Capitalism and Freedom Part Four – Friedman

Friedman, Capitalism and Freedom

Friedman, Capitalism and Freedom

Part three of this blast from the past looked at The Role of Government In a Free Society. In that chapter, Friedman argues that small government is conducive to individual freedoms. The more the government looks after people–even with seemingly benign programs such as retirement pension plans–the less freedom a people have. Remember that the Canada Pension Plan (CPP) isn’t free (except perhaps for the first generation of recipients). The contributions come out of your and your employer’s pockets. If there was no CPP, you would have been able to spend your money as you saw fit.

Incidentally, the last company I worked for had a defined benefit plan. They gave the employees the option to opt out of the plan; employees who opted out would have the deduction for the pension plan removed from their paycheques. That is to say, they would receive a larger paycheque. I opted out and invested the money in investments of my own free choosing. Expanding CPP (that is all the talk these days) is fine. But why not make it so people can also opt out of it? That way, those without investment knowledge would be covered and those wishing to manage their own retirement portfolios would be able to do so.

While a fan of small government, Friedman believes that government does some things better than the private sector. First, government is a rule maker and umpire. Second, government coins and regulates the value of money. With this, we turn to chapter three: The Control of Money.

Friedman on The Control of Money

Our task in this and the following chapter is to steer a course between two views, neither of which is acceptable though both have their attractions. The Scylla is the belief that a purely automatic gold standard is both feasible and desirable and would resolve all the problems of fostering economic co-operation among individuals and nations in a stable environment. The Charybdis is the belief that the need to adapt to unforeseen circumstances requires the assignment of wide discretionary powers to a group of technicians, gathered together in an ‘independent’ central bank, or in some bureaucratic body. Neither has proved a satisfactory solution in the past; and neither is likely to in the future.

The gold standard is undesirable because the amount of money in a society would be dependent on the ability of that society to extract, refine, and produce gold. Friedman doesn’t mention this, but this brings to mind ancient Athens. Why was Athens able to attain hitherto undreamt levels in literature, art, science, and philosophy? Was it because of their democracy? Maybe. But it was more likely because they had unlimited money in the form of the silver mines of Laurium: 20,000 slaves toiled there daily in the 5th century. So, a gold or a silver standard can positively or negatively affect a state, depending on its mineral wealth.

The central bank is undesirable because, in attempting to resolve crises, it often makes the problem worse. Friedman blames the Federal Reserve System for exacerbating the Great Depression.

I find these shoulda woulda arguments on the Great Depression only half convincing. Arguing that ‘this made things worse’ or ‘this made things better’ is at best a thought experiment. To do a controlled experiment in economics, you’d need to set up an alternate-earth to see the actual effects of differences in policy. The failure of shoulda woulda arguments is that they are not tested against their unintended consequences. I much prefer economists to make projections into the future based on their models and hypotheses. While it would be hard to determine whether their forecasts are right because they were right (they can nail the prediction and still be dead wrong), at least they have to face up to the unintended consequences of their policies. This seems more honest than the ‘I told you so’.

Friedman On the Dispersal of Power

A liberal is fundamentally fearful of concentrated power. His objective is to preserve the maximum degree of freedom for each individual separately that is compatible with one man’s freedom not interfering with other men’s freedom. He believes that this objective requires power to be dispersed.

While Friedman is talking about the dangers of concentrating the power of regulating money in the government, the need to disperse power got me thinking about the amalgamation of municipalities.

Victoria, or Greater Victoria, is composed of many separate municipalities: Saanich, Esquimalt, Langford, Sooke, and so on. There has been talk for many years about amalgamating the municipalities. There would be significant cost savings to streamlining everything: fire, police, garbage, landscaping, and so on, especially for the smaller municipalities such as View Royal, which has a population under 10,000. There would also be benefits to businesses. Building inspectors from each of the municipalities all follow the BC Building Code, but they interpret the clauses differently. Amalgamating the municipalities would mean a construction company would know what to expect no matter where the construction site was located.

I’m a fan of amalgamating the municipalities. So much waste in having little dukedoms spread over the place, duplicating services. I guess here I disagree with Friedman: I favour efficiency over freedom.

Friedman On Inflation

In the present state of our knowledge, it seems to me desirable to state the rule in terms of the behaviour of the stock of money. My choice at the moment would be a legislated rule instruction 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 rat of X per cent, where X is some number between 3 and 5. The precise definition of money adopted, or the precise rate of growth chosen, makes far less difference than the definite choice of  particular definition and a particular rate of growth.

By ‘growth in the stock of money’ I take it that Friedman means ‘inflation’. How times have changed since he wrote those words in the early 1960s! Today the bogeyman is deflation and we are lucky to achieve a 2% rate of inflation. From 1984-2015, core inflation has averaged 2.22% As of October 2015, core inflation is at 2.1% and dropping. No wonder the 1960s were a decade of change: at 5% growth, every 20 years, the society is 100% changed (5% * 20 years = 100% change). People speak of ‘change’ today. But at 2% growth and under, how much change can you have? Countries like India and China, which are growing at >7%: now there’s possibility for change (and revolution if you’re not careful).

In the quote on inflation, I take it that Friedman wants the mandate of the Federal Reserve to be limited to maintaining inflation rather than full employment. Today, the Federal Reserve (and also the Bank of Canada) has a dual mandate: target inflation and full employment. I’m not sure about this, but the argument seems to be that if monetary conditions are stable, let private enterprise figure the employment part out. That sounds reasonable to me.

The thing I don’t quite get is why a 3-5% rate of inflation was targeted in the 1960s and why a 2% rate of inflation is desirable today. Why do we need inflation at all? Is inflation and growth the same thing?–i.e. if the GDP rises 3%, does inflation also rise 3%? I don’t think so. Is inflation built into the system to prevent people from hoarding money (because it eats away at non-invested savings)? Or?

Until next time, I’m Edwin Wong and, believe it or not, Doing Melpomene’s Work, like economics, is a study of how people behave in a dog eat dog world where resources are limited.