This paper has been written to report upon Free To Choose: A Personal Statement, a classic book on economics written by Milton and Rose Friedman. The book accompanied a series of videos made for PBS in 1979. The writing encompasses their beliefs on how our freedom has been eroded and our prosperity undermined through the explosion of laws, regulations, agencies, and spending in Washington, and how good intentions often produce deplorable results when government is the middleman. The authors include suggested remedies for these illnesses. This paper will walk through Free to Choose in the order of its chapters.
The first chapter is entitled The Power of the Market. This explains the basic logic behind the operation of a free market. The first principle is voluntary exchange through cooperation, which is described as necessary for a society to achieve a heightened level of prosperity. People are most satisfied when they are doing what they want and believe they will personally receive some or all of the benefits of hard work. If one party refuses the deal because he does not feel that he is receiving a good price, then both sides can work harder to come to an acceptable arrangement. This idea is the driver behind free markets.
The next principal of this chapter is the role of prices in a free market. The authors state, Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another. Prices represent the implied value of capital invested in that item. It allows the seller and the buyer both to come to a term they think is fairly representative of that value. It weaves a mosaic of the millions of people who can be both directly or indirectly involved with even such a simple item as a pencil. Prices are the balance between supply and demand in a free market. Prices perform three functions in organizing economic activity. According to the authors, these functions are: first, transmitting information; second, providing an incentive to adopt those methods of production that are least costly, and thereby, use available resources for the most highly valued purposes; third, they determine who gets how much of the product the distribution of income.
The remaining question of a free market is What role should the government play? The drafters of the constitution intended the federal and state governments to play the position of a referee in the free market game. That is to say, they should make sure all players follow the rules of fair play. Such clear-cut cases would involve protecting individual rights to capital and intellectual properties. The government should also protect people from the coercion of others. More and more, the government is expanding upon these duties and actually donning a jersey to compete against people or to attempt to manage the teams. Tariffs, restrictions on entry into various occupations and fixed prices and wages are just some of the government activities that actually harm fair play, rather than assist it in the economy.
The next chapter of deals with government and what the authors deem to be the Tyranny of Control. In essence, they further describe the specific harms federal controls place upon our economic freedom. The first area addressed is tariffs and international trade. A popular phrase, especially among politicians, is we live in a one-world economy. Why then, do we place taxes and regulations upon other nations that we do not impose within our own country? Some controls are understandable. It stands to reason selling military equipment and nuclear secrets to Iraq, is not in the interest of people. While a select few might financially benefit from such sales, the danger these weapons place upon public safety make such trade unreasonable. Our government prevents farmers from selling much of their products to other nations, and then subsidizes these same farmers with our tax money instead of letting a positive economic activity take place. The same examples are present in many of our industries such as automobiles, fuel, and steel to name a few. These limitations are said to be for our protection, if an industry truly needs protection that translates as being that it is simply not successful in the face of competition and should be allowed to fail. In the end we pay both higher prices through tariffs, then pay again when we are taxed in order to protect American industry.
The next area touched upon is government controlled central economic planning. These are the same nations that continually ask the United Nations for economic assistance in the form of loans and grants. Even our authors admit that they could not begin to plan an economy and establish where it should invest its energy. Why then, should a handful of elected officials know what is best for their people instead of letting the market decide for itself.
What about these controls that the government places upon economy that are supposedly for the protection of the consumer? Without government imposed licensing, a person cannot be a lawyer, dentist, plumber, barber, mortician, or a host of other occupations. These controls have left a great deal of power in the hands of a few whose best interest lies in restricting access to the trade in order to keep prices artificially high
The next chapter moves on to cover the pending crisis that is the government s growing role in managing the value of money. The Federal Reserve System was adopted to avoid banking panics and facilitate commerce, and secondly to act as the governments banker. It would act as a mediary between banks in order to help transfer funds between each other and to also help insure deposits in banks by guaranteeing that funds deposited would be there any time a person needed to withdraw them.
This system quickly backfired as the government would take money in return for bonds and then spend the money on military or other expenses. This method essentially increased the amount of money in circulation and fed inflation. It would grow the supply in order to support business during slow times or decrease the supply during rapid growth in order to maintain stability in the system. Basically, this power to control the economy was left in the hands of a few people who, like any political official, could use it in any way they wanted to support their own power.
In the nineteen-thirties, when another financial crash occurred on Wall Street and spread into the banking community, the Federal Reserve Bank decided to maintain a small amount of money in the hopes of preventing a drain upon its own money supply. During the first years of the depression, the federal gold reserve actually increased, showing that the government was managing to reduce the amount of money in circulation both here and overseas. Actually serving to export our economic woes abroad. This caused interest rates to hike even higher and effectively keep money out of the hands of people and further eliminate the much-needed economic activity that could have helped stave off the depression. Under normal circumstances, a depression would have caused the prices of American goods and services to decrease and thusly increase the amount that other nations would be willing to purchase. But our monetary policy also prevented other countries from being able to spend money here.
The authors next address the political changes that occurred during the depression and still affect our economy today. Politicians were led to believe that capitalism was failing and that it should be the government s role to help redistribute money back into the economy. Since this period, our federal government has grown roughly ten times larger. Instead of allowing more money into the system for business to spend on growth, they actually took even more taxes from the people and attempted to spend it themselves in order to assist the economy. This basically took away the peoples economic vote, money, and left the federal government to make our spending decisions for us. Which violates the very principals of the constitution. As discussed earlier, such a plan bypasses the incentive system that is the basis of a strong economy.
The first of these programs that violates every principal of capitalism is Social Security. It was enacted as a savings program to assist after retirement. It does nothing of the sort. It effectively takes money away from working people and gives it to those who are not working. It gives an incentive to some people to not work after the established age of retirement because a person can either work and have their pension taken away, or not work and make the same amount of money. Not only does it take money from one person to give to another, but it is also filtered through thousands of administrators who take paychecks and finance their own operations off of this money so that even less is drawn out than is actually paid in. Social Security also reduces the incentives of an individual to save due to the fact that they first have less money to spend because of the tax and secondly, due to a false sense of security through the belief that the government will take care of them after they retire.
Public and housing assistance are the other fallacy to the logic of the government taking care of people from cradle to grave. Unemployment, food stamps, aid to parents, and housing subsidies are just a few of the over one hundred programs that exist in this realm. While one can argue that these programs help some people, far more abuses occur. The need that started off as food, clothes, and shelter has grown into cable TV, microwaves, and nice cars.
The Declaration of Independence stated that every person was entitled to equality and liberty. These too, are definitions that have changed with time. When drafted by Thomas Jefferson, it was intended that each person is equal before god and should be able to serve his own purposes; that no other shall be entitled to invade. Equality before God personal equality is important because people are not identical. They have different values and tastes that will cause them to lead different lives.
Equality of opportunity is an area that has been interpreted far too literally. Clearly, no one is born equal. Some may be born more physically capable than others, while some might naturally be more intelligent. It is only violated when one is denied a pursuit due to ethnic background, color, or religion. This has transformed into a different idea, which is equality of outcome. The government has attempted to insert fairness into the system hoping that all will come out ahead. The graduated tax is an example of this. Taking from the rich and giving to the poor is a method that destroys the incentive to be part of the rich. Many people aren t willing to work more hours or overtime because they know that they will be taxed more heavily so that the extra work will reap no rewards. Such practice leaves little incentive to work and produce. It doesn t seem fair that some children are born into wealth that will allow them a larger inheritance or a family business to work for. But isn t it equally unfair that some children are born with natural skills and abilities that will allow them to surpass others. Should we place some sort of a tax on these people as well?
The equality that is inherent to capitalism is the fact that anyone, through hard work and determination, can come out ahead in the game of life. Such rewards should not be handed over to everyone who did not earn it. A free market is what truly levels the playing field. The technological improvements that have come about because of this system mean the least to the wealthy. Does a microwave oven mean much to a person who has servants to cook their meals? No, it helps out the middle class by saving them time that they can put towards leisure or advancing their careers, just as those of wealth do with their time. The machinery that replaces backbreaking toil of the working class is only present in free, capitalist societies. It is regulated economies such as China and India in which you still find people plowing field with oxen and weaving fabric with non-automated looms.
The next chapter is entitled What s Wrong with Our Schools? The lesson of this chapter follows that of competition as incentive to perform. The education system is run by the government and thus, has no competition that will drive it to innovate and improve itself. Federal bureaucracy forces it to maintain the status quo and spend more time dealing with regulations than with the act of teaching.
The first area addressed is elementary and secondary education. Until 1840, the school system was mostly financed directly through fees rather than indirectly by taxes. A campaign was started mostly by politicians and teachers to have the federal government take control of the system and impose a standardized system of education. While a few schools are still privately operated by various religious groups, the government now controls all education. While the number of teachers employed by schools has increased slightly, the number of supervisors has increased dramatically. The taxes to fund such schools, has increased even more sharply despite no increases in the number of students.
The authors propose a voucher plan to give power back to the parents and a free market. Instead of giving money directly to the school districts, the government would instead give it to the parents in the form of a money voucher redeemable only for education. The parents would then be free to choose which school they want their children to attend. This plan would force schools to compete against each other for students, thus adding a competitive edge to our education system. If parents want their children to attend a more expensive school, they could then add money out of their own pockets to pay the difference.
The next area of this chapter addresses higher education. While the United States contains some of the world s greatest private universities, the majority of students attend state colleges due to the lower cost. The authors correctly argue that with private institutions the students are the primary customers; they are paying for what they get, and they want to get their money s worth. The percentage of students who complete their bachelor s degree at private schools is far higher than those at public institutions where many students view their education as something to do. The problem that lies within bureaucracy is also present in state institutions where administrators are most likely to exert their energy towards getting more grants rather than their primary role of education.
The authors propose a simple and straightforward solution to this problem. Have all government schools charge fees covering the full cost of the educational services they provide and so compete on equal terms with nongovernment schools. They feel that a student will then reconsider what occupation they want to work towards and compare the costs with the cost of an education. Insofar as any tax money is spent to subsidize higher education, the least bad way to do so is by a voucher arrangement like that suggested for elementary and secondary schools. The government could limit the number of vouchers per field of study and support those that we need and grant fewer vouchers for the already overburdened economic sectors.
The next chapter is titled Who Protects the Consumer? It deals with the issue of who will see to the well being of the consumer without government regulations in effect. The authors specifically detail the workings of the Interstate Commerce Commission, the Food and Drug Administration, the Consumer Products Safety Commission, the Environmental Protection Agency, and the Department of Energy. Each of these agencies make their respective sectors more expensive and stifle innovation due to the excessive controls they impose.
The best form of consumer protection is inherent to the free market. If someone is selling goods that are harmful to the consumer, then they will quickly lose business and face lawsuits due to their immoral business practices. After all, we are living in the information age. At no other point in history has the average person had such a large amount of data available, everywhere from newspapers to the Internet. A free market also provides the benefit of a middleman. This is the sales person who acts as a quality expert on the customer s behalf. Doctors won t prescribe drugs that have proven harmful or come from questionable sources, nor will Sears sell a bad television set, because they want to establish trust and customer loyalty.
The next chapter answers the question, Who protects the worker? Historically, the government has played an essential role by providing a framework for a free market. But direct government action was clearly not the reason for the improvement in the lot of the worker. Any business that abuses its employees will be quick to lose them in a robust economy that is hungry for talent. No company can afford the high costs of repeatedly recruiting and training new workers on a regular basis, thus making the practice of abusing their employees unaffordable.
One solution to the needs of the worker is the labor union. The labor unions are actually a throwback to preindustrial trade guilds that acted to limit the number of members in their area and maintain a high rate for their members. Nothing has changed. Unions still represent a special interest that would have themselves benefit at the expense of others. The reason for the success of unions is not their ability to supply skilled workers to the market, but their ability to limit their membership, so that the prices can stay artificially high.
The most notorious of unions has been the American Medical Association. They successfully control which schools can be accredited to teach doctors. Thus, they control the exact number of doctors available for the market. Anyone who thinks that there are plenty of doctors available should go to the emergency room at two in the morning with the hopes of being home by sun up. The most recent area of union growth has been amongst government workers: teachers, policemen, sanitation workers, and virtually every other venue of government employment. These unions do not deal with the taxpayers who pay their members salaries, they bargain with the government for high wages and benefits. Montgomery County, Maryland has the highest per-family income in the nation and is not surprisingly one-quarter employed by the government. Their incomes and pensions are directly linked to the cost of living and inflation.
In addition to protecting its own employees, the government has adopted a host of laws aimed towards protecting the working class. Workmen s compensation, child labor, minimum wage, and OSHA are just some of the areas that the government has tried to extend its umbrella of protection. All of these acts have done little beyond raising expenses of business and limiting the number of employees that they can afford to employ.
The following chapter delves into the subject of inflation. The authors first define what money really is. As such, it is actually just pieces of paper or metal with images printed on them. However, what these items stand for is what is difficult to explain. Money represents a value that the spender and the receiver must have a sort of faith in. A person needs to believe that they can rely upon this coinage to be redeemable for goods and services. Thus, money is linked to the reliability of the country that prints it. This is why the American dollar holds such value in other nations and why the money of countries such as Russia and India are virtually worthless outside their native soil.
The proximate cause of inflation is that the supply of money increases more rapidly than the output of goods and services. While a free market is closely tied to the output of goods and services, it is the government that can increase and decrease the supply of money. Economic output is limited the expansion of resources and technology and the expansion of money is limited to bookkeeping entries which have no physical limits. The three main causes for the increase in money during the past years have been the growth in government spending, the government s full employment policy, and the policies pursued by the Federal Reserve System.
Higher government spending alone will not cause monetary growth if it is funded through additional taxes or by borrowing from the public. Since both of these methods are politically unattractive to the public, there remains only one option. That is for the government to finance it s spending by printing more money. This is a very attractive method for the government to pursue because the money seems to magically appear for the government to fund public programs.
In a dynamic world and a dynamic economy, new products and businesses will appear and disappear quite frequently representing shifts in demand. Between these shifts, there will be periods of unemployment while people are switching between jobs. Likewise, it is much more common these days for people to switch jobs more often due to the availability of different fields of work. Either way, people will be unemployed during these periods. In order to keep these unemployment numbers low to please the public and demonstrate that they are effective leaders, the government has attempted to employ more people and spend more money to keep our economy busy. As before, taxes and borrowing are unattractive, so the government prints more money to spend on these programs.
The Federal Reserve s has attempted to exert powers that it does not have in order to support these government objectives. Not only do they control the flow of money, they have attempted to control interest rates. These actions have created a roller coaster affect upon our money and interest rates.
The solution to this problem is very simple, but it is equally difficult to do. Just as an excessive increase in the quantity of money is the one and only important cause of inflation, so a reduction in the rate of monetary growth is the one and only cure for inflation. Unfortunately the effects of inflation are similar to that of a drug addiction. Initially, the user feels only the good of drugs. As the use continues, some of the harm begins to show itself. When attempting to quit, the addict will feel a great deal of pain while waiting for the positive effects to show themselves. People enjoy the initial effects of inflation as they feel the prices of what they sell go up along with their income. It is only with time that they realize that everyone else s prices are increasing too, so that the benefits have been negated.
The final chapter is called, The Tide is Turning. This title is based upon the political climate that is beginning to turn against big government and socialist programs. People are realizing that higher inflation is a form of taxation without representation. This concept never has been and never will be popular. Voters are now turning out in favor of the candidates who pledge to reduce the role of government and shrink the budget. These opinions are showing up with a growing favoritism towards adopting a balanced budget amendment to the constitution.