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Milton and Rose Friedman’s“Free to Choose” and Its Impactin the Global Movement TowardFree Market Policy: 1979 –2003Peter J. BoettkeIn 1964, Lyndon Johnson defeated Barry Goldwater for the presidency of theUnited States by the overwhelming margin of 61 percent of the popular voteto 38 percent, and in terms of states won, the figure was forty-four to six.Barry Goldwater ran a campaign calling for less government and freer markets,and the population said no to him and yes to Lyndon Johnson’s big governmentprograms of the 1960s, for example, the War on Poverty. However, in the 1980election, Ronald Reagan was able to defeat the incumbent president, JimmyCarter, with 51 percent of the popular vote to 41 percent, and in terms of states,forty-four states to six states, running on essentially a similar platform to Goldwater’s.Obviously, something had drastically changed in that intervening sixteenyears in the United States. For sure, a good part of that was the failure of thewelfare/warfare state in the 1960s and 1970s. The U.S. economy in the 1970swas suffering from declining productivity, growing public debt, and inflation.The declining stature of the United States as the economic leader in the worldwas matched by a declining stature as a military superpower — as the frustrations of Vietnam fed into the failed policies in the Middle East, most obviouslybrought home by the Iranian hostage crisis in 1979. Reagan ran on a platformto reverse all of that, and in so doing he captured the imaginations of many. Inparticular, his rhetoric of uncompromising adherence to free market economicssignaled a change in political rhetoric and public opinion.Since the beginning of the progressive era, laissez-faire economics hadbeen on the run from intellectuals and politicians and, since the Great Depression, the general public. There were, of course, lone wolf voices bucking thistrend all along: Ludwig Mises, F. A. Hayek, Henry Hazlitt, and Ayn Rand beingperhaps the most prominent in the 1930s, 1940s, and 1950s. In the 1940s, asuperstar economist emerged to add his voice to these lone wolves and chal137
138Peter J. Boettkelenge the Keynesian hegemony in the economics profession and the conventional wisdom in the court of public opinion — Milton Friedman. Friedman’saccomplishments as an economist, and as the premier public intellectual in thesecond half of the twentieth century for economic liberalism, are well known,so that is not what I am going to emphasize here. Instead, I want to focus onhow his work in conveying the basic principles of economic liberalism changedpublic attitudes in the United States and abroad among the political elite, theintelligentsia, and the educated public, and, in particular, how that success inchanging the climate of public opinion in the West in turn represented a beaconof hope to those in East and Central Europe and the former Soviet Union duringthe years leading up to the collapse of communism in 1989 and 1991.There are many hypotheses about why the communist system collapsed inthe late 1980s and early 1990s. One is that a Polish pope gave legitimacy to theChurch behind the Iron Curtain and the unrest with Solidarity discredited theWorkers’ State in Poland. Once the Polish communist regime collapsed, the othersfollowed. Another hypothesis is that Ronald Reagan’s decision to up the militarystakes highlighted the technological gap between the economic systems and toppled the system. Still another hypothesis is that a generation of political leadersfrom within the communist system that came of age during 1956 (the “thaw generation”) and knew firsthand of Stalin’s crimes against humanity had decided thatthis was no way for a civilized people to live. I cannot do justice to all these competing hypotheses here, but I want to suggest an alternative one and provide evidence of its plausibility—namely, that the economic failures of the real-existingcommunist system in East and Central Europe made sense only in light of theideas of economic liberalism.1 And in the 1980s, no one had stated those ideasmore plainly and concisely than Milton and Rose Friedman in Free to Choose.2FROM CAPITALISM AND FREEDOM TO FREE TO CHOOSEOne way to measure the impact of Milton Friedman’s ideas is to simplycompare and contrast the reception of Capitalism and Freedom at the time ofits publication in 1962 with that of Free to Choose in 1980. As the Friedmansinform us in their memoirs, the intellectual climate of opinion at the time ofCapitalism and Freedom was, to put it mildly, hostile (Friedman and Friedman1998, 339). Milton Friedman states in the preface to the 1982 edition of Capitalism and Freedom that when it was first published in 1962,its views were so far out of the mainstream that it was not reviewed by anymajor national publication — not by the New York Times or the Herald Tribune (then still being published in New York) or the Chicago Tribune or byTime or Newsweek or even the Saturday Review — though it was reviewedby the London Economist and by the major professional journals. And thisfor a book directed at the general public, written by a professor from a major
Milton and Rose Friedman’s “Free to Choose”139U.S. university, and destined to sell more than 400,000 copies in the nexteighteen years. It is inconceivable that such a publication by an economistof comparable professional standing but favorable to the welfare state orsocialism or communism would have received a similar silent treatment.(Friedman 1982, vi)The publication of Free to Choose would provide the exact opposite experience for the Friedmans.3 The book sold 400,000 copies in hardcover and as amass market paperback has sold millions of copies and been translated intoover a dozen languages.4 Perhaps an even better measure, though harder to puta precise number to, is how proposals first discussed in Capitalism and Freedom (and considered too radical for respectable conversation) have nowbecome commonplace: monetary rules versus discretionary policy, private certification on the market rather than government licensure, school vouchers andcompetition in education versus government monopoly, and the flat tax versusa progressive income tax are but a few examples of how Friedman was the trailblazer for creative applications of market thinking to areas of public policy.In Capitalism and Freedom, Friedman sought to establish an argumentabout the interconnectedness of economic and political freedom. It was possible, he argued, to have limited political freedom while adopting policies of economic freedom, but it was impossible to eliminate economic freedom withoutalso infringing on the political freedoms of individuals. Moreover, economicfreedom would put pressures on the political system to open up. In contrast tothe popular position among intellectuals that political and economic freedomcould be separated neatly, Friedman put forth the following historical challenge:Historical experience speaks with a single voice on the relation betweenpolitical freedom and a free market. I know of no example in time or placeof a society that has been marked by a large measure of political freedom,and that has not also used something comparable to a free market to organize the bulk of economic activity. (Friedman 1982, 9)While Capitalism and Freedom is in many ways a more philosophical andfoundational book than Free to Choose, the basic teachings of economic liberalism are conveyed even more forcefully and the applications more persuasivethan in the earlier book. Moreover, Free to Choose is more explicit in its use ofideas such as the informational role of prices, the spontaneous order of the market system, and the interest group logic of political interference with the market. These aspects of the theoretical foundations of liberalism were not emphasized in the early 1960s but emerged more explicitly with the development ofpublic choice theory by James Buchanan and Gordon Tullock in The Calculusof Consent (1962) and the theory of spontaneous order in F. A. Hayek’s workfrom The Constitution of Liberty (1960) to Law, Legislation and Liberty (1973,1976, 1979).5 In short, what the Friedmans argued in Free to Choose is that the
140Peter J. Boettkepower of the market system is its ability to mobilize the incentives of individuals to realize the gains from mutually beneficial exchange, and that the pricesystem is an indispensable aid in this endeavor by discovering the relevantinformation and communicating it to the relevant actors within the system, whoin turn utilize it efficiently in realizing their individual plans. On the other hand,the attempt by government to interfere in the market order results in perverseincentives, distorted information, and the catering of special interests that concentrates benefits on well-organized and well-informed interest groups and disperses the costs among the unorganized and ill-informed mass of voters.The Friedmans summarize the functions of prices in a market economyas follows: “Prices perform three functions in organizing economic activity:first, they transmit information; second, they provide an incentive to adoptthose methods of production that are least costly and thereby use availableresources for the most highly valued purposes; third, they determine who getshow much of the product — the distribution of income” (Friedman and Friedman 1980, 6). The price system constitutes an intricate web of information andincentives. Attempts by government to substitute control for voluntaryexchange often result in a failure to rectify whatever perceived problem wasused to justify government action in the first place and, in fact, often exacerbate the problem by imposing costs on some parties and concentrating benefits on others. Freedom of trade fosters cooperation and harmony of interestsamong diverse parties. Controls lead to conflicts and special interest politics:“There is, as it were, an invisible hand in politics that operates in precisely theopposite direction of Adam Smith’s invisible hand. Individuals who intend onlyto promote the general interest are led by the invisible political hand to promote a special interest that they had no intention to promote” (Friedman andFriedman 1980, 281).Free to Choose leaves its reader with a clear message about the power ofthe market to harness individual initiative and knowledge of time and place, theimportance of property rights and the rule of law in enabling individuals to realize the gains from exchange and to preserve our personal freedom, the failureof government policy to achieve the goals set, the vulnerability of governmentpolicy to opportunistic behavior by special interests, and the threat to humanliberty that government intervention in the economy represents. While theirmessage was directed primarily at an audience of U.S. readers, the Friedmansinfused their work with a comparative analysis drawing on examples from Russia, India, China, and Hong Kong, among other places. The message learnedthrough this comparative historical analysis is this:Wherever we find any large element of individual freedom, some measureof progress in the material comforts at the disposal of ordinary citizens, andwidespread hope of further progress in the future, there we also find that
Milton and Rose Friedman’s “Free to Choose”141economic activity is organized mainly through the free market. Wherever thestate undertakes to control in detail the economic activities of its citizens,wherever, that is, detailed central economic planning reigns, there ordinarycitizens are in political fetters, have a low standard of living, and have littlepower to control their own destiny. (Friedman and Friedman 1980, 46)It is this broad sweeping judgment that would serve as an inspiration andcatalyst for dissident economists within the former Soviet Union to push for economic and political change in the late 1980s and early 1990s.THE INDIRECT AND DIRECT INFLUENCE OF MILTON FRIEDMANIN 1989 AND 1991The indirect influence of Milton Friedman as the leading intellectualspokesman for economic liberalism stretches from China to Poland and allpoints north and south as well. Only Hayek’s influence would compare.6 Thisindirect influence is revealed anytime a modern economic reformer insists onthe interrelationship between economic freedom and political freedom, on thenecessity of private property and the freedom of contract, on the importance ofrule-bound monetary and fiscal policy, on the perverse consequences of government regulation, and on the special interest groups that form the tyranny ofthe status quo. Friedman made it respectable for economists to argue in favorof free markets and offer market solutions to public policy questions. In his ownattempts to provide market solutions in public debates, Friedman originatedmany of the ideas that defined not only the Thatcher and Reagan revolutions inthe 1980s, but would define transition policies in Poland, the Czech Republic,and Russia in the 1990s. Many of these ideas were forged in Friedman’s attemptsin the 1960s, 1970s, and 1980s to address vexing policy problems in the UnitedStates, UK, India, Israel, Latin America, and China.Far from just the figurehead of the political philosophy and political economy of classical liberalism that many of the reformers embraced in their rejection of the previous socialist system, Friedman was also an inspiration formany of the policy proposals adopted. The Friedmans did not dare in 1980believe that communism would topple in a decade, but they also didn’t rule thatoption out:[L]etting the genie of private initiative out of the bottle even to this limitedextent [context is Yugoslavia in the 1970s] will give rise to political problemsthat, sooner or later, are likely to produce a reaction toward great authoritarianism. The opposite outcome, the collapse of communism and its replacement by a market system, seems far less likely, though as incurable optimists, we do not rule it out completely.7 (Friedman and Friedman 1980, 49)
142Peter J. BoettkeThe problem with the real-existing systems in Soviet bloc countries couldnot be tackled coherently with minor reforms to the socialist system. The problem wasn’t with this or that aspect of the system but the entire system.8Milton Friedman (1984), in a pamphlet for the Centre for Research intoCommunist Economies, summed up his position on the problems of trying tointroduce markets into a command economy by stating,I believe this way of putting it is upside down. The real question is how farone can go in introducing command elements into a market economy. Ibelieve it would be literally impossible for any large-scale economy to beoperated on a strictly command basis. Fundamentally, what enables a country such as China or the Soviet Union to function at all is the market elements that are either deliberately introduced or are inadvertently permittedto operate. When I speak of market elements being introduced into command economies such as China’s and the Soviet Union’s, I am not speakingof free markets; they are highly distorted markets. That is why those countries have such low standards of living; that is why they are so inefficient.(Friedman 1984, 8)The power of Friedman’s observations of the failure of the real-existingsocialist economies of the Soviet bloc was not lost on those in charge of designing the reforms for those economies. Abel Aganbegyan, one of Gorbachev’smain economic advisors during the 1980s, describes his meeting with MiltonFriedman in San Francisco as follows:I was astonished by his fantastic faith in private property, a faith thatexcluded the possibility of any other kind of property ownership such as thatwhich exists in the socialist countries. In Friedman’s opinion, well-being canbe reached only through private ownership of property, a free market andthe existence of banks completely independent from the state and servingthat free market. But if we move away from conceptual problems to theconcrete theories advanced by Milton Friedman in his studies, we find thatmany of them can be of great use to us. In a number of cases Friedmanpoints to examples of financial misjudgement by the state in increasingexpenditure, printing excess money and so on. And while I do not accepthis view that the socialist countries should transfer property into privateownership, I nevertheless listened with great interest to his explanations ofthe present inflation in China, which he had recently visited, and in othersocialist countries. (Aganbegyan 1989, 52 – 53)The Gorbachev reform team lacked the imagination to embrace privateproperty and the market economy, and instead the inconsistency in their reformefforts led to the unraveling of the Soviet system.When a group of young economists was tapped to form the new reform
Milton and Rose Friedman’s “Free to Choose”143team at the end of the Gorbachev period and then into the Yeltsin years, Milton Friedman’s influence was again repeatedly recognized. In her book Sale ofthe Century, Chrystia Freeland makes this stunning observation: “It was, ofcourse, an absurd decision. Here was Gaidar, an ardent capitalist, a fan of F. A.Hayek and Milton Friedman, a man who thought the welfare state in WesternEurope was far too large and would have voted for Ronald Reagan, shaping theeconomic ideology of the Communist Party of the Soviet Union (CPSU). It waslike asking a crusading atheist to write a new catechism for the Vatican” (Freeland 2000, 29).9Friedman’s insights into the nature of real-existing communist economieswere important for a variety of reasons that would later prove crucial during thetransition period. It was the distorted market economy that failed in 1989 and1991, with the social networks and political interconnections that had beenformed under the incentives of that distorted system. The system led to disproportionate power to those in politically privileged positions, inefficiencies inproduction due to perverse incentives and the distorted signals of administeredprices, and lacked any incentive for innovation, change, and progress. As Friedman would put it during a trip to China in 1988, “The problems of overcomingvested interests, of frustrating rent-seeking, apply to almost every attempt tochange government policy, whether the change involves privatization, or eliminating military bases, or reducing subsidies, or anything else” (Friedman 1990, 94).In order to defeat the vested interests and transition to a free market economy, Friedman counseled that reformers move quickly and decisively. The discussion is subtle because Friedman admits that “slow and steady” may outperform “one fell swoop” under certain conditions, and in particular mayoutperform with regard to issues of equity and political sustainability of thereforms. But ultimately, the arguments for economic efficiency, and the realitythat gradualism enables vested interests to organize and fight against change,leads one to lean toward quick and decisive moves in economic policy. Thisdoes not mean that reformers should give little thought to the political sustainability of reforms. Instead, as Friedman highlights, there are a few basic ways toaddress the tyranny of the status quo in economic reform. One way, followedin the case of British Telecom, is to try to create stakeholders from the vestedinterests so they will see the benefits of privatization. As Friedman warns, theproblem with this approach is if you end up simply substituting a privatemonopoly for a government monopoly, the politically connected will fight tomaintain an effective barrier to entry in the respective industry.10 To avoid thisproblem, Friedman himself advocated a free distribution of shares in the stateenterprises and then allowing citizens to freely buy or sell the shares in an openmarket. And, finally, rather than fighting the existing monopoly head-on, thereformer could simply eliminate the government-enforced barrier to entry in theindustry and allow the market to generate substitutes either through the entry
144Peter J. Boettkeof direct competitors or technological innovations that change the nature of theindustry.11While we have seen that the different economists in Russia acknowledgedFriedman’s influence in framing their discussions, the most successful economicreformers in Poland and the Czech Republic borrowed from Friedman morethan a frame of reference. Poland’s finance minister, Leszek Balcerowicz, hasturned to Friedman to find practical ideas from monetary stabilization to privatization to the flat tax.12 Jeffrey Sachs (1993, 87), Anders Aslund (2002, 256), andMarshall Goldman (2003, 196) all credit Friedman as the “godfather” of thevoucher privatization proposals that circulated throughout transition economies.Perhaps the strongest endorsement of a direct influence of Milton Friedmanguiding the transition experience comes from Vaclav Klaus, and thus it is worthquoting him at length from a speech he gave at the Prague School of Economics on the occasion of awarding an honorary doctorate to Milton Friedman onApril 17, 1997:Reading and studying Milton Friedman’s works helped me and many of usto understand economic reality, to understand economics, to understand itsmethodology, the role of the market in society, the role of the state in a freemarket economy, the role of money in the economy etc. Surely there wereother influential authors but there was no one comparable in intellectual andhuman integrity, in firmness of stances and attitudes, in innovative boldness, in simplicity and clarity of exposition and in the scope and quality ofimportant contributions both to economic theory and to the theory of public policy.Milton Friedman is, however, not only a theoretician in the very rigorous discipline of economic science. He is, at the same time, a true believer in theunrestricted market economy and I believe that his books Capitalism andFreedom, together with a more recent Free to Choose, opened the eyes ofwhole generations of not scholars but of ordinary citizens on all continentsof this planet.All that helped us to understand the tenets of the old communist regime andits oppressive character and economic irrationality. With Milton Friedman’sworks as our background we had no dreams about the so-called third ways,about perestroika, about the reformability of communism. Milton Friedmanhelped us to interpret the actual communist economy not as a textbook command economy, based on directives going in the vertical direction from thecentral planning commission at the top to individual firms but as a verystrange and truncated market economy with imperfect, but neverthelessdominant horizontal relations among economic agents at the microlevel. Milton Friedman knew that it was impossible to suppress human behaviour, the
Milton and Rose Friedman’s “Free to Choose”145spontaneity of exchange, implicit if not explicit prices, wide-spread bargaining etc. It was a very rare attitude at that time.At the same time, the works of Milton Friedman helped us to understand thelogic of the transformation of a communist country into a free society and afull-fledged market economy. Because of him, we had a clear vision whereto go and a pragmatic strategy how to get there. We did not want to mastermind the whole process because it would not be possible and definitely notsuccessful. We knew we had to trust free citizens to create the new world —with a moderate help from the above only.Klaus’s words touch on the themes we have emphasized as coming out ofCapitalism and Freedom and Free to Choose with regard to the power of markets and the tyranny of controls, and clearly state how Friedman’s ideas guidedthe construction of economic policy during the transition.How have these policies fared? If you listen to the popular press and leftleaning academics, then you will hear about social disruptions and a generaldiscrediting of market reforms in East and Central Europe and the former SovietUnion. But the popular rhetoric is often divorced considerably from the realityof the situation, especially as compared with merely a decade ago.13 As VladimirDlouhy, the former minister of industry and trade of the Czech Republic has putit: “If someone would have told me in 1989 that by 2009 we would have a capitalist economy, the rule of law, a stable democracy, European integration, etc.,etc., I would have told them they were crazy. When you look at the immediatepast, you become a pessimist. When you look at a longer term horizon, theprogress is breathtaking.”14 Of course, mistakes were made, and the corruptinginfluence of interest group politics is ever present. Intellectually, we now knowthat we must emphasize the necessity of certain key institutions in order formarkets to work as effectively as we might hope—a point that is implicit in theFriedman analysis of the power of the market and tyranny of controls, but nowmust be made more explicit, as has been repeatedly stressed by JamesBuchanan (1997), Ronald Coase (1992), and Douglass North (1994). Moreover,culture and history no doubt represent a significant constraint on our ability toestablish a successful market economy in the former communist economies, asrecently stressed by Steve Pejovich (2003).The impact of culture and history is not felt in terms of economic performance of market-oriented reforms if they were implemented.15 Privatizationand competition will lead to gains in productive efficiency and with that, wealth.But the culture and history of a country can impede the long-term legitimacy ofthe private property order and thus reverse the policy mix in a country. Thisleads us back to the project of the Friedmans — to educate not just the intellectuals of any society but also the citizenry. The economic liberal’s project is notonly to pursue a correct scientific understanding of the world but to change the
146Peter J. Boettkeintellectual climate of opinion toward an appreciation of the liberal project ofconstraining the government and encouraging the voluntary cooperation ofindividuals in society.16 And here we can hope that the peoples of the formersocialist economies will continue to benefit from the teachings of the Friedmans.In 1980, they ended Free to Choose with an optimistic chapter pointing out that“The Tide Is Turning.” The call to action that the Friedmans make is characteristically straightforward:Needless to say, those of us who want to halt and reverse the recent trendshould oppose additional specific measures to expand further the power andscope of government, urge repeal and reform of existing measures, and tryto elect legislators and executives who share that view. But that is not aneffective way to reverse the growth of government. It is doomed to failure.Each of us would defend our own special privileges and try to limit government at someone else’s expense. We would be fighting a many-headedhydra that would grow new heads faster than we could cut the old ones off.Our founding fathers have shown us a more promising way to proceed: bypackage deals, as it were. We should adopt self-denying ordinances that limitthe objectives we try to pursue through political channels. We should notconsider each case on its merits, but lay down broad rules limiting what government may do. (Friedman and Friedman 1980, 287)The danger is when a people forget that one of the most basic truths inhuman affairs is that the greatest threat to our freedom and our ability to realize peaceful social cooperation is the concentration of power in the hands offew. As the Friedmans warned, we had deluded ourselves in the twentieth century into believing that the concentration of power was not a threat as long asthat power was to be used for good purposes (Friedman and Friedman 1980,297). The costs to humanity were great, and nowhere as great as to those peoples who had to endure the good intentions of communism.17 Hopefully, thereformers-turned-political-leaders learned not only how to privatize theireconomies but also how to constitutionally constrain their governments fromthe wisdom of Milton Friedman.CONCLUSIONWe live in a world where activists take to the streets to protest globalization and the inhumanity of capitalism, and at the same time are wearing sneakers constructed in Indonesia, sweaters made in England, pants made in theUnited States, and gas masks made in Canada. Of course, a free market economist himself can find fault with the International Monetary Fund, World Bank,and World Trade Organization, but that degree of subtlety is absent from our
Milton and Rose Friedman’s “Free to Choose”147protestors’ argument. On the other hand, they contend that the spread of markets throughout the world generates a race to the bottom in terms of labor policy and environmental control, and reinforces an unequal distribution ofresources between rich and poor nations.The logic of economic reasoning and the evidence point in the oppositedirection. Markets are the most effective means available to improve the lot ofmankind by spreading the international division of labor and increasing the productive capacity of mankind. Increases in real income can result only fromincreases in real productivity, and increases in real productivity result fromimprovements in labor skill, advancements in the stock of technological knowledge, and more effective management and organization of economic production within enterprises. Globalization brings all three of these sources of realproductivity gains from the more developed economies to the less developedones. Moreover, the expansion of the market area erodes the power of localmonopolies and exposes political leaders to world standards of acceptable public policy toward the least advantaged in a society. As the Friedmans contendedin Free to Choose, letting the market genie out of the bottle destabilizes themonopoly on political power that the ruling elite possess in a comman
stakes highlighted the technological gap between the economic systems and top-pled the system. Still another hypothesis is that a generation of political leaders from within the communist system that came of age during 1956 (the “thaw gen - eration”) and knew first
