Milton Friedman’s Capitalism and Freedom, published in 1962, has had a profound impact on the economic policies of the United States of America. Some of his laissez-faire ideas concerning monetary policy, taxation, privatization, and deregulation were used by the US government heavily during the 1980s as Friedman was Ronald Reagan’s economic advisor. (Wikipedia.org, 2011) Laissez-faire, or let it be, is the economic philosophy that government should intervene in the economy as little as possible. Friedman embraces this philosophy and it is the cornerstone for all his theories in Capitalism and Freedom. His central believe is that a free-market economy will self-regulate much more efficiently than any closed, controlled, or mixed economy. His feeling is that in the long run, an economy will eventually adjust to changes in the real supply and demand regardless of government intervention, so why artificially try to regulate. Instead, the government should help protect the freedom of its people and allow free markets.
Chapter 1
Economic freedom is an indispensable means toward the achievement of political freedom. (Friedman, 1962, pg. 8) Political freedom, according to Friedman, is the absence of coercion of a man by its fellow man. (Friedman, 1962, pg. 15) He felt that if a man was economically free, he would be by default politically free because no man could coerce him to make decisions that were not of his freewill. The existence of a free market does not eliminate the need or government; it is essential both as forum for determining the rules of the game and an umpire to interpret and enforce the rules decided on. (Friedman, 1962, pg. 15)
Chapter Two
The need for government in free society is to provide the means where the people can modify the rules, to mediate in the event of disagreement, and to enforce compliance, such as property rights, contract enforcement, and controlling the irresponsible. (Friedman, 1962, pg. 25) The role of the government is also to do something that the market cannot do itself, namely, to determine, arbitrate, and enforce the rules of the game. (Friedman, 1962, pg. 27) Freidman was discussing transactions that were primarily exceedingly costly or practically impossible. In the case of civil defense, it is impractical for the individuals to organize and collaborate quickly in the event of attack, so the government should have a monopoly in that area.
Chapter Three
A private free-enterprise economy is inherently unstable as it will produce recurrent cycles of boom and bust. (Friedman, 1962, pg. 37) It should be a role of government to provide a stable monetary framework without the irresponsible government tinkering. (Friedman, 1962, pg. 51) Milton believed that monetary policy tinkering has a powerful, and sometimes disastrous, short-term effects on the real economy; but in the long run changes in the money supply have a primary effect on the price level. (Bernanke, 2005, pg 546) Milton means that if government adjusts the money supply to prevent recession or depression, the only result is a worse recession or depression along with unanticipated inflation or deflation. Friedman was one of the first economists to argue this point. Milton Friedman, along with Edmund Phelps, discovered later in the 1970s that unanticipated inflation has a negative relationship with cyclical unemployment. Due to this, Friedman argues that the Federal Reserve is a source of instability rather than a suppressor of it and should follow some rules. (Bernanke, 2005, pg 547)
Milton Friedman’s theories in Capitalism and Freedom were applied to a great deal of economic policies in the 1980s. As one of President Reagan’s economic advisors, he had the influence to reduce government growth, reduce income tax, reduce government regulation, and control the money supply as he thought it should be. As a result of these economic policy changes, the mid-1980s through the mid-2000s was a rather prosperous time for the United States, with the expectation two small recessions in 1990 and 2001. Then, in 2007, a great recession occurred in the United States and Friedman’s style of economics is currently viewed as a major contributing factor. Major companies and individuals were unaccountable for unethical business dealings due to little or no regulation or oversight by government. The housing and the financial markets became so inflated by bad investments that their collapse caused many to lose faith in the unregulated free market. In my opinion, Milton Friedman’s theories have two prevalent defects: it assumes most participants in the free market are ethical, rational, and have perfect information and it assumes the government can umpire an unregulated market. As we have seen from the great recession of 2007 - 2009, that is not entirely true. Consumers and businesses make poor decisions, are irrational and unethical, and have bad information. At the same time, the government can’t umpire the economy without regulation and authority.
QUESTIONS FOR DISCUSSION
Do you feel that Milton Friedman's theories caused the 2007-2009 recession?
What improvements can be made to his theories?
Are you a Keynesian or a Friedmanian?
