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Friedman the Libertarian
In 1962 Friedman published Capitalism and Freedom, a comprehensive exposition of the libertarian position. The book made his first major splash outside his academic discipline. It was launched into a barren environment for individualist thought. As Friedman later noted, though it was “destined to sell more than 400,000 copies in the next 18 years, written by an established professor at a leading university and published by a leading university press…it was not reviewed in a single popular American publication.”
Capitalism and Freedom contained almost all the themes Friedman would stress during his career as a public intellectual. It emphasized the connection between economic and political freedom—a familiar idea today but not in the early 1960s, when the dream of democratic socialism was still prevalent. It explained how markets permit unanimity without conformity—that they allow us all, for the most part, to get the products and services we want, even if they aren’t the same as what the majority wants. It gave some credence to the danger of monopolies but still argued that an unregulated private monopoly is a lesser evil than government attempts to regulate it, on the grounds that “dynamic changes are highly likely to undermine” private monopolies, while government programs and regulations tend to last forever. Friedman granted that certain market actions might have neighborhood effects—harms, such as pollution, that affect third parties—and that those might warrant government action. But he advised that the initial presumption must always be against such action.
Friedman explained how unions help cartelize industry, to the consumer’s detriment. He attacked the idea of “corporate responsibility.” (Friedman believed a corporation’s responsibility to its shareholders is simply to make profits, and that individual shareholders should be able to decide for themselves how much of their money they want to give to other causes, not have that decision made for them by corporate executives.) He showed how occupational licensing allows professionals to block competition and neither ensures quality nor helps consumers. He accepted the idea of a government-set income floor but advocated a negative income tax—a set stipend that you could spend as you wished—as a replacement for all current welfare programs. That, he insisted, is the cheapest and least bureaucratic way to assist the poor, and the method that leaves them with the greatest personal autonomy. This idea entered the policy debate over poverty programs before the decade ended and influenced the earned income tax credit we now have.
Capitalism and Freedom was filled with Friedman’s particular concerns as a monetary economist. He called for strict rules defining a set rate of growth in the money supply from year to year. He also called for floating exchange rates between national currencies—allowing the price of currency in international markets to be set by market forces, not government commands.
The book argued for the abolition of a long list of government functions: price supports, tariffs, licensing, minimum wages, Social Security, housing subsidies, the draft, toll roads, the post office, and national parks. The one that is now gone, the draft, was Friedman’s pet issue, and his role in its abolition is the policy victory of which he was most proud.
Martin Anderson, the libertarian-leaning author of The Federal Bulldozer (on the dire effects of urban renewal), had been director of research for the 1968 Nixon campaign, and he was a special assistant to the president in the early days of the Nixon administration. Anderson had already been influenced by Friedman’s arguments for a volunteer military, and he urged Nixon to appoint a 15-member advisory commission, with Friedman as a member, to contemplate the future of the draft. The president adopted the suggestion, creating the Gates Commission—named after Chairman Thomas Gates, a former secretary of defense—in March 1969.
Friedman used his polemical powers to win the commission over to his belief in an all-volunteer army. Vietnam troop commander William Westmoreland gruffly announced during one commission hearing that he was not interested in leading an army of “mercenaries.” Friedman coolly replied, “Would you rather command an army of slaves?”
Westmoreland bristled. “I don’t like to hear our patriotic draftees referred to as slaves,” he said. “I don’t like to hear our patriotic volunteers referred to as mercenaries,” Friedman snapped back—and pointed out that if they were, then he was a mercenary professor and Westmoreland a mercenary general.
At the outset, the commission’s members ostensibly were evenly split three ways—five opposed to the draft, five in favor, five undecided. In less than a year of meetings, spurred by Friedman’s argumentative power and moral force, the commission unanimously recommended ending the draft in February 1970. (That said, with Anderson’s thumb on the scales, the commission was intended from the beginning to come up with a workable, realistic plan for shifting to an all-volunteer force.) Nixon agreed with the general shape of the Gates Commission’s suggestions, though he didn’t move as quickly as Friedman would have wanted (the draft didn’t officially end until 1973); nor did he raise the salaries of enlisted men as much as Friedman thought would be necessary and proper.
The political pressure of street unrest was also important in compelling Nixon to end the draft. But Nixon later said that “I would not have followed through after the election had I not become convinced that a voluntary army was economically feasible and militarily acceptable.” And that achievement was largely the result of Friedman’s persuasive power.
Friedman the Economist
As an economist, Friedman is best known as the apostle of “monetarism”: the idea that changes in the money supply are the prime causes of inflation and the business cycle. Over time, this view triumphed over the Keynesian notion that fiscal policy—taxing and spending—is government’s best tool to manage the economy. Friedman argued that fiscal policy was likely to be impotent in the long term. In the simplest layman’s terms, if the government taxed to spend more, citizens would have that much less to spend. If the government borrowed to spend more, that much less money would be available for private borrowers. Similarly, if the government tried the reverse fiscal policies, spending less by cutting either taxes or borrowing, it would leave more for citizens to spend. Hence government attempts to manipulate “aggregate demand” are generally useless, since no matter what the government does to manipulate its own demand, counterbalancing changes in demand from the private sector in the opposite direction would blunt those effects.
Even if fiscal policy could have some useful effects, which Friedman doubted, there’s no reason to believe government managers could use the policy at the right times and in the proper amounts to achieve the desired effect. As he wrote in Capitalism and Freedom, what government fiscal manipulations really tended to do was introduce “a largely random disturbance that is simply added to other disturbances.” Besides, private spending was a truer representation of consumer wants than government spending.
Friedman famously believed that the true test of economic theory was not whether it seemed to make sense but whether it led to testable predictions that were borne out by observable evidence. Thus he didn’t depend only on logical argument to make his point. He and his collaborator Anna Schwartz scrupulously accrued data that showed, in as close to controlled experiments as history allows, how monetary changes usually had far greater effect on nominal income, prices, and output than did fiscal changes.
That doesn’t mean monetary policy provides a magic wand for the government to use in fine-tuning the economy. The juicy libertarian implication of Friedman’s dry and scientific work is that government stabilization attempts, whether through fiscal or monetary policy, are bound to fail, since the effects of money on the economy work only through a lag that’s both long and variable. Any attempt to respond to an economic ailment by increasing or decreasing the money supply is apt to be either too little, too late or too much, too soon. When the Federal Reserve jiggers with the money supply, it is as likely to exacerbate problems as solve them.
Friedman thus thought the Fed should lose its ability to make such arbitrary decisions. He advocated abolishing the central bank and setting money growth on automatic pilot: a 3 percent to 5 percent increase each year, to keep up with expected growth in population and production.