Markets as a Justification for Milton Friedman’s New Liberalism

I’ve put up several weedy posts explaining my view of the terms Market and Market Economy. In this post I pull back to see how this all fits in with neoliberalism. The basic idea of 19th Century liberalism was stated by Milton Friedman in this essay:

This development, which was a reaction against the authoritarian elements in the prior society, emphasized freedom as the ultimate goal and the individual as the ultimate entity in the society. It supported laissez faire at home as a means of reducing the role of the state in economic affairs and thereby avoiding interfering with the individual; it supported free trade abroad as a means of linking the nations of the world together peacefully and democratically. In political matters, it supported the development of representative government and of parliamentary institutions, reduction in the arbitrary power of the state, and protection of the civil freedoms of individuals

… Whereas 19th century liberalism emphasized freedom, 20th century liberalism tended to emphasize welfare. I would say welfare instead of freedom though the 20th century liberal would no doubt say welfare in addition to freedom. The 20th century liberal puts his reliance primarily upon the state rather than on private voluntary arrangements.

Friedman prefers 19th Century liberalism, or as he calls it “new liberalism”, which focuses on the freedom of capital, and the economic liberty of the rich. Friedman takes up the misery of the working class and the poor in 19th C. England, and the solutions of Bentham.

The relation between political and economic freedom is complex and by no means unilateral. In the early 19th century, Bentham and the Philosophical Radicals were inclined to regard political freedom as a means to economic freedom. Their view was that the masses were being hampered by the restrictions that were being imposed upon them, that if political reform gave the bulk of the people the vote, they would do what was good for them, which was to vote for laissez faire. In retrospect, it is hard to say that they were wrong. There was a large measure of political reform that was accompanied by economic reform in the direction of a great deal of laissez faire. And an enormous increase in the well-being of the masses followed this change in economic arrangements.

Perhaps this quote is unfair; this is just a short paper. However a quick review of the google on this issue shows absolutely nothing of the sort. Here’s a typical example of what Bentham thought of the Poor Laws of 1834. Since the greatest good would be produced by the lowest taxes, this author says Bentham supported cutting poor relief to the bone.

Nevertheless, this quote seems to capture a central difference between Friedman’s new liberalism, and 20th Century liberalism, characterized by a willingness to use government to solve problems and rejecting the use of “private voluntary agreements” as solutions. Given the takeover of the mainstream Democratic Party by a version of Friedman’s new liberalism, (maybe changing, huh Rahm?) the current version of that view is largely the province of progressives, by which I mean those who question the prevailing economic discourse of neoliberalism.

Friedman tells us that neoliberalism values freedom, which he says has two parts, economic and political freedom. He claims that economic freedom supports political freedom by establishing a counterweight to the strength of government.

It is important to emphasize that economic arrangements play a dual role in the promotion of a free society. On the one hand, “freedom” in economic arrangements is itself a component of freedom broadly understood, so “economic freedom” is an end in itself to a believer in freedom. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.

Nobody doubts that economic freedom benefits the rich. The harder problem for Friedman is to explain how economic freedom for the rich benefits the rest of us. At the same time, most of us can see that political freedom can be a tool to make our lives better. We benefit from a well-run government that provides a common infrastructure on which we can build our lives: physical infrastructure like water and sewer services, roads, bridges, and health services; intellectual infrastructure like schools and colleges, research and development, and record-keeping and statistics; and security, in the form of police, fire, EMTs and military. The harder part is to explain how these benefit the very rich, who think they are exempt from such mundane needs; at least, they don’t want to pay for them.

To explain how the 99% benefit from economic freedom, Friedman and his neoliberal colleagues say that the market benefits all of us by allowing us to maximize our personal individual utility in exchanges of various kinds. They claim that the market will always maximize the utility of the individual, and will do a fabulous job of allocating scarce resources. This argument rests on neoclassical economic analysis from the likes of William Stanley Jevons. I think that argument is facially wrong, in part for the reasons I discuss here. There are no competitive markets in the sense Jevons uses the term. The idea that individual benefit at each point in time is the correct measure of utility is silly. It ignores the free rider problem, the problem of the tragedy of the commons, and the simple fact that most of us value our friends and family and neighbors, and want them to have good lives too. I’ll discuss various measures of utility in another post, I hope.

Deeper than this, there is a conflict at the heart of Friedman’s analysis. He claims to favor political freedom, but he argues that it must not be used to infringe on economic freedom. For example, he says:

The citizen of the United States who is compelled by law to devote something like 10% of his income to the purchase of a particular kind of retirement contract, administered by the government, is being deprived of a corresponding part of his own personal freedom.

There isn’t any question that Social Security has worked well to provide minimal support for all of us and our families and the disabled. When Friedman says that it abridges freedom, he is asserting that the only interest of any person is their personal utility at a given moment, which is to pay no taxes. He ignores, as Jevons does not, the personal utility for me in providing for the future, and for taking care of other people today. He is saying that if you disagree with this assessment of utility, you are being damaged by being forced to participate in the system, and that’s a denial of freedom. It’s obviously not political freedom, because Social Security is a valid law. It must be a violation of economic freedom. Or maybe it doesn’t matter.

The essence of political freedom is the absence of coercion of one man by his fellow men. The fundamental danger to political freedom is the concentration of power. The existence of a large measure of power in the hands of a relatively few individuals enables them to use it to coerce their fellow man. Preservation of freedom requires either the elimination of power where that is possible, or its dispersal where it cannot be eliminated.

Again, I’m citing a short paper by Friedman, and perhaps he has a more sophisticated argument, but this is patently absurd. The whole point of government is mutual coercion of all of us not to do things that damage us or the things we share in common, like air and water and safety, and to do things together that we cannot do by ourselves in the exercise of our maximum economic freedom. Friedman is arguing that preventing people from dumping nasty chemicals into rivers from which we drink is an abridgment of personal freedom; and that letting our neighbors die poor and sick is fine as long as we don’t coerce anyone to do anything.

Perhaps the danger of concentrated wealth in the hands of a few thousand people wasn’t paramount in Friedman’s mind, and if he were writing today he might rethink the italicized sentence in that quote. But the plain fact is that one of the best parts of democracy is our ability to protect ourselves from the power of a few rich people. As examples, Elizabeth Warren, Chuy Garcia, and Net Neutrality. Doing so requires a new way of thinking about the economy, because this one isn’t working for anyone except the rich. The first step on that road is knocking down the existing framework of discourse about the economy. And that is the goal of this series of posts.

11 replies
  1. earlofhuntingdon says:

    Friedman looks on social welfare as oppositional to economic and political freedom. He does admit that liberals might look on the 20th c. as seeing the growth of freedom and social welfare. (It also saw endless war and the substitution of economic for political imperialism.) His polemics rarely elaborate who benefits most from, and who pays for, the kinds of “freedom” he promotes. He’s a courtier for the haves.

  2. TarheelDem says:

    I noticed in your review of Friedman’s argument that the whole notion of “economic freedom” seems to be pulled out of the magician’s hat without any practical grounding of what that means. It certainly gets reflexive nods, but what exactly does it mean?

    I lived through the debates just prior to when Friedman wrote this; I know that it is grounded in an argument against the New Deal and is taking on FDR’s notion of Four Freedoms. But 40-50 years later “economic freedom” sounds like a hollow propaganda term. And the appeal to laissez-faire is like the waving of the magician’s scarf.

    With Friedman in general, economic freedom comes down to the right to profit regardless. The business types to whom Friedman appeals are all the time talking about people not allowing them to make a profit–the customer who complains about price, the vendor who complains about a raw deal, the employee who complains about wages, the government that demands reasonable taxes to cover infrastructure are all conspiring to prevent the poor business owner from making a profit. The worker is free to starve, but the business owner must be guaranteed a profit.

    It might be a helpful exercise for Americans to talk more specifically about what exactly economic freedom is and should not be. Or if it is more than terms of a lame appeal for economic privilege.

    The key point for me is the question of what does economic freedom mean for individuals in the institution of a corporation beyond the legal chief officer. Neoliberal individualism always is presented as everyman an entrepreneur, and that just is not how modern society is structured.

  3. Alan says:

    The Chicago School often likes to trace their lineage to Smith. There are ideological reasons for that. Bentham is a more realistic founding ancestor.

    Discussion of the Poor Laws has to bring in Malthus. Malthus is interesting as he provides a counter to the usual fairy tale of ever expanding markets and benefits flowing to all. He also provides and interesting twist on unintended consequences. Economists often misrepresent Smith in this regard. Read Wealth and there are examples of self-interested market actions that have unintended catastrophic consequences although you’d never know this from neoclassical economists waffling on about the ‘invisible hand’. Go to Hayek or Friedman and the idea is that one can never understand the whole system (unless of course you are Hayek or Friedman) but by pursuing individual self-interest the invisible calculating machine of the market takes care of everything and everyone benefits. This amounts to renunciation of any moral responsibility to consider the consequences of one’s actions. We have foresight, we think about consequences, we learn, etc. We are social and moral beings. That’s what makes us human. Malthus wrote about population (an issue still very much with us) but today one could also think about global warming, pollution, and so on.

  4. galljdaj says:

    I two points and a comment regarding the numerous things to be said… .

    The Free Trade World is anything but free, and in order to be a free trade which includes National Sovereignty, then the seller to a foreign country has no rights to sell in that country. The seller can sell to a buyer and may/must arrange shipment to the buyer and the buyer must arrange removal from the shipper. No warranties! No foreign owners of businesses. No work forces trading. Commodities only. Help is allowed when authorized and verification provided and provided by one friendly govt to another. The laws of each country are independent and sovereign. Visitors are subject to the laws of that country.

    As to practices within the US as to a free market, we don’t have such a system. First off, we the people license corporations for Our Benefit, the People and the Common Good. ha ha! Today we have an adversarial corporate/business structure. Profits and the few are the beneficiaries. Very few of the Peoples have benefits.

    We had benefits but its changed. Why? How? Many years ago, I wrote objecting to the legal system changing trials from finding the truth method to adversarial method, saying it would lead to ‘fighting’ and ‘injustices’ and has no place in democracy. The next objection I wrote about was the requirement that brought about Lawyer JUDGES AND POLITICIANS AS A RULE; The adversarial system training of lawyers will bring about the rule of the few over the Peoples!

    Walla! all the bad has happened! Lay People mixed in with Lawyers keep the Lawyers honest and the systems Free and Democratic in Our Elections!

  5. camelotkidd says:

    Karl Polanyi has quite a bit to say about this belief in an unchecked market.
    In The Great Transformation, he, offers a forceful argument against a neoliberal market economy with free trade pacts and ruthless capitalism. He argues that creating a neoliberal market economy mandates that humans and the environment be transformed into commodities, which will lead to the destruction of society and the environment.

    “Our thesis is that the idea of a self-adjusting market implied a stark utopia. Such an institution could not exist for any length of time without annihilating the human and natural substance of society; it would have physically destroyed man and transformed his surroundings into a wilderness.”

  6. bevin says:

    Bentham, whose brother Jeremy was one of Potemkin’s high level officials in Russia, was attracted by enlightened despotism. Towards the end of his life he congratulated himself on the way that his disciples had taken over the direction of the Indian Empire-that famous liberal JS Mill, who believed that lesser races were unfit to rule themselves, being a leading example. John Bowring-Bentham’s literary executor and friend-was largely responsible for the Second Opium war.
    The influence of Political Economy on utilitarianism and vice versa makes a very interesting study (James Mill was a close collaborator with Ricardo).
    As to the Poor Law of 1834, it remains central to all our politics “Are there no workhouses?” remains the first line in the national anthem of the selfish and the greedy.

  7. jonf says:

    What impresses me about the argument for free market economics vs. politics is its “squishiness”. The arguments seem invariably to condemn government power in favor of an all knowing and free individual in economic matters. Ignored are the importance of the commons and those things that might be termed for the public purpose, like roads and social security and education and even regulation of the more extreme elements of so called free markets. The market, and the allocation mechanisms embedded therein are emphasized, along with individual freedoms. Never mind that much of that market is far removed from the ideal “free” notion. Never mind because that would destroy the argument and lead to unwarranted power for the monopolist.

    I find it somewhat impossible to believe in either sector to the exclusion of the other. We live in a world of government and economic actors. It is not nearly so simple as freedom of the individual to the exclusion of all else. Friedman is an apologist for the rentier class and little more. He is a libertarian. And except for the wealthy, freedom can be elusive. Just ask the poor man. It often seems there is no recognition of a government economic sector, only a malevolent force. But we emphatically live in a multi economic sector, comprising no less that the government and private sectors. Why is the government’s ability to affect the economy so willfully ignored?

    As FDR demonstrated, what we need is a government in pursuit of the public purpose, not a favorite of any actor. Government and free men are simply not antithetical except in the minds of the wealthy. After all, those few, the one percent, are in pursuit of power for their own ends. Trickle down economics suits them just fine as it did Friedman. This does not mean government may be left to its own ends, but that we live in a world where cooperation within society is necessary to avoid a cataclysm. There are many failed states on this planet.

    This all leads directly to our current condition. The wealthy have been empowered by law through Citizens United and the sell out of the Democratic Party to the neoliberal creed to control our political discourse and what constitutes the public purpose. That only happened due to neglect. I fear I will never see anything different as the conservative-libertarian grip now appears unbreakable.

  8. Neil says:

    The harder problem for Friedman is to explain how economic freedom for the rich benefits the rest of us.

    Another sharp analysis. You could replace rich people with black people, and send us back to the 18th century!

    The harder problem for Friedman is to explain how economic freedom for black people benefits the rest of us.

  9. >Z says:

    It’s interesting to read about Friedman and compare the ideas and practices with the Chile case. The Mont Pelerin institute has been working hard in the post war era and continues to propogate these ideas and the newspeak of economic freedom. But the main course (and Friedmans´ main cornerstone) is to reduce the public notion and indeed utility of the state. This is the essence of monetarism.

  10. earlofhuntingdon says:

    Good point that Jeremy Bentham is probably a better forefather of Chicago’s neoliberals than Adam Smith. His founding of London’s UCL aside (his preserved remains, accoutered in period costume, sat in the main building for decades, occasionally purloined by inebriated undergraduates), Bentham was astringent about individual rights, meaning those claimed by the lower orders, and big on law and order, meaning the protection of those higher on the social/political/economic/legal scale (at Bentham’s time, those rights were inseparable). Smith’s nuance, especially his cautions about monopoly and unbridled self-interest, are usually ignored by Friedmanites and their courtiers (such as David Brooks).

    The idea that the pursuit of unbridled self-interest would generate any outcome but harm and more unbridled self-interest is illogical. That some good remains after the vaunted, governmentally sanctioned release of such selfishness is happenstance, forced to work as justification.

    • Alan says:

      Friedman himself seems to have gotten more extreme with age. His 1976 presentation on Smith at the Mont Pelerin Society meeting in St Andrews is full of nonsense. It was republished recently. See Adam Smith’s relevance for 1976. When you look at what he claims Smith claimed and what Smith actually writes in Wealth and Moral Sentiments one has to ask: is he illiterate or consciously misrepresenting Smith for his own ideological ends.

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