Milton Friedman Unraveled

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This article originally appeared in The Individualist in 1971,
and was reprinted in the Journal
of Libertarian Studies
in the Fall 2002 issue.

Mention
"free-market economics" to a member of the lay public
and chances are that if he has heard the term at all, he identifies
it completely with the name Milton Friedman. For several years,
Professor Friedman has won continuing honors from the press and
the profession alike, and a school of Friedmanites and "monetarists"
has arisen in seeming challenge to the Keynesian orthodoxy.

However,
instead of the common response of reverence and awe for "one
of our own who has made it," libertarians should greet the
whole affair with deep suspicion: "If he's so devoted a libertarian,
how come he's a favorite of the Establishment?" An advisor
of Richard Nixon and a friend and associate of most Administration
economists, Friedman has, in fact, made his mark in current policy,
and indeed reciprocates as a sort of leading unofficial apologist
for Nixonite policy.

In
fact, in this as in other such cases, suspicion is precisely the
right response for the libertarian, for Professor Friedman's particular
brand of "free-market economics" is hardly calculated
to ruffle the feathers of the powers-that-be. Milton Friedman is
the Establishment's Court Libertarian, and it is high time that
libertarians awaken to this fact of life.

THE
CHICAGO SCHOOL

Friedmanism
can be fully understood only in the context of its historical roots,
and these roots are the so-called "Chicago School" of
economics of the 1920s and 1930s. Friedman, a professor at the University
of Chicago, is now the undisputed head of the modern, or second-generation,
Chicago School, which has adherents throughout the profession, with
major centers at Chicago, UCLA, and the University of Virginia.

The
members of the original, or first-generation, Chicago School were
considered "leftish" in their day, as indeed they were
by any sort of genuine free-market criterion. And while Friedman
has modified some of their approaches, he remains a Chicago man
of the thirties. The political program of the original Chicagoans
is best revealed in the egregious work of a founder and major political
mentor: Henry C. Simons's A
Positive Program for Laissez Faire
.1
Simons's political program was laissez faireist only in an
unconsciously satiric sense.

It
consisted of three key ideas:

  1. a drastic policy of trust-busting of all business firms and
    unions down to small blacksmith-shop size, in order to arrive
    at "perfect" competition and what Simons conceived
    to be the "free market";

  2. a vast scheme of compulsory egalitarianism, equalizing incomes
    through the income-tax structure; and

  3. a proto-Keynesian policy of stabilizing the price-level through
    expansionary fiscal and monetary programs during a recession.

Extreme
trust-busting, egalitarianism, and Keynesianism: the Chicago School
contained within itself much of the New Deal program, and, hence,
its status within the economics profession of the early 1930s
as a leftish fringe. And while Friedman has modified and softened
Simons's hard-nosed stance, he is still, in essence, Simons redivivus;
he only appears to be a free-marketeer because the remainder
of the profession has shifted radically leftward and stateward
in the meanwhile.

And,
in some ways, Friedman has added unfortunate statist elements
that were not even present in the older Chicago School.2

The
Chicago School on Monopoly and Competition

Let
us take the leading elements of Simonsian collectivist laissez
faire in their turn. On monopoly and competition, Friedman
and his colleagues have happily come a long way toward rationality
from the old ultra-trust-busting of Simons. Friedman now concedes
that the major source of monopoly in the economy is the
activity of government, and focuses on repeal of these monopolizing
measures.

The
Chicagoans have gotten progressively more friendly to large business
operating on the free market, and such Friedmanites as Lester
Telser have even emerged with excellent arguments on behalf of
advertising, previously anathema to all "perfect competitionists."
But while in practice Friedman has become more libertarian on
the monopoly question, he still retains the old Chicagoite theory:
that in some way, the absurd, unreal, and unfortunate world of
"perfect competition" (a world in which every firm is
so minute that nothing it does can affect its demand and the price
of its products) is better than the real, existing world
of competition, which is dubbed "imperfect."

An
infinitely superior view of competition is found in the totally
neglected school of "Austrian economics" which scorns
the "perfect competition" model and prefers the real
world of free-market competition.3
So while Friedman's practical view of competition and monopoly
is
not too bad, the weakness of his underlying theory could permit
at any time a return to the frenetic trust-busting of the Chicagoans
of the 1930s. It was not very long ago, for example, that Friedman's
most distinguished associate, Professor George J. Stigler, advocated
before Congress the trust-busting break-up of U.S. Steel into
many constituent parts.

Friedman's
Chicagoite Egalitarianism

While
Friedman has abandoned Simons's call for extreme egalitarianism
through the income tax structure, the basic lineaments of statist
egalitarianism still remain. It remains in the Chicagoite desire
to lay the tax structure's greatest stress on the income tax,
undoubtedly the most totalitarian of all taxes. Chicagoites prefer
the income tax because, in their economic theory, they follow
the disastrous tradition of orthodox Anglo-American economics
in sharply separating the "microeconomic" from the "macroeconomic"
spheres.

The
idea is that there are two sharply separated and independent worlds
of economics. On the one hand, there is the "micro"
sphere, the world of individual prices determined by the forces
of supply and demand. Here, the Chicagoans concede, the economy
is best left to the unhampered play of the free market. But, they
assert, there is also a separate and distinct sphere of "macro"
economics, of economic aggregates of government budget and monetary
policy, where there is no possibility or even desirability of
a free market.

In
common with their Keynesian colleagues, the Friedmanites wish
to give to the central government absolute control over these
macro areas, in order to manipulate the economy for social ends,
while maintaining that the micro world can still remain free.
In short, Friedmanites as well as Keynesians concede the vital
macro sphere to statism as the supposedly necessary framework
for the micro-freedom of the free market.

In
reality, the macro and micro spheres are integrated and intertwined,
as the Austrians have shown. It is impossible to concede the macro
sphere to the State while attempting to retain freedom on the
micro level. Any sort of tax, and the income tax not least of
all, injects systematic robbery and confiscation into the micro
sphere of the individual, and has unfortunate and distortive effects
on the entire economic system. It is deplorable that the Friedmanites,
along with the rest of Anglo-American economics, have never paid
attention to the achievement of Ludwig von Mises, founder of the
modern Austrian School, in integrating the micro and macro spheres
in economic theory as far back as 1912 in his classic The
Theory of Money and Credit
.4
Milton Friedman has revealed his quintessential pro-income tax
and egalitarian position in numerous ways. As in many other spheres,
he has functioned not as an opponent of statism and advocate
of the free market, but as a technician advising the State on
how to be more efficient in going about its evil work. (From the
viewpoint of a genuine libertarian, the more inefficient the State's
operations, the better!5) He has opposed
tax exemptions and "loopholes" and worked to make the
income tax more uniform.

One
of Friedman's most disastrous deeds was the important role he
proudly played, during World War II in the Treasury Department,
in foisting upon the suffering American public the system of the
withholding tax. Before World War II, when income tax rates
were far lower than now, there was no withholding system; everyone
paid his annual bill in one lump sum, on March 15. It is obvious
that under this system, the Internal Revenue Service could never
hope to extract the entire annual sum, at current confiscatory
rates, from the mass of the working population. The whole ghastly
system would have happily broken down long before this. Only the
Friedmanite withholding tax has permitted the government to use
every employer as an unpaid tax collector, extracting the tax
quietly and silently from each paycheck. In many ways, we have
Milton Friedman to thank for the present monster Leviathan State
in America.

In
addition to the income tax itself, Friedman's egalitarianism is
revealed in the Friedman-Stigler pamphlet attacking rent controls.
"For those, like us, who would like even more equality than
there is at present . . . it is surely better to attack directly
the existing inequalities in income and wealth at their source"
than to restrict the purchases of particular commodities, like
housing.6 The single most disastrous
influence of Milton Friedman has been a legacy from his old Chicagoite
egalitarianism: the proposal for a guaranteed annual income to
everyone through the income tax system – an idea picked up
and intensified by such leftists as Robert Theobald, and one which
President Nixon will undoubtedly be able to ram through the new
Congress.7* In
this catastrophic scheme, Milton Friedman has once again been
guided by his overwhelming desire not to remove the
State from our lives, but to make the State more efficient. He
looks around at the patchwork
mess of local and state welfare systems, and concludes that all
would be more efficient if the whole plan were placed under the
federal income tax rubric and everyone were guaranteed a certain
income floor. More efficient, perhaps, but also far more disastrous,
for the only thing that makes our present welfare system even
tolerable is precisely its inefficiency, precisely the
fact that in order to get on the dole one has to push one's way
through an unpleasant and chaotic tangle of welfare bureaucracy.
The Friedman scheme would make the dole automatic, and
thereby give everyone an automatic claim upon production.

Welfare's
"Supply Function"

We
have to realize that being on welfare is not, as most people
believe, a simple and absolute act of God or nature, a stark given
like a volcanic eruption. Being-on-welfare, like all other
human economic acts, has a "supply function": in other
words, if you make welfare pay enough, you can produce as many
welfare clients as you wish to have. Pay them little enough and
you can reduce the number of clients at will. In short, if the
government should announce that anyone who signs up at a "welfare"
desk gets an automatic annual check of $40,000 for as long as
he wishes, we will find soon enough that almost everyone has become
a welfare recipient – and what is more, will join a "welfare
rights" organization to lobby for $60,000 to offset the rise
in the cost of living.

More
specifically, the supply function of welfare clients is inversely
proportional to the difference between the prevailing wage
rate in the area and the level of welfare payments.
This difference is the "opportunity cost" of going on
welfare – the amount that one loses by loafing instead of
working. If, for example, the prevailing wage rises in an area
and the welfare payments remain the same, the differential and
the "opportunity cost" of loafing rise, and people tend
to leave the welfare dole and go to work. If the opposite happens,
more people will go on the dole. If being on welfare were an absolute
fact of nature, then there would be no relation between this differential
and the number on welfare.8

Secondly,
the supply of welfare clients is inversely proportion to another
vitally important factor: the cultural or value disincentive of
going on welfare. If this disincentive is strong, if, for example,
an individual or group strongly believes that it is evil to
go on welfare, they will not do it, period. If, on the other hand,
they do not care about the stigma of welfare, or, worse yet, they
regard welfare payments as their right – a right to
exert a compulsory, looting claim upon production – then
the number of people on welfare will increase astronomically,
as has happened in recent years.

 

There
are several recent examples of the "stigma effect."
It has been shown that, given the same level of income, more people
tend to go on welfare in urban than in rural areas, presumably
as a function of the greater visibility of welfare clients
and hence the greater stigma in the more sparsely populated region.
More important, there is the glowing fact that certain religious
groups, even when significantly poorer than the rest of the population,
simply do not go on welfare because of their deeply held
ethical beliefs. Thus, the Chinese-Americans, while largely poor,
are almost never to be found on welfare. A recent article on Albanian-Americans
in New York City highlights that same point.

These
Albanians are invariable poor slum dwellers, and yet there is
no Albanian-American on welfare. Why? Because, said one of their
leaders, "Albanians do not beg, and to Albanians, taking
welfare is like begging in the street."9

Another
example is the Mormon Church, very few of whose members are on
public welfare. For the Mormons not only inculcate in their members
the virtues of thrift, self-help, and independence, they also
take care of their own needy through church charity programs which
are grounded on the principle of helping people to help themselves,
and thereby getting them off charity as quickly as possible.10
Thus, the Mormon Church counsels its members that "to seek
and accept
direct public relief all too often invites the curse of idleness
and fosters the other evils of dole. It destroys one's independence,
industry, thrift, and self-respect."11
Hence, the Church's highly successful private welfare program
is based on the principles that the Church has encouraged its
members to establish and maintain their economic independence:
it has encouraged thrift and fostered the establishment of employment-creating
industries; it has stood ready at all times to help needy faithful
members.

And:

Our
primary purpose was to set up, in so far as it might be possible,
a system under which the curse of idleness would be done away
with, the evils of a dole abolished, and independence, industry,
thrift, and self-respect be once more established among our people.
The aim of the Church is to help the people help themselves. Work
is to be re-enthroned as the ruling principles of the lives of
our Church membership. . . . Faithful to this principle, welfare
workers will earnestly teach and urge Church members to be selfsustaining
to the full extent of their powers. No true latterday Saint will,
while physically able, voluntarily shift from himself the burden
of his own support.12

The
Libertarian approach to the welfare problem, then, is to abolish
all coercive, public welfare, and to substitute for it private
charity based on the principle of encouraging self-help, bolstered
also by inculcating the virtues of self-reliance and independence
throughout society.

Incentives
under the Friedman Plan

But
the Friedman plan, on the contrary, moves in precisely the opposite
direction, for it establishes welfare payments as an automatic
right, an automatic, coercive claim upon the producers.
It thereby removes the stigma effect altogether, disastrously
discourages productive work by steep taxation, and by establishing
a guaranteed income for not working, which encourages loafing.
In addition, by establishing an income floor as a coercive "right,"
it encourages welfare clients to lobby for ever-higher floors,
thus continually aggravating the entire problem. But Friedman,
caught in the Anglo-American separation of "micro" and
"macro," gives very little attention to these cataclysmic
effects on incentives.

Even
the handicapped are hampered by the Friedmanite plan, for an automatic
dole removes the marginal incentive for the handicapped worker
to invest in his own vocational rehabilitation, since the net
monetary return from such investment is now greatly lowered. Hence,
the guaranteed income tends to perpetuate these handicaps.
Finally, the Friedmanite dole would pay a higher income per
person to welfare families, thereby subsidizing a continuing
increase in the child population among the poor – precisely
those who can least afford such a population growth. Without joining
in the current hysteria about the "population explosion,"
it is certainly absurd to deliberately subsidize the breeding
of more pauper-children, which is what the Friedman plan would
do as an automatic right.

MONEY
AND THE BUSINESS CYCLE

The
third major feature of the New Deal program was proto-Keynesian:
the planning of the "macro" sphere by the government
in order to iron out the business cycle. In his approach to the
entire area of money and the business cycle – an area on
which unfortunately Friedman has concentrated most of his efforts
– Friedman harks back not only to the Chicagoans, but, like
them, to Yale economist Irving Fisher, who was the Establishment
economist from the 1900s through the 1920s. Friedman, indeed,
has openly hailed Fisher as the "greatest economist of the
twentieth century," and when one reads Friedman's writings,
one often gets the impression of reading Fisher all over again,
dressed up, of course, in a good deal more mathematical and statistical
mumbo-jumbo. Economists and the press, for example, have been
hailing Friedman's recent "discovery" that interest
rates tend to rise as prices rise, adding an inflation premium
to keep the "real" rate of interest the same; this ignores
the fact that Fisher had pointed this out at the turn of the twentieth
century.

But
the key problem with Friedman's Fisherine approach is the same
orthodox separation of the micro and macro spheres that played
havoc with his views on taxation. For Fisher believed, again,
that on the one hand there is a world of individual prices determined
by supply and demand, but on the other hand there is an aggregate
"price level" determined by the supply of money and
its velocity of turnover, and never the twain do meet. The aggregate,
macro, sphere is supposed to be the fit subject of government
planning and manipulation, again supposedly without affecting
or interfering with the micro area of individual prices.

Fisher
on Money

In
keeping with this outlook, Irving Fisher wrote a famous article
in 1923, "The Business Cycle Largely a u2018Dance of the Dollar'
" – recently cited favorably by Friedman – which
set the model for the Chicagoite "purely monetary" theory
of the business cycle. In this simplistic view, the business cycle
is supposed to be merely a "dance," in other words,
an essentially random and causally unconnected series of ups and
downs in the "price level." The business cycle, in short,
is random and needless variations in the aggregate level
of prices. Therefore, since the free market gives rise to this
random "dance," the cure for the business cycle is for
the government to take measures to stabilize the price
level, to keep that level constant. This became the aim of the
Chicago School of the 1930s, and remains Milton Friedman's goal
as well.

Why
is a stable price level supposed to be an ethical idea, to be
attained even by the use of governmental coercion? The Friedmanites
simply take the goal as self-evident and scarcely in need of reasoned
argument. But Fisher's original groundwork was a total misunderstanding
of the nature of money, and of the names of various currency units.
In reality, as most nineteenth century economists knew full well,
these names (dollar, pound, franc, etc.) were not somehow realities
in themselves, but were simply names for units of weight of gold
or silver. It was these commodities, arising in the free market,
that were the genuine moneys; the names, and the paper money and
bank money, were simply claims for payment in gold or silver.
But Irving Fisher refused to recognize the true nature of money,
or the proper function of the gold standard, or the name of a
currency as a unit of weight in gold. Instead, he held these names
of paper money substitutes issued by the various governments to
be absolute, to be money. The function of this "money"
was to "measure" values. Therefore, Fisher deemed it
necessary to keep the purchasing power of currency, or the price
level, constant.

This
quixotic goal of a stable price level contrasts with the nineteenth-century
economic view – and with the subsequent Austrian School.
They hailed the results of the unhampered market, of laissez
faire capitalism, in invariably bringing about a steadily
falling price level. For without the intervention of government,
productivity and the supply of goods tends always to increase,
causing a decline in prices. Thus, in the first half of the nineteenth
century – the "Industrial Revolution" – prices
tended to fall steadily, thus raising the real wage rates even
without an increase of wages in money terms. We can see this steady
price decline bringing the benefits of higher living standards
to all consumers, in such examples as TV sets falling from
$2000 when first put on the market to about $100 for a far better
set. And this in a period of galloping inflation.

It
was Irving Fisher, his doctrines, and his influence, which was
in large part responsible for the disastrous inflationary policies
of the Federal Reserve System during the 1920s, and therefore
for the subsequent holocaust of 1929. One of the major aims of
Benjamin Strong, head of the Federal Reserve Bank (Fed) of New
York and virtual dictator of the Fed during the 1920s, was, under
the influence of the Fisher doctrine, to keep the price level
constant. And since wholesale prices were either constant or actually
falling during the 1920s, Fisher, Strong, and the rest of the
economic Establishment refused to recognize that an inflationary
problem even existed. So, as a result, Strong, Fisher, and the
Fed refused to heed the warnings of such heterodox economists
as Ludwig von Mises and H. Parker Willis during the 1920s that
the unsound bank credit inflation was leading to an inevitable
economic collapse.

So
pig-headed were these worthies that, as late as 1930, Fisher,
in his swansong as economic prophet, wrote that there was no depression,
and that the stock market collapse was only temporary.13

Friedman
on Money

And
now, in his highly touted Monetary
History of the United States
, Friedman his demonstrated
his Fisherine bias in interpreting American economic history.14
Benjamin Strong, undoubtedly the single most disastrous influence
upon the economy of the 1920s, is lionized by Friedman precisely
for his inflation and price-level stabilization during that decade.15
In fact, Friedman attributes the 1929 depression not to
the preceding inflation boom but to the failure of the post-Strong
Federal Reserve to inflate the money supply enough before
and during the depression.

In
short, while Milton Friedman has performed a service in bringing
back to the notice of the economics profession the overriding
influence of money and the money supply on business cycles, we
must recognize that this "purely monetarist" approach
is almost the exact reverse of the sound – as well
as truly free-market – Austrian view. For while the Austrians
hold that Strong's monetary expansion made a later 1929 crash
inevitable, Fisher-Friedman believe that all the Fed needed to
do was to pump more money in to offset any recession. Believing
that there is no causal influence running from boom to bust, believing
in the simplistic "Dance of the Dollar" theory, the
Chicagoites simply want government to manipulate that dance, specifically
to increase the money supply to offset recession.

During
the 1930s, therefore, the Fisher-Chicago position was that, in
order to cure the depression, the price level needed to be "reflated"
back to the levels of the 1920s, and that reflation should be
accomplished by:

  1. the
    Fed expanding the money supply, and
  2. the Federal government engaging in deficit spending and
    large-scale public works programs.

In
short, during the 1930s, Fisher and the Chicago School were "pre-Keynes
Keynesians," and were, for that reason, considered quite
radical and socialistic – and with good reason. Like the
later Keynesians, the Chicagoans favored a "compensatory"
monetary and fiscal policy, though always with greater stress
on the monetary arm.

Some
might object that Milton Friedman does not believe so much in
a manipulative monetary and fiscal policy as in an "automatic"
increase by the Federal Reserve at a rate of 3–4 percent per year.
But this modification of the older Chicagoans is purely a technical
one, stemming from Friedman's realization that day-to-day, short-term
manipulations by the Fed will suffer from inevitable time lags,
and are therefore bound to aggravate rather than ameliorate the
cycle. But we must realize that Friedman's automatic inflationist
policy is simply another variant in his pursuit of the same old
Fisherine-Chicagoite aim: stabilization of the price level –
in this case, stabilization over the long run. Thus, Milton
Friedman is, purely and simply, a statist-inflationist, albeit
a more moderate inflationist than most of the Keynesians. But
that is small consolation indeed, and hardly qualifies Friedman
as a free-market economist in this vital area.

Fisher,
Friedman, and the End of the Gold Standard

From
his earliest days, Irving Fisher was – properly – considered
to be a monetary radical and a statist for his desire to scrap
the gold standard. Fisher realized that the gold standard –
under which the basic money is a commodity mined on the free market
rather than created by government – was incompatible with
his overpowering desire to stabilize the price level. Hence, Fisher
was one of the first modern economists to call for the abolition
of the gold standard and its replacement by fiat money.

Under
a fiat system, the currency name – dollar, frank,
mark, etc. – becomes the ultimate monetary standard,
and absolute control over the supply and use of these units is
necessarily vested in the central government. In short, fiat currency
is inherently the money of absolute statism. Money is the central
commodity, the nerve center, as it were, of the modern market
economy, and any system that vests the absolute control of that
commodity in the hands of the State is hopelessly incompatible
with a free-market economy or, ultimately, with individual liberty
itself.

Yet,
Milton Friedman is a radical advocate of cutting all current ties,
however weak, with gold, and going onto a total and absolute fiat
dollar standard, with all control vested in the Federal Reserve
System.* Of course, Friedman would then advise the Fed
to use that absolute power wisely, but no libertarian worth the
name can have anything but contempt for the very idea of vesting
coercive power in any group and then hoping that such group
will not use its power to the utmost. The reasons that Friedman
is totally blind to the tyrannical and despotic implications of
his fiat money scheme is, once again, the arbitrary Chicagoite
separation between the micro and the macro, the vain, chimerical
hope that we can have totalitarian control of the macro sphere
while the "free market" is preserved in the micro. It
should be clear by now that this kind of a truncated, Chicagoite
micro-"free market" is "free" only in the
most mocking and ironic sense: it is far more the Orwellian "freedom"
of "Freedom is Slavery."

A
Return to the Gold Standard

There
is no question about the fact that the present international monetary
system is an irrational and abortive monstrosity, and needs drastic
reform. But Friedman's proposed reform, of cutting all ties with
gold, would make matters far worse, for it would leave everyone
at the complete mercy of his own fiat-issuing state. We need to
move precisely in the opposite direction: to an international
gold standard that would restore commodity money everywhere and
get all the money-manipulating states off the backs of the peoples
of the world.

Furthermore,
gold, or some other commodity, is vital for providing an international
money – a basic money in which all nations can trade
and settle their accounts. The philosophical absurdity of the
Friedmanite plan of each government providing its own fiat money,
cut loose from all others, can be seen clearly if we consider
what would happen if every region, every province, every state,
nay every borough, county, town, village, block, house, or
individual would issue its own money, and we then had, as
Friedman envisions, freely fluctuating exchange rates between
all these millions of currencies. The ensuing chaos would stem
from the destruction of the very concept of money –
the entity that serves as a general medium for all exchanges on
the market. Philosophically, Friedmanism would destroy money itself,
and reduce us to the chaos and primitivism of the barter system.

One
of Friedman's crucial errors in his plan of turning all monetary
power over to the State is that he fails to understand that this
scheme would be inherently inflationary. For the State would then
have in its complete power the issuance of as great a supply of
money as it desired. Friedman's advice to restrict this power
to an expansion of 3–4% per year ignores the crucial fact that
any group, coming into the possession of the absolute power
to "print money," will tend to . . . print it! Suppose
that John Jones is granted by the government the absolute power,
the compulsory monopoly, over the printing press, and allowed
to issue as much money as he sees fit, and to use it in any way
that he sees fit. Isn't it crystal clear that Jones will use this
power of legalized counterfeiting to a fare-thee-well,
and therefore that his rule over money will tend to be inflationary?
In the same way, the State has long arrogated to itself the compulsory
monopoly of legalized counterfeiting, and so it has tended to
use it: hence, the State is inherently inflationary, as
would be any group with the sole power to create money. Friedman's
scheme would only intensify that power and that inflation.

The
only libertarian solution, in contrast, is to make the
State disgorge its hoards of commodity money. Franklin Roosevelt,
under cover of a "depression emergency," confiscated
all of the gold held by the American people in 1933, and nothing
has been said for nearly four decades about giving our gold back.
In contrast to Friedman, the genuine libertarian must call upon
the government to give the people back their stolen gold, which
the government had seized from us in return for its paper dollars.

NEIGHBORHOOD
EFFECTS

Thus,
in the two vital macro fields of taxation and money, Milton Friedman's
influence has been enormous – far greater than in any other
area – and almost uniformly disastrous from the point of
view of a genuinely free market. But even on the micro level,
where his influence has been smaller and usually more beneficial,
Friedman has provided to interventionists a theoretical loophole
as wide as a barn door. For Friedman maintains that it is legitimate
for the government to interfere with the free market whenever
anyone's actions have "neighborhood effect." Thus, if
A does something which will benefit B, and B does not have to
pay for it, Chicagoites consider this a "defect" in
the free market, and it then becomes the task of government to
"correct" that defect by taxing B to pay A for this
"benefit."

It
is for this reason that Friedman endorses government supplying
funds for mass education, for example; since the education of
kids is supposed to benefit other people, then the government
is allegedly justified in taxing these people to pay for these
"benefits." (Once again, in this area, Friedman's pernicious
influence has been in trying to make an inefficient State operation
far more efficient; here he suggests replacing unworkable public
schools by public voucher payments to parents – thus leaving
intact the whole concept of tax-funds for mass education.)

Apart
from the vitally important realm of education, Friedman would,
in practice, limit the neighborhood effects argument to such measures
as urban parks. Here, Friedman is worried that if the parks were
private, someone might enjoy looking at one from afar and not
be forced to pay for this psychic benefit. Hence, he advocates
public urban parks only. Rural parks, he feels,
can be private for they can be secluded enough to force all users
to pay for services rendered.

It
is small comfort that Friedman himself would confine this neighborhood-effects
argument to a few instances, such as education and urban parks.
In reality, this argument could be used to justify almost any
intervention, and subsidy and tax scheme. I, for example, read
Mises's Human
Action
; I therefore imbibe more wisdom and become a better
person; by becoming a better person, I benefit my fellow man;
yet, hang it, they are not being forced to pay for those benefits!
Shouldn't the government tax these people and subsidize me for
being so worthy as to read Human Action?

Or,
to take another example, whether Women's Libbers like it or not,
many men obtain a great deal of enjoyment from watching girls
in mini-skirts; yet, these men are not paying for this enjoyment.
Here is another neighborhood effect remaining uncorrected! Shouldn't
the men of this country be taxed in order to subsidize girls to
wear mini-skirts?

There
is no point in multiplying examples; they proliferate almost endlessly,
and expose the total absurdity and the pervasiveness of Chicagoite
neighborhood-effect concessions to statism. The only reply that
Chicagoites have been able to make to this reductio ad absurdum
is that they wouldn't carry government intervention
that far, though they concede the logic. But why not? By what
standard, by what criterion, do they stop at parks and
schools? The point is that there is no such criterion, and this
only points up the intellectual bankruptcy, the lack of logical
rigor, at the core of most current-day economics and social science
– Friedmanism included.

THE
IMPACT OF FRIEDMAN

And
so, as we examine Milton Friedman's credentials to be the leader
of free-market economics, we arrive at the chilling conclusion
that it is difficult to consider him a free-market economist at
all. Even in the micro sphere, Friedman's theoretical concessions
to the egregious ideal of "perfect competition" would
permit a great deal of governmental trust-busting, and his neighborhood-effect
concession to a government intervention could permit a virtual
totalitarian state, even though Friedman illogically confines
its application to a few areas. But even here, Friedman uses this
argument to justify the State's provision of mass education to
everyone.

But
it is in the macro sphere, unwisely hived off from the micro by
economists who remain after sixty years ignorant of Ludwig von
Mises's achievement in integrating them, it is here that Friedman's
influence has been at its most baleful. For we find Friedman bearing
heavy responsibility both for the withholding tax system and for
the disastrous guaranteed annual income looming on the horizon.
At the same time, we find Friedman calling for absolute control
by the State over the supply of money – a crucial part of
the market economy. Whenever the government has, fitfully and
almost by accident, stopped increasing the money supply (as Nixon
did for several months in the latter half of 1969), Milton Friedman
has been there to raise the banner of inflation once again. And
wherever we turn, we find Milton Friedman, proposing not measures
on behalf of liberty, not programs to whittle away the Leviathan
State, but measures to make the power of that State more efficient,
and hence, at bottom, more terrible.

The
libertarian movement has coasted far too long on the intellectually
lazy path of failing to make distinctions, or failing to discriminate,
of failing to make a rigorous search to distinguish truth from
error in the views of those who claim to be its members or allies.
It is almost as if any passing joker who mumbles a few words about
"freedom" is automatically clasped to our bosom as a
member of the one, big, libertarian family. As our movement grows
in influence, we can no longer afford the luxury of this intellectual
sloth. It is high time to identify Milton Friedman for what he
really is. It is high time to call a spade a spade, and a statist
a statist.

BIBLIOGRAPHY

  • Brehm,
    C.T., and T.R. Saving. "The Demand for General Assistance
    Payments." American
    Economic Review 54, no. 6 (December 1964).
  • Fisher,
    Irving. The Stock Market Crash – And After. New
    York: Macmillan, 1930.
  • Friedman,
    Milton, and Anna Schwartz. A
    Monetary History of the United States, 1867–1960
    . Princeton,
    N.J.: Princeton University Press, 1963.
  • Friedman,
    Milton, and George J. Stigler. Roofs or Ceilings? Irvington-on-Hudson,
    N.Y.: Foundation for Economic Education, 1946.
  • Hayek,
    F.A. Individualism
    and the Economic Order
    . Chicago: University of Chicago
    Press, 1948.
  • Hazlitt,
    Henry. Man
    vs. The Welfare State
    . New Rochelle, N.Y.: Arlington
    House, 1969.
  • Mises,
    Ludwig von. The
    Theory of Money and Credit
    . Translated by H.E Batson.
    Indianapolis, Ind.: Liberty Classics, 1980.
  • Mowat,
    Charles Loch. The Charity Organization Society. London:
    Methuen, 1961.
  • Rothbard,
    Murray N. America's
    Great Depression
    . Princeton, N.J.: D. Van Nostrand,
    1963.
  • – – – . "The Great Inflationary Recession
    Issue: u2018Nixonomics' Explained." The
    Individualist
    (June 1970).

  • – – – . "The Guaranteed Annual Income."
    The Rational Individualist (September 1969).

  • – – – . What
    Has Government Done To Our Money?
    Auburn, Ala.: Ludwig
    von Mises Institute, 1990.

  • Simons,
    Henry C. A Positive Program for Laissez Faire: Some Proposals
    for a Liberal Economic Policy. Chicago: University of Chicago
    Press, 1934.
  • Welfare
    Plan of the Church of Jesus Christ of Latter-Day Saints. The
    General Church Welfare Committee, 1960.

Notes

  1. Henry
    C. Simons, A Positive Program for Laissez Faire: Some Proposals
    for a Liberal Economic Policy (Chicago: University of
    Chicago Press, 1934).
  2. In
    this article, I am confining discussion to the politico-economic,
    and omitting the technical problems of economic theory and methodology.
    It is in the latter where Friedman has been at his worst, for
    Friedman has managed to change the older Chicagoan methodology,
    in its essence Aristotelian and rationalist, to an egregious
    and extreme variant of positivism.
  3. For
    an excellent introduction to the Austrian view, see of F.A.
    Hayek, Individualism
    and
    the Economic Order

    (Chicago: University of Chicago Press, 1948), chap. 5.
  4. Ludwig
    von Mises, The
    Theory of Money and Credit
    , trans. H.E Batson (Indianapolis,
    Ind.: Liberty Classics, 1980).
  5. There
    is a charming anecdote about the distinguished industrialist
    Charles F. Kettering. Visiting the hospital bed of a friend
    who was complaining about the growth of government, Kettering
    told him "Cheer up Jim. Thank God we don't get as much
    government as we pay for!"
  6. Milton
    Friedman and George J. Stigler, Roofs or Ceilings? (Irvington-on-Hudson,
    N.Y.: Foundation for Economic Education, 1946), p. 10.
  7. For
    a further critique of the Friedman-Nixon guaranteed income doctrine,
    see Murray N. Rothbard, "The Guaranteed Annual Income,"
    The Rational Individualist (September 1969); and Henry
    Hazlitt, Man
    vs. The Welfare State
    (New Rochelle, N.Y.: Arlington
    House, 1969), pp. 62–100. *Rothbard
    correctly predicted that this Friedman proposal would be part
    of the 1972 presidential campaign. Interestingly, and tellingly,
    it was proposed by Nixon's Democrat opponent, Senator George
    McGovern. Voters considered it to be extremely radical, and
    McGovern was overwhelmingly defeated. Ed.
  8. For
    an empirical demonstration of this relationship, see C.T. Brehm
    and T.R. Saving, "The Demand for General Assistance Payments,"
    American Economic Review 54, no. 6 (December 1964), pp.
    1002–18.
  9. New
    York Times (April 13, 1970).
  10. This
    was the same principle as the one guiding the Charity Organization
    Society in nineteenth-century England. That classical-liberal
    organization "believed that the most serious aspect of
    poverty was the degradation of the character of the poor man
    or woman. Indiscriminate charity only made things worse; it
    demoralized. True charity demanded friendship, thought, the
    sort of help that would restore a man's self-respect and his
    ability to support himself and his family." Charles Loch
    Mowat, The Charity Organization Society (London: Methuen,
    1961), p. 2.
  11. Welfare
    Plan of the Church of Jesus Christ of Latter-Day Saints
    (The General Church Welfare Committee, 1960), p. 48.
  12. Welfare
    Plan, pp. 1–2.
  13. Irving
    Fisher, The Stock Market Crash – And After (New
    York: Macmillan, 1930).
  14. Milton
    Friedman and Anna Schwartz, A Monetary History of the United
    States, 1867–1960 (Princeton, N.J.: Princeton University
    Press, 1963).
  15. See
    Murray N. Rothbard, America's
    Great Depression
    (Princeton, N.J.: D. Van Nostrand,
    1963), for a contrasting view of the 1920s. More on the Friedmanite
    vs. Austrian view of the business cycle can be found in Murray
    N. Rothbard, "The Great Inflationary Recession Issue: u2018Nixonomics'
    Explained," The Individualist (June 1970), pp. 1–5.

*This
is, in fact, exactly what happened within a few years of this
article's original publication. See Murray N. Rothbard, What
Has Government Done To Our Money?
(Auburn, Ala.: Ludwig
von Mises Institute, 1990). – Ed.

Reprinted
from Mises.org.

Murray
N. Rothbard
(1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and academic
vice president of the Mises
Institute
. He was also editor — with Lew Rockwell
— of The
Rothbard-Rockwell Report
, and appointed Lew as
his literary executor. See
his books.

The
Best of Murray Rothbard

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