The long-running Selected Papers series features notable work by University of Chicago faculty and other business leaders. This essay is an edited excerpt; the original was presented in 1974 at a luncheon sponsored by the University of Chicago.
Do free markets make free men, or do free men make the free markets? That might seem like a play on words or a purely semantic question, but it is not. It is a very real and very important question, and I think it contributes a great deal to understanding the kind of world we live in, and might live in.
One’s offhand impression is to say, “Well it must be free men who make free markets.” There’s an element of truth in that, but I think to a far greater extent, free markets make free men and not the other way around.
It’s true that there have been free men who have made free markets. The founders of the United States were free men who believed in individual and personal freedom, and they set up a constitution that was designed to preserve free markets. But many people who regarded themselves as free men have produced totalitarian societies. The intellectual creators of the Soviet Union would have called themselves free men and would have said that they believed in individual and personal freedom. Yet they created not free markets but controlled markets.
I believe that free markets have historically been made much less by free men than by accidents of circumstance. The founders of the American Constitution did establish free markets, but what really preserved free markets in the US were not the philosophical ideas of the founders. It was a fortunate accident that in the 1830s, when state after state went in for government control and government activity, the government projects were failures.
At one time, the State of Illinois had state-owned and operated banks. They failed and went out of business. There was an enormous movement in the early 19th century for states to construct canals and railroads, a movement toward what today we would call socialism or national enterprise or central planning on a state level. But the crisis of 1837 wiped them all out. It was that accident, more than the philosophical ideas of the founders of the US, that preserved free markets in the US.
The experience of Great Britain was somewhat similar. There was a conscious, ideological movement known as the Anti-Corn Law League—by corn, as you know, at that time the British meant all grains, including wheat—and what stimulated free markets in that country was popular opposition to tariffs on food imports. That opposition was blown up by the Anti-Corn Law League into a fight of the grasping, selfish landowners against the ordinary people, and that’s what destroyed the tariffs. If you don’t have tariffs, it’s almost impossible to have anything other than free markets. The greatest defense of free markets is free trade among countries.
So I believe that you cannot really say that free men make free markets. They may or may not. But you can say with great certainty that free markets make free men and that controlled markets destroy free men.
This is more than symbolism; it is reality. If you look at our historical record, you will see that very clearly. It’s interesting to contrast the tycoons of industry of the 19th and the 20th century. The tycoons of industry of the 19th century, at a time when we had truly free markets and almost no governmental intervention, were men of independent mind and independent thought who were willing to stand up and say what they thought and what they believed. They were willing to express their opinions on affairs, wherever the chips might fall. The tycoons of the 20th century are people who have learned how to get around Washington. The criterion of success is that you know how to butter up the right people and get the right governmental regulation, or laws, or interpretations.
When a tariff is imposed on a foreign good or an export quota on a domestic good, consumers are forced to spend their income in ways that they would not spend it if they were free to do what they wanted.
If you want to see the effect of the absence of free markets on free men, I ask you to contemplate the state of free speech in the US today. How many people in the US today enjoy freedom of speech in the literal sense, in that they feel free to get up and say what they believe, honestly and freely, without fear of the consequences? I believe that only those of us who happen to hold tenured positions in private universities are today pretty fully assured of freedom of speech.
If you are the president of a great corporation, would you really feel free to get out and express your frank opinions? You would risk violating the interests of your stockholders if you stood up and said the wrong thing. Because there are too many legal and extralegal ways in which the government could crack down on your corporation.
Why is TV so bland? Because government gives, and government takes away, licenses. And every TV station operates under the threat that its license might be taken away. If, by accident, the television camera had been invented in the 19th century and the printing press in the 20th century, we would have free speech on TV in that case, but we would not have a free press.
We have something of a free press because of the accident that the press grew up at a time when there were free markets, and the press was not subject to control. You did not have to have a license from a federal press agency in order to be able to start a newspaper. But of course there are demands that we must control the press, and so very likely we shall move in that direction.
Whether we do or not is irrelevant to my main point: the way in which free markets make free men and unfree markets destroy freedom. It’s not because the people are better one way or another. After all, the human beings who occupy Russia are no different as human beings from those who occupy the US. If they do not seem to be free men, and people in the US do seem to be free men, it’s not because of a difference in their personal character or anything like that. It’s because of a difference of the institutions in the two countries. The chief difference in the institutions is that we still have some small measure of free markets, while they have a much lesser measure of free markets.
It’s easy, when talking about free men, to talk of abstractions: freedom to express opinion, freedom of belief, freedom of thought. My proposition is far more obvious for the more material components of freedom—the freedom to decide how to spend your money, what to do with your time, where to work, where to live. Those material aspects of freedom are all associated with free markets, and they are no less important to most people than freedom of thought, of speech, of political persuasion.
Here again, the absence of free markets destroys free men, and the presence of free markets makes free men. The average American citizen is free to spend, at most, 60 percent of his income. Forty percent is what the state, local, and federal governments spend on his behalf.
Why do I say “at most”? Because a large part of the other 60 percent you’re not free to spend the way you want. You’re not free to have or not have safety belts in your car. If you’re a businessman building a factory, you may not be free as to how to build it or where you build it. In fact, we are free to dispose of probably a good deal less than half of our income.
The only way political authorities have found to pay for their mistakes is to try to take advantage of the free market by interfering with it and by controlling it.
In October 1974, US President Gerald Ford got a couple of companies to agree to a “voluntary” embargo on sales of grain to Russia. I may have missed it in the papers, but I heard few voices sounding off about what a disgraceful and intolerable action that was, what a violation of human freedom it was to stop those sales. Why didn’t people sound off? Was it because they believed it was a desirable thing? Was it because they believed it was consistent with a free society that, without there being a law, a governmental official should be in a position to say to companies, “You stop that sale or else”?
If you had been the head of one of those corporations, you would have gone along too. Why would you have gone along? Not because you believed it was morally justified, but because you would have been afraid of what might happen to your income-tax returns, or whether your company would be slapped with an antitrust suit, or whether you would be charged with breaking some other law.
There should have been an outcry on that voluntary restriction on exports. There should have been an outcry first because it was done by extralegal means, and not as a result of legal authority. Equally important, the prevention of those exports was a violation of the economic freedom of the people of this country.
The typical analysis of that embargo is that US consumers gained and farmers lost by having a lower price of wheat than would otherwise have existed. That is the ordinary kind of superficial analysis that leads to so much bad economic policy. Consumers as well as producers lost. The effect of our selling less wheat to Russia was that we acquired less foreign exchange; the result of that was to make the price of the dollar in terms of foreign currencies lower than it otherwise would be; the result of that was to make foreign goods more expensive than they otherwise would be. So the consumers got cheaper wheat and dearer perfume, cheaper wheat and dearer wine.
Let’s suppose prohibiting the exports lowered the price of wheat by 10 cents per bushel. Suppose instead that a tax of 10 cents per bushel had been imposed on every farmer and a subsidy of 10 cents given to every potential purchaser of wheat. Then the farmers would be in the same position. We then have to ask whether the people who got that subsidy would choose to spend that money on wheat. Not at all. The customers would choose to spend some of that money on French perfume and some of that money on Portuguese wines. So the fact of the matter is that what you did by imposing the embargo was to say to the American consumer, “Even though you would like to trade some of your wheat for some French perfume, we’re not going to let you do it. You’ve got to consume wheat whether you want to consume wheat or not.”
All I’m giving you is the general argument for free trade that Adam Smith developed two centuries ago.
With free trade, consumers decide how they would like to use their income and what they would like to buy with it. When a tariff is imposed on a foreign good or an export quota on a domestic good, consumers are forced to spend their income in ways that they would not spend it if they were free to do what they wanted. In that sense, the embargo was a restriction of the freedom of the consumer, as well as the freedom of the producer. It transferred income from the farmers to the consumers, and it hurt all consumers as consumers by denying them freedom of choice about how to spend their money. That’s what all of us should have been saying in the newspapers at the time.
Now free markets are on the defensive all over the world. Why? They are on the defensive not because they haven’t worked, but because they have worked. It’s precisely because every time political authorities have tried to do without them, they have gotten into trouble. The only way political authorities have found to pay for their mistakes is to try to take advantage of the free market by interfering with it and by controlling it.
The long-term trend has clearly been toward greater governmental control. I’ve cited the figure of 40 percent as the percentage of our national income being spent by government. That number was 10 percent in 1929. It’s gone up from 10 percent to 40 percent. If you want to look forward to the future, I will predict one thing with absolute certainty: that will not happen again. The percentage cannot go up to 160 percent in the next 40 years.
Milton Friedman was Paul Snowden Russell Distinguished Service Professor of Economics at the University of Chicago. He died in 2006.