Book SummaryCapitalism and Freedom, by Milton Friedman

1-Page Summary1-Page Book Summary of Capitalism and Freedom

Capitalism and Freedom is Nobel Prize-winning economist Milton Friedman’s classic 1962 treatise on economic freedom. Friedman argues that a society cannot maintain liberal democracy and representative institutions without a robust commitment to free-market capitalism. For capitalism to function best, it must be as free of government interference as possible.

Today, it is hard to overstate the extent to which Friedman’s once-controversial ideas have triumphed. Over the past 40 years, governments across the Western Hemisphere have reoriented their economic strategies toward more market-based solutions, including reducing marginal tax rates, all but eliminating tariffs, privatizing public monopolies, and even introducing choice and competition in public education. While reasonable people can disagree about the effects of Friedman’s ideas in the real world, no one can deny their influence.

In this summary, we’ll explore:

• How economic freedom is essential to political freedom;
• Why the government has a responsibility to protect economic freedom by breaking up monopolies, providing those services that the private sector cannot, and prudently managing the money supply;
• How the government often harms economic freedom through aggressive deficit spending, the creation of public monopolies, excessive professional licensure, and a poorly designed tax and welfare system.

The Necessity of Economic Freedom

Economic freedom is an essential component of total freedom—the ability of an individual to pursue her own happiness and fulfillment without any external impediments, provided that she does not infringe on the freedom of others. Any form of coercion is an assault on freedom.

Economic freedom is vital to political freedom. A society simply cannot have political freedom without the ability of individual buyers and sellers in a marketplace to engage in voluntary transactions that satisfy their needs. There has never been a successful example of a society that joined state control of the economy (in the form of socialism or communism) with political liberty.

Political power is dangerous, because it can be easily concentrated and centralized in the hands of the few. Economic power, however, works differently. In a well-functioning capitalist society, millions of individual buyers and sellers make decisions about which goods and services they require to satisfy their needs. As long as there are no monopolies, buyers are free to choose their sellers, sellers to choose their buyers, and workers to choose their employers. Free markets are inherently decentralized in nature, thus maximizing individual freedom and choice.

The Proper Role of Government

Despite the threat of government power, even those most committed to free-market principles must accept the idea that there are some societal functions that the market is unable to perform, such as national defense, domestic security, and the enforcement of property rights. These functions are crucial to the preservation of economic liberty, and can only be performed by the

public sector. Beyond these basic duties, governments also have a responsibility to:

• Curb the power of monopolies; and
• Provide those essential public services that confer broad-based social benefits and could not be efficiently provided by the private sector

Curbing Monopolies

One of the government’s most important responsibilities is to curb the power of monopolies.

A monopoly occurs when a market for a particular good or service has only one seller. Because they make it impossible for buyers to find an alternative seller, markets dominated by monopolies cannot be considered free.

Because monopolies pose a threat to economic freedom, it is a legitimate exercise of government power to limit them or break them up.

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, all things being equal, unregulated private monopolies are usually the least harmful. Regulated private monopolies and public monopolies use the coercive power of the state to enforce anti-competitive practices. Competition is literally illegal in such cases.

Monopolies and near-monopolies benefit from poorly designed features of the US tax code. For example, corporate, capital gains, and dividend taxes all disincentivize shareholders from putting corporate profits toward new investments. Because investors face a tax penalty when they sell stock or collect a dividend, it is often a better option to simply plow money back into an existing large company by purchasing more shares, thus increasing the stock price for shareholders. The effect is to protect large incumbent businesses by giving them the lion’s share of available capital, even when they have little productive use for it.

Neighborhood Effects

Governments also have a responsibility to provide those services that have strong neighborhood effects. Neighborhood effects arise when some individual economic activity confers benefits upon individuals whom it is extremely difficult to charge for their receipt of such benefits.

A good example is local parks. People who regularly walk through such parks, have views of them from their homes, or just happen to pass by them can reasonably be said to receive a benefit from them. But because the benefits of...

Capitalism and Freedom Summary Introduction

Capitalism and Freedom is Nobel Prize-winning economist Milton Friedman’s classic 1962 treatise on economic freedom. Friedman argues that a society cannot maintain liberal democracy and representative institutions without a robust commitment to free-market capitalism. For capitalism to function best, it must be as free of government interference as possible.

Although these ideas have become mainstream in western policy and intellectual circles in the nearly 60 years since the publication of Capitalism and Freedom, they were highly controversial—even fringe—at the time. In that era, the Keynesian economic policy consensus dominated the postwar United States, advocating for a...

Capitalism and Freedom Summary Chapter 1: The Necessity of Economic Freedom

Economic freedom is an essential component of total freedom—the ability of an individual to pursue her own happiness and fulfillment without any external impediments, provided that she does not infringe on the freedom of others.

Any form of coercion is an assault on freedom. Thus, if you are forced to surrender part of your income to pay for old-age insurance (as with Social Security), you have been robbed of the ability to fully make decisions about what to do with the money you earn from your labor.

Similarly, if you are prohibited from entering a profession of your choice by licensing requirements, you are being prevented from exercising your freedom to apply your talent and initiative as you wish. In this chapter, we’ll explore:

• The link between economic freedom and political freedom; and
• Why the decentralizing tendencies of the free market serve as a powerful check on government power.

The Relationship Between Economic and Political Freedom

Economic freedom is vital to political freedom. A society simply cannot have political freedom without the ability of individual buyers and sellers in a marketplace to engage in voluntary transactions that...

Capitalism and Freedom Summary Chapter 2: Monopolies and Neighborhood Effects

Governments are always coercive. Even in democratic societies, governments operate on the principle of majority rule. Those in the minority must, by definition, yield to the will of those in the majority.

Because of their collective nature and their need to serve the masses, governments cannot satisfy individual needs—instead, they must demand conformity. After all, you cannot have national legislation tailored to suit your individual needs (if anything, national legislation is more likely to work against your individual interests, a topic we’ll explore in greater detail later in the summary).

This is in contrast to how markets operate. By their very nature, free markets serve the individual customer on a voluntary basis. As a buyer, you are free to choose another seller who offers you a fairer price or a better good.

Of course, this is not to say that there is no role for government in a capitalist society. Even those committed to free-market principles accept the idea that there are some societal functions that the market is unable to perform, such as national defense, domestic security, and the enforcement of property rights. In this chapter, we’ll look...

Shortform Exercise: Explore Economic and Political Freedom

Examine the link between economic and political freedom.

Do you think there are freedoms that are more important than the freedom to spend your own money as you wish? Why or why not?

Capitalism and Freedom Summary Chapters 3-4: The Money Supply and Monetary Policy

In the last chapter, we talked about the role of government in curbing monopolies and regulating neighborhood effects. As we saw, the public sector has a role to play in these aspects of economic activity, because the free market would be unable to do them (or do them efficiently).

But free-market principles also allow for some other, limited functions of government. One of these is the issuance of currency and the regulation of the money supply. In this chapter, we’ll analyze how governments manage the domestic money supply through central banks. We’ll also explore how governments balance their currencies against those of other nations—and the implications of these activities for economic freedom.

The Trouble With Commodity Standards

We’ve already seen how large concentrations of government power tend to threaten individual liberty because of the collective, coercive nature of government itself. Because money is so central to the billions of daily individual transactions that power a market economy, therefore, capitalists tend to favor a reduced role for the public sector in monetary policy.

This aversion to central control of the money supply is why a commodity...

Capitalism and Freedom Summary Chapter 5: Against Keynesianism

In the last chapter, we analyzed monetary policy—a government’s control of its money supply and its currency’s value—and its impact on economic freedom. In this chapter, we’ll turn our attention to fiscal policy—how (and how much) the government chooses to tax and spend.

In particular, we’ll focus on the once-dominant Keynesian school of economics—and why its simplistic assumptions failed to deliver the real-world benefits it promised.

Keynesian Economics

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 gross domestic product (GDP) was primarily made up of four components:

• Consumer spending
• Government spending
• Investment
• Net exports

According to this theory, when a severe recession or...

Capitalism and Freedom Summary Chapter 6: Public Schools

Even in a capitalist society supposedly based upon voluntary exchange between individuals, we have come to accept a large role for the government in the management of economic affairs and the provision of certain goods and services. We’ve seen this already with important government functions like the curbing of monopolies and regulation of the money supply.

But should the government play such a key role in our lives? Is much of what the government does truly defensible in the context of a society that claims to value economic freedom?

One sector where the government plays a nearly monopolistic role is in the financing and administration of children’s education. In this chapter, we’ll explore:

• Why K-12 education provides broad benefits to society;
• How the American system of government-run schools eliminates choice and competition in education, thereby producing bad results;
• How giving parents the freedom to choose where to send their children to school will boost economic freedom and yield better educational outcomes; and
• Why vocational and technical education should not be supported with taxpayer money.

Neighborhood Effects of Education

We...

Capitalism and Freedom Summary Chapter 7: Capitalism and Discrimination

We’ve seen in earlier chapters how voluntary exchange provides a decentralizing check against the power-centralizing forces of government. Despite this, capitalism is often seen by its critics as an exploitative system that rewards the already-powerful and subjugates the powerless. But precisely the opposite is the case.

By celebrating and promoting voluntary exchange, capitalism is actually a great promoter of human freedom, especially for traditionally marginalized groups. In this chapter, we’ll explore:

• Why racial or any other form of discrimination is incompatible with a free market;
• Why a principled opposition to discrimination requires one to oppose both equal opportunity employment laws favored by the political left and right-to-work laws favored by the political right.

(Shortform note: Friedman’s opposition to equal employment opportunity laws reflects what was once mainstream opinion, particularly among economic conservatives at the time of Capitalism and Freedom’s publication in 1962. Many today will find this view offensive, arguing that the repeal of such laws would cause direct harm to people of color and provide further support for systemic...

Shortform Exercise: Analyze Capitalism and Discrimination

Explore how capitalism might support or undercut discrimination.

According to Friedman, why is discrimination irrational in a capitalist system?

Capitalism and Freedom Summary Chapter 8: Monopoly Power

In the last chapter, we saw the hollowness of charges that capitalism is an instrument of oppression and discrimination. In a similar vein, those who favor a movement away from a system of voluntary exchange toward one of central state control over the economy often cite monopolies as a dangerous—and inevitable—aspect of capitalism.

But this is also incorrect. While monopolies are indeed harmful to individual liberty, free-market capitalism in fact offers the best antidote to the dangerous concentration of economic power they represent.

In this chapter, we’ll explore:

• The two types of private monopoly (industrial and labor), as well as public monopoly;
• Why public monopolies and government support for private monopolies pose the greatest threats to economic freedom;
• Policy ideas to discourage monopolies; and
• Why notions of “corporate social responsibility” are inherently dangerous to a system of voluntary exchange.

The Myth of Industrial Monopoly

In Chapter 2, we looked at the three types of monopolies: private unregulated, private regulated, and public. But within private monopolies, there are two sub-categories: industrial and labor...

Capitalism and Freedom Summary Chapter 9: Licensing Restrictions

Governments trample on economic liberty in a variety of ways. We’ve already seen how public monetary, fiscal, and educational policies hamper the proper functioning of free markets based on voluntary exchange.

In this chapter, we’ll explore another aspect of state interference with capitalism—professional licensure. Specifically, we’ll look at how licensing regimes use public safety as a justification to protect (and enrich) existing practitioners at the expense of consumers.

Occupational Licensing: Eliminating Choice for Practitioners and 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.

An astonishing range of professions in the United States require practitioners to obtain some sort of license in order to practice legally. Depending on the locality, every occupation from medicine to hairdressing to dog grooming mandates the acquisition of a license.

We encounter licensed professionals so frequently that we seldom question the wisdom or justice of such licensing...

Capitalism and Freedom Summary Chapters 10-12: 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.

Yet critics of capitalism assert that one’s right to private property is itself an injustice. They claim that capitalism as a system inherently leads to unequal—and, according to their worldview, unjust—outcomes.

In this chapter, we’ll explore why income and wealth inequality are not injustices, but rather, the natural outcomes of a system based upon economic freedom. We’ll see how inequality is not merely a regrettable by-product of capitalism but vital to the maintenance of a voluntary exchange system. Lastly, we’ll explore how redistributive government policies like progressive income taxes fail to achieve their stated goals of reducing income inequality.

Payment According to Product

The fairest and most efficient way to allocate resources in a system of voluntary exchange is through payment according to product. Essentially, you get what you put in. Your compensation is a direct result of the value you create in the economy through your labor (the...

Capitalism and Freedom Summary Conclusion

A true capitalist system must always put equality of opportunity before equality of outcomes. Proponents of redistribution and government intervention in the economy do not have the evidence of history on their side.

During the early days of socialism in the 19th and early 20th centuries, it may well have been possible to imagine a collectivist utopia as a superior form of social organization to industrial capitalism—simply because such...

Shortform Exercise: Understand Capitalism and Freedom

Explore the main takeaways from Capitalism and Freedom.

How did the book challenge your existing ideas about the balance between free markets and government? Did it change any of your ideas? Explain why or why not.