Is America still the land of opportunity, or is it a land worn thin, showing much bureaucracy and less freedom? Dr. Friedman’s view of America’s present situation is not sanguine. He identifies the chief problem and its corollary solution: We must restore the prestige and influence of the single mechanism most responsible for America’s greatness— the free market. Our greatest defense against becoming over-governed is the free market.
Five myths cloud our perception of both the past and the present. (1) The “robber baron” myth which holds that in late nineteenth-century America there were powerful men who became rich at the expense of the poor. The reality is that they became wealthy by being productive, and that there is no other period in history which saw such a rapid and widespread improvement in the well-being of the average individual, (2) The myth that the Great Depression was caused by a failure of business. It was, in fact, produced by a failure of government and specifically by the Federal Reserve System. (3) The myth that government in the economy has expanded in response to public demand. Actually, the public has had to be sold “hard” for politicians to enact every major social program. (4) The “free lunch” myth. No matter how the government raises money—by taxing individuals, by taxing businesses, or by printing more money — it is the individual who pays. (5) The myth that government, like Robin Hood, transfers wealth from the rich to the poor. The reality is that the government usually transfers wealth and income from both the very rich and the very poor to those in the middle.
The question is irrelevant. Capitalism per se is not humane or inhumane; nor is socialism. If we compare the two in terms of results, it is clear that only capitalism fosters equality and works toward social justice. The one is based on the principle of voluntary cooperation and free exchange, the other on force of position and power. In a free economy, it is hard to do good—you either have to use your own hard-earned money to do it or work hard to persuade others to your course. But by the same token, it is difficult to do harm because by preventing a concentration of power, capitalism prevents people from committing sustained, serious harm. Is capitalism humane or inhumane? It is neither. But it tends to give free rein to the human values of human beings.
John Stuart Mill said, in effect, that self-protection is the only legitimate reason for people to interfere with the freedom of others. If we are to define the role of government in a free society, we must first specify what we mean by self-protection. Defense from foreign enemies and protection of property, including the enforcement of private contracts, are clearly legitimate functions of government. But when we come to two other functions of government—providing a substitute for voluntary cooperation when it appears impossible to achieve, and providing for irresponsible individuals— the justification is much less clear-cut, because in a free society people should be able to take risks but should not be able to force others to pay the consequences. If the proper limitations of government action were observed, the government would not do many things it now does. We should not resort to government regulations until we have adequately explored the possibilities for coordinating our activities through voluntary means. If we understood the implications of our own values, we would not allow ourselves to be “front men” for values we oppose, merely because we are confused about the meaning of freedom and the legitimate role of government in a free society.
The welfare state is an attempt to “do good” with someone else’s money. The aim may be worthy but the means are faulty. The problem is that you do not spend someone else’s money as carefully as your own. More to the point, it’s impossible to “do good” with someone else’s money without first taking it away from someone else. That implies coercion—the use of bad means to corrupt the good ends of the welfare state. Welfare programs implicitly encourage competition for government funds and create unfortunate divisions and antagonisms in our society that erode individual freedom. We must find other means—voluntary cooperation and private giving, for example — to achieve our objective.
Inflation is blamed on many things. But it has only one cause: It is a monetary phenomenon. Inflation occurs when the quantity of money increases faster than the quantity of goods. Why does the money supply increase? Very often, it does so to enable the government to pay its bills without raising taxes. There’s only one real cure for inflation. It is a cure that’s easy to describe but difficult to apply: The government must reduce spending and print less money. The alternatives are both recession and double-digit inflation.
Why do Americans pay more in taxes than they really want to? Can they do anything about it? Americans must understand that their true tax burden is what the government spends—regardless of how that spending is financed — and that if government spending goes up faster than prices in general, the real tax burden increases. Simplifying the system is far from easy, but the real defect is not in the tax system, anyway, but in the budget structure. Our only hope for tax reduction is in establishing constitutional provisions that will set limits on government spending.
If free trade is so good, why is protectionism so popular? Part of the answer lies in a simple political principle — interests that are concentrated (those of the producer) are more politically effective than interests that are diffuse (those of the consumer). Protection does not create jobs or move goods; rather, it forces us to expend greater effort to get the goods we produce, since they cost more to produce at home than abroad. The balance of payments can take care of itself, provided we do not manipulate foreign exchange markets to put an artificial value on the dollar. The right solution is to dismantle systematically our own trade barriers and set an example for the rest of the world.
It’s pointless to try to predict the availability of adequate sources of energy. What we need is an adjustable mechanism to enable us to adapt to whatever happens. We already have such a mechanism: The market helps us make transitions to the future—just as it has done in the past— if it is allowed to operate freely. Our present energy crisis exists because this crucial mechanism has not been allowed to function freely. Our prospects will be much improved if we can devise means to abolish —or at least work around—the government controls that interfere with the production and distribution and use of energy.
Increasing government involvement in medical care will take us toward fully socialized medicine. This trend is clearly against the interests of patients, physicians, and other health care personnel. There is of course, no such thing as “free” health care —you either pay for it directly, or via the tax system, with bureaucrats taking their usual cut along the way. The reality of the situation is that government involvement in the economics of medical care leads directly to higher costs for that care. There is no special role for government in medical care. Government should do there only what it does in other fields — enforce laws against fraud and deception, and offer some assistance (comparable to flood or tornado relief) to those in extreme medical distress.
The quality of public education in America today in many places is deplorable. Dr. Friedman identifies (1) the increasing centralization and bureaucratization of the educational establishment, which inhibits educators from seeing and responding to the needs of their “consumers” — parents and students; (2) our altered view of the relationship between the individual and society— the shift from seeing the individual as responsible for oneself to seeing the individual as someone controlled by social forces. An obvious solution is to give power back to the parents. The voucher system is an especially effective means of exercising that power; it can foster competition among public and private institutions and incite them to offer us a better quality educational “product.”
Consumer legislation doesn’t in the end protect the consumer; rather, it benefits the consumer advocates, including reformers, special interest groups, and regulatory agencies. What does protect the consumer? Alternative sources of supply at variable prices are the inevitable result of international competition—free trade.
Unions offer protection to workers in some situations, but union membership represents only one fifth of the American labor force. And while some unions do benefit their members, it is generally at the expense of competing workers and frequently at the expense of the consumer. Government? Government provides some protection, but its efforts are minor. Some workers with only one possible employer—or with no possible employer— enjoy very little protection. The right answer to the question “Who protects the worker?” is that the worker is protected by employers — by the existence of other employers who can and will compete for his or her services if a present employer fails to provide decent wages and working conditions. The only real way to protect the standard of living of the American worker is to preserve a freely competitive labor market.
If the government has the power and responsibility to promote equality of income, then how do we define the concept of equality? Jefferson, in his Declaration of Independence, meant equality before the law, a concept necessary precisely because people are not equal in tastes, values, or capacities. Later, equality came to mean equality of opportunity—the chance to run a fair race. Within a free market system, both definitions are consistent with other values: Efficiency, justice, and liberty. More recently, equality has come to mean equality of outcome. Equality of outcome cannot be mandated, cannot be insured. Any serious attempt to achieve it would destroy freedom.
We live under a form of slavery—government domination of the market economy. We have come a long way from a truly free economy: Consider the number of markets to which new firms do not have free access; consider the erosion of expression for business people; consider the plethora of government regulations American business must contend with. Can these trends be reversed? It is harder to repeal laws than pass them. Private business is unfortunately shortsighted when it turns to politics. But count among the favorable signs the very inefficiency of government—and the American public’s growing recognition of this fact. Business qua business can do relatively little to reverse this trend (though it can at least become more sophisticated and farsighted in political planning), but business people as individuals, as citizens, must seek to persuade the public that we are already on the road to a collectivist state, that if we continue it, we will lose prosperity and liberty.
