Freidman – Genius?

Book Review – Capitalism and Freedom

“Brother, can you spare a dime?” this song, written by Jay Gorney in 1931, summarises the economic condition of the US at the time. High unemployment and poverty were ever-present. Minority groups faced even harsher economic turmoil due to discrimination and fewer employment possibilities. In the 1930s, there was a rise in government interference owing to Keynesian thought. Roosevelt introduced the First and the Second New Deals as a solution for it. The orthodox theory at the time was that of Keynes. It stated that a free economy would constantly create cycles of boom and bust and thus highlight the need for government interference. During the 1930s, the presiding belief was that deficit spending was a way out of the Depression. Like his teachers at the University of Chicago, Friedman favoured the Keynesian theory. However, ‘the end of the War “cured” him of Keynesian thinking’. In the 1940s, neo-liberalism emerged in reaction to The New Deal Welfarism in the US, the British Keynsian state and socialist Europe. The idea was to re-invent liberal philosophy and go against interventionist forces, which Friedman embarks upon in his book Capitalism and Freedom.

The economic unrest after the Great Depression garnered the basis for the political debate against government intervention during the 1950s. Amid the tumultuous 1960s, when the United States was wrestling with Civil Rights, the Vietnam War, the Cold War and the rise of the counterculture, “A long-delayed product of Series of Lectures” by Milton Friedman was collated and first published in 1962. He argued that the prolongation of the depression and its subsequent consequences were a direct result of government mismanagement as opposed to Keynesian reasoning. In Capitalism and Freedom, Friedman captures the essence of libertarian principles and how they should apply to governmental control, going against political expediency. He exerts his principle convictions about civil and economic liberties to public institutions and governmental activities. Friedman embarks on an ambitious task of exploring the role of private enterprises operating within a free market to achieve economic freedom. What makes his work compelling is that he went against the dominating ideology at the time and challenged the role of the government within society. For this, he amalgamates historical examples to showcase the unnecessary intervention of the government in areas such as postal services, rent control, etc.

His assertions in the book are thought-provoking, but one may doubt how his liberal ideas adhere to the current society. Broadly these limitations can be encompassed by methodological and particularly implicative limitations.  His methodology takes broad principles and applies them to particular cases. This paper will highlight how Friedman’s methodology leads to the oversimplification of concepts and doesn’t account for the intricacies of contemporary society. One example is in the juxtaposition between increasing corruption and reduced government power. Friedman argues for the need for a government to “set the rules of the game”. This argument distinguishes his work from that of others such as Mises, Rand and Rothbard, as they advocate for an economy governed solely by laissez-faire. He erects his system upon the framework that a government is needed only when the market fails. Such intervention is limited to areas of technological monopoly and neighbourhood effects. He eliminates the idea of coercive monopoly and states that economic power will be a check upon the government. Such a government would have to be elected by the people. These election campaigns need substantial funding and thus be financed by the small percentage of people in high-income classes. They will influence candidates to advance their interests, which furthers inequality and centralisation of power in the hands of the wealthy. Hence a competitive capitalistic country would still create a centralised body of high-income citizens.

The aforementioned goes against his ideal of proportional representation. He acknowledges the presence of corruption but believes the answer lies in property rights and the law and not interventionist forces. However, in the previously stated argument, there will be corruption (as private individuals influence governmental decisions due to affluence) on private and public spectre unless there is a governing body. An example of this argument is of the US in 2014 when 90% of the population did not influence political decisions. It is possible to challenge the US not to be the capitalist state described by Friedman. But his utopic ideas don’t yet conform to real-world intricacies. The US ranks amongst the top 20 most economically free countries according to the Wall Street Journal (based on the work of Friedman). Therefore, it poses a just example.

Even still, Friedman believes that the market is self-correcting and most regulation is counter-productive. He also builds a case for radical movements in capitalistic societies to be funded by the elite few. Yet, he doesn’t touch upon instances that can’t be self-corrected, has significant neighbourhood effects, and are not financed frequently by the wealthy. One such example is financing campaigns for climate change which do not get funded by most rich people as they directly gain from the carbon emissions emitted by them. Such externalities necessitate the need for a government to counter detrimental effects which do not fall under the profit-making scope of businesses. Another failure of deregulation, pointed out by Appelbaum, is the Savings and Loan failure of 1980. S&L was caused owing to deregulation and failed due to “the belief that financial markets could regulate themselves”.

In 1913, Wilson established the Federal Reserve. In 1931, Britain went off the gold standard, which led to a high gold stock to Federal Reserve ratio. Friedman largely annotates the severity and length of the Great Depression to the failure of proper action by the Federal Reserve. Friedman’s opposition to governmental discretion in monetary policy stems from his belief in the quantity theory of money. The theory suggests that as a consequence of changes in the money supply, there will be an impact on prices and economic activity. Parallel to Hayek, Friedman argues that a government of laws should establish policies that lead to fixed and predictable changes within the money supply and avoid inflation. This view touches upon Friedman’s theory of monetarism which posits that the quantity of money in circulation is a crucial determinant of economic growth and stability.

Friedman was a firm proponent of a floating exchange system against a fixed exchange system. He contended that it allows countries to adjust their economic policies, inducing stability and efficient international trade and finance. Friedman’s inferences are made digestible due to the historical context of the Gold Pool crisis, which effectively resulted in a shift towards a floating exchange rate.

Liberalism, as outlined in Capitalism and Freedom, garnered the attention of economists, philosophers and policymakers. A good reason for this is his belief that market capitalism efficiently allocates resources and promotes equality. Friedman purports the idea with the example of the Virginia system to perpetuate school segregation. He ontologically elucidates the integration of Virginia’s schools into its voucher system. Such an inference is misleading as it does not garner the effect of the monumental ruling of Brown v. Board of Education (1954). His belief is rooted in the philosophical notion of the invisible hand by Adam Smith. It posits that the best interest of society gets realised unintentionally through the pursual of self-interest. He states that – “there is one and only one social responsibility of business to use its resources and engage in activities designed to increase its profits”. Assuming businesses engage in activities without deception or fraud, market forces will naturally lead to social welfare.

He argues that social welfare is achieved by pursuing free market capitalism, even if the two are seemingly at odds. However, he fails to consider ethical principles such as justice, prudence and benevolence, which partake in Smith’s views. He misinterprets his argument from maximising gross-domestic product to the promotion of societal interest. As pointed out by Smart, Friedman does not justify the equation between having choices and the disposition to achieve one’s wants. Large corporations greatly sway the free market, hence inhibiting the ability of others to access it. Also, his arguments stem from the inherently flawed assumption that everyone is satisfied at the end of a transaction. As pointed out by Nico, the free market is not free from coercion. It can also still have negative consequences outside the trade, thus requiring a regulatory body.

In his analysis, Friedman goes against government redistribution as it creates disincentives for individuals to innovate and impedes economic growth. He also disagrees with occupational licensure as they create unnecessary barriers to entry, leading to higher prices for consumers. Besides, licensure does not necessarily ensure quality and disproportionately affects minorities and low-income households. It is to note that in occupations such as car washing, needing a licence (as in California) can be considered to be a barrier to entry. His argument stems from his belief that reputation and reliability would aid market forces in creating an efficient outcome, thus de-necessitating government regulation.

The mere admission that regulatory bodies are inadequate to promote social equality is not an accurate litmus test to prove that capitalism will reduce market-oriented social discrimination. To argue that monopolies are primarily subject to such discrimination is erroneous. Friedman hypothesises that freedom is a necessary precursor to equality. In his view, the force used to achieve equality will never achieve it, and the force introduced itself would get corrupted. He argues for the laws of laissez-faire to promote equality. In his view, there should be no corporation tax to solve the problem of monopolies. People divert their resources to avoid taxation gridlocks by undertaking arbitrary immoral discourses. By doing so, people’s resources are better-made use of than finding ways to evade said tax. It is evident in history that morality does not always precede human rationale. People spend more on personal gratification than social causes such as climate change and medical advancement. The consumers are also affected as the service quality they receive depends on their ability to spend. Perhaps an example can be seen within medical services. The determining factor for services received would not be one’s medical needs but their ability to pay.

Friedman coined the phrase “The Miracle of Chile”. Chile is amongst the first guinea pigs to test Friedman’s theories. In 1973, after the military coup, the ‘Chicago Boys’, under Pinochet’s regime, implemented free market capitalism in Chile as guided by Friedman. These implementations led to an increase in economic growth but also led to increased inequality. His regime was also responsible for human rights violations, thus proving what happened in Chile was most certainly not a miracle. Hayek argues that it is the outcome of individual choices and sometimes a necessary intermediary step. However, growth in Chile has been going down for the past 15 years, proving that this is not the case. Social justice cannot get sidelined when exploring models to regulate the economy. The cumulative effect of Capitalism and Freedom and Friedman’s other ideas has influenced US policies ever since. His hypothesis of self-correcting free markets gave birth to the Steagall Act in 1999. It allowed Commercial banks to take on riskier investments. In line with Friedman’s views, lending standards were relaxed, and the housing market emerged deregulated. The Steagall Act and deregulation led to housing bubbles. These bubbles inevitably burst, leading to the 2008 crisis.

Friedman’s libertarian views are convenient in their historical context to show that capitalism is better than other economic models. In the past, the welfare system failed due to interventionist forces. Excessive taxes have led to tax evasion, redistribution rewarded laziness, and licensure heightened costs. Nevertheless, the 2008 crisis and the 80s S&L show that Freidmen’s free market capitalist society does not function. There is a need for regulation or a new version of capitalism. Friedman’s neoliberal capitalism is irreconcilable with societal intricacies and far from the ideal solution. In its more contemporary backdrop, his ideas do not hold.

– Ananya Goyal


  • Appelbaum, Binyamin. The Economists’ Hour: False Prophets, Free Markets, and the Fracture of Society. First edition. New York: Little, Brown and Company, 2019.
  • Friedman, Milton, and Rose D. Friedman. Capitalism and Freedom. 40th-anniversary ed. Chicago: University of Chicago Press, 2002.
  • Gilens, Martin, and Benjamin I. Page. “Testing Theories of American Politics: Elites, Interest Groups, and Average Citizens.” Perspectives on Politics 12, no. 3 (September 2014): 564–81.
  • Smart, Barry. Economy, Culture, and Society: A Sociological Critique of Neo-Liberalism. 1. publ. Theorizing Society. Buckingham: Open Univ. Press, 2003.
  • Stiglitz, Joseph E. Freefall: America, Free Markets, and the Sinking of the World Economy. Pbk. ed. New York: W. W. Norton & Co, 2010.

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