Capitalism: freedom or death!

The review of another edition of the ‘’Bible of neo-liberalism’’ by an advisor to Reagan from the economic observer of Realnoe Vremya

Capitalism: freedom or death! Photo: news.com

Even though the economic science is not a religion, but it has sacred canonical texts from authors such as Adam Smith, David Ricardo, Alfred Marshall, John Maynard Keynes… Every self-respecting economist must acquaint themselves with their works. Milton Friedman is rightly among this great pantheon. His canonical radical book Capitalism and Freedom, according to the economic observer of Realnoe Vremya Albert Bikbov, is still relevant today, though it was written in the distant 1962. The main thing it teaches is to respect the spirit of economic freedom and to fight the dominance of a state in the economy.

What is China reading today?

President of the People's Republic of China Xi Jinping, who has attended the forum in Davos this year, spoke in support of globalization. He said so liberal speech that made everyone uncomfortable:

''The right thing to do is to seize every opportunity, jointly meet challenges and chart the right course for economic globalization. <…> We must <…> say no to protectionism. Pursuing protectionism is like locking oneself in a dark room. While wind and rain may be kept outside, that dark room will also block light and air.''

In his speech, Xi Jinping called to abolish intercountry trade barriers, to reduce tariffs. Anatoly Chubais, was also attended the forum in Davos, called the speech ''an ode to the market economy''. Now China stands in support of globalization, free trade. But the United States and the United Kingdom bristled by various protectionist tools and now they encourage to close and lock the room for the winds of globalization. The world has turned upside down.

This market approach by the Chinese leadership is not surprising. The top leadership of China at every opportunity quotes Adam Smith, whose books flooded the Chinese book shops. Secretary of the Central Commission for Discipline Inspection Wang Qishan, chief fighter with corruption in China, in the form of an order forces his employees to read the books of Alexis de Tocqueville (a historian of American democracy). Democracy and market economy — it is surprising to hear it from communists! But in China, even incomplete adherence to these canons gives the result, a significant one I'll say!

President of the People's Republic of China Xi Jinping, who has attended the forum in Davos this year, spoke in support of globalization. Photo: newstes.ru

If you look at the list of favourite books of Xi Jinping, you'll be surprised to find the absence of Karl Marx and Friedrich Engels, and Lenin is very modestly presented by the book Imperialism, the Highest Stage of Capitalism.

However, the list includes many books of a convinced economy marketer and democrat. Here they are:

  • The Federalist by Alexander Hamilton, James Madison, and John Jay
  • De l'Esprit des loix by Montesquieu
  • The Theory of Economic Development by Joseph Schumpeter
  • Economics by Paul Samuelson
  • Economic Growth of Nations: Total Output and Production Structure by Simon Kuznets
  • An Inquiry into the Nature and Causes of the Wealth of Nations by Adam Smith
  • Capitalism and Freedom by Milton Friedman

The list was published by the state newspaper People's Daily on 14 Oct 2016, so it is easy to guess what the great mass of Chinese is reading today.

Father of neoliberalism

Milton Friedman deserves special attention. If Adam Smith is 240-years-old archaism, Milton Friedman is the latest work from the list, though first published in 1962. By the way, Milton Friedman visited China in 1980 and he gave an intensive course of lectures on the pricing theory to the top Chinese leadership during a week.

Milton Friedman, an American economist, won the Nobel Prize in Economics in 1976 ''for his achievements in the field of consumption analysis, monetary history and theory''. His name is usually associated with the leader of the Chicago monetary school (Friedman is neither more nor less than ''father of monetarism'') and the main opponent of the Keynesian concept of state regulation of the economy.

Milton Friedman, an American economist, won the Nobel Prize in Economics in 1976 ''for his achievements in the field of consumption analysis, monetary history and theory''. Photo: ipolitics.ca

The name of Friedman is associated with the current economic revolution of the last 30-40 years in the world. The economists call the work of Friedman a ''point of reference''. The economic policy of U. S. President Ronald Reagan, Prime Minister Margaret Thatcher in many respects is connected with the ideas of Friedman. By the way, in 1981-1984, Friedman was an economic advisor to U.S. President Ronald Reagan. He also consulted the strategy of implementation of the Marshall Plan developed by John Marshall.

Both scientific and political fields, many of the reforms that occurred in Latin America are based on the ideas of Friedman. In the 80-90-s, the first reform was the reform in Chile, then in Eastern Europe, in China, in many other countries around the world it was connected with what was said and promoted by Milton Friedman.

The Bible of neoliberalism

Of course, the question immediately arises: ''How can the book, in which much of the practical reasoning is associated with American intellectual 55-year-old disputes, be interesting?''. Yes, a lot of it is already out of date, nevertheless, the book is still in the must read list of a huge number of eminent economists and observers. The book is often called the Bible of neoliberalism.

Yegor Gaidar characterised it in the following way: ''This book, in my opinion, is a must read for any educated person, regardless of the fact that whether they share the views of the author or not. If no, at least in order to argue competently.''

The book is so radical that out of 14 points proposed in the book (about which I will tell below), the U.S., even until today, has decided only on the rejection of the conscript army. Can you imagine what shock it was in 1962! Despite the fact that the times were grim for free market. The period of the mid 1950s-early 1960s is perhaps the peak of influence of dirigisme and socialist ideas in the world. The dynamic growth of economies of the socialist countries was not interrupted yet by growing difficulties of their development in the 1970s, President of the U.S. John Kennedy and Prime Minister of Great Britain Harold Macmillan are discussing what they will do when the USSR will surpass the USA in economic power. In the public consciousness dominates the belief in the usefulness of expanding state participation in the regulation of economic processes and increasing the share of public expenditure in the gross domestic product. Left-wing intellectuals, highly influential in academic circles, prove that seemingly obvious advantages of the socialist economy can be mixed with the preservation of political freedoms.

The dynamic growth of economies of the socialist countries were not interrupted yet by growing difficulties of their development in the 1970s, President of the U.S. John Kennedy and Prime Minister of Great Britain Harold Macmillan are discussing what they will do when the USSR will surpass the USA in economic power. Photo: cvce.eu

Just then there was very influential Milton Friedman with his manifesto of economic freedom, which they listened to. In the 1970s, the United Kingdom and the United States refused the economic doctrine of Keynesianism in favour of neoliberalism. In England with the advent of Thatcher there was the famous ''conservative revolution'', Reagan hold the neoliberal course in the United States. The turn of the Western world to the new doctrine occurred through the efforts of the financial elite of the developed countries aspiring to freedom from government interference in the market economy.

The main idea of the book is freedom. It is economic and political freedom for a country, for a person, an individual human freedom because the creator of all wealth in the modern world, which it has always been, is human being himself. The more they are free, the more they can do.

Recipes for success: limiting the powers of the state, plus federalism

As Milton Friedman wrote in Introduction:

''The free man will ask neither what his country can do for him nor what he can do for his country. He will ask rather «What can I and my compatriots do through government» to help us discharge our individual responsibilities, to achieve our several goals and purposes, and above all, to protect our freedom? And he will accompany this question with another: How can we keep the government we create from becoming a Frankenstein that will destroy the very freedom we establish it to protect? Freedom is a rare and delicate plant. Our minds tell us, and history confirms, that the great threat to freedom is the concentration of power. Government is necessary to preserve our freedom, it is an instrument through which we can exercise our freedom; yet by concentrating power in political hands, it is also a threat to freedom. Even though the men who wield this power initially be of good will and even though they be not corrupted by the power they exercise, the power will both attract and form men of a different stamp.

How can we benefit from the promise of government while avoiding the threat to freedom? Two broad principles embodied in our Constitution give an answer that has preserved our freedom so far, though they have been violated repeatedly in practice while proclaimed as precept.

First, 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 more 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. By relying primarily on voluntary co-operation and private enterprise, in both economic and other activities, we can insure that the private sector is a check on the powers of the governmental sector and an effective protection of freedom of speech, of religion, and of thought.

The second broad principle is that government power must be dispersed. If government is to exercise power, better in the county than in the state, better in the state than in Washington. If I do not like what my local community does, be it in sewage disposal, or zoning, or schools, I can move to another local community, and though few may take this step, the mere possibility acts as a check. If I do not like what my state does, I can move to another. If I do not like what Washington imposes, I have few alternatives in this world of jealous nations.''

Milton Friedman: If I do not like what my local community does, be it in sewage disposal, or zoning, or schools, I can move to another local community, and though few may take this step, the mere possibility acts as a check. If I do not like what my state does, I can move to another. If I do not like what Washington imposes, I have few alternatives in this world of jealous nations. Photo: macrobusiness.com.au

Tatarstan could not agree more with the last paragraph. Indeed, we need the powers and funding not only at the regional level (which often Tatarstan President Rustam Minnikhanov criticises about the federal government) but also at the local municipal level.

Milton Friedman literally praises freedom of exchange:

''So long as effective freedom of exchange is maintained, the central feature of the market organization of economic activity is that it prevents one person from interfering with another in respect of most of his activities. The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. The seller is protected from coercion by the consumer because of other consumers to whom he can sell. The employee is protected from coercion by the employer because of other employers for whom he can work, and so on. And the market does this impersonally and without centralized authority.

Indeed, a major source of objection to a free economy is precisely that it does this task so well. It gives people what they want instead of what a particular group thinks they ought to want. Underlying most arguments against the free market is a lack of belief in freedom itself.

The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the «rules of the game» and as an umpire to interpret and enforce the rules decided on. What the market does is to reduce greatly the range of issues that must be decided through political means, and thereby to minimize the extent to which government need participate directly in the game.''

And more:

''The need for government in these respects arises because absolute freedom is impossible. However attractive anarchy may be as a philosophy, it is not feasible in a world of imperfect men. Men's freedoms can conflict, and when they do, one man's freedom must be limited to preserve another's as a Supreme Court Justice once put it, ''My freedom to move my fist must be limited by the proximity of your chin.''

Famous 14 principles of radical neoliberalism

Then Friedman gives the famous 14 principles what the government in the U.S. should not do. So, the principles are following:

  1. Parity price support programs for agriculture,
  2. Tariffs on imports or restrictions on exports,
  3. Governmental control of output,
  4. Price and wage control,
  5. Legal minimum wage rates, or legal maximum prices,
  6. Detailed regulation of industries and transportation,
  7. Control ofradio and television,
  8. Present social security programs,
  9. Licensure provisions in various cities and states,
  10. Subsidyprograms directed at fostering residential construction,
  11. Conscription to man the military services in peacetime,
  12. National parks,
  13. The legalprohibition on the carrying of mail for profit,
  14. Publiclyowned and operated toll roads.

Besides, he criticises the Fed in the period before and during the Great Depression and he formulates the general monetary Milton's rule of ''monetarism'':

''My choice at the moment would be a legislated rule instructing the monetary authority to achieve a specified rate of growth in the stock of money. For this purpose, I would define the stock of money as including currency outside commercial banks plus all deposits of commercial banks. I would specify that the Reserve System shall see to it that the total stock of money so defined rises month by month, and indeed, so far as possible, day by day, at an annual rate of X per cent, where X is some number between 3 and 5.''

If he was alive today, imagine how strongly he would be against protectionism policy, supported by Donald Trump! Photo: businessinsider.my

Milton Friedman passionately criticises any restriction to the international financial and trade relations. If he was alive today, imagine how strongly he would be against protectionism policy, supported by Donald Trump!

There is also a strong detailed criticism of Keynesianism on the part of fiscal policy, which the Western countries followed in the 70-80s. In the book there are many arguments for commercialization of education, the elimination of monopolies and compulsory licensing. There are also amazing thoughts about the idea of departure from a progressive taxation, that surprised me most of all, the idea of introduction of a certain similarity to one of the most interesting systems of modern social support. We are talking about BI, Basic Income. It should be noted that Milton Friedman wrote about this back in 1962, much ahead of its time.

So, this book is a must read and I believe it will be relevant for a long time.

By Albert Bikbov