TCS Daily

Milton Friedman's Case

By Arnold Kling - November 20, 2006 12:00 AM

"Friedman was a pragmatic libertarian. He believed that -- as an empirical matter -- giving individuals freedom and letting them coordinate their actions by buying and selling on markets would produce the best results...that the market system would create new opportunities for trade that would route around market failures...that government failure was pervasive, and that any expansion of government beyond the classical liberal state would be highly likely to cause more trouble than it could solve."
-- Brad DeLong

Milton Friedman often was praised as a great debater, which can be a backhanded compliment. After all, a lawyer might be very persuasive using an emotional argument for a weak case. Instead, I contend that Friedman won on merit, because his basic position was correct. Nonetheless, the flawed arguments for statism continue to be made, often in new contexts.

On questions of public policy, Friedman's answer was always that it is better to allow individuals to make their own decisions than to impose government fiat. His opponents were always in the position of arguing that government must dictate an individual's choice. This is a dubious proposition, and it is Friedman's opponents who have had to resort to demagoguery and rhetorical tricks in debate. Their assertions -- that individuals should cede their freedom to experts, that consumers require regulatory protection, or that individuals must submit to the "collective good" -- do not stand up to Friedman's logic.

Expert Paternalism

When would you willingly give up your right to choose? Assuming that you are still in possession of your faculties, would you want to give someone else unconditional power over your decisions?

One rationale used by advocates of government intervention is that individuals lack expertise. It is true that there are many instances where, lacking know-how, you delegate decision-making to others. You let a mutual fund manager pick your stocks. You let a stylist cut your hair. You ask a travel agent to plan your vacation. However, you retain ultimate control over these decisions. At any moment, you could fire your fund manager, your hair stylist, or your travel agent.

The paternalists say that government must manage your retirement savings and your children's school, unless you are wealthy enough to afford private suppliers in addition to paying for the state-run service. Friedman argued for making school choice and private retirement accounts available to everyone -- not just the rich.

Not too long ago, the paternalists thought that government expertise was even greater. In post-war Europe, they believed that the state should run key industries, such as steel. In the United States, Keynesian economists believed that government policies to control wages and prices were needed to control the inflationary tendencies of labor and business. The failure of state socialism and wage-price controls vindicated Friedman.

However, the battle against paternalism is far from over. A number of social scientists have claimed on the basis of recent research that people have flaws in their understanding of what makes them happy. Some of the purveyors of this "happiness research" go so far as to suggest that government should override consumer choices with informed expert decisions. Friedman would probably ask why individuals cannot decide on their own to study the results of this research or to hire "happiness consultants" if they would like expert assistance.

Happiness research is simply the latest example within a long "progressive" tradition which sees the development of expertise as a reason to expand government power and restrict freedom. The ultimate result of "progressivism" is to turn the possibility of an individual's mistaken decision into a criminal offense. Friedman saw that this approach denies human freedom and often has unforeseen consequences that are far worse than the occasional mistakes of the individual.

License to Regulate

Another rationale for government is to protect us from unscrupulous individuals. This gives rise to food and drug regulations, consumer product safety regulation, and occupational licensing requirements. However, Milton Friedman would argue that as long as the laws against fraud are enforced, consumers can be protected by market institutions.

For example, Friedman often wondered why we need government licensing of occupations, particularly medical professionals. Presumably, I am better off being treated by a doctor who graduated medical school than one who did not. Still, I should be allowed to make my own decision about where I seek treatment. Why should it be illegal for me to pay an uncredentialed doctor, as long as the doctor is honest about not having a medical degree?

The irony of regulation is that regulatory policy often comes to be dominated by trade groups, replacing unscrupulous individual action with unscrupulous collective action. Price-fixing, supply restrictions, and other forms of cartel and conspiracy receive sanction under the guise of regulation.

The Collective Good

Perhaps the most insidious argument against freedom is the assertion that individual choice must be sacrificed for the collective good. We see this argument at work when someone says that "we" need to redistribute income, make health care a basic right, or stop global warming.

Friedman was not against trying to help poor people. However, he always insisted on trying to give the poor as many choices as possible. Hence, he preferred vouchers for health care to having government take over the health care system. Similarly, he preferred vouchers for schools to a government-run school system. However, he preferred straight cash transfers, via a negative income tax, to specific vouchers. He trusted poor people to make the best choices for themselves in allocating money among health care, schooling, and other goods.

Unlike Friedman, today's would-be income distributors seem to be mostly concerned with what is happening at the top of the income distribution. Their main worry is the widening gap between the very rich and the merely affluent. They make hollow arguments for reducing the incomes of CEO's and other high earners in the name of equality as a collective good.

The slogan that health care is a basic right has become a battle cry for socialized medicine. Ultimately, a government-run system deprives people of basic rights. With government in charge, people are less likely to be able to choose the medical services that they want from providers that they want at the time that they want.

Friedman would object to the presumption that in order to provide the poor with access to medical services, everyone else's rights have to be curtailed. He would ask why government involvement needs to go beyond providing vouchers to the very poor and the very sick.

When it comes to health care, Friedman pointed out the ways in which government involvement is the problem, not the solution.

Some years ago, the British physician Max Gammon, after an extensive study of the British system of socialized medicine, formulated what he called "the theory of bureaucratic displacement." He observed that in "a bureaucratic system . . . increase in expenditure will be matched by fall in production. . . . Such systems will act rather like 'black holes,' in the economic universe, simultaneously sucking in resources, and shrinking in terms of 'emitted production.'" Gammon's observations for the British system have their exact parallel in the partly socialized U.S. medical system. Here, too, input has been going up sharply relative to output.

Finally, on the ultimate excuse for draconian technocratic controls, the threat of global warming, Friedman was skeptical of climate models. In an interview published in Inside the Economist's Mind, by Paul A. Samuelson and William A. Barnett, Friedman drew a comparison between climate models and the sorts of large macroeconomic models that were discredited three decades ago.

The one place where you seem to be having that kind of modeling now is in the debate about global warming. And those models seem to be very unreliable and inaccurate. But if you think of physics, they usually have models with only a few equations. In any event, if you have a lot of equations, you ought to be able to draw implications from them that are capable of being understood. You should not present the model and say, now it's up to you to test. I think the person who produces the model has some obligation to state what evidence would contradict it.

A general rule is that the amount of data that you need in order to confirm a model rises exponentially with its complexity. In the case of climate modeling, the processes involved are highly complex. Yet there are really only three data points -- a slow rise in global temperatures between 1900 and 1940, a leveling off between 1940 and 1970, and a somewhat faster rise since then. Three data points are not enough to validate a model with one equation and one explanatory variable, much less the sort of multi-equation, multivariate models that are used to speculate about the causes and future behavior of global temperature movements.

Using such models, global warming "hawks" argue that technocrats must be given control over the economy, for our collective good. But these tend to be people who have never trusted individual freedom and have always supplied rationales for expanded government power. It leads one to wonder whether technocratic control of the economy is a means to address a strong desire to address global warming, or whether global warming is a means to address a strong desire to exert technocratic control.

Overall, the historical record shows that individual choice works well. Government expansion, whether justified by paternalism, regulatory protection, or the collective good, consistently is over-promised in terms of theoretical benefits and delivers adverse unintended consequences in practice. Milton Friedman won debates because he was on the right side.

Arnold Kling is a TCS Contributing Editor and author of Learning Economics.


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