Economics, Consequentialism

Milton Friedman’s Classical Liberalism

Economist Milton Friedman, 1983Inspired by Pete Boettke’s semi-recent post, I’ve just finished re-reading Milton Friedman’s Capitalism and Freedom. It is a great work articulating and defending liberalism “in its original sense.”

It is also a work that illustrates the ways in which classical liberalism differs from the kind of 20th century libertarianism espoused by Ayn Rand, Murray Rothbard, and Robert Nozick. The difference between these positions is sometimes blurred over, perhaps even in Pete’s first post here. But in the way I see the libertarian landscape, they are distinct positions, even if they share a strong family resemblance.

Take the issue of the size and scope of the legitimate state. The standard libertarian view is that the night-watchman state is the most extensive state that can be justified – police, courts, and military. Milton Friedman, however, believes that the state is often justified in going beyond these narrow bounds:

“The scope of government must be limited. Its major function must be to protect our freedom both from the enemies outside our gates and from our fellow-citizens: to preserve law and order, to enforce private contracts, to foster competitive markets. Beyond this major function, government may enable us at times to accomplish jointly what we would find it difficult or expensive to accomplish severally. However, any such use of government is fraught with danger. We should not and cannot avoid using government in this way. But there should be a clear and large balance of advantages before we do.” (Capitalism and Freedom, pp. 2-3)

Note the tension here. Friedman (especially by the time of Free to Choose) is aware of the kind of public choice considerations that make it risky to give the government the power to good. But he sees the government, like the market, as a kind of tool that we can and should use to achieve gains for society when it is appropriate. It is a dangerous tool. But sometimes it is the best tool that we have.

Much of Friedman’s book, of course, is devoted to criticizing government – its monetary policy, its role in education, its licensure of various occupations, and so on. But toward the very end of the book, Friedman points out that government has done some things well:

“The expressways crisscrossing the country, magnificent dams spanning great rivers, orbiting satellites are all tributes to the capacity of government to command great resources. The school system, with all its defects and problems, with all the possibility of improvement through bringing into more effective play the forces of the market, has widened the opportunities available to American youth and contributed to the extension of freedom. It is a testament to the public-spirited efforts of the many tens of thousands who have served on local school boards and to the willingness of the public to bear heavy taxes for what they regard as a public purpose. The Sherman antitrust laws, with all their problems of detailed administration, have by their very existence fostered competition. Public health measures have contributed to the reduction of infectious disease. Assistance measures have relieved suffering and distress. Local authorities have often provided facilities essential to the life of communities. Law and order have been maintained, though in many a large city the performance of even this elementary function of government has been far from satisfactory. As a citizen of Chciago, I speak feelingly.” (Capitalism and Freedom, p. 199)

There’s some mixed praise in there, to be sure. But the basic message is clear. Government has done a lot of good. And the implication certainly seems to be that government has done good in ways that the market on its own could not have done. For Friedman, that’s good enough. For Rand, Rothbard and Nozick, of course, it wouldn’t be.

It’s easy to assume that the practical difference between classical liberalism and libertarianism stems from differences in their underlying moral philosophy: Friedman is a utilitarian, while Rand, Rothbard and Nozick are all natural rights theorists. But notice that nothing in the passages I’ve quoted here commits Friedman to consequentialism at all, let alone a naive utilitarianism. You could agree with everything that Friedman said and still believe that liberty has intrinsic value (i.e. that it is not merely instrumentally valuable for the utility it produces). You could agree with everything that Friedman has said and still believe in natural moral rights. To say that government is a tool that we should use when it works is not to commit oneself to consequentialism. It is merely to commit oneself to the view that we face a variety of moral demands, the balance of which does not always preclude state action.

Published on:
Author: Matt Zwolinski
  • A minor point.

    “To say that government is a tool that we should use when it works is not to commit oneself to consequentialism.”

    Well, it is not to commit oneself to a thoroughgoing consequentialism, i.e., all that matters is consequences. But it is to commit oneself to consequentialism as one part of an overall moral view. Most, if not all, people who accept ‘natural rights’ also accept that, in some circumstances, a duty to promote good consequences will override a duty to respect a natural right.

    I doubt that I am contradicting you. I am just clarifying terminology.

    • If I understand your point, then I would be resistant to using the term ‘consequentialism’ in that way. What distinguishes consequentialism, as I see it, is its stance that consequences are the *only* thing that matter in the moral evaluation of an action. To say that a view is partly consqeuentialist because it holds that consequences matter somewhat or in some circumstances is, I think, to water down the term to the point of uselessness. Believing that consequences sometimes and in some ways matter, morally, does not make you a consequentialist; every plausible moral theory agrees with this.

  • Phillip Black

    I highly disagree with the notion that Friedman was a utilitarian. Friedman had repeatedly said that freedom is an end NOT a means. Friedman is the living reincarnation of  the J.S. Mill who wrote, “On Liberty.”

    • Aeon Skoble

      Well, he’s not the _living_ reincarnation of Mill, I’m positive about that.

    • Kevin Vallier

      You can include freedom in a utility function as an independent goal to be achieved that is a proper part of utility.

    • The J.S. Mill who wrote “On Liberty” was also the J.S. Mill who wrote a little book called “Utiltitarianism.” A lot of people have argued that there’s a tension between those two works, but Mill himself seemed to think that liberty was entirely compatible with utiltiarianism.

    • Damien S.

      I think I remember him saying in C&F that it was a lucky coincidence that the path of freedom was also the path of greatest prosperity, but that he would advocate freedom even if it wasn’t most prosperous.  (This in 1963, when lots of people still worried about the competitive powers of Communism.)  I was impressed by this statement of principle, back when I was 14.

      These days I note it’s cheap to make a stand on principle when you think it pays off the best anyway, and that very few people actually advocate a system they think makes things worse off in a way they care about.  (Some might grant that social justice measures slow GDP growth, but not think that’s very important.)  Almost everyone’s an implicit consequentialist, invoking good consequences as fall-back to defend a system they primarily defend for reasons of deontology or tradition or authority or self-interest or something.  Perhaps out of instinct, perhaps because it’s the only way to reach someone who doesn’t share one’s deontology, tradition, etc.

      Of course, that opens the door to intellectual dishonesty and corruption, if it turns out the consequences of something one is already committed to believing in aren’t in fact optimal.   Easier to deny the evidence than to actually admit inferiority but belief anyway.

      Which suggests to me that the people who are have the least amount of principles or axioms, and the most commitment to consequentialism for its own sake, are most likely to have an accurate view of consequences.

  • Aeon Skoble

    Is this a philosophical distinction or an empirical one?  “Government has done a lot of good. And the implication certainly seems to be that government has done good in ways that the market on its own could not have done. ”  But the argument is that he’s simply mistaken: we would have highways and dams and sanitation trucks even if there were no government. 

  • Frank Hecker

    This reminds me of the discussion of Friedman and other classical liberals in John Tomasi’s “Free Market Fairness” (which I’m currently reading). I get the impression that classical liberals lost out to libertarians in large degree because although they believed that government could have legitimate functions beyond the basics, they couldn’t “prove it”, i.e., find a compelling philosophical justification deducing from a set of plausible and congenial axioms.

    To make an analogy with the sciences, it’s like the old “mathematicians vs. physicists” debates. There have been cases where the physicists could get good results built on foundations that were shaky (e.g., Newton used calculus productively well before it had an adequate mathematical basis) or even absurd (e.g., the Bohr model of the atom, which made no sense given the existing physics at the time). If I’m reading Tomasi right, he’s trying to provide a more solid philosophical foundation under the ideas of classical liberalism–which I guess would make him the would-be Schroedinger of political philosophy.

    • A big part of it, too, is a problem of line-drawing. Libertarianism draws a bright line between permissible and impermissible actions (or appears to do so, anyway). Classical liberalism, as I understand it, is much more resistant to line-drawing. Determining the proper functions of government is more a matter of practical judgment than deductive logic. And I think people like a doctrine with clear implications, even if the clarity is achieved only by the sacrifice of nuance.

      • Frank Hecker

         This is a good point, and ties in with a thought I had in reading Bruce Schneier’s “Liars and Outliers” at the same time as “Free Market Fairness”: I’m wondering if this enthusiasm for line-drawing is partly driven by changes in the relative effectiveness of social norms vs. laws in driving beneficial collective action and deterring potential defectors. To the extent that we move away from operating on the societal equivalent of handshake deals and towards a more legalistic framework, it seems to me that the temptation would exist for people (and not just libertarians) to nitpick the social contract, seeking less ambiguity in its language and trying to renegotiate it on terms more congenial to their own beliefs and desires.

      • Damien S.

        Heh.  I OTOH for a while was thinking of myself as classical liberal after reading some Hayek, precisely because he seemed a lot more nuanced than most of the libertarianism I knew[1].  And that’s when I was still pretty radical libertarian.

        [1] Commodity-basket money instead of gold standard; market as information eliciter rather than assuming perfect information; granting that market outcomes wouldn’t always look ideal or fair on their own merits but insisting they were fair if fair rules were followed.  Don’t remember if I’d seen the support for social insurance.

    • Damien S.

      Depends what you mean by ‘lost out’.  As a distinct category, maybe.  But people holding such views probably got swallowed up into one form of conservatism (government small but sometimes useful) or modern liberalism.  As Matt says, there’s a clear line between classical lib. and pure libertarianism, but not on the other side, where the difference between this sort of classical liberal and a social democrat is largely a matter of degree.

      • Frank Hecker

         I meant “lost out” in the sense that (speaking as a layperson) it seemed like the intellectual energy had gravitated to more explicitly libertarian philosophies and philosophers (e.g., Nozick et.al.)

    • geoih

      Classical liberals lost out to libertarians because the empirical evidence shows that using government for ‘good’ results in the monstrosity we call the state today. Friedman was right, using government is fraught with danger, and all you have to do is look at government as it exists today all over the world to see the disasterous results of that danger.

      • Frank Hecker

         I accept that many (most?) libertarians believe that the current world situation shows that social democracy and “mixed-economy” states are doomed, and I agree that modern democracies face a lot of challenges. However in the past socialists believed that capitalism was headed for the ash-heap of history, and we know how that turned out. It’s entirely possible, even probable IMO, that democracies  around the world will muddle through, surviving and even thriving as a result of some combination of fiscal reform, market liberalization, and other policy changes in the classic liberal mold, but not ending up anywhere near the minimal state of libertarian ideals. I guess we’ll see how things evolve.

  • “we would have highways and dams and sanitation trucks even if there were no government” — sanitation trucks, sure, but where’s the empirical evidence for creation of large public works projects in the absence of government institutions?

    • LogisticEarth

      of

    • OTTObox

       Check out “How Capitalism Saved America” by Thomas J. DiLorenzo.  Well sourced book with plenty of examples of private roads and canals built before the federal government became a large bank for “public works.”  Another example is the Great Northern Railroad which was privately financed and did not succumb to the whims of congressmen wanting a depot in their district or forced to run through “under-served” markets.

      Another question to ask is why would government take on public works projects then pass non-competition laws?  Prime example is Tennessee Valley Authority.   Seems that government knew that services would eventually be provided and was covering for the favors it was giving contractors involved with construction and maintenance.

      • Thanks, the GNR is a good example.  On the flip side (similar to LogisticEarth’s point), this recent book on Hoover Dam sounds interesting: http://www.usnews.com/opinion/articles/2010/06/17/hoover-dams-big-government-lessons

  • dL

    The social justice of a police state.  But, hey, as long as the trains run on time…

    • Huh?

      • dL

        Huh?

        Capitalism and Freedom is an old book for a different time. The United States is a police state.  Given this, you should be concerned about correcting/reforming violations against the fundamental boundary constraints of the liberal state than pondering effective actions by State actors.

        More generally, a critique of  BHL can be found here:
        http://rulingclass.wordpress.com/2011/07/09/liberaltarian-failure/ 

        • Can’t I be concerned about both? Or is your view that Friedman’s argument somehow justifies or legitimizes a police state? 

          • dL

            Sure you can be concerned with both. But I would say that when the State threatens to become the total source of government, then there is really nothing further to think about. The conversation vis a vis liberalism is over.

            And regarding Friedman, I believe his policies inadvertently contributed to American totalitarianism.

  • famadeo

    I’m afraid that quote completely threw me off. I can only imagine the context is that Friedman acknowledges gov’t is *capable* of doing things well and still prefers (for whatever reason) that they were done by the market. Otherwise, I don’t see any possible  reconciliation between libertarianism and what is effectively a form of modern-day liberalism without one swallowing up the other.

  • “However, any such use of government is fraught with danger. We should not and cannot avoid using government in this way. But there should be a clear and large balance of advantages before we do.” (Capitalism and Freedom, pp. 2-3)

    I suppose we should consider the “clear and large balance of advantages” that existed in the mid-1960’s (when the Federal Reserve was freed of the responsibility to maintain Treasury-Direct coin redeemability), and then compare them with the advantages and ever-increasing dangers of maintaining a modern day Fed that views Congress and its debt collector (the IRS) as its puppets.

    • The problem with money is that it doesn’t have a title recording system like we have for cars and real estate (to prevent unscrupulous sellers from selling the same car or house to multiple buyers). If we did have such a system for money, we could truly say the money in our bank account is ours, and it wouldn’t be subject to multiple payment, i.e., it couldn’t be in two or more places at once.

      Because of great difficulty in creating a title recording system for money (especially where depositors are not demanding title to their money) governments often control the money creation and distribution process through taxation (ususally income taxation), and let private parties create as many money substitutes as the market will bear.

      In Friedman’s defense, maybe because of the extreme impracticality of dealing in hand-to-hand coin (which was really the only way to prevent multiple payment in his time), he felt his best option was to let the Fed have its debt-based income tax regulated currency, even though it precluded workers from claiming self-ownership in their labor, and even though it compromised Congress’ Treasury-Direct monetary powers.However, would Friedman choose differently if today Congress and its Treasury Department announced it had the ability to create an electronic monetary titling system?  

      • “The problem with money is that it doesn’t have a title recording system like we have for cars and real estate (to prevent unscrupulous sellers from selling the same car or house to multiple buyers). If we did have such a system for money, we could truly say the money in our bank account is ours, and it wouldn’t be subject to multiple payment, i.e., it couldn’t be in two or more places at once.”

        You’re making a mistake. There is no money in your bank account. Saying that there is, is a common but inaccurate shortcut. The way your checking account works is that you go to the bank, hand them $100 and they write you an IOU for $100. That IOU is called a “deposit”. When you go to the store and pay $100 with your debit card, you take your $100 IOU and give it to the merchant. It is clear that nothing fishy is going on as long as you think about what happens in more precise terms.

        Where did the money go? That’s none of your business. You agreed to lend it to the bank and as long as they abide by the rules of your loan contract, they can do whatever they want. It’s their money, not yours.

        • That’s my point. We need to change the game so the money in our bank accounts IS ours. Continuing our tacit consent to the existing system will eventually bankrupt all of us, and no amount of philosophizing will make it go away.  Federal Reserve debt notes can never be our money, and you’re correct, we shouldn’t even refer to these notes as money.

          But there is great inertia working against us, so we need lots of nail-eating lawyers.  Banks obviously don’t want the money to be ours, which would mean they’re mere baby sitters who are only allowed to keep the spread between our deposits and the interest rate at which they’re able to lend our money out to others. 

          Gov’t hates the idea because right now they just take what they need from the Fed, without asking us, while deluding us into thinking they need our tax dollars to run the gov’t, which they don’t. 

          Corporate America’s employers hate the idea too because of their dependency and often close ties to banks/gov’t.

          • “That’s my point. We need to change the game so the money in our bank accounts IS ours.”

            There are no laws requiring you to open an account with a fractional-reserve bank. You are free to instead have a safety-deposit box and put your valuables, including cash, in there. You could also open a bank that practices 100% reserve. Of course, good luck competing with the more efficient arrangement that fractional reserve banking provides…

            And what I said is not that money in your bank account isn’t yours. What I said is that it’s not currency. It’s deposits. You very much own the deposits. You just don’t own the currency you gave to your bank because that’s what giving something to someone means. You bought an IOU called a deposit from the bank and now they own the money and you own the IOU.

            “Federal Reserve debt notes can never be our money, and you’re correct, we shouldn’t even refer to these notes as money.”

            I don’t understand what you mean by money not being ours. I very clearly own the Federal Reserve Notes in my wallet. I also own the deposits that I have with my bank. It’s mine.

            “Banks obviously don’t want the money to be ours, which would mean they’re mere baby sitters who are only allowed to keep the spread between our deposits and the interest rate at which they’re able to lend our money out to others.”

            That’s exactly what they do. They take your money, give you and IOU and loan out some of the money keeping the spread. What is your complaint?

            “Gov’t hates the idea because right now they just take what they need from the Fed, without asking us, while deluding us into thinking they need our tax dollars to run the gov’t, which they don’t.”

            If what you said was true, the FOMC would adopt a very lose monetary stance. But they don’t. Look at the TIPS spread.

          • Banking corporations in the U.S. get their charters — i.e., their permission to exist — under the authority of state and federal constitutions, so if I want to object to Federal Reserve debt notes (which you claim you “clearly own”) and maintain my bank accounts only in Treasury-Direct coin or non-coin money, banks are obligated to provide it under McCulloch v. Maryland (1819), which in a nutshell, stands for principle that a child (a subsidiary corporation) cannot dictate what a parent corporation must do. 

            So, no, I don’t buy your argument that I must get a safe deposit box and only deal with banks on terms they’d prefer.

            Also, I suppose you could argue we can “own” debt, but that’s a pretty low grade property right. 

            And, if my deposit was never really money, but an IOU (a debt the bank owes to me), what gives the bank the right to loan it out as though it were money, and thereby acquire claims to real property?

          • “And, if my deposit was never really money, but an IOU (a debt the bank owes to me), what gives the bank the right to loan it out as though it were money, and thereby acquire claims to real property?”

            What gives the bank the right to use the currency you gave them? The fact that you gave it to them. Let me try one last time:

            You start out owning a Federal Reserve Note which bears the denomination of $100. You walk into a bank. You hand them the note. They give you an IOU (called a “deposit”) which states in a nutshell that at any time, you can walk into the bank, present the IOU they are contractually bound to give you Federal Reserve Notes which total a denomination of $100. At that point, they own the Federal Reserve Note and you own the IOU. At this point, you can roughly do whatever you want with the IOU and they can do whatever they want with the Federal Reserve Note because that is the essence of property rights.

            So at this point, the bank might parts or all of this note to purchase IOUs from other people. Or they might use it to purchase some other asset. I’m not sure what’s so strange about that.

          • “The fact that you gave it to them … and they can do whatever they want with the Federal Reserve Note because that is the essence of property rights.”

            Wow, I hope you never become a fiduciary, or even a baby sitter for that matter.

            When I deposit money in a bank, it’s not a gift or a donation for them to do whatever they please (even if they pay me a pittance in interest).

            I consider my deposits to represent my property, my hard earned wages.  And if the bank doesn’t see it that way, we have serious issues.

          • Argh! Yes, your deposits are your hard-earned property. Not the currency you used to buy the deposits. The fiduciary duty of the bank owners concerns your deposits, NOT the currency you gave them to purchase said deposits.

            The problem is that you are using imprecise language. There are two separate things involved here: Currency and Deposits. You use Currency to buy Deposits. When you have purchased Deposits using your Currency, the Currency is no longer yours. Now, you instead own Deposits. Deposits are a claim against the bank’s assets and they do come with fiduciary responsibilities, but that does not mean that you still own the Currency that you gave to the bank. Now, that Currency has become an asset of the bank and most likely, the Deposit specifies that they must manage their assets in a prudent manner in order to be able to honor their claims, but that doesn’t mean they can’t go and prudentially purchase stuff using the Currency in question.

          • “When you have purchased Deposits using your Currency, the Currency is no longer yours … that Currency has become an asset of the bank.”

            You’re assuming that I’ve deposited a debt-based currency that was already owned by the banking system, i.e., the Federal Reserve note. However, I’m advocating that depositors make a legal demand for Treasury-Direct-only accounts, in which case the deposit becomes a liability of the bank, not an asset.

          • “You’re assuming that I’ve deposited a debt-based currency that was already owned by the banking system, i.e., the Federal Reserve note. ”

            What does that have to do with anything? (Oh, and I would very much like to see some sort of evidence that Federal Reserve Notes are owned by the banking system as you claim. The pieces of paper are in my wallet and I dispose of them as I see fit. That sounds like ownership to me.) What I described is a system that started with goldsmiths in the 17th Century. You go to the bank, give them an asset and they give you an IOU. What is so complicated about that?

            “in which case the deposit becomes a liability of the bank, not an asset.”

            That’s what giving you an IOU means. That’s what deposits are. Look at a bank’s balance sheet. Deposits are in the “liability” section, always.

  • I think a plausible libertarian critique of Friedman is that, sure, government is capable of “good” works, but at someone’s expense.  The government normally has this advantage when undertaking any action.  When it puts up tariffs, it benefits certain industries, but at the expense of consumers.  When it grants monopoly privileges, it is at the expense of someone else.  The better way to look at it is as a tradeoff.  Sure, governments built dams, but at what cost?  Is the cost worth it?  Is it moral to do good at someone else’s expense?  This is really just another way of saying what Bastiat pointed out.  We cannot only look at the seen; we must also look at the unseen.

    • 3cantuna

      Like too many Mont Pelerin Society liberals, Friedman supported elements of social democracy, these elements chosen selectively based on personal preferences rather than sound economics.  Not only does Bastiat apply here, but further implications of Mises’s economic calculation argument (that even Mises did not consistently incorporate or logically develop).  In order to understand economic viability of roads, courts whatnot, competitive property must be voluntarily exchanged so that real prices emerge from which to conduct entrepreneurial review and speculation. The State destroys legitimate property and voluntary exchange– rendering calculation distorted, muted or impossible. Is it fair to say that Friedman believed this problem non-existent or surmountable via mathematical construct and/or government techno-management?

    • 3cantuna

      Further, to say that the national expressways were dangerous but necessary for the government to force on people is clearly an understatement from a historical and human point of view. OTTObox and Logistic Earth go into it above. Friedman must have known about Chicago’s racist thug political machine Mayor Daley and his success at making the fed highway a de facto apartheid barrier, too.

      •  You’re preaching to the choir.  I’m an anarcho-capitalist, but I’m always open to opposing argument.  I’m simply trying to understand Friedman’s positions better and find more nuanced opposition to his position.  I’ve always been baffled by Friedman, especially his monetary positions.  How could he have gotten everything so right, but that so wrong?  As Matt Z pointed out, it’s easy to criticize from the anarcho position, I’d just like a less clear-cut criticism for my more moderate intellectual opposition.  If they can at least get the cost-benefit analysis, we might be able to convince them of the further complications.  As you probably know, just getting that far is a monumental Sisyphian feat.

        • Damien S.

          Echoing Robin Hanson: how do you know he got it wrong?  Why do you think he got it wrong, and what do you think he would say about why *you* get it wrong?

          •  Right, obviously people take different positions on monetary policy.  You have Keynesians, monetarists, Austrians, and many in between.  Perhaps I’m more sensitive to central banking incompetence because I’m living through the Euro crisis.  I’m also a big believer in Hayek’s view of knowledge.  Obviously, my views could be wrong.  In the end, my view that Friedman got monetary policy wrong is just an opinion.  I have many reasons for my views, but others have reasons why he was right and others different reasons why he was wrong.

          • Damien S.

            Funny you should mention the euro crisis, since what the ECB is doing wrong is in not doing what Milton Friedman would have recommended!  He’d be all about the expansionary monetary policy in these circumstances.  Instead they’re running the euro a lot like a gold standard, i.e. a fixed or slightly growing money supply indifferent to what’s going on.  So the central bank is messing up — in not doing its job and in acting as if it weren’t there, in a sense. 

          • Well, doesn’t it depend on what you think caused the crisis?  You seem to think current tightening (though that’s debatable since they’ve pumped a trillion euros in) is the problem.  I would say the loosening of credit and moral hazard unleashed before it came about was the cause.  Interpretation.  Friedman also praised Greenspan highly and never saw the 2008 crisis coming.  Interesting.

          • 3cantuna

            Do you really think that the Fed, with all of its privileges of printing money and paying off friends, could ever stick to Friedman’s 3% (if I recall) rule?  Maybe professionalism can overcome Lord Acton’s dictum about power?

          •  Even the 3-5% is arbitrary.  What if the economy swings and the demand for money drops or rises?

          • 3cantuna

            Right. Price stability is a myth and attempts at aggregational control is theft and destruction.

          • Damien S.

            The Fed is currently failing to hit 2%. The ECB isn’t even trying.  The Bank of Japan hasn’t exactly been running up the inflation either.

            Reality, liberal bias, etc.

          • That’s why the Treasury Department itself should be issuing money its own money, not using privately-owned central banks. Private money-issuers will naturally play the game in ways most likely to effect payment of interest owed to them, not what is best for a nation’s economy.

            When the Treasury Department issues its own (non-coin) money, the money is still debt, and still needs to be regulated by an income tax, but there is no interest due on the money’s issuance, so it can issue whatever is necessary (but ultimately coin-redeemability is what keeps Congress tied to reality).

        • 3cantuna

          How could Friedman advocate himself out of a career and prestige by dropping monetarism?  Even now in the States more than half of all professional economists have ties to the Central Bank and its fortunes.

  • Christopher Morris

    All systems either of preference or of restraint, therefore, being thus completely taken away, the obvious and simple system of natural liberty establishes itself of its own accord. Every man, as long as he does not violate the laws of justice, is left perfectly free to pursue his own interest his own way, and to bring both his industry and capital into competition with those of any other man, or order of men. The sovereign is completely discharged from a duty, in the attempting to perform which he must always be exposed to innumerable delusions, and for the proper performance of which no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society. According to the system of natural liberty, the sovereign has only three duties to attend to; three duties of great importance, indeed, but plain and intelligible to common understandings: first, the duty of protecting the society from violence and invasion of other independent societies; secondly, the duty of protecting, as far as possible, every member of the society from the injustice or oppression of every other member of it, or the duty of establishing an exact administration of justice; and, thirdly, the duty of erecting and maintaining certain public works and certain public institutions which it can never be for the interest of any individual, or small number of individuals, to erect and maintain; because the profit could never repay the expence to any individual or small number of individuals, though it may frequently do much more than repay it to a great society.

    Book IV, ch. 9

    • 3cantuna

      Chris, do you buy Smith’s argument for public works?

      • Christopher Morris

        yes, subject to an efficiency condition and some other constraints. (I don’t want to suggest I have worked this out.)

        • 3cantuna

          Thanks. It would be interesting to see how you work this out. Especially how you overcome the problem of economic calculation concerning public works. There also is an incentive problem for those commandeering public funds– e.g. there is a disconnect between power and responsibility.

    • berserkrl

      By “public works” does Smith mean government projects — or chartered private corporations?

      • Christopher Morris

        reply both to berserkr1 and cantuna:

        I’m not an expert on Smith, but I always read this passage as an early statement of the collective action problem posed by public or collective goods (in the technical sense). So I interpreted him as endorsing government action to provide collective goods (presumably when this is efficient and just). I thought I remembered a passage with some examples.

        This reading may be a bad one. I should ask an expert. 

        • berserkrl

          I don’t know that Petkantchin is right; I’m not an expert on the terminology of the time either.  But it’s an interesting article.

    • Friedman, by the way, has an extended discussion of this passage from Smith early on in Free to Choose.

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  • PrometheeFeu writes: “What I described is a system that started with goldsmiths in the 17th Century. You go to the bank, give them an asset and they give you an IOU. What is so complicated about that?”

    The fact that you want me to forget about whatever currency I deposited with the bank, and thereafter just accept the bank’s IOU’s as the only currency I can trade with.

    Imagine depositing gold coin currency with your 17th century goldsmith and receiving an IOU, then when you go to redeem your IOU for the gold coin, the goldsmith says, “That gold coin currency became mine when you deposited it, but here’s another IOU.”

    Similarly, today, if I make a legal demand for a Treasury-Direct-only (coin or non-coin) bank account, upon withdrawing from such an account, the bank has no right to make me accept the Federal Reserve’s IOU’s. 

    • Rick, you’re laboring under the fallacy of reification, imagining that money is something more real than what it actually is: an instrumentality of law. A lot of people make that mistake. It’s understandable, since from the individual perspective having a quantity of currency is to have wealth, since it can be exchanged for real goods and services. But from the 30000-ft, macro, perspective money is NOT wealth. Money is just accounting; a way to keep track of who has what. Currency is really just a way to do accounting without having to write stuff down. In a very real sense, all currency is IOU’s. It’s just a general claim on real goods and services in the economy.

      In the case of your goldsmith, what you’re getting upset about is that you’re not getting back the exact same gold, but rather an identical quantity of gold that is the same weight and purity.

      I agree with you that the Treasury should be issuing our money rather than a central banking cartel. But you’re focusing (obsessively) on the wrong issue — something that really isn’t a big problem in and of itself. The real issue is that the banking cartel collects interest on almost all the money in circulation due to the way money is created vis-a-vis FRB. The banks have the power to make or break on economy through the manipulation of interest rates.

      • Rod, I appreciate your comments, but I fully understand that money is a legal construct, i.e., it’s whatever a country’s constitution declares it to be. And our Constitution says that money is metallic coin, with no specification as to metal type. So, I have to disagree that “all currency is IOU’s” because current coin is not. But yes, paper/electronic money issued by Treasury-Department is a debt-free IOU and paper/electronic money issued by the central bank is a debt-based IOU.

        Also, I just used the 17th century goldsmith example above because PrometheeFeu used it, and I was not upset about being denied the same gold coin(s) I deposited with the theoretical goldsmith, but that I was denied ANY gold coins at all when I presented my IOU, which is what happened over the centuries:  

        We started using bits of paper and we all seem to have forgotten that the real underlying money, the only money that can discharge debt, was the underlying coin. According to PrometheeFeu, when I gave the goldsmith the gold coin (which could have been any metallic coin), I lost all rights to claim similar coin, but only rights to the goldsmith’s IOU’s. That’s an incorrect position (in my view) that he has replied to yet.

        Dismissing the reality that there is actually a currency capable of discharging debt plays into the hands of banking cartels. Please keep thinking about it anyway, as absurd as it sounds to demand current coin-only bank accounts.

        • Damien S.

          The US constitution says no such thing.  It gives Congress the power to coin money, and forbids states from coining money, or issuing bills of credit, or making anything other than gold or silver coin legal tender.  So there’s a coin bias.  OTOH Congress is not forbidden from using non-gold or silver coins, nor from issuing bills of credit, or setting the legal tender to be whatever it wants.

          And once you grant the use of any metal… say hi to the new dollar, a 1 kilogram iron coin.  Want to cash in your paper?

          • “Congress is not forbidden from using non-gold or silver coins, nor from issuing bills of credit, or setting the legal tender to be whatever it wants.”

            The problem here, and this is a major reason a privately-owned central bank was established in 1913, is that under the Legal Tender Cases (1871-1875), when Congress issues non-coined money, it has to represent a borrowing of existing circulating coinage. Therefore, without a Constitutional amendment, Congress cannot indefinitely issue a fiat paper/electronic currency, but private parties like the Fed can  (so long as they don’t block our access to coinage), though I often question whether even the Fed can Constitutionally be unbound from coin-redeemability.

            “And once you grant the use of any metal… say hi to the new dollar, a 1 kilogram iron coin.  Want to cash in your paper?”

            Yes, absolutely, which is not to say I want to physically deal in hand-to-hand coinage, but I do want coin’s ability to discharge debt, release me from a currency-regulating income tax, and its ability to make the banking system honest (because coined money can’t be in two places at once, it can’t be created out of thin air, as for example, can be done by adding zeros to paper money or hitting an extra keystroke for electronic money).

  • j_m_h

    A few thoughts, and not so much to dismiss Friedman — he’s definitely done some great work.

    1) Looks to Buchanan for a better understanding of the challenges in applications and functionality of these social tools we call market and government. I think he gets a lot deeper into the matter than Friedman does.

    2) I think there’s a lot of confusion, and perhaps ignorance , when people talk about the application of these tools to various ends or goals. Even first quote from Friedman begs such charges. Enforcing private contract carries a lot of baggage — what were the conditions or the contract and the negotiations…; “law and order” likewise — send in a swat team to  bust some small time pot dealer is not my idea of “law and order” in a free society; in what sense can government accomplish what severally we cannot? The roads and bridges that Friedman points to are falling apart under our cars and trucks–just getting something built when there is a lot of slack in the economy and plenty of room for fiscal and monetary expansion to fund the activity is not enough to support any claim of success.

    3) What really distinguishes government ability to bring people together into a cooperative effort and that of a corporation or mutual company? Sure, monopoly on force but surely that’s not the basis for Friedman’s statement. Here again, we might consider Buchanan to gain additional insights to forms and scope of action of our government that I don’t find we Friedman.

    4) What does “foster competitive markets” mean? That sounds like it opens the door wide to the concept of industrial and central planning. While I certain agree that government (governance) must play a key role here it probably should not have any type of monopoly role in terms of defining the rules of the game — at least not beyond some general principles. There was an interest article back in the mid 90s in JPE where a it was argued that some of the early merchant guilds were mistakenly viewed by the modern economist as monopolistic in their intent. What was argued was the rules for membership in these trading markets actually tended to promote quality and keep prices down. 

    If one is going to apply Friedman’s criteria of what government should be doing we really need some ex ante criteria upon which the policies can be judged. The problem is that, since these are all social goals, we’ve got the same type of problem any social planner has: a multitude of ends to be achieved with the application of the same tool — and the evaluation of the suitability of that tool to specific ends will differ so agreement will prove challenging to imposibel for whoever the decision makers are. And that assumes the decision makers are not partisan.

    • Damien S.

      “What does “foster competitive markets” mean?”

      anti-trust laws, for one.  Labeling requirements.  Externality taxes.

      “What was argued was the rules for membership in these trading markets actually tended to promote quality and keep prices down”

      Prices *down*?  This sounds like ideological redefinition of reality.  Did the author say the same thing of the AMA?

      Guess the author:
      “People of the same trade seldom meet together, even for merriment and
      diversion, but the conversation ends in a conspiracy against the public,
      or in some contrivance to raise prices.”

      • j_m_h

        You really miss the whole point and seem intent on argument rather than expanding the discussion and dialogue.

        Many of our anti trust laws not only daily to provide for competitive markets but intentionally pervert the underlying rules to ensure monopoly rents to incumbents.
        Is that what you’re support with your comment?

        Go read the article if want — I’ll dig the cite up if you need one. The authors said nothing about anything but the specific rules that governed membership behavior in a particular merchant guild — and keep in mind the guild did tent to have special trading rights in the cities they were located. The whole point was a) don’t be too quick to jump to conclusions about industry self-regulation and b) the underlying rules governing market actions are what matter when assessing the status of competitive or monopolistic. 

        I’m not sure that just “free entry” and enforcement of property rights does ensure competitive markets. Nor do I think the same set of rules will necessarily apply across time in a dynamic setting.

        Please complete the quote you’re suggesting I don’t recognize. And yes, that would be Adam Smith from Wealth of Nations. Silly cherry-picking out of context quotes is silly.

        Your reference to Smith is a good entry to the question of just what “competitive markets” means. If we’re conceiving of social institutions as tools then what is it the social application of that tool should be accomplishing? For instance, would a competitive market result in the actual producer earning the full value of the produce they produce? This is something you hear some libertarians as well as others alluding to if not flat or suggesting. This is a variant of the labor theory of value. Or should competitive markets serve to mediate the division of social surplus value in something like an aristotilian golden mean division? Or perhaps we should ignore the division of surplus value, consider it merely a residual and consider only allocative efficiency of a competitive market as we think of the what rules need to be in place to affect a competitive market setting?

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