Free Markets -- Part 3

Milton Friedman’s Free to Choose.

Milton Friedman won the Nobel Prize in Economics in 1976, and a few years later he wrote a widely popular and influential book on free markets called Free to Choose that was made into a television series for PBS, which you can watch for free in its entirety here. This essay explores some of the book’s many insights.

In the Foreword to the book, Friedman writes:

Is Free to Choose outdated and no longer needed now that its main thesis has become conventional wisdom? Far from it. Conventional wisdom may have changed, but conventional practice has not. Political leaders in capitalist countries who cheer the collapse of socialism in other countries continue to favor socialist solutions in their own. They know the words, but they have not learned the tune … The fraction of our income that goes to finance government spending—supposedly on our behalf—has not declined appreciably and in many countries has continued to increase … In the words of the Declaration of Independence, our governments continue to erect “a multitude of new offices” and send “swarms of officers to harass our people and eat out our substance.”

And Friedman introduces the book as follows:

Ever since the first settlement of Europeans in the New World America has been a magnet for people seeking adventure, fleeing from tyranny, or simply trying to make a better life for themselves and their children. When they arrived, they did not find streets paved with gold; they did not find an easy life. They did find freedom and an opportunity to make the most of their talents. Through hard work, ingenuity, thrift, and luck, most of them succeeded in realizing enough of their hopes and dreams to encourage friends and relatives to join them. 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 of ideas was embodied in The Wealth of Nations, the masterpiece that established the Scotsman Adam Smith as the father of modern economics. It analyzed the way in which a market system could combine the freedom of individuals to pursue their own objectives with the extensive cooperation and collaboration needed in the economic field to produce our food, our clothing, our housing. 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 of ideas was embodied in the Declaration of Independence, drafted by Thomas Jefferson to express the general sense of his fellow countrymen. It proclaimed a new nation, the first in history established on the principle that every person is entitled to pursue his own values: “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.” Or, as stated in more extreme and unqualified form nearly a century later by John Stuart Mill, The sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number, is self protection … [T]he only purpose for which power can be rightfully exercised over any member of a civilized community, against his will, is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant … The only part of the conduct of any one, for which he is amenable to society, is that which concerns others. In the part which merely concerns himself, his independence is, of right, absolute. Over himself, over his own body and mind, the individual is sovereign. Much of the history of the United States revolves about the attempt to translate the principles of the Declaration of Independence into practice—from the struggle over slavery, finally settled by a bloody civil war, to the subsequent attempt to promote equality of opportunity, to the more recent attempt to achieve equality of results.

Like Hayek, whose work we explored in previous essays, Friedman says

Economic freedom is an essential requisite for political freedom. By enabling people to cooperate with one another without coercion or central direction, it reduces the area over which political power is exercised … [Thomas] Jefferson’s ideal, as he expressed it in his first inaugural address (1801), was “[a] wise and frugal government, which shall restrain men from injuring one another, which shall leave them otherwise free to regulate their own pursuits of industry and improvement.”

Friedman gives the example of agriculture to illustrate the success of the free market system:

The fecundity of freedom is demonstrated most dramatically and clearly in agriculture. When the Declaration of Independence was enacted, fewer than 3 million persons of European and African origin (i.e., omitting the native Indians) occupied a narrow fringe along the eastern coast. Agriculture was the main economic activity. It took nineteen out of twenty workers to feed the country’s inhabitants and provide a surplus for export in exchange for foreign goods. Today it takes fewer than one out of twenty workers to feed the 220 million inhabitants and provide a surplus that makes the United States the largest single exporter of food in the world. What produced this miracle? Clearly not central direction by government— nations like Russia and its satellites, mainland China, Yugoslavia, and India that today rely on central direction employ from one-quarter to one-half of their workers in agriculture, yet frequently rely on U.S. agriculture to avoid mass starvation. During most of the period of rapid agricultural expansion in the United States the government played a negligible role. Land was made available— but it was land that had been unproductive before … [T]he main source of the agricultural revolution was private initiative operating in a free market open to all—the shame of slavery only excepted. And the most rapid growth came after slavery was abolished.

Friedman invites the reader to deeply appreciate the “power of the market”:

Every day each of us uses innumerable goods and services—to eat, to wear, to shelter us from the elements, or simply to enjoy. We take it for granted that they will be available when we want to buy them. We never stop to think how many people have played a part in one way or another in providing those goods and services. We never ask ourselves how it is that the corner grocery store—or nowadays, supermarket—has the items on its shelves that we want to buy, how it is that most of us are able to earn the money to buy those goods. It is natural to assume that someone must give orders to make sure that the “right” products are produced in the “right” amounts and available at the “right” places. That is one method of coordinating the activities of a large number of people—the method of the army. The general gives orders to the colonel, the colonel to the major, the major to the lieutenant, the lieutenant to the sergeant, and the sergeant to the private. But that command method can be the exclusive or even principal method of organization only in a very small group. Not even the most autocratic head of a family can control every act of other family members entirely by order. No sizable army can really be run entirely by command. The general cannot conceivably have the information necessary to direct every movement of the lowliest private. At every step in the chain of command, the soldier, whether officer or private, must have discretion to take into account information about specific circumstances that his commanding officer could not have.

Friedman offers the example of the simple pencil:

A predominantly voluntary exchange economy … has within it the potential to promote both prosperity and human freedom. It may not achieve its potential in either respect, but we know of no society that has ever achieved prosperity and freedom unless voluntary exchange has been its dominant principle of organization. A delightful story called “I, Pencil: My Family Tree as Told to Leonard E. Read” dramatizes vividly how voluntary exchange enables millions of people to cooperate with one another. Mr. Read, in the voice of the “Lead Pencil—the ordinary wooden pencil familiar to all boys and girls and adults who can read and write,” starts his story with the fantastic statement that “not a single person ... knows how to make me.” Then he proceeds to tell about all the things that go into the making of a pencil. First, the wood comes from a tree, “a cedar of straight grain that grows in Northern California and Oregon.” To cut down the tree and cart the logs to the railroad siding requires “saws and trucks and rope and ... countless other gear.” Many persons and numberless skills are involved in their fabrication: in “the mining of ore, the making of steel and its refinement into saws, axes, motors; the growing of hemp and bringing it through all the stages to heavy and strong rope; the logging camps with their beds and mess halls … untold thousands of persons had a hand in every cup of coffee the loggers drink!” And so Mr. Read goes on to the bringing of the logs to the mill, the millwork involved in converting the logs to slats, and the transportation of the slats from California to Wilkes-Barre, where the particular pencil that tells the story was manufactured. And so far we have only the outside wood of the pencil. The “lead” center is not really lead at all. It starts as graphite mined in Ceylon. After many complicated processes it ends up as the lead in the center of the pencil. The bit of metal—the ferrule—near the top of the pencil is brass. “Think of all the persons,” he says, “who mine zinc and copper and those who have the skills to make shiny sheet brass from these products of nature.” What we call the eraser is known in the trade as “the plug.” It is thought to be rubber. But Mr. Read tells us the rubber is only for binding purposes. The erasing is actually done by “Factice,” a rubberlike product made by reacting rape seed oil from the Dutch East Indies (now Indonesia) with sulfur chloride. After all of this, says the pencil, “Does anyone wish to challenge my earlier assertion that no single person on the face of this earth knows how to make me?” None of the thousands of persons involved in producing the pencil performed his task because he wanted a pencil. Some among them never saw a pencil and would not know what it is for. Each saw his work as a way to get the goods and services he wanted—goods and services we produced in order to get the pencil we wanted. Every time we go to the store and buy a pencil, we are exchanging a little bit of our services for the infinitesimal amount of services that each of the thousands contributed toward producing the pencil. It is even more astounding that the pencil was ever produced. No one sitting in a central office gave orders to these thousands of people. No military police enforced the orders that were not given. These people live in many lands, speak different languages, practice different religions, may even hate one another—yet none of these differences prevented them from cooperating to produce a pencil. How did it happen? Adam Smith gave us the answer two hundred years ago.

A great video of Milton Friedman illustrating this pencil phenomenon can be found here.

NOTE TO READERS: We can appreciate the free market system we enjoy today only because brave American patriots fought for independence from Great Britain and its mercantilist policies starting in 1776. So for the next two weeks, leading up to July 4, we’ll take a break from exploring the free market system so we can appreciate what an average Revolutionary War soldier went through to help win that independence through the only first-person account of the Revolutionary War written not by a general or a historian, but by a common line soldier. In the next four essays, we’ll enjoy excerpts from Joseph Plumb Martin’s The Adventures of a Revolutionary Soldier.