Book Reviews

Capitalism and Freedom

Capitalism and Freedom is the best entry point into the world of Milton Friedman.

If there are patron saints of economics, consider Milton Friedman canonized. This isn't to say he's right about everything, or necessarily even anything. Rather, his work stands above the fray. Even compared to other Nobel Prize winners in economics, Friedman belongs with the few who put such an indelible mark on the field as to become an institution—those whose theories have stood the test of time and become the basis for accepted schools of thought. 

Clocking in at less than 200 pages, Capitalism and Freedom has everything a pure free market monetarist could ask for—deficit hawkery, school vouchers, gold standards, missives on competition and incentives, and then some. It's the best entry point to Friedman's world—lighter and more fluent than his academic work, but less reductionist and facile than his Free to Choose (which came in the form of a book and PBS mini documentary in the ‘80s, and was co-authored with his wife, Rose). 

Like all the greats, Friedman stands on the shoulders of giants—his views, in sum, are a continuation of the Austrian economists (Ludwig von Mises, Friedrich Hayek, and the like) and even Adam Smith, but with a bent toward modern monetary policy (hence the school of "monetarism"). Likewise, monetary theory wasn't new either—the quantity theory of money had been qualitatively observed long before and more rigorously fleshed out by infamous Irving Fisher and even Keynes

It's interesting that Friedman was regarded as conservative by the mainstream—a word that usually speaks of tradition and rigidity. Friedman was nothing of the sort: His ideas were usually radical and opposite the status quo (at a time when Keynesian economics ruled). Here is a man who staunchly advocated against the FCC, against a conscripted military, against segregated schools, and yet was also against the existence of most social welfare and the Fed. No, Mr. Friedman was a liberal in the original sense of that word—he saw freedom as the ultimate human value, and wanted it as unfettered as possible. 

And that is his strongest attribute—where many free market supply-sider economists speak broadly about the importance of incentives and deregulation, Friedman tends to gloss over those and gets right to the heart of things: Democracy and capitalism are siblings, and freedom is wrapped inexorably within them. He abhors elite concentration of power across any venue. Instead, Friedman insists that the greatest, fairest vote a person has is the daily freedom to fulfill one's own personal volition without other entities deciding for them. 

If you haven't guessed by now, I have a soft spot for Mr. Friedman. I remember when he died in November 2006, back in my junior analyst days. I've read his Monetary History of the United States 1867-1960 (one of the most turgid economics books ever wrought and weighing in at a whopping 800 pages) not once, but twice. Twice! I often wonder what he would have made of the chaos of the last few years. Actually, I think I can make a decent guess—he'd say government elitism, from the GSEs (Fannie and Freddie), to the Fed and Treasury's blunderings, to FASB's disastrous accounting rules, were what induced the panic—all poor or ignorant decisions by privileged groups allotted far too much power. 

And that, while noble, also reveals Friedman's greatest shortcoming—he is an idealist often to the point of absurdity. He often doesn't live in this world. Friedmanites will no doubt disagree—Friedman often called himself a pragmatist. But this is frequently the case when economists move from their circle of technical academic speak (Friedman's was domiciled at the University of Chicago for most of his career), to the broader public. He wants to abolish the Fed, go back to the gold standard, eliminate trade tariffs, and a litany of other things that, alas, simply have no chance of happening. This makes much of his work more thought experiment than practical guide.  

Only pure intellectuals have the luxury of being so pure. Those of us in the stock market forecasting profession do not. The world is too messy for pure theory. In market forecasting, we're most concerned with phenomenology—which is a fancy way of saying, "analyze what's actually happening; see the world as it is." We can't use folks like Friedman as guiding gurus. Fact is, Keynes made some good points too (though not nearly as many to my view!), and occasionally (if rarely) Keynes' philosophy might even be a better fit for the world (like the massive global monetary and fiscal stimulus efforts in late 2008). The point, however, is that good market forecasting is dubious of any pure-form "school" of thought, and realizes there are virtues, problems, and anomalies within all of them. 

To his credit, Friedman acknowledges his wishes are often extravagant. He says that even his centerpiece views about capitalism and democracy have their anomalies through history. Right now, for instance, one of the great economic debates is whether China is capitalist, communist, or some strange new social hybrid that's more efficient than either. My sense is Friedman would guffaw. Heartily. China may be the world's darling now, but let's not forget they have a tremendous age problem ahead (from their "one child per family" rule), among the largest disparities in standards of living anywhere in the world, and still feature mostly closed and controlled capital markets and means of production. These are still communists, and my guess is those issues (and others) will come to critical mass at some point (just not necessarily immediately) to cause major social/economic/cultural problems. Indeed, one could argue China's success the last few decades has been directly proportional to its liberalization. But this is a larger topic for a different venue. 

An advantage to Friedman's pure-form free market views is that it makes us realize neither the US, nor any other country in the world, today resembles pure form capitalism. That will sound disheartening to some, but that is the world. We have social programs, sometimes mercantilist laws, fiat money, and all the rest. So be it—despite it all, capital markets have advanced and wealth creation continues. 

Perhaps the most endearing component of Friedman's work is the close collaboration between he and his wife, Rose, a tremendous intellectual in her own right. Much of the second half of Friedman's career—which moved from academia to outspoken public policy and philanthropy, was anchored by her. What a formidable pair they made. 

This book will anger and frustrate some, or act as sweet salve for others—because it is ideological, and therefore polarizing. (In fact, most economic theory is more ideological than it seems—another reason it can threaten cogent market forecasting.) But wherever you may fall on the political spectrum, there is no doubting that with freedom comes high responsibility for oneself, and in this way the life and work of the Friedmans is to be admired.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.