Milton Friedman on governmental intervention
Milton Friedman is regarded as one of the most prominent economists of the second half of the twentieth century and an advocate of the economic liberalism and capitalism. His views was mostly associated with the neoclassical school of economy. He was also a notable member of Chicago school of economy and one of the founders of monetarism theory. In 1976 he was awarded with Nobel Prize in Economics “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy”1.
Friedman considers freedom as undividable. He states that confining the freedom on one field will eventually affect other fields too and therefore, abridging economic freedom leads to abridgement of freedom in other fields, including freedom of speech and freedom of media. Nevertheless, he contends that absolute freedom today is impossible, as long as we live in the society with members being interdependent. These interdependencies leads us to enacting abridgements of our freedom necessary to exist as a society. However, in Friedman’s opinion, all the abridgements that were imposed on us had already crossed the border of necessity. They are reducing our freedom further than for a level essential for existence of society. Everyone should be able to use one’s own property at will. Notions of increasing percentage of one’s income being appropriated by government were regarded by Friedman as dangerous for a both economic and personal liberty.
Adam Smith’s works are quoted repeatedly by Friedman, he is the source of inspiration for whole school of neoclassical economy. Agreeing with Smith on the role of government, Friedman states that two primary objectives that government should strive for are the protection of their people both from internal and external violence – both from the other states and from their fellow countrymen. This is absolutely essential for the existence of the free market, as there is no freedom of choice for those unprotected and endangered. Therefore, military and police are necessary to protect the state and its people from the internal and external threats.
Moreover, Smith considers establishing “proper judiciary system” as duty of government which is necessary for the existence of the free market. The judiciary system should protect the people from injustice and oppression one can experience from another member of the society. In Friedman’s opinion most disputes can be settled by mediation by private arbiters chosen by both parties, although state should also establish a judicial system, for example as a court of last resort. Another task for government is facilitation of the free trade by enacting the general rules of the market, for example defining the private property. Friedman agrees with Smith, that creating and maintaining some kinds of infrastructure can be unprofitable for a single man or even a company, but profits for the society as a whole can justify using public funds on it. Taking tolls for crossing a bridge can consume more effort than profits that can be made from these tolls, but the bridge can benefit the society to such extent, that the taxes are a rightful price to pay to build it. Although, it is the government who should be encumbered with a burden of proving, that eventual profits of such intervention will outweigh the costs. The fourth duty of the state, which Friedman is proposing, is guardianship over those, who can’t be regarded as responsible for their actions – children and mentally impaired.
Friedman states, that government acting in order to create personal equality or equal opportunities will reinforce the liberty, as this is the correct approach. On the other hand, acting to bring about “even shares for everyone” will constrict the liberty and ultimately lead to the totalitarian regime, as in Soviet Russia, China and Cambodia.
As a proponent of the monetary theory, Friedman contends that it is government that should be found guilty for creating excessive inflation by increasing money supply. There are numerous phenomena that can create fluctuations of the inflation rate, but they will affect the inflation rate perpetually only to the degree that it changes the rate of increment of money supply. Amount of governmental expenses, policy of full employment and central bank’s policy can be the main perpetrators of increasing inflation rate, and they all are actions of government. Governmental expenses that are intended to create new jobs can be funded from taxes or from created money reserves. The taxes reduce private expenses, and therefore discourage companies from creating new jobs. Therefore, policy of full employment will lead to increment of governmental expenses, which are likely to be funded from newly issued money. Although, this will just result in price rises.
A clear demonstration of the failure of the concept of central planning are public housing programs in the United States. Most spectacular example was the huge state-funded project Pruitt-Igoe in St. Louis. The complex had be demolished, because there were not enough people willing to live in a project which quickly turned into decaying and crime-infested neighborhood. There were Americans who preferred to build new house for themselves or renovate the old in order not to live in governmentally subsidized housing estates. These estates often ended up as slums, with terrifying crime rate and tenants composed mostly of people living off social security programs.
Unsurprisingly, Friedman considered social security programs as a waste of taxpayer’s money. Despite of rising economic well-being of the American society, there were more and more benefiters of the social security programs. Those receiving allowances do not have any reason to look for a job. Moreover, the money allotted for the social security programs are usually used in the major part to maintain the welfare system and cover administrative expenses. Those, who are actually poor and in need can receive what is left after going through the bureaucracy. Bureaucracy will always emerge to manage such amount of money that is spent on social welfare.
Imposing of minimum wages was also criticized by Friedman. He observes, that instead of protecting the people with low qualifications and wages it actually prevents people with low or no qualifications from getting any job at all. If one hour of employee’s work will produce goods worth 6$, it is unreasonable to expect that his employer will pay him 7.25$. If he is forced to set salaries that high, he rather would not employ anyone with such qualifications. If potential employer could adjust the wages to the actual worth of one’s job, the unqualified worker will have a chance to improve his qualifications, and even more importantly, will get a job he wouldn’t get otherwise. It is quite obvious that most people would prefer to work for a lower salary than remain jobless (provided they do not live off social welfare system).
Another way in which government can disrupt the market mechanism is licensing the professions. Most notable examples are doctors, lawyers and plane pilots. High salaries in those two professions are the effect of the licensing. There are very few pilots and doctors, and that leads to salaries higher than there should be on a free market. Process of licensing seems particularly interesting. It is the practitioners who issue a proposition of licensing their profession to the government. The reason is always the same: to protect the customer. Why there are no customers lobbying for licensing professions? Because they actually do not actually benefit from the fact that there are fewer doctors or pilots. In fact, they just need to pay more for their services.
Friedman observes, and states that observation quite ironically, that government in the last few decades became one of the most steadily growing branches of the economy in United States. Moreover, it is probably the best employer on the United States. Salaries of governmental employees are not only higher than salaries that employees of private companies on similar positions receive, their salaries are evaluated with the inflation. Acts concerning public service in USA consisted of twenty one tomes taking five feet of bookshelf space. And that was in 1973!
Summarizing, Friedman is a fierce opponent of government meddling in economy and society, convincing us that it can’t manage the resources as rationally as the people. Yet, he was not as radical in his views as economists aligned with the Austrian school. I think the message he was trying to deliver was that people usually do better for their well-being that government thinks they can.
Przemysław Widuch