank of England came under overwhelming pressure to abandon monetarism, which it did in 1986. The experiment was such a failure that not even conservatives abroad wish to repeat it.

In step with Great Britain, the U.S. Federal Reserve announced in 1979 that it, too, would follow a monetarist policy. Many people blamed the double-digit inflation of the late 70s on Keynesian theory, on too much expansion of the money supply trying to achieve "full employment." Many critics thought that monetarism would restore some responsibility and stability at the Fed. Chairman Paul Volcker apparently agreed, and under the name of monetarism contracted the money supply down to a steady level. This produced a deep recession, but it did cure double-digit inflation.

In 1982, when inflation looked defeated, the Fed suddenly abandoned monetarism and reverted to a Keynesian policy. In that summer it sharply increased the money supply, and a few months later the economy roared to life, in a recovery that would last seven years. Milton Friedman was furious at the betrayal, but he got little sympathy from his fellow economists, who were witnessing a monetarist disaster unfold in Great Britain.

Why did the Fed abandon monetarism? Because it was never really monetarist in the first place. Volcker's strategy to defeat double-digit inflation had been classically Keynesian: reign in the money supply, and accept a deep recession in the process. The "monetarist" label was simply political cover, to mollify the Fed's growing number of critics. Such criticism was not renewed after monetarism failed in Britain, and Keynesian policies produced a seven-year boom in the U.S. The contrasting experience of those two nations was responsible for the demise of Friedman's theory.

Endnotes:

1. Except where otherwise noted, this review is primarily based on Paul Krugman, Peddling Prosperity (New York: W.W. Norton & Company, 1994), pp. 34-40, 172-178.

2. Krugman, p. 40.

3. Edward Herman, Triumph of the Market (Boston: South End Press, 1995), p. 36.

4. Paul Diesing, "Hypothesis Testing and Data Interpretation: The Case of Milton Friedman," Research in the History of Economic Thought and Methodology, vol. 3, pp. 61-69.

5. Peter Pugh and Chris Garratt, Introducing Keynes (Cambridge, UK: Icon Books Ltd., 1994), p. 152.
 

Flawed from the beginning, February 8, 2005
 
Reviewer: D. Vieira - See all my reviews
(REAL NAME)   
If you accept Friedman's underlying assumptions his arguments seem logical. If you open your mind it's easy to take apart some of his suppositions and the rest of the book becomes a joke. It's important to examine this first point carefully because many of his assumptions later in the book rest on this point.

-One of my favorite arguments in this book (because it is so ridiculous) is the idea that capitalism is free because all exchanges or relationships made through the market are voluntary and benefit all parties involved.
As an example Friedman claims that if you work for a corporation it is a voluntary contract because if you didn't want to work for a corporation, you can just produce directly for yourself. Almost no one has the resources to do this. 90% of small businesses fail within the first few years. And why do 90% of small businesses fail? Because they have to compete with gigantic corporations who have 100,000's of times more resources (money, productive facilites, etc) and so can produce goods and services at a much cheaper rate and therefore put small businesses under. So what happens to that 90%, that tried to produce for themselves but failed? They are forced to sell their lives away, 8 (or more) hours a day.
Clearly, most people don't have a choice. If I don't work for a corporation (where I'll have to take orders and abuse from my bosses, do repetitve mind numbing tasks or physical labor that will end up shortening my life), then my family and I starve to death. So when I work for a corporation, it's not because that's where I want to work, its because i'm forced to. I'll be faced with a form of physical violence (starvation) if I choose otherwise.
Some of you may be saying 'so what?', we're forced by violence to work for a corporation? Even if a corporation was a wonderful place to work where you didn't have to take orders and abuse from your boss, capitalism still restricts freedom because it FORCES us to work there. It forces us to take orders from other people.
There are alternative ways of running an economy that allow for democracy and freedom, and that resemble neither Capitalism nor Communism. For more info, google "Participatory Economy" or "ParEcon".

-Friedman compares how both Capitalism and Communism can take away political liberty. He uses McCarthyism and the Blacklisting in the movie industry to demonstrate how capitalism will preserve freedom. He claims that even though these people had to go into hiding and weren't allowed to publish their work, at least they could find other jobs, which couldn't happen if there was no market. He then argues that eventually these people were allowed to make films again, and thus he says, when capitalism takes away freedom, at least it is not prohibitive.
Freidman misses the point here. Freedom to Friedman, only means economic freedom. Note that he claims that even though their political freedom to express themselves was taken away, at least they had the economic freedom to find a job. Here he is arguing that econmic and political freedom are one in the same, and they are obviously not. I'm sure the directors of these films felt very much prohibited. How elitist of Friedman to claim otherwise: he does not know how it feels to be severely censored as they were.
Capitalism does allow for political freedom at times. But when there is a crisis, when the capitalist system is threatened by a competing ideology, it will always use force to restrict speech. McCarthyism is just one example of this. Around the world, capitalism has always restricted free speech, but only when the elites in any country have been threatened. You could look at any Latin American country's history for an example (Pinochet's coup, as one example- when an attempt at socialism AND democracy was being made).


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