HOME BOOK COVER BIOGRAPHY COPYRIGHT CONTENTS PLATES TABLES CHARTS BIBLIOGRAPHY AUTHORS INDEX BIBLICAL INDEX SUBJECT INDEX SEARCH LEGAL

CHAPTER 2

The Champions of the Free Enterprise System

 

Intellectual champions of the free enterprise system, such as Milton Friedman and Friedrich A. Hayek, both recipients of the Nobel Prize in economics, assured us that the only road to freedom is through the marketplace -- and that collectivism is a sure road to serfdom.1 But many supporters of the marketplace understand neither Friedman nor Hayek. In Capitalism and Freedom, Friedman asserted that the basic economic transaction of the marketplace -- the act of buying and selling -- benefits the buyer and the seller, "provided the transaction is bi-laterally voluntary and informed"2 [italics in the original]. What many of the "solemn buffoons"3 of the marketplace, as Nietzsche called them, do not seem to understand, is that, if this bi-lateral condition is not met, then Friedman's "possibility of co-ordination" of human activity "through voluntary co-operation," is dashed -- the marketplace degenerates then collapses, and Capitalism becomes yet another road to tyranny, servitude, and misery4 -- not just for minorities, but for the majority.

 


Navigator
 

Plate 2-1
Plate 2-2

Table 2-1

1 See Friedrich A. Hayek, The Road to Serfdom (1944), 50th anniversary edition, with a new Introduction by Milton Friedman, 1972 and 1994.

2 See Milton Friedman, Capitalism and Freedom, with the assistance of Rose D. Friedman, 1962 and 1982, at 13.

3 See Friedrich Nietzsche, Thus Spoke Zarathustra (1892), translated with an Introduction by R.J. Hollingdale, 1961 and 1969, at 78-81 (Of the Flies of the Marketplace), especially 79 ("The marketplace is full of solemn buffoons . . . ").

4 Friedman's characterization of "the typical state of mankind"; see Milton Friedman, Capitalism and Freedom, 1962 and 1982, at 9.

  

 

CAPITALIST DOCTRINE
SELECTED PHILOSOPHICAL AND IDEOLOGICAL FOUNDATIONS -- FRIEDMAN AND HAYEK

 

MILTON FRIEDMAN FRIEDRICH A. HAYEK
ECONOMICS AND FREEDOM

"The typical state of mankind is tyranny, servitude, and misery" (C&F, at 9).

"Economic arrangements" and "political freedom" are interrelated. The latter is not possible without "economic freedom" (C&F, at 8).

"Competitive capitalism" separates powers into "economic power" and "political power." This separation "promotes political freedom" (C&F, at 9).

LIBERTY

"Individual liberty" and "private property" are "inseparable" (LLL3, at 166, and associated notes at 203-204). "Liberty" and "responsibility" are also inseparable (COL, at 71).

"Those who would give up essential liberty to purchase a little temporary safety deserve neither liberty nor safety" (quote from Benjamin Franklin in RTS, at 147).

The protection of the individual's "privacy and secrets" by the government, which is "critical" to liberty, has so far been inappropriate (LLL3, at 63).

THE MARKET

The market is not only indispensable to society, it is the only vehicle for coordinating human activities -- while promoting freedom. The other vehicle is "central direction" -- or "coercion" -- as practiced by armies or totalitarian states. (C&F, at 8-9.)

The "economic transaction" is the basic element for coordinating the exchange of goods and services between parties. In a free society, the transaction must be "bi-laterally voluntary and informed." In other words, it must be free and uncoerced. (C&F, at 13.)

THE MARKET

The "market order" is a "wealth-creating game" -- a "game of catallaxy." In this "game," economic outcomes depend on "luck" and "skill" -- and not on "merit." Therefore, the game can be "felt to be unjust." (LLL2, at 115 and 120.)

The "market order" is a "spontaneous order" which allows individuals to coordinate their actions, and to use their "knowledge and skills" to increase their wealth (LLL2, at 107, 120, 124, and 126).

The "market mechanism" is the "most effective method for securing services that can be priced" (COL, at 125).

"Interference" in the market order is an "act of coercion"; it "can never be just" -- as it distorts the marketplace, and secures "privileges" and "benefits to some at the expense of others" (LLL2, at 128-129).

COMPETITIVE CAPITALISM

"Competitive capitalism" is a model of "social organization" where economic exchanges between parties are beneficial to both parties, voluntary, and uncoerced. "Competitive capitalism" is the name given to a "free private enterprise exchange economy." (C&F, at 13.)

COMPETITION AND THE PRICE SYSTEM

Competition is the best arrangement for coordinating the economic activities of individuals. And the "price system" is the best system for conveying "information" (about values of goods and services and opportunities) to individuals, so they can adjust their "decisions" accordingly. (RTS, at 55-56.)

MONEY

Money is an efficient "means" of exchange (C&F, at 14.)

MONEY

Money is "one of the greatest instruments of freedom ever invented by man" (RTS, at 98-99).

HARM

Two kinds of harms must be distinguished: "Positive harms" (e.g., harms inflicted by coercing someone into signing a contract), and "neighborhood effects" (e.g., effects of pollution) (C&F, at 14).

COERCION

"Coercion is evil" because it "eliminates an individual as a thinking and valuing person and makes him a bare tool in the achievement of the ends of another" (COL, at 21).

The "only way to prevent" coercion is "by the threat of coercion" (COL, at 21).

LAW AND ORDER

Law and order must be used to: "prevent physical coercion"; and to "enforce contracts" (C&F, at 14).

The "rules of the game" are maintained, interpreted, and enforced by the government (C&F, at 15 and 27).

RULE OF LAW

The Rule of Law prevents the government from exercising arbitrary coercive or discriminatory powers against the individual. It allows individuals to determine, in advance, the "actions" of the state, and to "plan" accordingly (RTS, at 80-81, 89, and 92-93). The Rule of Law is a necessary, but not sufficient, "condition for the satisfactory working of a free economy" (COL, at 222).

The "rules of just conduct" serve to "prevent conflict." They act to eliminate "some sources of uncertainty," and, therefore, "facilitate co-operation" (LLL2, at 38).

In the market, only the "rules of conduct" can be "just" -- not the outcomes. The question whether the outcomes can be just or unjust is meaningless. (LLL2, at 70 and 122.)

MONOPOLIES

Monopolies -- labor, private, or public -- reduce the options and alternatives available to consumers. Monopolies can seriously "interfere" with free exchange. (C&F, at 14, 28, and 36.)

The three major areas of monopoly are: "monopoly in industry"; "monopoly in labor"; and "government and government-supported monopoly" (C&F, at 121-128).

The three major sources of monopoly are: "'technical' considerations"; "government assistance"; and "private collusion" (C&F, at 128-132).

MONOPOLIES

Monopolies have two powers: "power . . . over the prices" and "power to discriminate." Such powers, when used to "coerce" individuals or firms," to "restrict competition," or to "influence" the behavior of the market, are "harmful" (LLL3, at 84).

Monopolies can result from "collusive agreement" or from "deliberate policy" by the state (RTS, at 51-52).

"Government monetary monopoly" has been systematically "abused in order to defraud and deceive" the people (LLL3, at 57-58).

SOCIAL RESPONSIBILITY

The only "social responsibility" of corporate capitalists is to maximize money for stockholders (C&F, at 133).

ECONOMIC CONTROL

Economic control is a "path to totalitarianism" -- and to the "suppression of individual liberty" (RTS, at 101-102, and associated footnotes).

ENEMIES OF THE FREE MARKET

Socialists and communists (C&F, at 21).

Government mismanagement; flawed monetary and fiscal policies; wrong rules for maintaining the stability of prices. (C&F, at 37-55.)

ENEMIES OF FREEDOM

In the long run, "expansionist" monetary policy destroys freedom. A monetary policy supporting "inflation" leads to greater "state control." The effects of inflation include  (COL, at 337-339):

  • a weakening of old age security;
  • decreases in savings; increases in debt;
  • increases in the rich-poor gap;
  • increases in social tensions;
  • increased preoccupation with "immediate advantages";
  • increases in "government control"; and, ultimately,
  • decreases in freedom.

"Single-minded idealists" and "fanatics" (socialists and communists) bent on "planning" society (RTS, at 61-62).

 
Table 2-1   Capitalist Doctrine: Selected Philosophical and Ideological Foundations -- From Friedman and Hayek

The views collected here are derived from works by Milton Friedman and Friedrich A. Hayek. The summarization, organization, and classification are mine.

Sources:

C&F Milton Friedman, Capitalism and Freedom, with the assistance of Rose D. Friedman, 1962 and 1982
RTS Friedrich A. Hayek, The Road to Serfdom (1944), 50th anniversary ed., with a new Introduction by Milton Friedman, 1972 and 1994.
COL Friedrich A. Hayek, The Constitution of Liberty, 1960.
LLL2 Friedrich A. Hayek, Law, Legislation and Liberty, Vol. 2, 1976.
LLL3 Friedrich A. Hayek, Law, Legislation and Liberty, Vol. 3, 1979.

[Copyright 1998 by MACROKNOW INC. All rights reserved.]

 

 

THE IDEAL ECONOMIC TRANSACTION
IN THE IDEAL FREE PRIVATE ENTERPRISE EXCHANGE ECONOMY

 

Plate 2-1
 
Plate 2-1    Milton Friedman's Ideal Economic Transaction: Informed and Uncoerced

What is the ideal economic transaction? How is the individual's economic freedom related to his political freedom? These and other important questions have been addressed by Milton Friedman. According to Friedman: both parties to the ideal economic transaction, the buyer and the seller, co-operate voluntarily -- the transaction must be both informed and uncoerced. The technique for co-ordinating the exchange without coercion is the marketplace. The fundamental requirement for a free enterprise system is the maintenance of law and order.

Source: on economic transactions, see Milton Friedman, Capitalism and Freedom, with the assistance of Rose D. Friedman, 1962 and 1982, at 7-21.

[Copyright 1998 by MACROKNOW INC. All rights reserved.]

 

 

THE REAL ECONOMIC TRANSACTION
HOW THE PRIVATE ENTERPRISE SYSTEM CAN BE MANIPULATED

 

Plate 2-2
 
Plate 2-2
   The Real Economic Transaction: Not Necessarily Informed or Uncoerced

The real economic transaction is nowhere close to Friedman's ideal transaction. The marketplace and the legal system are frequently manipulated by dominant parties whose success depend on having entrenched net advantages. Many private and commercial transactions are often neither informed nor uncoerced; they are often nothing but speculative gambles -- with other people's money. The asymmetries in the powers of many parties to economic, political, and social transactions are too great.

[Copyright 1998 by MACROKNOW INC. All rights reserved.]