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Capitalism as a Good or Bad System in the Context of Milton Friedman’s Ideology
The question of whether or not capitalism is a good or bad system requires that we first define our terms. We will use Milton Friedman’s basic definition of capitalism as an economic system, where private citizens engage in voluntary exchange and cooperation without compulsion from the state, and where the means of production are primarily owned and operated privately for a profit. Friedman attaches a condition to the nature of the exchange, “the essential notion is that both parties to the exchange must benefit, that each individual by separately pursuing their own self-interest, can promote the social interest” (Friedman, 2012). This is a reiteration of Smith’s ‘invisible hand’. We must also take care to be clear about what we mean by a ‘good’ or ‘bad’ system, in making this judgement are we comparing our modern capitalist system to an ideal capitalist system (practice to theory), or to alternative economic systems (ex. feudalism or communism)? It seems we must do both, contrast our current capitalist system to alternative economic systems (past and present), and simultaneously hold the market in practice to the standard promised by Friedman, as an organic corrective to social ills (ex. discrimination). Two of Friedman’s main arguments from capitalism and freedom will be examined: 1) the necessary relationship between capitalism and democracy, and 2) the corrective effect that capitalism has on discrimination. These will be analyzed in context with two important criticisms of (or caveats to) the capitalist ideal: externalities and the concept of public good. Both of which appear absent from Friedman’s ideology. In this context, ‘good’ will be measured by the degree to which our capitalist system outperforms alternative economic systems insofar as providing a standard of living for a broad cross-section of society, including its most marginalized members. Second, whether capitalism actually delivers on Friedman’s utopian ideals.
The first of Friedman’s arguments to be examined here is that capitalism (economic freedom) is a necessary means of achieving democracy (political freedom) (Friedman, 2012). Essentially, he argues that when the means of production are entirely under the control of the state, there is no space available for dissent to arise or organize. It’s difficult to argue that nations in history and today with centrally controlled economies have as much political freedom as those with market economies. For instance, in China or North Korea where state industries comprise a substantial part, or the entirety of the economy, political freedom is severely limited, and progress on this front is painstakingly slow in the case of China, or non-existent in North Korea. It’s difficult to find an example of a state anytime in history without a sizable free-market component to the economy whose citizens enjoyed any amount of political freedom. From a comparative perspective then, capitalism appears a favorable system.
However, Friedman’s view of ‘freedom’ is narrowly defined, his conception focuses only on ‘negative freedom’ (ie. the freedom from state coercion) and ignores what Locke termed ‘positive freedom’, such as access to opportunity (Baran, 593). Friedman considers only the freedom from something (state coercion) and ignores the dimension of freedom to something. Additionally, he is unconcerned with regulating discrimination by private citizens or enterprises, as he believes market mechanism will eradicate private discrimination.
Friedman sees only the differential intentions, ambitions, choices and industriousness between individuals, and pays no attention to the differential circumstances of birth, ie. privilege, that individuals inherit. His emphasis on individual freedom forces a sacrifice of other values, such as harm or fairness. He ignores the reality that unregulated markets inevitably lead to the concentration of wealth, monopolies and oligopolies. This concentrated economic power allows businesses to “massively affect the lives of people and communities” (Wright, 2010, 54). This concentration of economic power leads inevitably to a concentration of political power, which ultimately services to undermine democratic principles.
However, Friedman is correct in that, in order to be free to criticize the state, citizenry must have some degree of autonomy from the state. While this clearly means that individuals must be free to cooperate voluntarily (as in a market system), it also means that they must be free from structural and institutional barriers to opportunity and success, and it is not at all clear that market mechanisms can correct for prejudice and discrimination in the way Friedman claims.
The United States has been built on capitalist foundations since independence in 1776, and yet institutional racism and other forms of prejudice flourish to this day. While Friedman is correct that an enterprise ‘pays a price’ for discrimination (Baran, 592) he is incorrect in assuming that this cost alone is sufficient to disincentivize or reduce discrimination. A prejudiced private enterprise can serve a loyal and equally prejudiced customer base. If free markets really eliminated discrimination, then why does it persist so brazenly despite centuries of free market dominance?
Friedman claims that a free market prevents the concentration of power (Friedman, 2012). But as pointed out by Monbiot (2016), this neo-liberal vision of capitalism results in a ‘shareholder democracy’ whereby not all ‘votes’ are equal. Some citizens have the power to spend much more than others and dominate as oligarchs or monopolists. These new oligarchs dominate news media, so-called ‘think tanks’, in fact most industries today are dominated by oligopolies. The financial meltdown of 2008 puts the lie to any claim that the market prevents concentration of power, as a small handful of de-regulated investment banks essentially torpedoed the global economy. Their losses were socialized through bailout packages, because as Monbiot notes, these corporations were “too big to fail” (Monbiot, 2016). Private enterprises can become so large (in Friedman’s logic so ‘successful’) that they effectively become essential public services, and cannot be permitted to collapse, and the logic of the market no longer applies. Friedman overextends himself in his criticisms of state intervention and in his rejection of regulation. Our current neo-liberal free-market economic structure is beset with market failures of all sorts (Baran, 592). One of the most obvious shortcomings of an unregulated free-market are negative externalities. Arguably the most pressing problem of our generation, global climate change, is a product of negative externalities, namely carbon pollution.
Wright and Rogers (2010) point out that negative externalities socialize costs not accounted for by private enterprise. This is an example of a kind of freedom, the freedom from violations by private enterprise rather than by the state, that Friedman does not account for. One cannot simply avoid purchasing products that contribute to the problem of climate change (electricity or gasoline) as these are compulsory if one is to engage with the economy. Nor can one simply choose to purchase exclusively from ecologically or socially responsible corporations. Consumers often have little or no access to the information needed to make such decisions. Also, where industries are dominated by oligopolies there is frequently little difference between competitors on which to base a decision.
Finally, the way in which Friedman and the neo-liberal school of economics puts individual freedom from state coercion on a pedestal, ignores the value of public goods and the tendency of the market to underproduce in these areas (Wright, 2010, 59). This ideological stance on the part of the neo-liberal school seems once again rooted in their ignorance of the realities of privilege. If and where education is a private good, those born into marginalized communities will lack access to adequate education. One of the results of this will be the dramatic underutilization of talented individuals from these communities, as they will lack the opportunity to contribute to the economy to their full potential. Far from creating efficiency, a free market for education will result in the inefficient use of human capital.
Klein’s conclusion that Friedman’s form of capitalism has been “midwifed by the most brutal forms of coercion” (Klein, 2007, 22) has merit up to a point. Considered in isolation it is true that the unfettered, neo-liberal brand of capitalism endorsed by Friedman tramples on many rights and ignores crucial positive freedoms. However, we must also acknowledge that the amount of political freedom enjoyed by citizens of capitalist countries far exceeds that in states with centrally planned (communist) economies, or those of the previous feudal era. The ability to cooperate voluntarily and engage in private economic transactions is clearly an essential aspect of freedom, just not the only aspect.
The question therefore is not whether voluntary cooperation is a condition of a ‘good’ economic system, but rather is this an ideal that all other rights and values must be sacrificed to. The answer is equally clearly no. Market mechanisms have no ability to curtail discrimination, unregulated capitalism leads inevitably to the concentration of economic power, which leads to the concentration of political power. Too big to fail corporation privatize profit while socializing risk and loss. Market failures and externalities give rise to calamitous problems such as global climate change, and to-date at least, market mechanisms are unable to solve it.
Friedman’s ideal brand of neo-liberal, unregulated capitalism, where individual freedom is prized above all values is clearly not a ‘good’ system. However, our capitalist system in practice, when compared to alternatives (Soviet Communism, for instance) does not appear to be uniquely ‘bad’ either. While any ‘good’ economic system must clearly include the rights of individuals to voluntarily cooperate, in order to secure a minimum form of individual autonomy, we must also accept the many limitations and failures of the free-market, and the need to build into our economic system concepts of social responsibility and public good.
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