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?
Great summary and reflection.
ReplyDeleteI have a few comments to add to the discussion ...
1) Some argue that it was not Friedman's economic policies that caused the 2009 bank crisis as you state. In fact - it is argued that the banks were forced by gov't regulation to grant loans that they knew were a bad bet for them to people who would not likely be able to repay them. Fannie and Freddie were gov't arms that forced granting these high risk loans with high interest rates to people who should not have had access to this type of money. Therefore the blame often is pointed to the free market when a free market would never have granted these insane loans to people without the government forcing them to make these loans.
2) Friedman does not call for no government regulation, but he does as you say - put the gov't in an umpire role. He view the gov'ts job as making sure there is a fair playing field for competition and staying out of the way otherwise. Friedman would not be a fan of the gov't injecting $700 Billion into the economy or bailing out GM - he would say GM should go into bankruptcy because they did themselves in with their poor products and unsustainable staff salaries and pensions.
Hi Matt!
ReplyDeleteGreat review of this book and I personally really liked your reflection. I find the battle between Keynes and Friedman an interesting one. We had to watch a PBS series in Global Business called Commanding Heights which detailed this "battle" in depth.
As far as your questions, I guess that Friedman's theories did in some part cause the 2007-2009 financial issues we saw. If we were in a more regulated economy we potentially would not have experienced the drastic fall as which we did. On the other hand, if we were in a more regulated economy we would never see the great highs we often see as well! Neither theory is perfect and both have benefits and failures associated with them.
As far as improvements, I don't feel I have any to recommend. His theory is what it is and I think for the most part it works if that is the direction you feel a country should go. Frankly, I like his thoughts on how the government should stay out of the way as Cory described. Unfortunately, our government did not do so in 2007-2009 and funnelled millions of dollars into businesses that probably didn't deserve a dime!
On a personal note, I think I am a hybrid of both theories. I do lean more towards Friedman, but I think that Keynes had some great ideas as well. I think I look at it as almost cyclical and that we need both to help balance out our country. Keynes's style served its purpose during and after the Great Depression to help get our country moving again, so I do think there is some merit to it when needed.
Great post!!!
Hi Matt,
ReplyDeleteExcellent job on the book review and your reflection was very informative. I had never heard of Milton Friedman and I learned a lot about his theories.
Milton Friedman believed in free enterprise with little government intervention. In fact, he opposed government regulation of many types. The Federal Reserve’s oversight before the recent recession was poor; they saw the recession coming but chose to do nothing about it. Thus, the recession was driven by the greed of banks, insurance companies, and CEOs of different institutions. For example, the bank industry did not care that people would not be able to afford their mortgage loans and would eventually lose their homes. For many years, things went along fine without much government intervention, but it was realized that there needs to be some sort of control to prevent this from reoccurring. Now, there are stringent policies for prospective homeowners involving credit scores, debts, minimum loan down payments, etc. Friedman’s theories, which lean toward the republican position of small government probably helped contribute to the recession if they were practiced by businesses. In a way, Friedman contributed to the recession because businesses enjoyed being under regulated. If government regulation would have been apparent, the recession may not have happened, or may have been less severe.
I am tied between Keynesian and Friedmanian because I believe they both have their own good qualities. However, I tend to agree with the quote below, which is more of a Keynesian perspective.
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered."
-Thomas Jefferson
Matt,
ReplyDeleteNice review and reflection.
I’m not sure how I feel about Laissez-faire, or let it be, is the economic philosophy that government should intervene in the economy as little as possible. Seems like more government is needed the more global we are.
I agree that the mid-1980s through the mid-2000s was a rather prosperous time for the United States. I also agree with you that Milton Friedman’s theories have two defects assuming most participants in the free market are ethical, rational, and have perfect information and it assumes the government can umpire an unregulated market. We know that this is certainly not trued. Politics and money are great influencers of each other and maybe he is right 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. I would have to agree based on the recent boom and bust of the housing market that a private free-enterprise economy is unstable. Unfortunately, it seems that regulations are the best way to prevent the instability.
A year or so ago I listened to a broadcast of "This American Life" called "The Giant Pool of Money." If you want to hear the real story of what caused the great recession you MUST listen to this program or read the transcript. I guarantee you will be blown away by what you hear. It really gets to the heart of the matter without getting complicated.
ReplyDeletehttp://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money
I think I'm more of an Keynesian. I wonder how different it would be in this country right now if some of the safety nets like unemployment were not there for people out of work. Because we have these things in place it doesn't look like the "great depression" of the 30s yet we know that it is worse this time.
However, I don't think that hands-off economic theory is to blame. As Cory pointed out, there were rules in place that were ignored. The only regulation I would suggest is requiring that mortgage originators keep loans on their books for a specific period of time. So if you originate a 30 yr mortgage you keep it for 10-15 years. As long as you can originate a loan and then immediately sell it off, there is no incentive for you to make sure the loan has a low risk.
Hi, Matt...very informative and thought provoking post.
ReplyDeleteWhen Friedman wrote Capitalism And Freedom and served in politics, the idea that if you were free economically, you were politically free seemed like a slam dunk. However, all we have to do is look to China today. It is a bustling and hugely growing economy...currently #2 and quickly rising to #1. There is a mix of free market and state owned, but free market seems to be gaining more dominance, but it is definitely not politically free. While the Chinese people may not be completely happy with the political state of communism, many feel that there is not political unrest in large part to the fact there is a predominantly capitalist market.
I don't feel that anyone one person or their philosophy is likely the cause of the 2007-2009 Recession...there were widespread issues at play; however, I do feel that deregulation played a major role. The assumption that "most participants in the free market are ethical, rational and have perfect information, is inherently flawed. First, perfect information is an illusion, there are always going to be unforeseen circumstances and differing viewpoints on the information available and secondly there are always going to be people who are blinded by greed and ego. Deregulation and the global economy has allowed mega-galactic corporations that weren't real possibilities just decades ago.
I am a mix of Keynesian and Friedmanian in thinking. Keynes advocacy of a mixed market that was largely made up of the private sector, but with a large government influence has served as well in our history and you have to look no further than our recovery from the Great Depression and World War 2. However, Friedman's ideas that the market will self regulate have certainly worked in the past. But I do not feel that the government should be limited to only arbitrating and reinforcing the rules of the game. All Americans have a stake in the markets and I feel that regulation served us better than the free for all attitude that contributed to our current financial crisis.
June 2, 2011 2:19 AM
Hey Matt!
ReplyDeleteGreat post! Very informative and the book sounds very interesting.
In my opinion, I feel that not one thing in particular caused the 2007-2009 recession, many things did. I do feel that his beliefs played a role but is not totally to blame. Sure there was lack of government guidance on who can get mortgages, for example, but those companies knew what they were doing. As far as improvements I don't have any to recommend. I agree with Shelley when she said in her post that it is what it is and for the most part it works if that is the direction you feel a country should go. I feel that government should play a role in some sort of regulating how things are run in a positive manner but also to let businesses be businesses. Unfortantely during the 2007-2009 recession when government stepped in they simply put a temporary band-aid on the problem without solving the deep down issues. Hopefully the deep down issues will get solved, the band-aids taken care of, and the economy back on it's feet again for good this time.
Great post!
Hi Matt,
ReplyDeleteI enjoyed your book review and think you did a great job with this! I found your identification of defects in Friedman's theories to be very intuitive. I just wanted to add to this point. It seems that it would be possible to unpack Friedman's language to say that if one is economically free then that means he is also free of coercion. However, in a deregulated government, I think the more economically powerful entities could have multiple coercive powers against lower financial classes in the free market. I think that this presents a bit of a contradiction to his argument and a potential ethical dilemma.
Thanks!
Hello Matt,
ReplyDeleteGreat book review,
I think that allowing the economy participants “Drivers” just do their thing without regulation contributed to the 2007-2009 recession. Government should hold oversight of the economy and free enterprise and when it perceives a problem that it can definitely do something to rectify it should and must interject.
Improvements to his theories would be the government operating in a watch dog role for and a listening post for the people. Many times preventative action is needed to prevent catastrophes like with this last recession. Government should also provide help to the people during economic troubling time. It is the common people not the rich or wealthy that really suffers during “hard times” without government help like extension of unemployment benefits, job creation efforts, etc. How would the hardest hit survive these times?
I am a mixture of both Keynesian and Friedmanian. The government should be there to intervene when necessary but still allow free enterprise to create its cycles of “boom and bust”.
Why do I have to choose?—I want both.
ReplyDeleteMilton Friedman and John Maynard Kenes seem to know there stuff, but I’m afraid that after an 8 week course in economics, and reading your blog, and briefly studying the theories of these economist; I am still unable to speak intelligently about the topic, or come down on either side. However, it has been my experience with most extremes, that the best option almost always lay somewhere in the middle.
So here it is: both Friedman and Keynes agreed that successful macroeconomic management is necessary — that the private economy on its own might well be subject to unbearable instability — and that strategic, powerful, but limited economic intervention by the government is necessary to maintain stability, and I agree :-)
http://discover-it.blogspot.com/2006/12/keynes-vs-friedman.html
Great review--very informative. Thanks Matt!
ReplyDeleteHello All,
ReplyDeleteRonya, thanks for the blogspot link. It presents a very nice comparison of the two economist Keynes and Friedman. I agree with you and them. Your post express my thoughts on the subject very well. “strategic but limited intervention by the government”.
Cheryl H.
Hi Matt, great post. I like how you were able to break this subject matter into easy to understand points.
ReplyDelete1. There is no question that the recession was a horrible event for this country. However, I do not believe that Friedman's theory was to blame for the event. I can understand that without regulation, companies can become corrupt and make decisions that can negatively effect the county. But the same can be said with a Keynes point of view, with a corrupt government controlling businesses in a negative way. Therefore, I think it was a combination of both events that led us to where we are today.
2. I don't necessarily believe that improvements can be made to his theory. The theory that he was trying to make was his view point. I can certainly see where he is coming from. While I am a mix of Keynes and Friedman, I can understand why freedom from government regulations can help the economy. This can allow companies to be innovative, and prosper in ways that are best for their individual standards, and that government regulations could prevent from happening.