Free to Choose: A Personal Statement

I have been reading Free to Choose: A Personal Statement by Milton and Rose D. Friedman on and off last a couple weeks. To read this book, we need to know first that this book was published in 1980. The global environment was very different then. That said, much of the content I find convincing and I am inclined to agree with the authors. However, some of it I am more inclined to disagree, especially about social welfare. Friedman argues for a laissez-faire economic model without government intervention, such as tariffs, regulations, subsidies and so on. Plenty of examples from history are provided to support this thesis: Britain’s glorious economic growth for a century before WWI, east and west Germany, Hong Kong as a rising star in the 1980s, Japan from 1867 to 1897 vs India after WWII as a comparison. Freedom from governmental intervention is credited for the rapid growth in both economic and political freedom. The comparison of Japan vs Indian exemplifies this argument.

Japan (from 1867 to 1897) relied primarily on voluntary cooperation and free markets – on the model of the Britain of its time. India (1947 to 1980s) relied on central economic planning – on the model of the Britain of its time. The Meiji government did intervene in many ways and played a key role in the process of development. It sent many Japanese abroad for technical training. It imported foreign experts. It established pilot plants in many industries and gave numerous subsidies to others. But at no time did it try to control the total amount or direction of investment or the structure of output….India is following a very different policy. Its leaders regard capitalism as synonymous with imperialism, to be avoided at all costs. They embarked on a series of Russian-style five-year plans that outlines detailed programs of investment. Some areas of production are reserved to government; in others private firms are permitted to operate, but only in conformity with The Plan. Tariffs and quotas control imports, subsidies control exports. Self-sufficiency is the ideal. Needless to say, these measures produce shortages of foreign exchange. These are met by detailed and extensive foreign exchange control – a major source both of inefficiency and of special privilege. Wages and prices are controlled. A government permit is required to build a factory or to make any other investment….Reliance on the market in Japan released hidden and unsuspected resources of energy and ingenuity. It prevented vested interests from blocking change. It forced development to conform to the harsh test of efficiency. Reliance on government controls in India frustrates initiative or diverts it into wasteful channels.

I made an earlier decision not to write about China, but there is one interesting passage about China in this book worthy quoting:

We recently came across a fascinating example of how an economic system can affect the qualities of people. Chinese refugees who streamed into Hong Kong after communists gained power sparked its remarkable economic development and gained a deserved reputation for initiative, enterprise, thrift, and hard work. The recent liberalization of emigration from Red China has produced a new stream of immigrants – from the same racial stock, with the same fundamental cultural traditions, but raised and formed by thirty years of communist rule. We hear from several firms that hired some of these refugees that they are very different from the earlier Chinese entrants into Hong Kong. The new immigrants show little initiative and want to be told precisely what to do. They are indolent and uncooperative. No doubt a few years in Hong Kong’s free market will change all that.

Economic and social progress do not depend on the attributes or behavior of the masses. In every country a tiny minority sets the pace, determined the course of events. In the countries that have developed most rapidly and successfully, a minority of enterprising and risk-taking individuals have forged ahead, created opportunities for imitators to follow, have enabled the majority to increase their productivity.

In this book, Friedman argues that the story of the United States is the story of an economic miracle and a political miracle that was made possible by the translation into practice of two sets of ideas – both, by a curious coincidence, formulated in documents published in the same year, 1776.

One set is embodied in The Wealth of Nations by Adam Smith. Adam Smith’s key insight was that both parties to an exchange can benefit and that, so long as cooperation is strictly voluntary, no exchange will take place unless both parties do benefit. No external force, no coercion, no violation of freedom is necessary to produce cooperation among individuals all of whom can benefit. That is why, as Adam Smith put it, an individual who “intends only his own gain” is “led by an invisible hand to promote an end which was no part of his intention. Nor is it always the worse for the society that it was no part of it. By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it. I have never known much good done by those who affected to trade for the public good.”

 

The second set is from the Declaration of Independence drafted by Thomas Jefferson. “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights; that among these are Life, Liberty, and the pursuit of Happiness.

There are many fascinating pieces from this book. Here are a few examples to whet your appetite.

Writing about equality: A society that puts equality – in the sense of equality of outcome – ahead of freedom will end up with neither equality nor freedom. The use of force to achieve equality will destroy freedom, and the force, introduced for good purposes, will end up in the hands of people who use it to promote their own interests. On the other hand, a society that puts freedom first will, as a happy byproduct, end up with both greater freedom and greater equality. Though a byproduct of freedom, greater equality is not an accident. A free society releases the energies and abilities of people to pursue their own objectives. It prevents some people from arbitrarily suppressing others. It does not prevent some people from achieving positions of privilege, but so long as freedom is maintained, it prevents those positions of privilege from becoming institutionalised, they are subject to continued attack by other able, ambitious people. Freedom means diversity but also mobility. It preserves the opportunity for today’s disadvantaged to become tomorrow’s privileged and, in the process, enables almost everyone, from top to bottom, to enjoy a fuller and richer life.

Talking about unions: A successful union reduces the number of jobs available of the kind it controls. As a result, some people who would like to get such jobs at the union wage cannot do so. They are forced to look elsewhere. A greater supply of workers for other jobs drives down the wages paid for those jobs. Universal unionization would not alter the situation. It could mean higher wages for the persons who get jobs, along with more unemployment for others. More likely, it would mean strong unions and weak unions, with members of the strong unions getting higher wages, as they do now, at the expense of members of weak unions.

About conformity vs unanimity: The ballot box produces conformity without unanimity; the marketplace, unanimity without conformity. That is why it is desirable to use the ballot box, so far as possible, only for those decisions where conformity is essential.

On inflation: Five simple truths embody most of what we know about inflation: 1. Inflation is a monetary phenomenon arising from a more rapid increase in the quantity of money than in output (though, of course, the reasons for the increase in money may be various). 2. In today’s world government determines – or can determine – the quantity of money. 3. There is only one cure for inflation: a slower rate of increase in the quantity of money. 4. It takes time – measured in years, not months – for inflation to develop; it takes time for inflation to be cured. 5. Unpleasant side effects of the cure are unavoidable.

 

Capitalism and Freedom

Milton Friedman’s Capitalism and Freedom was my companion during my trip to Australia recently. This book would challenge your capability to focus, if you read it in public spaces such as airports and planes like I did of some chapters. What impresses me most besides its content is its delivery, the meticulously articulated logic reasoning. Regardless whether you agree with the author’s verdicts, you can touch and feel the logical threads leading to them. I am not an economist nor a politician, but economics always fascinates me. Politics, exactly the opposite. This book broadens my view on the inseparability and strong inter-influence between economic freedom and political freedom. Later Milton Friedman added civil freedom to this dichotomy, in light of Hong Kong’s return to China from British sovereignty in 1997 and its subsequent development. In the book, Friedman also credited this instance for persuading him that: while economic freedom is a necessary condition for civil and political freedom, political freedom, desirable though it may be, is not a necessary condition for economic and civil freedom.

Describing what this book is about, Friedman wrote: its major theme is the role of competitive capitalism – the organization of the bulk of economic activity through private enterprise operating in a free market – as a system of economic freedom and a necessary condition for political freedom. Its minor theme is the role that government should play in a society dedicated to freedom and relying primarily on the market to organize economic activity.

Friedman wrote the following on the role of books like this one: First, to provide subject matter for bull sessions….The only person who can truly persuade you is yourself. You must turn the issues over in your mind at leisure, consider the many arguments, let them simmer, and after a long time turn your preferences into convictions. Second,…to keep options open until circumstances make change necessary. There is enormous inertia – a tyranny of the status quo – in private and especially governmental arrangements. Only a crisis – actual or perceived – produces real change. When that crisis occurs, the actions that are taken depend on the ideas that are lying around. That, I believe, is our basic function: to develop alternatives to existing policies, to keep them alive and available until the politically impossible becomes politically inevitable. Both arguments are convincing to me.

To summarize my overall understanding upon reading this book: increasing the economy freedom and decreasing the governmental intervenes in an overly governed state is the direction for further prosperity. Many policies do not deliver the outcome that aligns with our intentions when creating those policies at the first place, for example, minimum wage. A social environment that promotes diversity is far more advantageous than the ones not. Purely my extended understanding of the messages: while in doubt, it is better to rely on the free market mechanism than political interference in the long run.

A few more discussions from the book that I quote here and I think more people would benefit from reading, even if not reading the entire book:

The great advances of civilisation, whether in architecture or painting, in science or literature, in industry or agriculture, have never come from centralized government….no one of these opened new frontiers in human knowledge and understanding, in literature, in technical possibilities, or in the relief of human misery in response to governmental directives. Their achievements were the product of individual genius, of strongly held minority views, of a social climate permitting variety and diversity.

A common objection to totalitarian societies is that they regard the end as justifying the means. Taken literally, this objection is clearly illogical. If the end does not justify the means, what does? But this easy answer does not dispose of the objection; it simply shows that the objection is not well put. To deny that the end justifies the means is indirectly to assert that the end in question is not the ultimate end, that the ultimate end is itself the use of the proper means. Desirable or not, any end that can be attained only by the use of bad means must give way to the more basic end of the use of acceptable means.

Fundamental differences in basic values can seldom if ever be resolved at the ballot box; ultimately they can only be decided, though not resolved, by conflict…The widespread use of the market reduces the strain on the social fabric by rendering conformity unnecessary with respect to any activities it encompasses. The wider the range of activities covered by the market, the fewer are the issues on which explicitly political decisions are required and hence on which it is necessary to achieve agreement. In turn, the fewer the issues on which agreement is necessary, the greater is the likelihood of getting agreement while maintaining a free society.

A businessman or an entrepreneur who expresses preferences in his business activities that are not related to productive efficiency is at a disadvantage compared to other individuals who do not. Such an individual is in effect imposing higher costs on himself than are other individuals who do not have such preference. Hence, in a free market, they will tend to drive him out. This same phenomenon is of much wider scope. It is often taken for granted that the person who discriminate against others because of their race, religion, color, or whatever, incurs no costs by doing so but simply imposes costs on others. This view is on a par with the very similar fallacy that a country does not hurt itself by imposing tariffs on the products of other countries. Both are equally wrong. The man who objects to buying from or working alongside a Negro, for example, thereby limits his range of choice. He will generally have to pay a higher price for what he buys or receive a lower return for his work. Or, put the other way, those of us who regard color of skin or religion as irrelevant can buy some things more cheaply as a result.

The more capitalistic a country is, the smaller the fraction of income paid for the use of what is generally regarded as capital, and the larger the fraction paid for human services…The great achievement of capitalism has not been the accumulation of poverty, it has been the opportunities it has offered to men and women to extend and develop and improve their capacities.

Finally, I uphold my decision of not writing about China. But that is not to say I have no passion for my motherland. To the contrary, I eagerly wish that China progresses towards the right directions in all the economic, civil and political arenas. I part you with a passage in the preface written by Friedman in 2002:  

The introduction of market reforms by Deng Xiaoping in the late seventies, in effect privatizing agriculture, dramatically increased output and led to the introduction of additional market elements into a communist command society. The limited increase in economic freedom had changed the face of China, strikingly confirming our faith in the power of free markets. China is still very far from being a free society, but there is no doubt that the residents of China are freer and more prosperous than they were under Mao – freer in every dimension except the political. And there are even the first small signs of some increase in political reform, manifested in the election of some officials in a growing number of villages. China has far to go, but it has been moving in the right direction.