Crawl Across the Ocean

Tuesday, January 11, 2011

78. Capitalism and Freedom (part 1)

Note: This post is the seventy-eighth in a series about government and commercial ethics. Click here for the full listing of the series. The first post in the series has more detail on the book 'Systems of Survival' by Jane Jacobs which inspired this series.

This week's post is on the book 'Capitalism and Freedom' by Milton Friedman.

The Wikipedia article provides a good summary of the book and it's main arguments so I won't go into much more detail here. In general, the theme is on why we should limit the role of government in society and let the free market reign wherever possible.

Friedman is a descendant of Veblen in many ways, strongly of a commercial syndrome mindset and naturally hostile to the guardian syndrome. But where Veblen had the better of Friedman though, was in his willingness to see how people who were nominally part of the free enterprise system could end up mired in corruption by taking on guardian roles and mindsets and activities. Veblen recognized the guardian syndrome and saw it as a threat when it mixed with the commercial one. Friedman, on the other hand, seems not to even recognize the existence of the guardian syndrome and, perhaps as a a result, exhibits an almost childlike belief in the virtues of the free market.

In this time when the U.S. is turning into a plutocracy before our eyes, it's amusing to read Friedman's explanation of how wealth inequality is a safeguard of political freedom. And while Friedman goes on at length about the hazards of monopoly, the hazards of a perfectly competitive market go unmentioned (although surely Friedman must have read many critiques of perfect competition such as the one made by Joseph Schumpeter in 'Capitalism, Socialism and Democracy'.)

I guess, much in the same way that it is hard for us to judge the ancient Greek's views on slavery, it may be hard for me to judge the writings of Milton Friedman in the 1960's, a very different era with respect to views of government and markets. To the extent that Friedman wanted to explain that the mixed economies of the West were a better approach than full-on Communism, then certainly he is on solid ground. And to the extent that he takes on special interest groups (such as the American Medical Association) that are out to serve their own interests ahead of society, then he is still on solid ground.

But Friedman goes beyond this to advocating a wide range of free market policies without really thinking through his analysis completely. The next post will be a case study of one example from this book, the case of 'Corporate Social Responsibility'.

Not to say the book isn't worth reading. Friedman is a great writer and a clear thinker and there's certainly lots of valuable points to be made. It's just that given current circumstances, it all seems a little dated, overstated and reminiscent of tiresome level 2 thinking1 at times.

Near the end of Capitalism and Freedom, Friedman comments that,
"The conversion of the intellectuals [to collectivist views] was achieved by a comparison between the existing state of affairs, with all its injustices and defects, and a hypothetical state of affairs as it might be. The actual was compared with the ideal.
At the time, not much else was possible ...

We now have several decades of experience with government intervention. It is no longer necessary to compare the market as it actually operates and government intervention as it ideally might operate. We can compare the actual with the actual.
If we do, it is clear that the difference between the actual operation of the market and its ideal operation - great though it is - is as nothing compared to the difference between the actual effects of government intervention and their intended effects."

The irony is that, at the time, Friedman himself was proposing a set of theoretical, ideal changes to the way society operated, comparing his ideal markets against how things actually worked the time. And here we are, decades later and so much of what Friedman recommended has been tried and failed. Central banks tried increasing the money supply in the manner Friedman suggested but found it unworkable and ineffective in practice. The financial meltdown of recent years disproved his theories about how the U.S. Federal Reserve (Central Bank) caused the great depression. School vouchers have been implemented in many places for many years to little noticeable effect. The Chilean pension system, modelled after Friedman's recommendations, had to be reformed (again) in 2008 because of the exact problems with coverage and cost that Friedman dismisses. The dismantling of social programs and anti-poverty measures and reductions in the level of union power has coincided with increases in inequality and poverty (since Friedman was writing in the early 60's), and recent years have made a mockery of Friedman's claims that the unhindered operation of the free market would result in the narrowing of class divisions or the advancement of popular culture by leaps and bounds or that greater reign for the free market would result in a less materialistic society.

At any rate, Friedman's book provides a good example of the commercial syndrome mindset applied to the question of the proper role of government. Friedman believed that collective action was almost always a bad thing because it forced people to go against their self-interest and thus would never work because people almost always follow their own self-interest. From this assumption of self-interest as the primary, at times sole motivator of humanity, flowed his belief in the supremacy of the market over collective action.

1 I remembered I had written a post about 'level 2 thinking' a while back, but only when I dug up the link did I realize that the quote that prompted that old post was also from Milton Friedman - I guess it's good to know I can be consistent even without the benefit of a properly functioning memory!

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