PDF Summary:Capitalism and Freedom, by Milton Friedman
Book Summary: Learn the key points in minutes.
Below is a preview of the Shortform book summary of Capitalism and Freedom by Milton Friedman. Read the full comprehensive summary at Shortform.
1-Page PDF Summary of Capitalism and Freedom
In his classic 1962 book Capitalism and Freedom, Nobel Prize-winning economist Milton Friedman argues that a society cannot maintain political freedom without a robust commitment to free-market capitalism—and that for capitalism to function best, it must be free of government interference. It is hard to overstate the extent to which Friedman’s once-controversial ideas have triumphed. Over the past 40 years, governments across the world have moved to market-based solutions by reducing marginal tax rates, eliminating tariffs, privatizing public monopolies, and introducing choice in public education. Some might disagree about the effects of Friedman’s ideas—but no one can deny their influence.
(continued)...
In a free society, competent individuals should face no restrictions on their ability to conduct transactions and make contracts.
Floating Currency
Instead of this elaborate and carefully managed system of international currency pegging, countries should be free to let their currencies simply “float”—i.e., let the free market determine the value of currencies relative to one another.
The inflows and outflows of currency would always balance out under such a system—the seller of dollars would need to find a buyer willing to pay her in the equivalent value of foreign currency. Losses of domestic currency would by definition be offset by gains in foreign currency reserves.
Against Keynesian Fiscal Policy
Monetary policy has a significant impact on economic freedom. But so does fiscal policy—how (and how much) the government chooses to tax and spend. Following the Great Depression, there was a groundswell of public support for aggressive fiscal policy on the part of the federal government. The public wanted the government to offset the collapse in private spending with large, deficit-financed spending from the federal government (that is, increases in spending without offsetting tax increases).
The intellectual underpinning of this policy was the Keynesian school of economics. Named for the British economist John Maynard Keynes, Keynesianism argued that government spending could make up for the shortfall in consumer spending during an economic downturn.
The fiscal multiplier effect is a lynchpin of Keynesian economics. According to this principle, when the government spends money, it creates new spending power in the economy above and beyond the original government expenditure, because it stimulates several rounds of private spending that otherwise would not have occurred. When Individual A receives money from the government, she spends it at a business owned by Individual B, which then becomes her income, which she will in turn spend to contribute to someone else’s income, and so on.
Borrowing Funds, Diverting Spending
If the government uses its fiscal power to publicly subsidize some service that you once paid for with your own private spending (like access to a beach), then in theory, it has freed you up to spend that money on something else.
But since you had been freely spending your money to get access to the beach, it is reasonable to assume that you placed a higher value on that use of your money than you did on alternative uses. Since you are now getting that access for “free,” you are unlikely to increase your spending on other goods or services above and beyond what you were already spending, because you don’t value those other goods and services as highly.
To finance new expenditures, the government is likely borrowing the money from investors and issuing bonds to them. This does not increase the total stock of money in the private sector—it merely moves it from one party (the purchaser of government bonds) to another (the ultimate recipient of government spending). Under most economic conditions, those investors would have spent the money they used to purchase bonds on some other set of goods and services in the private sector. The borrowing in and of itself, then, only diverts and offsets spending that would have occurred anyway.
Restriction of Choice
We’ve already seen that there are services that the government provides that are intended to confer broad benefits to society. Yet many of these government efforts end up harming economic liberty by unfairly inhibiting freedom of contract or establishing public monopolies that deprive individuals of market choices they would otherwise have. Although its efforts are often well-intended, the ways in which the government provides many of its services restrict the freedom of individual buyers and sellers to enter into contracts of voluntary exchange.
Government and Education
One sector where the government plays a nearly monopolistic role is in the financing and administration of education. Education has strong neighborhood effects, as it benefits society to have a population that is literate, civic minded, and adequately prepared to take on the responsibilities of citizenship. But while the financing of education through public money can be justified on the basis of neighborhood effects, its administration cannot be.
Parents are legally mandated to send their children to the school for which they are zoned, even if the quality of education at that school is known to be poor or if they dislike the content being taught. If they had a choice in where to educate their children (as they do in nearly all other markets), parents might choose to send their children to other schools, where the content and quality of education is more in line with their preferences.
While parents technically do have the option of moving to a different school district or sending their children to private school, the costs of doing so are so prohibitively expensive as to not represent a genuine “choice.”
Vouchers and School Choice
One solution to this problem is to decouple the public financing of education from the public administration of schools. Instead of paying taxes and having no choice in the matter of where to send their children to school, parents should instead receive a voucher from the government.
This voucher would be redeemable for educational services up to a certain amount for each child, provided that they are spent on approved education providers that meet certain minimum standards. Beyond that minimum requirement, parents would be free to spend their vouchers on whatever educational option they deem to be best for their children.
Equal Employment Opportunity Laws
The bedrock principle of a free-market economy is that individuals ought to be able to enter into voluntary contracts with one another. But equal opportunity employment laws, which are intended to prevent discrimination against members of minority groups, constitute a dangerous violation of freedom of contract. For example, such laws might mandate that a minority candidate be hired regardless of whether or not the employer believes they are a proper fit for the position.
This in and of itself violates the employer’s freedom of contract rights. Once the government violates the principle of freedom of contract, any number of abuses becomes possible. If the government can negate freedom of contract by denying the right of employers to discriminate on the basis of race, sex, or any other individual characteristic, it could also theoretically negate freedom of contract by mandating that private employers engage in such discrimination.
Licensing Restrictions
Another way in which governments restrict choice is through professional licensure. For example, professional licensure often functions as a means by which existing practitioners in a field limit competition—at the expense of consumers.
A license is a permit from a legal authority to engage in some specific economic activity. Licenses are backed up by force of law—if you don’t have the license, you cannot practice the trade, and will be punished if you attempt to do so.
Professional licensure serves to protect incumbent practitioners in the field by making it difficult and/or expensive for newcomers to enter the profession. By keeping the number of professionals in a given field low, licensure enables incumbents to charge higher prices for their services.
Inequality and Redistribution
One of the cornerstones of a society based upon voluntary exchange is the right to keep what you earn. After all, what you earn in the market is a product of the productive capacity of your own labor and capital. The fairest and most efficient way to allocate resources in a system of voluntary exchange is through payment according to product. Your compensation is a direct result of the value you create in the economy through your labor (the work you perform for which you are paid in wages and tips) and your capital (the productive assets you own, like land or machinery).
Forced redistribution schemes are inherently unjust. There is no moral justification for a majority to compel a minority to hand over its property—whether it’s a gang of armed robbers telling you to hand over the cash in your wallet or a majority of voters passing legislation to legally confiscate wealth from the so-called “1 percent.”
Unfortunately, some of the government’s most grave threats to economic liberty come cloaked in the language of equality, fairness, and economic justice. Below, we’ll explore some of the worst public manifestations of this.
Against Progressive Income Tax
To combat the alleged dangers of income inequality, most industrialized countries have established systems of progressive taxation. Under such a system, the marginal rate of taxation increases the more one earns. Thus, your income from $0-$49,000 might be taxed at 12 percent, your income from $50,000-$99,999 might be taxed at 25 percent, and so on.
One problem with progressive taxation is that it increases pre-tax income inequality. If high earners know that their top marginal tax rate is going to be high, lucrative jobs become less attractive than they would otherwise be. The only way to compensate for this is to make these kinds of jobs even more well-paid—thereby increasing pre-tax inequality.
Progressive tax codes are also nearly always more complex than alternatives. They contain all sorts of loopholes and deductions that tax certain kinds of income (like capital gains) at different rates than other kinds of income (like standard wages and tips). This creates a strong incentive for wealthy people to devote inordinate resources to devising complex and wasteful tax-avoidance schemes.
The Flat Tax
A flat tax is more efficient and equitable than a progressive tax. Under a flat tax, everyone would pay the same rate, regardless of income level or income type. A flat tax plan would also broaden the definition of “income,” taxing more types of income than the present system does, while closing loopholes and special-interest exemptions.
Because the rates would be uniform and all types of income would be equally subject to taxation, there would be far less incentive for individuals and businesses to waste resources on tax avoidance schemes.
Anti-Poverty Programs
Progressive taxation is not the only policy by which the government attempts to redistribute income and alleviate poverty. Through a range of programs, including the provision of public housing, the establishment of federal and state minimum wages, and social insurance (most notably Social Security in the United States), public authorities have attempted—nearly always with the best of intentions—to raise the standard of living of the worst-off members of society.
But these anti-poverty programs injure economic freedom by confiscating property from one segment of the population to give it to another, enable the growth of large and increasingly unaccountable government bureaucracies, and paternalistically presume that the government knows what’s best for the people rather than the people themselves.
Social Security
Perhaps the most famous redistributive program in the United States is Social Security. Social Security is a government pension system that pays benefits primarily to elderly and disabled citizens. It is financed by payroll taxes collected on people during the course of their working lives. As a compulsory program, no one has the option of not paying into Social Security. Taxpayers are forced to hand over their money to purchase a product that they might very well have elected not to purchase if they had been given free use of their own money.
Negative Income Tax
Alleviating poverty does benefit society broadly. But the problem arises when anti-poverty measures require large and expensive bureaucracies to maintain them. To get around these traditional defects of such programs, governments should adopt a negative income tax.
By providing proportional subsidies for people who fall below a certain income threshold, a negative income tax would redistribute income, but on a far more equitable and transparent basis than traditional tax-and-transfer programs. It would effectively guarantee a certain basic income for everyone. It would also be more efficient than the current patchwork of welfare programs, most of which are targeted to specific groups (like veterans, widows, the elderly, and so on). The narrow and targeted nature of such benefits programs requires an expensive bureaucracy to maintain and administer them.
In Defense of Capitalism
Capitalism has proven itself to be history’s most effective system for alleviating poverty and raising the standard of living for the vast majority of the human population. Supporters of economic and political freedom must resist every attempt—even by the most well-intentioned idealists—to impose central control over systems of voluntary exchange. Increased government control over our lives would ultimately lead to the creation of a less free and less prosperous society. We must always remember that concentrated power is dangerous, regardless of the intentions of those wielding it.
Want to learn the rest of Capitalism and Freedom in 21 minutes?
Unlock the full book summary of Capitalism and Freedom by signing up for Shortform.
Shortform summaries help you learn 10x faster by:
- Being 100% comprehensive: you learn the most important points in the book
- Cutting out the fluff: you don't spend your time wondering what the author's point is.
- Interactive exercises: apply the book's ideas to your own life with our educators' guidance.
Here's a preview of the rest of Shortform's Capitalism and Freedom PDF summary:
PDF Summary Introduction
...
- The role of government in protecting free markets by curbing monopolies and providing those few services that cannot be provided more effectively by the private sector;
- How government mismanagement of both monetary and fiscal policy has led to economic calamity and the distortion of the free market;
- How public schooling, while beneficial, tends to limit the choices families have in deciding where to educate their children; and
- How public monopolies, occupational licensure, progressive taxation, anti-poverty programs, and other trappings of the modern welfare state only serve to exacerbate the problems they are designed to solve.
PDF Summary Chapter 1: The Necessity of Economic Freedom
...
Thus, a great deal of power over a crucial area of day-to-day life is taken away from the hands of the few, and placed into the hands of the many. Free markets are inherently decentralized in nature, thus maximizing individual freedom and choice. In a capitalist society, economic power acts as a check on the power of political authorities because it is not in the hands of the government.
The Threat of Unchecked Political Power
In a communist society, it would be impossible for someone to exercise their political freedom to, for example, champion capitalism. This is because engaging in any political cause costs money. But in a communist society, there is no voluntary exchange—the government controls all the jobs and restricts how money may be spent. Thus, the advocate of capitalism would be dependent on the goodwill of her communist paymasters in order to be able to spread her message. Given their control of her income, it would be unrealistic to assume that they would allow her to do this.
Even if she somehow gathered the money to do this, she would face further obstacles owing to control by the political authorities of all the economic means of production. She would...
PDF Summary Chapter 2: Monopolies and Neighborhood Effects
...
Because monopolies pose a threat to economic freedom, it is a legitimate exercise of government power to limit them or break them up. Thus, a capitalist ought to be in favor of economic regulations like the Sherman Antitrust Act. It is important, however, that governments wield this power on an equitable basis—if large businesses are to be broken up by the Justice Department through antitrust laws, monopolistic unions that control the supply of labor in a given market must also be subject to the same laws.
Three Forms of Monopoly
There are three forms of monopoly:
- Unregulated private monopolies, in which a private firm has cornered the market and is allowed to operate unfettered;
- Regulated private monopolies, in which the government acts to eliminate competition in an essential market, like municipal power or water, often by subsidizing the sole authorized supplier (keeping the price of the good artificially low for the public); and
- Public monopolies, in which the government itself acts as the sole manufacturer and seller of a good or service.
All three forms involve the elimination of competition, and are therefore harmful to economic freedom. But,...
What Our Readers Say
This is the best summary of Capitalism and Freedom I've ever read. I learned all the main points in just 20 minutes.
Learn more about our summaries →PDF Summary Chapters 3-4: The Money Supply and Monetary Policy
...
Therefore, most economies evolved to have private individuals and financial institutions issue paper money that could serve as a substitute for gold and would be redeemable in gold if presented to the issuer. From there, it naturally followed that governments would issue their own paper money and begin to regulate the currency so as to prevent fraud.
Over time, people simply came to accept paper money as valuable in and of itself, independent of its convertibility to gold. As long as the government guarantees that official paper currency can be used as legal tender, it has value. Therefore, some amount of government involvement in the issuance of money is inevitable.
Central Banks, Central Control
Because governments must play some role in the regulation of the money supply in a modern economy, central banks like the Bank of England in the UK or the Federal Reserve System in the US have emerged to take on this core function. Central banks are publicly chartered financial institutions that have the power to increase or decrease the supply and circulation of money in an economy, primarily through their control of interest rates.
When the United States Federal...
PDF Summary Chapter 5: Against Keynesianism
...
Unfortunately, it has historically been difficult for policymakers to turn the fiscal pump on and off at the right time. New spending programs are hastily voted on, but often only go into effect after the crisis has passed and they’re not needed anymore. Because these programs inevitably create beneficiaries, politicians tend to be highly reluctant to end them, for fear of antagonizing voters. The result over time is a cycle of higher spending, higher taxes, higher borrowing, and higher inflation, all to pay for an out-of-control welfare state.
Multiplier Effects
Another lynchpin of Keynesian economics is the fiscal multiplier effect. According to this principle, when the government spends money, it creates new spending power in the economy above and beyond the original government expenditure. This is best illustrated by example.
- Let’s say that during an economic downturn, the government sends you a check for $100. You then proceed to save 20 percent of it ($20) and then spend the remaining $80 on goods and services of your choice.
- But because one person’s spending is another person’s income (and vice versa), the recipient of the $80 you just spent...
PDF Summary Chapter 6: Public Schools
...
The provision of education to children and adolescents has strong neighborhood effects. Especially in a democratic system, society broadly benefits by having a population that is literate, civic minded, and adequately prepared to take on the responsibilities of citizenship. Basic education instills these qualities in young people and confers significant benefits upon everyone else, but it is impossible to “charge” everyone else for the “value” of the benefit they receive. Therefore, it is appropriate that governments guarantee K-12 education (although we’ll explore later in the chapter why neighborhood effects don’t apply to education beyond this age range).
Government Financing vs. Government Administration of Schools
Because of the clear neighborhood effects, nearly all advanced, industrialized countries make significant investments in public education. In the United States, K-12 public education is financed primarily through property taxes assessed on those owning property within a given school district. This is often supplemented by additional money from the state and federal government, usually based on standard school aid formulas.
**But while the _financing...
PDF Summary Chapter 7: Capitalism and Discrimination
...
Free markets enable individuals to advance on the basis of their talent and productivity, not skin color, gender, religion, or other irrelevant characteristics. This is not to say, of course, that people in a free-market society don’t practice discrimination—experience plainly shows that they do.
But their decision to do so is irrational and against their economic interests. If a white restaurateur, acting on her racism, refuses to serve black customers, hire black staff, or purchase supplies from black wholesalers, she is harming her own interests by limiting her range of options and restricting potential revenue from black customers who might otherwise be happy to spend their money in her establishment.
In a capitalist society, the entrepreneur benefits from choice and competition. Our restaurateur is limiting her options and, as a result, will face higher labor and overhead costs—while limiting herself to fewer customers. Capitalism thus explicitly punishes segregation and rewards egalitarianism.
Equal Employment Opportunity Laws
**Those on the political left tend to favor equal employment opportunity laws, enacted to solve the problem of discrimination in...
PDF Summary Chapter 8: Monopoly Power
...
Labor Monopoly and the Problem of Unions
A labor monopoly is when a set of workers in an industry gains full control of its labor market. This is usually achieved through labor unions and “closed-shop” contracts, which stipulate that all employees hired by management must be members of the union (a topic we explored in the last chapter). With a labor monopoly, unions can demand higher wages of employers, the costs of which ultimately get passed along to consumers.
As with industrial monopolies, however, labor monopolies are rare. The vast majority of unions simply lack the kind leverage necessary to exert this level of control. But even without a monopoly, there is a special danger that a heavily unionized workforce in a key industry can collude with the owners of capital in that industry (who would traditionally be the adversaries of labor) to drive up prices for consumers.
This is precisely what happened with the United Mine Workers (UMW) and the coal companies during the 1930s. The UMW scheduled strikes or work stoppages in order to halt the production of coal whenever the supply of coal in the market got too high. This had the effect of driving prices of coal...
Why are Shortform Summaries the Best?
We're the most efficient way to learn the most useful ideas from a book.
Cuts Out the Fluff
Ever feel a book rambles on, giving anecdotes that aren't useful? Often get frustrated by an author who doesn't get to the point?
We cut out the fluff, keeping only the most useful examples and ideas. We also re-organize books for clarity, putting the most important principles first, so you can learn faster.
Always Comprehensive
Other summaries give you just a highlight of some of the ideas in a book. We find these too vague to be satisfying.
At Shortform, we want to cover every point worth knowing in the book. Learn nuances, key examples, and critical details on how to apply the ideas.
3 Different Levels of Detail
You want different levels of detail at different times. That's why every book is summarized in three lengths:
1) Paragraph to get the gist
2) 1-page summary, to get the main takeaways
3) Full comprehensive summary and analysis, containing every useful point and example
PDF Summary Chapter 9: Licensing Restrictions
...
All of these entail significant commitments of time, money, and energy. Facing such hurdles, many would-be professionals give up and choose to enter a different line of work. By keeping the number of professionals in a given field low, licensure enables incumbents to charge higher prices for their services.
This is why licensing systems are so harmful to economic freedom. They deprive people of the right to use their talent and initiative in the field of their choosing, while robbing consumers of the range of choices that would otherwise be available to them.
Even the “public safety” rationale is insulting, as it paternalistically assumes that consumers lack the intelligence to make informed decisions about whom to pay for professional services. Far from being agents of public welfare, licensing boards are really the modern-day equivalent of medieval guilds—powerful trade associations that use their political clout to monopolize the sale of a good in a particular area and restricted entry into the trade.
Irrelevant Criteria
**Many of the criteria used to screen candidates for licensed practice have little relevance to public safety or best practices within the...
PDF Summary Chapters 10-12: Inequality and Redistribution
...
A system that mandated equal compensation would therefore produce unequal outcomes, because individuals doing unpleasant work would receive the same money as those doing more leisurely work. But because one group values money more than the other, the total compensation would be more unequal than it was before.
Inheritance and Economic Freedom
In a capitalist society like the United States, where there is great mobility of people and capital and a tremendous variance in the level of individual talent, it is extremely difficult to determine what the source of someone’s wealth is at any given time.
Far too many factors come into play to determine one’s net worth, many of them completely beyond an individual’s control. It is simply impossible to determine how much anyone’s wealth is “earned” or “unearned,” however we choose to define the terms. But even if a system could somehow be devised that only redistributed “unearned” wealth (like from an inheritance) and left “earned” wealth alone, it would still be harmful to economic freedom.
This is because there is no moral difference between earned wealth and inherited wealth. Even if you inherit a vast fortune from...
PDF Summary Conclusion
...
Increased government control over our lives would ultimately lead to the creation of a less free and less prosperous society. We must always remember that concentrated power is dangerous, regardless of the intentions of those wielding it.