Capitalism and Freedom: Fortieth Anniversary Edition

226 Pages·2002·7.78 MB·English

by  Milton Friedman

CAPITALISM AND FREEDOM
MiltonFriedmanis a senior research fellow at the HooverIn
stitution, Stanford University, and the Paul Snowden Russell
Distinguished Service Professor Emeritus ofEconomics at the
University of Chicago. In 1976 he was awarded the Nobel
Memorial Prize in Economics. With his wife, Rose D. Fried
man, he wrote the best-selling book, Free to Choose (1980)
and a jointmemoir (1998).
CAPITALISM
AND
FREEDOM
40th Anniversary Edition
With a new Preface by the Author
MILTON FRIEDMAN

WITH THE ASSISTANCE OF ROSE D. FRIEDMAN
The University ofChicago Press
Chicago and London
TO
JANET and DAVID
AND THEIR CONTEMPORARIES
WHO MUST CARRY THE TORCH OF LIBERTY
ON ITS NEXT LAP
TheUniversityofChicagoPress,Chicago60637
TheUniversityofChicagoPress,Ltd.,London
Copyright©1962,1982,2002byTheUniversityofChicago
Allrightsreserved. Originallypublished1962
ReissuedwithanewPrefacein1982,andagainin2002.
PrintedintheUnitedStatesofAmerica
09 08 07 06 2 345
ISBN:0-226-26421-1(paper)
ISBN:0-226-26420-3 (cloth)
LibraryofCongressCataloging-in-PublicationData
Friedman,Milton,1912-
Capitalismandfreedom/MiltonFriedman;withtheassistance
ofRoseD.Friedman;withanewprefacebytheauthor-
40thanniversaryed.
p. cm.
Includesbibliographcialreferencesandindex.
ISBN0-226-26420-3 (cloth:alk.paper)- ISBN0-226-26421-1
(paper:alk.paper)
I.Captialism. 2.State,The. 3.Liberty. 4.UnitedStates
Economicpolicy. I. Friedman,RoseD. II.Title.

HB501 .F7 2002
330.12'2-clc21
200206753°
@Thepaperusedinthispublicationmeetstheminimum
requirementsoftheAmericanNationalStandardfor
InformationSciences-PermanenceofPaperforPrinted
LibraryMaterials,ANSI239.48-1992.
+
Contents
PREFACE, 2002 VB
PREFACE, 1982 Xl
PREFACE XV
INTRODUCTION I
THE RELATION BETWEEN ECONOMIC FREEDOM
AND POLITICAL FREEDOM 7
II THE ROLE OF GOVERNMENT IN A FREE SOCIETY 22
III THE CONTROL OF MONEY 37
IV INTERNATIONAL FINANCIALAND TRADE
ARRANGEMENTS 56
V FISCAL POLICY 75
VI THE ROLE OF GOVERNMENT IN EDUCATION 85
VII CAPITALISM AND DISCRIMINATION 108
VIII MONOPOLY AND THE SOCIAL RESPONSIBILITY
OF BUSINESS AND LABOR 119
IX OCCUPATIONAL LICENSURE 137
X THE DISTRIBUTION OF INCOME 161
XI SOCIALW ELFARE MEASURES 177
XII ALLEVIATION OF POVERTY 19°
XIII CONCLUSION 196
INDEX 2°3

+
Preface, 2002
IN
MY PREFACE TO THE 1982 edition of this book, I docu
mented a dramatic shift in the climate ofopinion, manifested
in the difference betweenthe waythis book was treated when
it was first published in 1962, and the way my wife's and my
subsequentbook, Free to Choose, presentingthe samephilos
ophy,wastreatedwhenitwaspublishedin 1980.Thatchange
in the climate ofopinion developed while and partly because
the role ofgovernment was exploding under the influence of
initial welfare state and Keynesian views. In 1956, when I
gave the lectures that my wife helped shape into this book,
governmentspendingintheUnitedStates-federal,state,and
local-was equal to 26 percent of national income. Most of
this spending was on defense. Non-defense spending was 12
percentofnational income. Twenty-five years later, when the
1982 edition of this book was published, total spending had
risento 39percentofnationalincomeandnon-defensespend
ing had more t han doubled, amounting to 3I percent of na
tional income.
Thatchangeintheclimateofopinionhaditseffect. Itpaved
the way for the election ofMargaret Thatcher in Britain and
Ronald Reagan in the United States. They were able to curb
Leviathan, though not to cut it down. Total government
spendingintheUnitedStatesdiddeclineslightly,from 39 per
cent of national income in 1982 to 36 percent in 2000, but
thatwas almostall dueto areductioninspendingfor defense.
Vin CAPITALISM AND FREEDOM
Non-defense spending fluctuated around a roughly constant
level: 3I percentin 1982, 30percentin 2000.
The climate ofopinion received a further boost in the same
direction when the Berlin wall fell in 1989 and the Soviet
Union collapsed in 1992. That brought to a dramatic end an
experiment of some seventy years between two alternative
ways oforganizinganeconomy: top-down versus bottom-up;
central planning and control versus private markets; more
colloquially, socialismversuscapitalism. Theresultofthatex
periment had been foreshadowed by a number of similar ex
periments on a smaller scale: Hong Kong and Taiwan versus
mainland China; West Germany versus East Germany; South
Koreaversus NorthKorea. Butittookthedrama oftheBerlin
Wall and the collapse of the Soviet Union to make it part of
conventional wisdom, so that itis now taken for granted that
central planning is indeed The Road to Serfdom, as Friedrich
A. Hayek titled his brilliant 1944 polemic.
What is true for the United States and Great Britain is
equally true for the other Western advanced countries. In
country after country, the initial postwar decades witnessed
exploding socialism, followed by creeping or stagnant social
ism. And in all these countries the pressure today is toward
giving markets agreater role and government a smaller one. I
interpretthe situation as reflectingthe longlag between opin
ion and practice. The rapid socialization of the post-World
War II decades reflected the prewar shift of opinion toward
collectivism; the creeping or stagnant socialism of the past
few decades reflects the earlyeffects ofthe postwarchange of
opinion; future desocialization will reflect the mature effects
ofthe change i n opinion reinforced by the collapse ofthe So
vietUnion.
Thechangeinopinionhashadanevenmoredramaticeffect
on the formerly underdeveloped world. That has been true
even in China, the largest remaining explicitly communist
state. The introduction ofmarket reforms by Deng Xiaoping
in the late seventies, in effectprivatizing agriculture, dramati
cally increased output and led to the introduction of addi
tional market elements into a communist command society.
The limited increase in economic freedom has changed the
Preface, 2002 IX
face of China, strikinglyconfirming our faith in the power of
free markets. China is still very far from being a free society,
butthere is no doubt that the residents ofChina 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 ofsome increase in political freedom, manifested
in the election of some officials in a growing number of vil
lages. China has far to go, butit has been moving in the right
direction.
In the immediate post-World War II period, the standard
doctrine was that development of the third world required
central planning plus massive foreign aid. The failure of that
formula wherever it was tried, as was pointed out so effec
tively by Peter Bauer and others, and the dramatic success of
the market-oriented policies of the East Asia tigers-Hong
Kong, Singapore,Taiwan, SouthKorea-has producedavery
different doctrine for development. By now, many countries
in Latin America and Asia, and even a few in Africa have
adopted a market-oriented approach and a smaller role for
government. Many of the former Soviet satellites have done
the same. In all those cases, in accordance with the theme of
this book, increases in economic freedom have gone hand in
handwithincreasesinpoliticalandcivilfreedom andhaveled
to increased prosperity; competitive capitalism and freedom
have beeninseparable.
Afinal personal note: It is a rare privilege for an author to
be able to evaluate his own work forty years after it first ap
peared. I appreciate very much having the chance to do so. I
am enormouslygratified byhowwell the book has withstood
timeandhowp ertinentitremainstotoday'sproblems.Ifthere
is one major change I would make, it would be to replace the
dichotomy of economic freedom and political freedom with
thetrichotomyofeconomicfreedom, civilfreedom, andpolit
ical freedom. After Ifinished the book, Hong Kong, before it
was returned to China, persuaded me that while economic
freedom is a necessary condition for civil and political free
dom, political freedom, desirable though it may be, is not a
necessary condition for economic and civil freedom. Along
these lines, the one major defect in the book seems to me an