Capitalism and
Freedom
Study Guide by Course Hero
What's Inside
criticized harshly by reviewers for being unorthodox at the time
of its publication. For example, economist Leon Keyserling
(1908–87) declared, "Despite considerable pretense to the
contrary, Professor Friedman's book sheds no light on
j Book Basics ................................................................................................. 1
a Main Ideas ................................................................................................... 2
d In Context .................................................................................................... 2
economic problems as such." The silence of major publications
with dedicated review sections was, to Friedman, also
indicative of the hostility toward his work at the time of its
publication. What does he argue for that is so radical?
Friedman attempts to persuade his audience that the
a Author Biography ..................................................................................... 4
k Plot Summary ............................................................................................. 6
c Chapter Summaries ................................................................................ 9
preservation of individual freedom is better served by limiting
the scope and power of government activities. The relevance
of views like Friedman's today is clear. At the time of
Capitalism and Freedom's publication both the United States
and the United Kingdom were pushing for more government
g Quotes ........................................................................................................ 22
regulation. In current times the political will is often aimed at
deregulation and reduction of costly social welfare programs.
m Glossary ..................................................................................................... 24
e Suggested Reading .............................................................................. 24
For example, in late 2017 the research group The Brookings
Institute created a website to track the "major deregulatory
ambitions" of President Donald Trump's administration.
Friedman himself notes in his prefaces to newer editions of
Capitalism and Freedom what he sees as positive trends away
j Book Basics
from extensive government regulation. How much this trend
has do to with Friedman's work is not clear. New York Times
Op-Ed columnist Paul Krugman (b. 1953), on the occasion of
AUTHOR
Milton Friedman
YEAR PUBLISHED
1962
GENRE
Economics, Philosophy
Friedman's death, wrote that "the great swing back toward
laissez-faire policies," or economic policies with a minimal
amount of governmental interference, "would have happened
even if there had been no Milton Friedman ... his tireless and
brilliantly effective campaign ... surely helped accelerate the
process."
ABOUT THE TITLE
AT A GLANCE
The words capitalism and freedom feature in the title because
Milton Friedman wrote Capitalism and Freedom in response to
Friedman argues there is a substantial connection between the
the worldwide trend toward developing socialist societies. In
two. He claims capitalist societies will necessarily be free
these societies centralized governments exercise significant
societies.
control over the economic and social activities of their citizens.
Socialist economic policies were the mainstream at the time
Friedman wrote Capitalism and Freedom, and his book was
Capitalism and Freedom Study Guide
a Main Ideas
Main Ideas 2
adults are capable of determining what risks are worth taking
and what goals are worth pursuing. To Friedman, every policy
motivated by a paternalistic concern to protect individuals from
Milton Friedman spent the majority of his life advocating for
themselves leads to disrespect. Moreover, he argues treating
free-market economic policies and a liberal social ideal.
society as having its own interests above the interests of
Capitalism and Freedom is a series of arguments and examples
individuals amounts to subjugating every individual and robbing
designed to show how these two viewpoints go hand in hand.
them of their freedom.
In place of paternalism and collectivism, Friedman views the
government's purpose from a liberal standpoint. Government
Observation over Political
Ideology
authority and activity only exist to give a stable background for
each individual to find and pursue whatever life they deem
worthy. The only limit to these goals is the freedom of other
individuals.
Friedman frequently complains critics of capitalist society
aren't paying attention to the real effects of economic and
The Free Market Is Efficient
social policy. Instead of arguing on the basis of how the world
works, they are arguing on the basis of how they would like it
and Flexible
to work. Even when the critics of capitalism do pay attention to
the actual outcomes of policies, Friedman claims they focus
In the early 20th century many countries imposed restrictions
only on short-term effects rather than seeing the long-term
and regulations on economic activity. While the extreme
problems caused by extensive government intervention.
circumstances of war may justify some short-term government
Throughout Capitalism and Freedom, Friedman tries to
practice what he preaches by acknowledging situations in
which government intervention in individuals' activities is
acceptable. He recognizes the need for some form of
government activity in the establishment and regulation of an
regulation of economic activity, Friedman argues in the long
term, and in normal conditions, lack of regulation should
prevail. In the chapters on monetary and trade policy, Friedman
aims to show unregulated free markets are the best tool to
prevent serious economic instability.
education system as well as a government program to relieve
Beyond managing unforeseen events such as wars, Friedman
poverty.
also claims free-market policies, rather than government
intervention, are the solution to achieving the greater good. To
Paternalism and Collectivism
Are Inconsistent with Freedom
end discrimination, to alleviate poverty, to provide quality
education, and to support individual freedom, Friedman
recommends the adoption of free-market capitalism. Because
markets are impersonal and geared only toward profit, they will
tend to lead to efficient outcomes and allow people the
Social and economic policies are often implemented to protect
freedom to shape their lives as they please.
people from themselves. The idea is human beings either lack
the information or discipline to successfully advance their own
interests. Individuals' actions must be directed toward a
common social good, and it is appropriate to sometimes make
d In Context
them sacrifice their own interests to further this common good.
This ideology is known as collectivism.
Friedman completely rejects both of these motivations for
The Great Depression
social and economic policy. He believes individuals know what
Milton Friedman was born at the beginning of a period of rapid
their interests are and how to further them. Mature and rational
development and change. The tragedies of World War I
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Capitalism and Freedom Study Guide
In Context 3
(1914–18), the Great Depression (1929–39), and World War II
Depression, when the Federal Reserve should have provided
(1939–45) left people looking for stability and security.
loans to failing banks at low rates of interests, it instead either
Economic woes, in particular, were seen as stemming from a
failed to provide loans or raised interest rates. Paralyzed by
lack of regulation of private investment and banking services.
government action and inaction, the banking system and
economy, in general, were not allowed to correct themselves.
The policies Friedman advocated during his career were
On this basis he concluded government intervention was
largely in response to the expansion of government authority
generally too sluggish and inflexible to deal with economic
over economic and social interactions after the Great
fluctuations.
Depression. This period, which lasted for the greater part of
the 1930s, saw dramatic drops in levels of income,
Friedman's diagnosis of the cause of the Great Depression is
employment, production, and consumption across all sectors
at odds with the mainstream opinion of the time. The
of the U.S. economy and all classes of society.
explanation put forward by economists like John Maynard
Keynes (1883–1946) was that exchange markets are volatile,
A series of bank failures, caused by too many customers
due largely to the unpredictability of mass consumer
withdrawing their deposits at once, created severe economic
psychology. As such, the theories of free-market economists
hardship. The series of bank failures in the United States at the
who say unregulated markets will self-correct are in error. The
beginning of the Great Depression were linked to the stock
Great Depression, on this view, was caused by the shattered
market crash of October 29, 1929—commonly referred to as
confidence of private individuals to spend and invest after
Black Tuesday. During this event, a large-scale sale of
stock market crashes in the United Kingdom and United States
numerous types of stocks lead to a significant dip in the price
in September and October 1929. For the Keynesian, periods
of stocks. In turn this decreased the amount of money held by
like this are those in which marked increases in government
investors—some of which were banks. Banks operating on a
spending are required to stimulate the economy until the
fractional-reserve system do not keep the total worth of their
confidence of private investors returns. Contemporary
customers' deposits readily available, instead loaning out those
explanations hold that, in essence, both Friedman and Keynes
funds or investing them. Upon learning about stock price
are partially correct.
decreases, bank customers feared they would lose the money
they had deposited and so attempted to retrieve their funds all
at once. However, because banks don't keep the total of
customers' deposits on hand, they closed, refusing to redeem
any withdrawals.
Free-Market Capitalism
Friedman was heavily influenced by the economists of the
Bank closures in one area led to further decrease in consumer
Austrian School of economics, who stressed a laissez-faire
confidence, stock sell-offs, and further bank closures. In this
approach. He specifically cites The Road to Serfdom (1944), a
situation banks ceased providing loans—particularly to other
book by Austrian economist Friedrich August von Hayek,
banks. Without external action to increase the amount of
whose role in Friedman's work is discussed below. The
money available to make loans, economic activity ground to a
Austrian School of thought was founded on the work of Carl
halt.
Menger (1840–1921), Eugene Böhm von Bawerk (1851–1914),
and Friedrich von Wieser (1851–1926). Laissez-faire (literally,
Friedman's expertise in monetary policy led him to severely
"leave them to do it") policies give private individuals and
criticize the structure of the Federal Reserve Bank. The
businesses the freedom to conduct their own economic
extensive authority granted to it was, according to Friedman,
activities without government intervention by proposing
not used when it should have been and then used when it
principled limits on what constitutes legitimate economic
should not have been. The Federal Reserve is administered by
activity. As Friedman argues in Capitalism and Freedom, the
a complex assortment of appointed public servants and private
kinds of government activity that must be limited include taxes,
individuals. These officials exercise independent authority over
tariffs, occupational licensure, and wage laws—among others.
interest rates, the regulation of banking services, and the
In this way markets are left free to self-regulate. The laissez-
certification of legal currency, among many other facets of
faire approach to economics is also referred to as a "free-
banking and money in the United States. During the Great
market" approach.
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Capitalism and Freedom Study Guide
Author Biography 4
Friedrich August von Hayek (1899–1992), one of the most
Statistical analysis allowed economists to analyze the
famous figures of the Austrian School of economics,
connections between various phenomena by correlating
collaborated extensively with Friedman to promote the free-
massive numbers of observations of economic exchanges with
market approach. This influence and collaboration led
facts about the government policies that formed the
Friedman to help develop the prominent Chicago School of
background of those exchanges—for example, the price and
economics thought during his 30 years at the University of
supply of corn during a time when heavy tariffs were levied on
Chicago. The Chicago School is primarily known for its focus
imported corn versus a time when no tariffs were levied. On
on issues of monetary policy and often advocates in favor of
this basis an economist could theorize about the effectiveness
limited government involvement. Additionally, economists of
of tariffs in general as a tool of economic policy.
the Chicago School view economics as a scientific discipline
applicable to more than simple matters of financial exchange.
This is the type of work Friedman did himself and championed
as the correct way to do work in economics. Friedman
Both men, and the economic schools associated with them,
criticized the government for placing too much power in either
stressed the importance of restricting government intervention
the hands of economic laypeople whose opinions were based
on monetary policy. For instance, instead of government
on shallow intuition or in the hands of specialists whose
agencies like the Federal Reserve fixing the exchange rate for
advanced knowledge rendered them unaccountable to the
their country's currency, Friedman argued in favor of allowing
masses. Moreover, he believed the government's decision-
market forces to naturally set the rates of exchange between
making process was too slow and was held hostage to political
different currencies.
wrangling. In his most extreme statements, Friedman
advocated the replacement of institutions like the Federal
Reserve Bank with computer programs based on econometric
Statistics in Economics
models. This demonstrates his confidence that economic
problems are ultimately mathematical ones to be solved by
running the numbers rather than exercising political judgment.
Friedman believed a new way of pursuing economic theory
could demonstrate that increased government regulation was
not an effective way to achieve long-lasting economic safety
and security. His work aimed to bring the newly honed tools of
a Author Biography
statistical analysis to bear on economic problems and to
display the superiority of free-market capitalist policies.
Friedman extensively studied not only economic theory but
also statistical methods. The use of statistics to analyze
observational economic data, known as econometrics, was still
in its early stages when Friedman began his graduate research
at the University of Chicago. Jan Tinbergen (1903–94) and
Ragnar Frisch (1895–1973) were among the first economists to
apply advanced statistics to economic problems, eventually
sharing the Nobel Prize in Economics of 1969 for their work in
the 1920s and 1930s. Modern statistical theory itself had only
matured in the early years in the 20th century. Karl Pearson
(1857–1936) developed a number of modern statistical
Early Years and Academic Life
Milton Friedman was born in Brooklyn, New York, on July 31,
1912, into a Jewish family who had emigrated from Eastern
Europe. Friedman's mother ran a dry goods store and his
father worked odd jobs, including operating a trading business.
Friedman, however, engaged in academic pursuits both in his
younger years and for most of his professional career. He
attended Rutgers, the State University of New Jersey on
scholarship at the age of 16 to study mathematics. He later
became interested in economics and earned the equivalent of
a major in both fields of study.
concepts, including the idea of a standard deviation from the
mean, in the decade spanning 1893 to 1904. Friedman, having
Friedman's studies continued at the University of Chicago and
done his graduate research for his PhD from 1933 to 1946, was
then Columbia University, where he received his master's
among the first wave of economists to have full access to
degree in 1933 and PhD in 1946, respectively. His studies and
these tools.
research stressed a statistical approach to economics. While
at the University of Chicago he met his research partner and
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Capitalism and Freedom Study Guide
wife, Rose Director (c. 1910–2009). Before settling into a
successful academic career at the University of Chicago,
Friedman worked for the U.S. government. There he designed
and campaigned for policies that he would eventually argue
Author Biography 5
Domestic and International
Advocacy
needed to be repealed. Following his retirement from the
University of Chicago in 1977, Friedman became a senior
Not satisfied to merely argue for free-market economic
research fellow at the Hoover Institution, a position he held for
policies within the covers of books and journals, Friedman also
nearly 30 years.
directly advocated for these policies as both a private
individual and political advisor.
Views on Economic Policy
Because Friedman's academic research was largely focused
on U.S. economic issues, his advocacy also centered on the
United States. In an official capacity, he worked for the U.S.
Friedman's criticism of policy he had a hand in designing gives
government at the National Resources Planning Board, the
a key insight into his motivations. He saw his work as putting
Department of the Treasury, and the President's Economic
forward economic policy based on the analysis of real data
Advisory Board for President Ronald Reagan (1911–2004;
about its effects, rather than motivated by political and
president 1981–89). In an unofficial capacity, Friedman advised
ideological concerns. In unusual and hectic times extensive
a variety of Republican candidates during their election
action by centralized government power could be justified.
campaigns, specifically former U.S. senator Barry Goldwater
However, the realities of everyday human behavior and their
(1909–98) and former U.S. presidents Richard Nixon (1913–94)
effect on economies suggested free-market capitalistic
and Ronald Reagan.
economic and social policies rather than socialist ones
controlled by the state. Friedman's ideological assumption was
Additionally, the book he coauthored with his wife Rose
that individual freedom is important enough to be preserved at
Friedman, Free to Choose (1980), had a companion 1980
most costs. But he was also confident the preservation of
television series on the Public Broadcasting Service (PBS).
individual freedom would lead to economic efficiency and
This series attempted to bring free-market economic ideas to
prosperity.
the general public of the United States through a series of
interviews with the Friedmans, as well as other prominent
At the beginning of his career, Friedman's economic views
figures in the field of economic policy.
were in the minority—a fact he stresses in Capitalism and
Freedom. Throughout the world during and after World War II
Friedman's influence is not limited to the United States. Most
(1939–45) there was a trend toward greater centralization of
famously, and infamously, he advised the government of Chile
government power. This included giving the government more
under Augusto Pinochet (1915–2006). Pinochet forcibly took
control over social and economic activities. In Friedman's view
control of Chile from a duly elected socialist government in
the prevalence of government action in economic matters after
1973, and he possibly received assistance from the United
the end of World War II placed limits on economic regrowth
States to do so. Friedman was invited by the private Catholic
and social renewal. Nearly 20 years after the end of the war,
University of Chile, which had an affiliation with the University
when Capitalism and Freedom was published, Friedman
of Chicago, to give a series of talks in Chile, and free-market
thought the time to restructure government and society in a
policies much like those he advocated were enacted by
way more friendly to individual freedom was long past. By the
Pinochet's government. Friedman later said in a PBS interview
dawn of the 21st century, Friedman viewed the general
in 2000 that he had purposely given the talks as a means to
direction of the change in the economic and political landscape
undermine Pinochet's totalitarian government. Friedman was
to coincide with his views, though he continued to disagree
widely criticized for providing aid to Pinochet's dictatorial
with the specifics of many policies. In today's context
government, which became notorious for corruption and the
Friedman's insistence on letting free markets do their work
violent suppression of political dissidents.
largely free from government regulation is a common
touchstone of right-wing politics in many parts of the world.
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Capitalism and Freedom Study Guide
Awards and Legacy
Plot Summary 6
k Plot Summary
Friedman remained an immensely prolific author until his death
from heart failure on November 16, 2006. Aside from
Capitalism and Freedom he wrote and cowrote dozens of
books and articles intended to inform and persuade an
Government Intervention and
audience unfamiliar with the complexities of economics.
Individual Freedom
In 1979 Milton and Rose Friedman coauthored Free to Choose:
As the title suggests, Capitalism and Freedom consists of a
A Personal Statement, which advances many of the same ideas
series of arguments meant to explore the relationship between
covered in the 1962 Capitalism and Freedom. Whereas
capitalist societies and individual freedom. In each chapter,
Friedman's earlier book was not widely reviewed, he notes in
Friedman explains how particular kinds of actions and policies
the 1982 preface to Capitalism and Freedom that the later
either promote or inhibit the freedom of individuals to do as
book "was reviewed by every major publication, frequently in a
they please. He argues the presumption should always be
lengthy, featured review." This warmer reception, Friedman
against government authority and regulation and letting people
claims, "cannot ... be explained by a difference in quality."
manage their own social and economic activities.
Rather, he claims it was the turn of world events that led to a
greater willingness to entertain the ideas in Capitalism and
Beginning with theoretical issues, Friedman gives his general
Freedom. Some factors included the political and moral
view of the role of government in society. The government
instability of communist governments like Russia and China,
should not enact paternalistic, or restrictive, laws and policies.
the troubled execution of social welfare programs in the United
Rather than seeing citizens as children to be protected from
States, and economic stagnation for everyday people. Real life
their own ignorance, they are to be seen as rational adults
seemed to bear out the merit of his arguments.
capable of directing their own lives. As such the role of
government is simply to provide a background for people to do
Where both Capitalism and Freedom and Free to Choose are
as they please. Each intrusion of government activity is a
books aimed at a general audience, Friedman is equally well
limitation on individual freedom. Whenever a policy
known for his more technical, specialist work. An important
implemented to increase the range of government activity is
focus of his academic work concerned the economics of
put forward, Friedman cautions it should only be enacted if
monetary policy. He cowrote with American economist Anna
there is no plausible alternative. This approach to government
Jacobson Schwartz (1915–2012) A Monetary History of the
and society, he maintains, is the only one deserving of the label
United States: 1867–1960, which was published in 1963.
liberal.
Friedman's view that the Great Depression, a worldwide
economic downturn beginning in 1929 and lasting a decade,
was largely caused by mismanagement of the United States'
central bank, the Federal Reserve, is developed at length in
this work. In general, economists agree that Friedman and
Economic and Political
Freedom
Schwartz successfully highlighted the neglected importance of
monetary issues in economic policy. However, their more
To set the stage for discussions of specific policies, Friedman
specific thesis about the role of the Federal Reserve during the
explores the relationship between two kinds of freedom:
Great Depression has been widely criticized for laying the lion's
economic freedom and political freedom. Friedman argues a
share of the blame on the central bank when the economic
capitalist economic system is the best way to support a
intricacies are much more complex.
generally liberal society. This raises the question of how
Friedman received the Nobel Prize in 1976, the Presidential
Medal of Freedom in 1988, and the National Medal of Science
in 1988. His ideas continue to influence public economic policy
today.
economic freedom can lead to political freedom. Friedman
claims political freedom is the more general concept and
includes economic freedom as part of it. Hence, any limitation
on the more specific kind of
freedom—economic—automatically limits the more general
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Capitalism and Freedom Study Guide
Plot Summary 7
kind—political. On this basis, Friedman states any departure
hampers progress rather than spurs it. In the case of
from a totally free-market capitalist arrangement can be
education, Friedman admits some government activity in the
justified only if a limitation on individual freedom can be
sphere of education is justifiable on the grounds of the
justified.
tremendous neighborhood effect of one individual becoming
educated. Every person in society benefits when an individual
becomes educated.
Monopolies and Neighborhood
However, as Friedman notes in both Chapters 1 and 6, when
Effects
belief or idea over another, it becomes difficult for alternate
government activity moves toward officially supporting one
ideas to gain a hearing. For example, if the government owns
the newspapers and TV stations, only government-approved
According to Friedman, the only situation in which government
views are likely to be circulated among the population.
activity is justified is when the operation of free-exchange
Likewise, if school curricula are controlled by the government,
markets is not practically feasible. Situations like this arise
children are likely to be exposed mostly to government-
either when there are monopolies or neighborhood effects.
approved beliefs and ideas.
Monopolies exist when one group or institution maintains total
control over the production and distribution of a good or
service. Neighborhood effects exist when an individual's
actions automatically have consequences for other
The Greater Good
people—positive or negative—whether or not they consent.
Government action impinging upon individual freedom in the
Friedman gives the example of one person polluting a water
name of the greater good is unacceptable to a liberal. Hence,
source others use. The other people are not in a position to
government regulation of professions in the form of licensing
choose whether they are affected or not, and their freedom is
laws and government support of the power of labor
limited even without government intervention.
organizations are unacceptable limitations of free-market
exchange. Friedman also argues the actions of any business
The Role of Government in
group, whether corporations or labor unions, should not be
Education
should act to further their own interests, so too should
oriented toward a public greater good. Just as individuals
business groups act only to further the interests of their own
members. Consider the idea that filmmakers and producers
Turning to specific government policies, Friedman asks two
have a social responsibility to increase the number of leading
questions: 1) Does it accomplish its intended goal? and 2) Are
roles given in their movies to underrepresented cultural groups.
there alternative ways to achieve this goal without government
If this is a genuine social responsibility, then it ought to be done
intervention?
regardless of whether such movies are profitable. However, if
Friedman believes government regulation of money,
international trade, and domestic trade all worsen the
problems they are meant to solve. He argues the monetary
regulations imposed by the Federal Reserve Bank of the
United States made the Great Depression much worse than it
otherwise would have been. Despite this, the sort of
government authority that exacerbated one of the greatest
worldwide economic crises in history only expanded after the
fact and continues to suppress growth and progress. Nor are
the problems with government authority limited to financial and
filmmakers lose money by carrying out their social
responsibility, they won't be able to continue making films. This
would prevent them from further carrying out any
responsibilities they have, social or otherwise. If the filmmakers
make a profit by carrying out their social responsibility, they will
be able to continue making films. But this would be consistent
with, and Friedman argues redundant to, their business
responsibilities. The only fundamental and real obligation
businesses have is to run their operations at a profit, according
to Friedman.
economic concerns. Friedman contends government
Finally, Friedman addresses various government programs and
intervention in the social issues of education and discrimination
policies aimed at supporting general social welfare. In this
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Capitalism and Freedom Study Guide
arena, as with education, Friedman acknowledges the
existence of significant neighborhood effects, which justify
some government action. However, in Friedman's view, the
graduated-rate taxes, public housing, minimum wage laws, and
social security policies adopted by the United States (among
other countries) universally fail to achieve their stated goals,
and they have, in the long term, opposite effects to what is
intended. Public housing projects, for instance, were meant to
improve the quality of housing for low-income citizens and
reverse "urban blight" (i.e., increases in crime and poverty in
urban areas). However, Friedman argues they have only
managed to make things worse. "The number of dwelling units
destroyed ... has been far larger than the number of dwelling
units constructed," and this fact has in turn "raise[d] the
number of persons per dwelling unit." But overcrowding means
a decrease in quality of housing and leads to increased crime.
The only acceptable government measure for supporting
social welfare in Friedman's view is a negative income tax.
Such a tax pays cash to any citizen whose income does not
reach a certain minimum level. Every other measure is
paternalistic and hence acceptable only to the view of a
socialist—but not a liberal.
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Plot Summary 8
Capitalism and Freedom Study Guide
c Chapter Summaries
Chapter Summaries 9
"Russia and China ... had clearly gone sour ... Great Britain ...
was in deep trouble," he states. These three countries, each
significant on the international stage, had tried giving extensive
economic power to a centralized government. In either
1962 Preface
economic or moral respects, they all had troubles.
In the United States there was economic trouble as well. For
Summary
everyday citizens, their pay often did not meet their needs and
the welfare programs meant to support those in need were
unstable. All of these factors conspire, Friedman argues, to
The preface to the original publication of Capitalism and
create an environment where free-market economic policies
Freedom describes the material from which the arguments of
receive a sympathetic ear.
the book was drawn and lists the people who assisted Milton
Friedman in the research and writing of the book. Special
mention is made of the assistance provided by his wife, Rose
Analysis
Director Friedman.
While Friedman allows himself a small celebration at the
Analysis
change of the world's opinion about socialism, he does not give
himself much credit. "Only a crisis—actual or
perceived—produces real change," he writes. This statement
Milton Friedman says that the acknowledgment of his wife's
shows a certain cynicism on Friedman's part concerning the
assistance is "an understatement." Rose Friedman was an
responsiveness of people, both as private individuals and
accomplished scholar of economics in her own right, and she
participants in government, to anything but dire situations.
coauthored Free to Choose: A Personal Statement with her
husband in 1979. Indeed, her contributions to Capitalism and
The tension between a wariness of, and faith in, people's
Freedom led economist Leon Keyserling to include her name in
decision-making ability pervades Capitalism and Freedom. In
the book's byline when he reviewed it for The Annals of the
this early moment of the book Friedman expresses pessimism:
American Academy of Political and Social Science.
the right decisions have been made late and may yet be
unmade. However, throughout the book he argues that leaving
people to do as they please is the best policy. How can these
1982 Preface
thoughts be reconciled?
Friedman's understanding of the dynamics of society is that by
Summary
limiting the number of people any given individual's decisions
affect, the damage they can do to others is limited. The
solution to human fallibility and laziness is not to coordinate
By 1982, 20 years after its initial publication, Capitalism and
them all through a few government powers; this would simply
Freedom is seen in a more favorable light, according to Milton
concentrate human error and make the decisions of a few
Friedman. He gives as an example of the improved opinion of
affect many. Instead the solution is to disperse power
free-market capitalist policies over socialist ones the popularity
wherever plausible and thereby disperse error as well. This is
of Free to Choose: A Personal Statement, published in 1979.
the lesson he takes the world to be slowly learning as it turns
Because Free to Choose and Capitalism and Freedom put
away from socialism.
forward the same ideas, Friedman reasons the greater
popularity of the later book is due to a change of general
opinion.
2002 Preface
The change in general opinion, Friedman continues, does not
stem from the convincing arguments in any books but the
actual consequences of socialist policies throughout the world.
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Capitalism and Freedom Study Guide
Summary
Writing 40 years after the initial publication of Capitalism and
Freedom, Milton Friedman again surveys the changes that
have occurred across the world in terms of economic policies.
He highlights the election of Margaret Thatcher as prime
minister in the United Kingdom and Ronald Reagan as
Chapter Summaries 10
economic or civil freedom, he is referring to the fact that Hong
Kong was administered primarily by appointed, rather than
elected, representatives. Citizens of Hong Kong, mostly those
of Chinese origin, had no say in who operated the government.
Government officials were appointed directly by the British
monarch, or by those to whom the monarch had delegated the
power of appointment.
president in the United States, discussing the modest cuts in
Despite this glaring lack of political freedom, Friedman states
overall government spending they achieved in their respective
there is extensive economic freedom and civil freedom. The
administrations. "They were able to curb Leviathan, though not
economic freedom he talks about is just the relatively free-
to cut it down," he states.
market capitalism that characterized the economy of the
Friedman also celebrates the fall of the Berlin Wall (1989) and
the ensuing collapse of the Soviet Union (1991), as well as the
liberalization of economic policies in China. These large-scale
events combined with successful liberalization of the
economies of smaller, developing countries "brought to a
United Kingdom. The favorable remarks Friedman makes about
the abandonment of socialism and the accomplishments of
Prime Minister Margaret Thatcher's administration apply
equally to Hong Kong. What, then, could Friedman mean by
"civil freedom"?
dramatic end an experiment ... between two alternative ways of
The residents of Hong Kong had many of the same rights that
organizing an economy ... socialism versus capitalism."
citizens of democratic countries like the United States do.
Capitalism, Friedman declares, has won.
Steve Tsang, director of Chinese Studies and director of the
Qualifying the success of ideas he champions, Friedman notes
what he takes to have been a significant oversight in his initial
formulation of the arguments in Capitalism and Freedom. The
whole book is set up to explore the relation of political, or
general, freedom with specifically economic freedom.
However, Friedman notes he now thinks a third kind of
freedom should have featured in his analysis—civil freedom.
SOAS China Institute, writes of Hong Kong that its people did
not demand voting rights because they had "the rule of law, the
protection of human rights, stability and the existence of a
government responsive to their views." Thus the "civil freedom"
Friedman refers to includes these elements. Hong Kong's
situation gives reason for Friedman to consider that his
analysis in terms of only political and economic freedom is
incomplete. This is because, to Friedman, the relationship
between government and society is essentially paternalistic.
Analysis
Friedman introduces the idea of civil freedom, adding it to the
The coexistence of paternalism with a largely free population
is a phenomenon Friedman did not think possible when he
originally wrote Capitalism and Freedom.
distention between economic and political freedom that he
uses in the main body of Capitalism and Freedom. However, he
does not give much in the way of explanation about what it is.
Introduction
He only says his observations and analysis of Hong Kong
demonstrate that having economic freedom is crucial for the
possession of political and civic freedom. However, he notes,
Summary
"political freedom, desirable though it may be, is not a
necessary condition" for economic and civil freedom.
Capitalism and Freedom begins with a thumbnail sketch of the
rest of the book. In this introduction, Friedman explains his
The period of time in Hong Kong's history Friedman is referring
general view of the correct relationship between a government
to is before it was returned as a part of China in 1997. Between
and its citizens. For example, Friedman points to a famous
1841 and 1997, with an interruption of four years (1941–45)
quote by U.S. president John F. Kennedy (1917–63) as an
during which Japan occupied it, Hong Kong was under the
example of an incorrect view of the relationship between a
control of the United Kingdom. When Friedman states that
government and its citizens: "Ask not what your country can do
political freedom is not a necessary condition for either
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Chapter Summaries 11
for you—ask what you can do for your country." The attitude
government imposes on society enforced by the threat of
embodied by this quote is, according to Friedman, not worthy
punishment reduces the range of options genuinely open to
of free people.
every individual.
Instead of the view embodied by Kennedy's speech, Friedman
offers one that he characterizes with the sentiment, "What can
I and my compatriots do through government to ... discharge
Chapter 1
our individual responsibilities?" He argues this superior view
demands a smaller role for, and less centralization of,
government than its alternatives. A society that proceeds on
this assumption will preserve freedom and produce great
innovations in all fields of human activity.
Summary
Friedman boldly asserts, "Historical evidence speaks ... on the
relation between political freedom and a free market."
Friedman provides some historical context concerning the
Throughout history, Friedman states there has been no true
labels for different sets of political beliefs. Specifically, he
political freedom without economic freedom. At the same time,
discusses the difference between the original and
wherever governments have taken direct control over
contemporary meaning of the label liberalism in political
economic activity political freedom has suffered.
philosophy. He concludes that though others have co-opted
liberalism as a label for viewpoints supporting extensive
government intervention, those viewpoints are not truly worthy
of the distinction. Hence, he perseveres in referring to his own
view that government authority should be limited as "liberal."
Friedman also discusses social viewpoints with respect to their
relationship to freedom. Individualism views individuals as the
only entities with genuine moral standing and interests.
Collectivism, on the other hand, attributes genuine moral
standing and interests to communities. Further, the collectivist
views community interests as more important than individual
Analysis
The political and social tradition Friedman insists on calling
liberalism is often referred to as libertarianism or classical
liberalism. The root of both words comes from the Latin term
libertas. Where Friedman frequently refers to the preservation
and protection of "freedom," the word liberty is usually a
passable substitute. Hence, when he criticizes modern views
about the role of government as not being worthy of the label
liberalism, Friedman means these views do not place enough
importance on the protection and preservation of liberty.
ones. Friedman claims the collectivist position is clearly
incompatible with extensive freedom for individuals.
Friedman argues not all forms of government are compatible
with preserving the freedom of individuals. Specifically, he
states socialism is not compatible with individual freedom, and
because of this, "democratic socialism" is a contradictory
phrase. This conclusion is explained at greater length by the
author in a series of examples where he tries to imagine how
dissenting political views could be freely expressed in a society
where media outlets were owned by the government (i.e., a
socialist society) rather than private individuals or groups (i.e., a
President Kennedy's famous quote is included to highlight the
capitalist society). He concludes while not completely
contrast between what passes for liberalism and what it
impossible, it is difficult to see how freedom of expression can
actually is in Friedman's view. Kennedy was elected in 1960 in
be maintained in a socialist society.
part because of his support of the civil rights movement
(1954–68), which culminated in his proposal of the Civil Rights
Act in 1964. This legislation increased the federal government's
authority to regulate the behavior of businesses and
educational and governmental institutions with respect to their
treatment of individuals on the basis of race, national origin,
religion, and sex. Some believed it removed limitations to the
freedom of many individuals, but Friedman argues no increase
of government authority can do that: every rule the
Analysis
The exact relationship between economic and political
freedom is not as clear as Friedman makes it out to be in some
of his statements. While he clearly realizes this, his rhetorical
purpose is to persuade people capitalist societies generally are
freer.
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Chapter Summaries 12
Friedman connects economic and political freedom in several
count as limitations on general freedom: "We do not believe in
ways. The purpose of this tactic is to simultaneously show the
freedom for madmen or children."
issue is complex while also making it clear there should be no
doubt what policies should be adopted. The wealth of historical
Friedman acknowledges some amount of government
examples reveal freedom has tended to advance when
involvement is necessary to make sure there is a system to
markets have been given the freedom to operate without
interpret and enforce any exchanges people agree to. He uses
heavy-handed regulation.
the umpire in a baseball game as a metaphor. "Just as a ...
game requires ... the umpire to interpret and enforce [rules],"
These statements are bolstered by the claim that economic
he says, "so a good society requires ... its members agree on
freedom is a necessary, but not sufficient, condition for
the ... conditions that will govern relations among them."
political freedom. This is a logical, rather than historical,
Beyond laying down a general template to regulate the free
argument. A necessary condition is required for something to
activity of individuals, Friedman also points out government
happen. For instance, it is necessary for a rectangle to have
activity will be necessary to prevent and deal with situations
four sides: if something does not have four sides, it cannot be a
that make free exchange between individuals difficult or
rectangle. Being a square, on the other hand, is merely
impossible. The two types of situations he describes are
sufficient for being a rectangle. If something is a square it is
monopolies and neighborhood effects. A monopoly exists
automatically also a rectangle, but something can be a
when one person or institution has total control of some good
rectangle without also being a square. Hence, Friedman's
or service. With monopolies, individuals have no real freedom
argument is that a society cannot have political freedom unless
to choose the provider if they want or need the good or
it has economic freedom, but it can have economic freedom
service.
without also having political freedom.
A neighborhood effect is when the actions of one person
The true backbone of Friedman's claims is an ethical argument.
create a situation other people cannot avoid. Friedman's
Demonstrating that economic and political freedom are
example is the pollution of rivers and lakes. If a person
connected as a matter of historical fact and a matter of logic
upstream dumps waste into a river, the people downstream
does not offer any indication as to how this information should
have no choice but to deal with it. While the polluter may be
guide policy and behavior. Unless freedom is assigned
able to compensate others for the contamination of their
fundamental ethical value, the historical and logical arguments
water, this does not count as a free exchange of water quality
can be viewed merely as intellectual curiosities. Therefore, the
for money because of the lack of alternatives for the people
idea that freedom is valuable, as established in the
living downstream.
Introduction, gives substance to the historical and logical
arguments.
Chapter 2
Analysis
Having described the general viewpoint he will work from in
Chapter 1, Friedman moves to start fleshing out his view in
Chapter 2. While the existence of laws and regulations
Summary
Chapters 1 and 2 of Capitalism and Freedom express
Friedman's overall theory about the relationship between a
society's capitalist arrangement and individual freedom. The
specific task of Chapter 2 is to discuss what the limits of
automatically creates some limits on individuals' freedom,
Friedman recognizes the necessity for some measure of
government activity. This places him squarely within the
political tradition of English philosopher Thomas Hobbes
(1588–1679). Friedman's earlier comments in the Preface about
"curb[ing] Leviathan" show his awareness of this tradition.
government activity are in a society that aims to preserve
Hobbes believed in order for individuals to further their own
maximum individual freedom. Friedman notes his comments
interests, they had to accept limitations on their ability to do
here are limited specifically to responsible and sane adults.
what they please—they had to accept a government. However,
Limitations to the freedom of children and the insane do not
where Hobbes believed the only viable government was a
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Chapter Summaries 13
centralized and powerful monarchy, Friedman argues a
standard should determine its value. Friedman discusses the
decentralized and relatively weak democracy will do. Chapter 2
relative merits of standard money, the value of which is backed
describes the purpose and nature Friedman ascribes to the
by commodities like gold, versus fiduciary money, the value of
government in society.
which is determined by people's confidence it will generally be
accepted. He argues against a total commodity standard and
The metaphor of government as an umpire is meant to convey
in favor of a mixed standard that heavily features government-
the fundamental neutrality of justifiable government
managed fiduciary money. He supports this by noting the
intervention. This directly contrasts with the metaphor of
numerous problems caused by gold-standard money in the
government as a parent. While parents have an intimate and
United States from 1879 to 1913, including several severe
personal interest in what their children do, umpires do not have
financial crises. For example, banks might refuse to provide
any such personal interest in what the players do.
customers gold when they try to redeem deposits.
Continuing the metaphor, thinking of citizens as players in a
Friedman continues by explaining how, in his view, the Federal
game rather than children is crucial to understanding
Reserve Bank of the United States contributed to the severity
Friedman's disdain for adopting paternalistic policies. It is
and duration of the Great Depression (1929–39). The Federal
acceptable for a parent to choose a child's activities to protect
Reserve Bank was created in response to the problems
the child from the poor decisions he or she might make.
Friedman cited as evidence for the impracticality of the gold
However, an umpire does not choose what actions a player will
standard. However, the power given to the Federal Reserve
take. Rather, an umpire watches passively until the actions a
was squandered, in Friedman's view. The Great Depression is
player chooses either threaten to harm another player or break
proof of the problems that can occur when a group of men in
the rules of the game.
the highest reaches of government "wield vast power over the
Finally, there is the issue of how and why rules apply to
monetary system of a country."
individuals in the two metaphors. Parents create the rules on
Friedman argues institutions like the Federal Reserve should
behalf of their children and enforce them without their consent.
be governed by rules that specify exactly what they should do,
The players of a game, by choosing to play the game, indicate
and when. These rules should be followed and revised in light
they consent to the rules. Moreover, the umpires themselves
of past experience to gain a deeper understanding of how
do not create the rules but merely enforce them upon those
monetary systems work. This is different than the actual
who have chosen to play.
structure of the Federal Reserve, which can take action on its
own initiative without assuming responsibility for those
Chapter 3
Summary
affected by its decisions.
Analysis
Chapter 3 begins Friedman's treatment of specific, concrete
This chapter begins with an overview of the reasons why
policy issues. He begins with a discussion of money. This is
people give the government control over issues concerning
one of the more technical and difficult chapters of the book
money, spending, and international trade. In each case,
because monetary policy is the focus of Friedman's own
Friedman says free-market capitalism is feared to be too
research. He and Friedrich August von Hayek, his mentor and
unstable and unable to sustain a constant rate of economic
colleague, emphasize the importance of monetary policy where
growth. Referring back to his general view about the purposes
opposing economic schools see it as neutral. Hence, the
of government, Friedman argues the extent to which
placement of money as first among specific, concrete
government should be involved in the regulation of money is
concerns constitutes a further criticism of those opposing
only to provide a stable framework for private individuals and
schools.
groups to engage in free exchanges.
The first issue concerning the control of money is what
A crucial point for Friedman's argument in this chapter is the
distinction between a government of law and a government of
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Chapter Summaries 14
men. This is connected with his statement earlier in the
goods, and declaring specific exchange rates between the
chapter: "A liberal is fundamentally fearful of concentrated
currencies of different countries. These policies, according to
power."
Friedman, not only diminish general freedom by preventing free
exchange but also negatively affect the standard of living for
Where government authorities are allowed to dictate policy
the citizens in all countries involved.
based on their personal judgment, they will be substituting their
preferences for all the individuals affected by their decisions.
Friedman's solution to both maximize general freedom, while
This is what Friedman means by a government of men. The
also preventing financial instability, is to abandon the policies
more policies a government agency controls, the more of the
concerning gold reserves and pricing. This, he argues, will
general population's preferences will be overridden. The liberal
allow the United States to abandon other tariffs. Instead,
is afraid of concentrated power because of its greater capacity
people's willingness to pay certain prices for products they
to abrogate individuals' freedom to act as they please.
desire will ultimately lead to stable exchange rates.
In contrast to a government of men is a government of law.
Within such an arrangement, government authorities can act
Analysis
only according to specified roles and are therefore not
substituting their preferences for the individuals they affect.
Friedman spends another portion of the book discussing
However, if the laws themselves are too numerous and broad
monetary policy, this time focusing on international rather than
there is still a concentration of power. Further, if the laws are
domestic implications.
made without consulting the individuals they affect, there is a
danger of subverting individuals' preferences. Therefore, even
Chapter 4 is the only chapter that goes into significant detail
a government of law can conflict with individual freedom.
about the effects of one country's economic policies on other
countries. At the end of the chapter he suggests free-market
policies are one of the "few measures we could take ... to
Chapter 4
promote the cause of freedom at home and abroad." Direct
and positive government intervention in the affairs of foreign
countries, such as foreign economic aid and military
Summary
operations, necessarily limit freedom just like direct and
Friedman discusses the role of gold as it relates to the value of
This point demonstrates how a liberal political outlook leads to
money. The U.S. government must support a certain
what is known as noninterventionism in terms of foreign policy.
percentage of its financial activities by holding reserves of
Just as Friedman believes there is no common good toward
gold. Friedman describes the system by which the United
which individuals should work in their home country, he also
States raises and lowers the amount of U.S. dollars and other
believes there is no global common good toward which all
currencies it has by buying up or selling off gold at a fixed
individuals should work. This is what Friedman means when he
price. He compares this situation with those experienced by
suggests the United States should take a "consistent and
domestic banks during the financial crises in the United States
principled stance" in its domestic and foreign policy. The
between 1879 and 1913. He claims runs on U.S. gold have
United States can lead other countries to protect and preserve
happened (as in 1960), and these threaten the country's
freedom only by example and not by force.
positive government intervention does at home.
economic stability.
The primary point of this chapter is that the United States'
policy of trading gold at fixed prices, preventing private
Chapter 5
ownership of gold for financial purposes, and holding a specific
amount of gold to support its financial activities forces it to
adopt certain foreign trade policies. In order to prevent runs on
its gold reserves, the United States must hamper free trade by
fixing prices on domestic goods, setting tariffs of foreign
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Summary
Friedman shifts from a focus on monetary policy to fiscal
policy. He argues increases in government spending do not
Chapter Summaries 15
assumption that markets are self-correcting. Friedman's
support of free markets arises specifically because he does
believe markets are self-correcting. In essence, he counsels
people to wait and they will find the ocean will be flat again.
generally lead to economic growth and expansion, contrary to
Friedman once again makes his arguments in several ways, as
what the prevailing opinion was in the period after World War II
he did in Chapter 1 when discussing the relation between
(1939–45).
economic and political freedom. He is not content to
The prevailing view Friedman rebuts is that government
spending can be a responsive and accurate counterbalance to
instability in a country's economy. Instead, Friedman states
government spending increases come into effect too slowly to
fix any problems. Further, governments do not usually
decrease their spending once the problems that prompted the
initial spending increase are resolved. In short, Friedman
demonstrate Keynesianism fails in only one way. The extended
discussion of how plausible a Keynesian analysis is indicates
Friedman is willing to concede this view is logically valid. It
presents a story that is internally consistent and would work if
the world were a certain way. However, Friedman argues the
Keynesian analysis is not sound. The world isn't the way it
needs to be to make the analysis work.
portrays government spending as a clumsy tool, which should
Even if the world worked like the Keynesians need it to this
rarely be used.
would not change the ethical argument. Keynesians' reliance
Throughout the chapter Friedman discusses the specific
conditions under which a Keynesian view about the effects of
increased government spending would be true. The general
on government activity to regulate the economy severely limits
individual freedom. Hence, Friedman concludes the Keynesian
picture must be abandoned.
idea behind Keynesianism is that every dollar of government
spending creates significantly more than a dollar of increased
income for private individuals and groups. Friedman argues
Chapter 6
while there are extreme conditions in which this view would be
true, these conditions have been and continue to remain
extremely unlikely. However, this fact has not stopped people
Summary
from making policy decisions on the basis of Keynesian views.
Friedman argues government subsidies for primary, secondary,
Friedman looks at real data about the effects of government
and higher—but not vocational—education can be justified.
spending. He concludes this work suggests the Keynesian view
However, the strength of the justification becomes weaker as
is likely wrong, but people should do more of this type of work
the level of education increases.
and continue investigating the issue.
The primary argument Friedman gives involves the
neighborhood effects of education. "The gain from the
Analysis
education of a child accrues not only to the child," he says, "but
also to other members of the society." If the bulk of people in a
Much of Friedman's criticism of various government programs
society were not provided an opportunity to learn reading,
and regulations is that people fail to appreciate the long-term
writing, and basic math, all citizens would be worse off. The
consequences of government activity. The direct objections he
benefit to the rest of society begins to drop off, Friedman
makes to Keynesian economics in Chapter 5 expose a
claims, as education becomes more advanced. That is, society
fundamental disagreement between the adherents to
is not clearly better off if the bulk of citizens are provided an
Keynesianism and the version of free-market capitalism
opportunity to learn advanced sciences and math. Instead, the
Friedman favors.
benefit of higher education is more limited to the individual
learner. In the case of vocational education, Friedman claims
British economist John Maynard Keynes (1883–1946) is
the benefit is completely limited to the individual learner, and
famous for saying, "In the long run we are all dead." Keynes,
hence there is no justification for public subsidy.
and the economic thought inspired by his work, reject the
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Chapter Summaries 16
While Friedman agrees the government should play a role in
government activity in the sphere of education? A tax to fund
education, he argues the current way it administers education
schools forces the taxed individuals to pay for whatever
impedes general freedom and produces inferior results.
teaching is going on whether or not they agree on the topics
Instead of government-run schools funded from money raised
being taught. Friedman reasons there is broad agreement
by taxes, he argues in favor of a voucher system. Families
about what should be taught to young children, and so any tax
should be paid a set amount per year and per child usable only
levied to fund the education of small children will not constitute
at schools that meet minimum standards. These schools could
forcing anyone to pay for something they don't agree with.
be public or private and would have no district requirements
However, there is less agreement about what teenagers and
for attendance. This way parents could use their vouchers to
adults should be taught. Hence, any tax used to fund higher
send their child to whichever school they deem best. As a
levels of education would more likely force people to pay for
result, general freedom would be maintained and competition
something they don't agree with.
between schools would keep the quality of education high
while keeping costs relatively low.
Chapter 7
Analysis
The concept of a neighborhood effect, introduced in Chapter
2, plays a central role here. When identifying neighborhood
effects it is important to ask both who benefits and who pays.
Summary
Friedman argues a free-market capitalist society tends to
dramatically decrease the level of discrimination individuals
The neighborhood effect resulting from education is a positive
face on the basis of features generally viewed as morally
one. That is, when an individual becomes educated they are
irrelevant: skin color, sex, and religion.
not the only one who benefits. Other people in society benefit
because an educated person will be better equipped to enter
into productive interactions with other people. Additionally,
they will have a better understanding of the system in which
free exchange operates. However, few of the people who reap
this benefit pay for it—unless they are made to through taxes
However, Friedman also argues the various government laws
designed to discourage and eliminate discrimination both fail to
do so and also illegitimately limit individuals' freedom. He
discusses three varieties of such laws: fair employment laws,
right-to-work laws, and school integration laws.
and fees to fund schools. This is the nature of the
One instructive example Friedman provides is the difference
neighborhood effect that can justify government activity in the
between school integration practices in the Commonwealth of
sphere of education.
Virginia and the city of Chicago. In Chicago the federal laws
Why does Friedman argue that the strength of the
neighborhood effect diminishes as the level of education
increases? Shouldn't a college-educated individual benefit
society as much, if not more, than if the same individual only
had a high school education? Friedman argues this is not the
case. While basic skills in reading, writing, and arithmetic
create the necessary conditions for a person to function in
society, an advanced degree in particle physics primarily
benefits only the individual who possesses it. Because of this,
there is no longer strong justification to impose costs on other
people through taxes and fees.
mandating school integration are in full force, but the schools
remain almost completely segregated. But in Virginia, a state
that created a school voucher system to help white citizens
avoid integrated schools, white students have been moving
from segregated to integrated schools. Friedman reasons this
is because individual choice has created a competitive system.
As such, where integrated schools provide a better education,
otherwise racist parents will send their children to those better
schools. Over time this will eliminate segregation, despite the
initial intention of the Virginia system to perpetuate school
segregation.
Additionally, Friedman claims agreeing about the appropriate
content of education is not as strong at higher levels of
education. Why does this matter to the propriety of
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Analysis
Friedman talks about "self-denying" ordinances when
discussing how a liberal society will deal with issues of
discrimination. By this he means adopting policies that curb
people's reflexive reactions to particular situations in favor of
general rules that ignore the specifics of a situation.
Chapter Summaries 17
institutions to provide it. For instance, sewer and water
services for a given community are usually handled by a single
provider. Friedman details how a government can give rise to
monopolies and gives tariffs as an example. If the U.S.
government placed an extra cost on the import of foreign
steel, this would reduce competition within the steel industry.
This in turn could support the development of the third sort of
monopoly, the kind that arises from private collusion. If several
Adopting general, abstract policies allows individuals to use
providers of a good or service agree to sell at the same price,
their self-interested nature to protect themselves. Friedman
they are colluding to fix the market for the good or service.
argues people tend to vote in favor of restricting the freedom
Friedman argues tariffs make this more likely by reducing the
of other people when it suits their own interests. So on a case-
number of providers that have to reach an agreement. If
by-case basis, people may tend to perpetuate discrimination.
foreign steel producers are effectively prevented from selling
However, if the policies presented as options to individuals are
in the United States, then only the steel producers in the
all-or-nothing propositions, they will tend to vote against them
United States have to cooperate—rather than every steel
out of concern that the policy may someday be used to restrict
producer in the world.
their freedom. This is what Friedman is explaining in his
discussion of free speech. Further, it explains his opposition to
limitations on bigoted speech: he believes making exceptions
to the right of free speech begins a slippery slope to banning it
all together.
The idea individuals should consider only well-defined, general
laws bears a surprising similarity to ideas found in the work of
the American political philosopher John Rawls (1921–2002).
Rawls's famous Original Position thought experiment placed
individuals in the hypothetical position of deciding upon the
laws of society in total ignorance of specific features of their
life. He reasoned that, under these conditions, self-interested
individuals would opt for policies that maximized the possibility
of their success regardless of their specific abilities and the
choices they made. The similarity of Friedman's point to
Rawls's work is surprising because Rawls's political philosophy
Though monopolies always restrict economic freedom,
Friedman argues people overestimate the prevalence and
effects of monopoly in the U.S. economy. As a result, he
argues, the various government regulations put in place to
prevent monopolies only serve to further limit the economic
freedom of individuals.
Friedman ends the chapter with a lengthy discussion of the
idea that corporations and labor unions have general
responsibilities to society at large. He objects to this idea by
stating: "This view shows a fundamental misconception of the
character and nature of a free economy." Friedman argues
imposing such responsibilities is essentially shifting from an
individualist, capitalist society to a collectivist, socialist one by
binding the decisions of individuals (e.g., businesspeople or
union members) to the general public.
focuses on achieving justice via redistributive means.
Analysis
Chapter 8
Friedman begins this chapter by discussing two different
notions of competition. He argues the common notion of
Summary
competition involves the idea of "personal rivalry." In this sense,
when people are in competition they have a personal interest
in outdoing one another, and even an interest in seeing the
Monopolies exist when a single person or institution controls
other fail. Given that this is the common notion of competition
the creation and distribution of a product or service. Friedman
partly explains why Friedman is wary of people's intuitive
lists three situations leading to the existence of monopolies:
judgments about the viability of capitalism throughout
technical limitations, government assistance, and private
Capitalism and Freedom. He considers many who criticize
collusion. Technical monopolies exist when the nature of a
capitalism to be the source of increasing income inequality and
good or service makes it impractical for multiple people or
exploitation.
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Chapter Summaries 18
In lieu of the sense of "competition" that involves personal
to individual freedom they incur. The possible justifications in
rivalry, Friedman suggests a definition in which competition
each case are that regulation might: a) protect individuals from
refers to the number of alternatives available. Hence, a
fraud, b) protect individuals from their own poor judgment, and
competitive market is simply one in which people have
c) facilitate the collection of taxes and fees. While Friedman
numerous and genuine alternatives to purchase goods and
admits the preservation of individual freedom is consistent with
services. It is this definition of competition that makes sense of
options a and c, it is not consistent with option b. Protecting
monopolies as situations in which there is no competition. A
individuals from their own poor judgment is a paternalistic
market suffers from monopoly when there are no genuine
action at odds with a liberal viewpoint. Even when the
alternatives to purchase a good or service. Friedman notes
supporting considerations fall under a or c, Friedman cautions
market monopolies often arise precisely because one provider
this must be carefully weighed against the limitations
acts to cause their rivals to fail.
regulations place on individual freedom.
Friedman's identification and separation of various senses of a
As a case study, Friedman extensively discusses the licensure
word is an important philosophical method. In any specialized
of medical professionals. He takes the case in favor of
field the everyday definitions of words can lead to significant
imposing strict regulation on the practice of medicine to be
misunderstandings. When this is the case, a specialist must
stronger than for any other profession. However, he still
create new words in the form of technical jargon. However,
ultimately concludes that licensing medical professionals is not
doing this presents an obstacle to the layperson's
justifiable. Even where these regulations are well intended,
understanding of the relevant issue. The fact that Capitalism
Friedman argues they fail to accomplish their goals any better
and Freedom is pitched to a general audience explains why
than a fully free-market medical exchange would. He
Friedman goes to such lengths to separate different meanings
expresses amazement at the idea that there is any ethical
of important terms.
reason in favor of medical licensure: "It is extraordinary ... [to]
proclaim publicly that they ... must be paid to be ethical."
Chapter 9
Adding to this failure is the fact that licensing restrictions
automatically reduce individual freedom, and he concludes
such restrictions are unacceptable.
Summary
Friedman investigates the justification for, and effects of,
occupational licensure—laws describing who can and cannot
engage in particular economic activities. Overall, Friedman
argues against licensure as well as less strict forms of
occupational regulation. The reasons he provides are by now
familiar: licensure and similar practices restrict individuals'
freedom to engage in voluntary exchange.
Friedman compares professional organizations (like the
American Medical Association) and trade unions (like the
United Automobile Workers) to medieval trade guilds. All of
these institutions, he claims, create artificial restrictions on
people entering a profession: "The overthrow of the ... guild
system was an indispensable ... step in the rise of freedom."
Analysis
Licensing for professionals is commonly thought to increase
the quality of the services provided by professionals. Friedman
argues this isn't necessarily the case, or at least that a free
market could maintain similar levels of quality without involving
the power of government. However, the more interesting and
initially counterintuitive argument he makes is that the
increased quality licensing might secure also guarantees
decreased supply.
In making this point, Friedman again explains two different
concepts to dispel confusion about the issue. The target
concept is efficiency. Arguments in favor of professional
licensing rely on the idea of technical efficiency, which
indicates a higher-quality product. Friedman concedes
There are three increasingly strict ways of regulating a
licensing might increase efficiency in this sense, but he
profession: registration, certification, and licensure. Friedman
counters that even if it does it will thereby decrease economic
explains the considerations that might justify imposing any of
efficiency. Thus, while the product's quality may increase, the
these forms of regulation on a profession, along with the costs
supply of the same product will decrease. This occurs because
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Chapter Summaries 19
licensing limits the number of providers. So the people who do
person may choose whatever occupation they wish, the
purchase the product will likely receive a better product, but
potential gains are larger. This kind of social mobility is an
not everyone who wants or needs the product will have the
important aspect of equality Friedman argues is only
opportunity to purchase it.
supported in capitalist societies.
Nor are the negative consequences only practical. Licensing
Finally, Friedman discusses taxation as a form of income
limits the economic freedom of both professionals and
redistribution. He claims it can be demonstrated on a
consumers. Not everyone who wants to practice a licensed
mathematical basis that the amount of tax collected by the
profession will be able to do so. In turn, this means not
graduated-rate tax system in the United States is lower than
everyone who wants to engage the services of the licensed
the amount that would be collected by a flat-rate tax system.
professional will be able to do so. Friedman again argues
Additionally, he notes all of the loopholes and exceptions in the
against such limitations on individuals' freedom.
U.S. tax code that allow people to pay less income tax than
their income level would otherwise render a graduated-tax rate
Chapter 10
ineffective. This also leads to the waste of a great deal of time
and resources used to find ways to evade taxation. Friedman's
proposed solution is to switch to a flat-rate tax and eliminate
the numerous loopholes and exceptions.
Summary
Friedman addresses the issues of income equality and
government activity. His aim is to discuss such inequality and
its effects. He argues inequality in actual earned income is a
necessary feature of free-market exchanges, and this sort of
income inequality fosters greater equality and freedom.
Misunderstanding about what income equality is and how it
relates to general equality lead to ineffective attempts to
redistribute incomes.
Actual incomes necessarily differ according to the difficulty
and appeal of various jobs. Friedman states income inequality
stemming from these considerations is necessary for
individuals to be genuinely free in their choice of occupation. If
a job is both difficult and unappealing to a person, they will
demand higher pay or more benefits to do it. Hence, controlling
wages prevents individuals from selling their services at the
rate they decide is appropriate.
The issue of income distribution and its relation to equality in
freedom is widely misunderstood, according to Friedman.
Contrary to widespread belief, he explains income inequality
has tended to decrease throughout history as free-market
capitalism has spread. This is the case both in the sense that
incomes for all individuals have increased and that the
potential lifetime gains in income available to an individual are
greater in capitalist societies. In status countries, where a
person's class status at birth largely determines the
occupations available to them, the potential lifetime gains in
income are small. However, in a capitalist country, where a
Analysis
Income redistribution is intended to rectify inequalities in the
level of people's income and standard of living. This rationale is
not acceptable to the liberal, argues Friedman. The source of
the liberal's disagreement is not, however, a general lack of
concern with equality. While Friedman states in a later chapter
that egalitarianism is inconsistent with liberalism, he maintains
some kinds of equality are important to liberals.
To untangle the issue, Friedman again sets about
distinguishing different aspects of a single concept. The crucial
question to ask when discussing equality is, "Equality of what?"
Where the socialist and the egalitarian advocate for equality of
income and standard of living, the liberal advocates for equality
of opportunity.
This is a frequent debate in political philosophy: whether the
proper aim is equality of outcome or equality of opportunity.
Friedman's advocacy for equality of opportunity opposes any
special treatment for specific individuals or groups. This will
seem counterintuitive to anyone who thinks equality means
equality of outcome, as the only way to guarantee equality of
outcome is to give special treatment to individuals and groups
that are less well-off. However, the advocate for equality of
opportunity sees any special treatment as creating an
inequality of opportunity: it gives one group a legal advantage
over another. Friedman uses a similar argument earlier in
Capitalism and Freedom to object to fair employment
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Chapter Summaries 20
protections.
Analysis
Chapter 11
Throughout Capitalism and Freedom Friedman maintains
paternalism is inconsistent with liberalism. It is not acceptable
to treat rational adults like children or madmen who are not
Summary
capable of discovering and pursuing their own interests. This
continues to apply even in the case of social security. There
are two reasons for this.
Friedman turns to examine a variety of social welfare programs
supported by redistributive taxation. The programs he
In general, elderly citizens are not like children or madmen.
examines are public housing, minimum-wage laws, farm price
While the elderly are more vulnerable than other adults it is not
supports, and social security.
primarily because they have ceased to be rational. Elderly
citizens are still generally able to identify and pursue their own
In every case, Friedman concludes that as well intentioned as
interests.
these social welfare programs may be, they achieve the
opposite of their goals and for this reason do not provide any
Additionally, the time at which a person decides whether or not
justification for the limitations on individual freedom they
to provide for their old age is much earlier in their life. Among
create. Public housing programs tend to decrease the total
the freedom Friedman demands people must be allowed is the
supply of housing and create more dangerous neighborhoods.
freedom to decide on the risks they are willing to take. Hence,
Minimum-wage laws increase unemployment and therefore fail
if a person wants to spend all of their income as they earn it,
to ensure everyone who seeks a job can make a decent living.
setting nothing aside for old age, that is their business. Forcing
Farm price supports raise the prices of food for all consumers
them to spend current income to provide for their old age is to
but do not increase the total income of the average farmer.
deny them the freedom to take risks.
Finally, all of these programs, because they are funded by
taxes paid by the general population, prevent individuals from
using their income as they please.
Chapter 12
Friedman spends more time discussing old age and survivors'
insurance (OASI), usually known as social security. He argues
the same desired effects of social security could be achieved
without requiring everyone to purchase government-managed
social security. Instead, the government could offer policies
alongside private businesses and the resulting competition
would lead to better policies. It would also show whether the
arguments in favor of nationalized social security are valid.
That is, whether the size of the federal government allows it to
provide policies at a lower price than any private firm could.
Most importantly, the legal requirement forcing all citizens to
purchase social security is paternalistic. It assumes people will
generally fail to save sufficiently for old age, even when they
have the opportunity and therefore must be forced to do so.
Friedman complains even if nationalized social security were
the most effective way to achieve the desired effects, which it
is not, any paternalistic policy applied to rational adult citizens
is unacceptable to the liberal who values individual freedom.
Summary
Friedman explains his favored way to help ease poverty. He
recognizes an effective system for easing poverty in general
must involve government action: "We might ... be willing to
contribute to the relief of poverty, provided everyone else did."
In order to assure there will be enough funds to address
poverty, everyone will have to contribute. But individuals will
only contribute if they believe others will do so as well.
Because of this, government action is required.
However, the assistance to the poor should be made in the
form of direct cash payments to individuals solely on the basis
of their income. To accomplish this, Friedman suggests
programs like farm price support, social security, and public
housing should be abandoned in favor of a negative income
tax. Such a system provides a cash payment to any individual
whose income does not meet a certain minimum standard.
Though this system would be more effective, Friedman notes it
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Capitalism and Freedom Study Guide
would be a difficult policy to convince people to vote for.
Chapter Summaries 21
do with it what they please.
A liberal and capitalist society, according to Friedman, tends to
reduce levels of poverty anyway. Further, everyone is free to
use their excess income to voluntarily support the less
Conclusion
fortunate. This is all accomplished while maintaining the
freedom of every person to pursue whatever opportunity they
wish. People in such a society may even decide to vote for
government action to help alleviate poverty. Friedman
contrasts this to what an egalitarian society would do: "[The
egalitarian] will defend taking from some to give to others ... on
grounds of 'justice.'" This kind of thinking and policy is
inconsistent with individual freedom and hence inconsistent
with liberalism.
Summary
Friedman briefly repeats the main points of the earlier
chapters. In general, he states government activity aimed at
achieving positive social effects not only fails but also achieves
the opposite of those aims. There are two reasons why an
increasing number of policies give the government more
power. Before they are enacted these policies are compared in
their ideal form to the actual form of free-market policies.
Analysis
Once they are enacted people only notice the immediate
Proponents of free-market capitalism are often perceived as
study of these long-term effects, Friedman says, shows
callous—unconcerned with the plight of the poor. However,
increased government intervention is not worth the cost it
Friedman takes pains to point out the liberal is not opposed to
imposes on individual freedom.
charity per se, but rather opposed to misdirected and enforced
charity. If individuals want to donate their time or income to
charity they may do so, but they should not be coerced by the
government into alleviating poverty.
positive effects and not the long-term negative ones. Careful
Capitalism and Freedom ends with a call to action. Friedman
praises the powerful effects the actions of liberal-minded
individuals have had despite the dampening effects of
government authority. He urges citizens to think carefully
Friedman's discussion of the conditions under which people
about the value of freedom and have the courage to allow
will be willing to give to charity involves some subtle issues. He
experimentation to continue fueling the engine of progress.
claims the pursuit of self-interest that characterizes rational
Only in this way can the enemies of freedom, both external and
and free people is not the same thing as the selfishness
internal, be defeated.
advocated by philosophers like Ayn Rand (1905–82). Rand's
systematic philosophy of Objectivism urged individuals to
pursue their own interest without regard to others and further
maintained that charitable actions are immoral. While Friedman
agrees with Rand that individuals should not subordinate their
own interests to those of other people or communities, he
argues if individuals freely choose to be charitable then their
actions are moral.
The negative income tax Friedman suggests constitutes an
acknowledgment that most people will not freely choose to be
charitable, but that the necessity to provide for the poor
justifies some level of government action. The structure of the
tax is meant to avoid paternalistic tendencies while working
with a greater efficiency than more targeted measures like
housing assistance. Targeted measures are paternalistic,
Friedman argues, because they limit the freedom of those who
are helped. It is better to simply give them money and let them
Analysis
The two sets of enemies Friedman refers to are two
embodiments of the same principle—socialism. The internal
enemies, those who want to "reform" capitalism, are the
paternalistic legislators elected to allegedly protect freedom.
The external enemies, those who want to "bury" capitalism, are
the agents of international communism.
Friedman is referring specifically to Nikita Khrushchev
(1894–1971) when he speaks of the enemies who want to bury
capitalism. Khrushchev was the leader of the Soviet Union from
1958 to 1964. He famously said, "We will bury you!" in response
to criticism of his government's actions in Hungary. According
to Khrushchev, this statement indicated not a promise of
violent overthrow but a prediction about the course of the
future. He and many others believed the extensive government
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Quotes 22
bureaucracy that characterized Soviet socialism was the key
It is foolish to invest too much power in a government because
to human advancement and prosperity. It was exactly this
the people in charge can just as easily be good or evil and will
opinion Friedman tries to combat in Capitalism and Freedom.
change over time.
And it is exactly this opinion that Friedman, in his retrospective
prefaces, believed had finally been abandoned.
"Historical evidence speaks ... on
g Quotes
"The pressure today is toward
the relation between political
freedom and a free market."
— Narrator, Chapter 1
giving markets a greater role and
government a smaller one."
— Narrator, 2002 Preface
Looking at his work 40 years later, Friedman notes there has
been a slow shift toward the sort of economic policy he
advocates. He attributes it to society's realization of the longterm harms of socialism.
In every place and time where economic activity has been free
from government intervention, individuals' freedom has
increased.
"The market reduces ... strain ... by
rendering conformity unnecessary
with respect to any activities it
encompasses."
"The free man will ask neither
what his country can do for him
nor what he can do for his
country."
— Narrator, Introduction
Individuals pursuing their own interests will not recognize a
greater social good, nor ask for assistance from society to
pursue their own interests.
— Narrator, Chapter 2
People become resentful when a law forces them to do
something other than what they wish. Allowing free markets to
self-regulate will always leave people with a choice and
thereby prevent social resentment.
"A liberal is fundamentally fearful
of concentrated power."
— Narrator, Chapter 3
"Power to do good is also ... to do
harm; those who control ... today
Because liberals value individual freedom, they want to avoid
may not tomorrow."
people.
giving any single person or institution the ability to coerce
— Narrator, Introduction
"Governmental control of the price
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of gold ... is inconsistent with a
Quotes 23
viewpoints of elected officials and their voters.
free economy."
"Not all schooling is education nor
— Narrator, Chapter 4
The freedom to decide what to pay for anything, even other
types of money, is an indispensable part of individual freedom.
all education, schooling."
— Narrator, Chapter 6
The collection of policies and practices to determine what
"We believe in freedom ... No one
people are taught is called schooling. Learning things to
can force you to be free."
education.
improve quality of life is education. Poor schooling can prevent
— Narrator, Chapter 4
"A stable and democratic society
This quote is meant to highlight the contradiction in the idea
that laws, backed up by the threat of punishment, can protect
freedom.
is impossible without a minimum
degree of literacy and knowledge."
— Narrator, Chapter 6
"I warn ... this is a ... simplified
analysis. A full analysis would
Educated individuals are so beneficial to the rest of society
require a ... textbook."
ensure every person has an opportunity for education.
that Friedman is willing to entertain government action to
— Narrator, Chapter 5
"Those ... who believe ... color is
Friedman is stressing that economics is a discipline involving
huge sets of data and complicated math. It takes time and
work to find the truth.
irrelevant [should] persuade our
fellows to be of like mind."
— Narrator, Chapter 7
"None of these shifts [are] ...
based on satisfactory evidence
Any issue is subject to disagreement. But even in profound
[but] ... rather on ... judgments from
debate.
disagreement force and violence are no substitute for rational
crude experience."
— Narrator, Chapter 5
"There is no personal rivalry in the
competitive market place."
Friedman is complaining economic policy is often not decided
on the basis of careful thought, but rather on the limited
— Narrator, Chapter 8
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Glossary 24
Friedman emphasizes competition in free markets is not about
banks hold in reserve an amount of cash that is only a small
trying to defeat anyone or sabotage their interests.
part of the total deposited by customers
Keynesian (adj) economic theories based on the ideas of John
"One cannot be both an egalitarian
Maynard Keynes (1883–1946), a British economist who claimed
... and a liberal."
prominent role for government spending to stabilize demand
— Narrator, Chapter 12
Friedman argues the idea that every person deserves to have
equal quality of life is inconsistent with valuing personal
freedom. Each person must be free to choose the quality of
their life and be responsible for the risks.
demand for goods and services was unstable and proposed a
laissez-faire (adj) type of policy leaving private individuals to
act according to their own wishes without intervention
leviathan (n) metaphor for a powerful, centralized government
in reference to the title of Thomas Hobbes's famous work of
the same name
liberalism (n) position defined by Milton Friedman in terms of
its 19th-century roots referring to beliefs and practices
supportive of individual freedom against state intervention
m Glossary
paternalism (n) type of government action where the state
claims to know what is best for its citizens, sometimes ignoring
capital (n) resource not desired for its own sake but for its
ability to produce something else that is desired
the citizens' own view of their interests
standard money (n) money whose value is determined by the
capitalism (n) theory stating that property, resources, and
amount of a specific commodity it can be exchanged for (e.g.,
technology should be owned and operated by private
gold)
individuals rather than by a community
collectivism (n) theory stating communities are more
tariff (n) additional charges imposed on products purchased
from other countries
important than the individuals who make up those communities
commodity (n) material or product that can be bought or sold
e Suggested Reading
economies of scale (n) positive economic effects, like
decreased production cost, resulting from higher production
Butler, Eamonn. Milton Friedman: A Concise Guide to the Ideas
numbers
and Influence of the Free-Market Economist. Harriman House,
2011.
egalitarianism (n) moral and political theory stating each
person is or should be made to be equal to every other person
Friedman, Milton, and Rose Friedman. Free to Choose: A
Personal Statement. Harcourt Brace and Company, 1979.
eleemosynary (adj) action related to charity
Hayek, F.A. The Road to Serfdom: Fiftieth Anniversary Edition.
fiduciary money (n) money whose value is determined by
U of Chicago P, 1994.
people's belief they will be able to exchange it for goods,
services, or other types of money
Krugman, Paul. "Who Was Milton Friedman?" The New York
Review of Books, NYREV Inc., 15 Feb. 2007,
floating currency exchange (n) system in which the
www.nybooks.com/articles/2007/02/15/who-was-milton-fried
currencies of different countries are exchanged at rates that
man/.
are not artificially fixed
fractional reserve banking (n) system of banking in which
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