I’m giving a talk in southern California later this month on the importance of Milton Friedman’s 1962 book Capitalism and Freedom and of Milton and Rose Friedman’s 1980 book Free to Choose.
There are so many pithy passages in both books. Here are two from Free to Choose that I particularly like:
The Tight Connection Between Incentives, Information, and Outcomes
However we might wish it otherwise, it simply is not possible to use prices to transmit information and provide an incentive to act on that information without using prices also to affect, even if not completely determine, the distribution of income. If what a person gets does not depend on the price he receives for the services of his resources, what incentive does he have to seek out information on prices or to act on the basis of that information?
–Free to Choose, p. 23
On the Effects of Economic Growth on the Difficulty of Work
You can travel from one end of the industrialized world to the other and almost the only people you will find engaging in backbreaking toil are people who are doing it for sport.
–Free to Choose, p. 148
READER COMMENTS
Phil H
Aug 31 2021 at 8:06pm
I’m not sure I see the logic in this:
“it simply is not possible to use prices to transmit information and provide an incentive to act on that information without using prices also to affect, even if not completely determine, the distribution of income.”
There’s only one price that directly affects income, and that’s the price of labour. I certainly agree that that allowing that price to vary does carry information, and will affect income distribution. But all other prices affect personal incomes only indirectly, so the extent to which they affect income distribution will be mediated by a bunch of other institutions.
For example, the existence or otherwise of intellectual property assets is a question of legal structures created at will by governments and courts. These assets probably play some role in the distribution of income, if the law wills them into existence. Their prices probably play some role in the distribution of income, if the law wills them into existence. But their existence is a question of will – it’s something that a country can choose to do or not do…
So, I suppose I agree with the Friedmans when they say “affect” – it seems likely that prices do affect. But I feel like the spirit of the piece is suggesting “…so there’s not that much we can do about income distributions, because we’ve got to just let market prices decide them.” I don’t know if that is what they go on to argue, but I wouldn’t agree with that. Because we can decide what markets there are, and set up markets to deliver the kinds of distribution that we want.
Thomas Strenge
Aug 31 2021 at 8:28pm
Spoken like a true communist! We, meaning the government, will decide what markets “we” want. That’s not how it works, comrade.
Phil H
Aug 31 2021 at 8:42pm
Except, it is. The length of copyright and patent protection is a famous example, relatively frequently changed by legislation. Don’t mistake your beliefs for how things are in the world. If you want to argue that they shouldn’t be that way, be my guest.
Jon Murphy
Aug 31 2021 at 9:27pm
Don’t mistake government enforcing a right with government creating that right.
Thomas Strenge
Aug 31 2021 at 8:43pm
Wages are driven by output. If the market, meaning other individuals, value the output of a particular worker at a million dollars, then she will get paid up to that amount minus whatever capital is used to produce that output.
If you confiscate enough wages, then workers will reduce output.
Very few workers have the talent to be doctors or championship athletes or celebrity porn stars. Consequently, there is wage inequality.
Jon Murphy
Aug 31 2021 at 9:26pm
The owners of capital are surprised to hear that.
This is where you start to go incorrect. Remember that prices are not merely “willed into existence.” They are not the product of a single will, nor some arbitrary thing. Prices come about from the interplay of buyers and sellers. Thus, for a price, any price, to affect the seller’s income, that seller must produce something that a buyer wants to buy. No amount of IP can product produce income if no one wants to buy that IP.
Also, as an empirical matter, property rights (including intellectual property) predate governments. So government cannot have willed them into existence.
Mark Brady
Aug 31 2021 at 11:16pm
Jon writes, “Also, as an empirical matter, property rights (including intellectual property) predate governments. So government cannot have willed them into existence.”
Please provide one or more examples of intellectual property that predate governments.
Jon Murphy
Sep 1 2021 at 7:33am
Agriculture as an innovation.
john hare
Sep 1 2021 at 5:44pm
Polynesian ocean going outrigger canoes/catamarans.
Club, spear, bow and arrow, fire , wheel, animal domestication.
Had to reach way back to predate ubiquitous governments.
Mark Brady
Sep 2 2021 at 4:53pm
I requested one or more examples of intellectual property that predated governments.
Jon suggests “agriculture as an innovation.” But that isn’t an example of intellectual property. Consider, for example, the introduction of the heavy plough in early medieval Europe. Yes, people owned so-called heavy ploughs and these ploughs embodied innovation but the creators did not possess any property rights in the innovation itself that would have prevented other people from copying the design or creating modifications.
John Hare suggests “Polynesian ocean going outrigger canoes/catamarans” and “club, spear, bow and arrow, fire , wheel, animal domestication.” and adds that he “had to reach way back to predate ubiquitous governments.” Again, nobody possessed any property rights in any of those innovations that would have prevented other people from copying the designs or creating modifications.”
Jon cites Bart J. Wilson’s The Property Species (2020). Yes, it’s a good book, and I consulted a copy to confirm my recollection that Wilson does not lend support to Jon’s or John’s claims that intellectual property ever predated the emergence of the state.
Jon Murphy
Sep 1 2021 at 7:35am
Bart Wilson has a fantastic book called “The Property Species” where he has, among other things, a history of property
Mark Z
Sep 1 2021 at 2:30am
Refusing to allow a market to exist amounts to disallowing the use of price signals. Friedman’s point, as I understand it, is that there is a tradeoff (not necessarily a linear one but a tradeoff in any event) between allowing markets to allocate resources efficiently on the one hand, and achieving a pre-specified income distribution as an outcome on the other. E.g. if we allowed for market pricing of labor, but via taxation and subsidies eradicated all post-tax income inequality resulting from it, you would cancel out the benefit of market pricing to begin with.
Same with intellectual property. The state might refuse to enforce IP rights because doing so would lead to less equitable outcomes, in doing so we would lose the information value of market pricing of IP. Insisting on characterizing that markets as mere inventions of governments doesn’t change anything. To the extent that you interfere in their outcomes to achieve an ‘equitable’ result, one reduces the usefulness of the price mechanism.
Phil H
Sep 1 2021 at 9:49am
I see what you’re saying, but you seem to be building in some pretty hefty assumptions about market outcomes yourself, there.
One of the examples that writers here like to cite is elite athletes, who earn extraordinary amounts of money. They say things like, “Kobe’s earning power makes him worth millions (to his various sponsors and employers).” But doesn’t a brief look around the world make it obvious how contingent this is? A player of Kobe’s talent can earn X in the USA; a player with that level of talent in soccer would earn less. A Chinese basketball player with the same level of talent might earn less. A player with the same amount of talent who lived 50 years ago would earn less… I confess to being mystified about what you think is “efficient” or “not interfered with”. I just don’t see anything in the world that hasn’t been interfered with – in fact, created by – people. And people can make and unmake things as they like.
My preferred approach would not be “interfering” in markets, as markets seem to be great. My approach would be to make the markets in the right way to derive the best possible results, and then stand back and let the market run without interference.
(To give you an idea of what that means, I’d rather have a market in drugs that work than a market in drugs that don’t, so I want some kind of FDA-like mechanism in place. I’m not concerned by how much money the drug companies make; that’s of secondary importance. I want businesses to have access to lots of capital, so the veil of limited liability seems like a good idea. Etc. None of these are natural or spontaneous or necessary. They’re all human inventions that can be finessed and improved to serve people better.)
Jon Murphy
Sep 1 2021 at 10:34am
Contingent on the skill being valued (ie, the productivity of the worker). But that’s all. Kobe Bryant scoring 25 points per game is highly valued in the USA. It’s not in other places. Conversely, a soccer player scoring goals is highly valued in other places but not the US. Thus, it makes sense that a basketball player would earn more than a soccer player in the US and vice versa elsewhere.
Within industry, Kobe Bryant would naturally earn more than a benchwarmer who is not as productive.
So, we get Freidman’s point: the most productive soccer players will go abroad. The most productive basketball players will come here. Prices signal that basketball players are more valued in the US than elsewhere and soccer players more valued elsewhere than in the US. Without those price signals, we’d not be able to tell where folks are most valued.
KevinDC
Sep 1 2021 at 9:45am
As Jon points out above, this ignores the whole “capital share of income” thing, which is not a minor point!
Also, you say that “other prices affect personal incomes only indirectly”, as if that was somehow in conflict with Friedman’s claim that prices will “affect, even if not completely determine, the distribution of income,” but I’m not sure I see what the difference is.
That’s not what I took from the piece at all. For me, the piece is a reminder of something I think is one of life’s most important rules – make the costs explicit. Friedman’s point is if you decide to alter prices from the market level, then you will necessarily distort the information contained in price signals and alter how we “seek out information on prices or to act on the basis of that information.” Whether or not that’s still worth doing is a normative question, not a positive one. A person could very well read what Friedman wrote and still think “it’s still worth altering prices anyway because equalizing income distribution is more important than improving economic efficiency.” If someone wants to argue in favor of that trade off, that’s great – but we shouldn’t deny that trade off is what’s being made. Saying “You can do X but only at the cost of Y” is not, as you suggest, somehow saying “in spirit” that therefore we shouldn’t do X.
And I think there is a lot of incentive for political actors and political systems to deny those trade offs even exist. It’s very common in public opinion polling to see questions like “Do you support expanding government program X” receive high levels of support – but when the follow up question is asked “Do you support expanding government program X if doing so would require tax increases,” then support for the idea plummets. Similarly, high levels of support for things like “equalizing income distributions” crashes hard when asked as “equalizing income distribution at the cost of slower economic growth.” Unsurprisingly, advocates of these sorts of measures rarely respond to this by trying to convince people that it’s actually a good idea to trade away some efficiency for some more equality of outcome. Far more often, they try to bypass that whole discussion by denying these trade offs even exist. And that makes points like Friedman’s all the more important to highlight.
Phil H
Sep 1 2021 at 10:04am
Yeah… yeah, I think I have to agree with all of that. You’re right that I ignored returns to capital in my first comment. And yes, I accept that intervention in an existing market dulls/distorts price signals; and the political point that politicians are incentivized to distort market information.
What I’m not yet convinced of is the existence of this thing called “the market”. What I see in the world is lots of little (and big) markets, all working in quite distinct ways. It’s not obvious to me that “price signals” mean anything outside their home market. And markets may only have moderate impact on each other, so it seems like you can shape a market by setting its rules in the right way to start with (which often, but not always, involves the state).
Jon Murphy
Sep 1 2021 at 10:37am
Who do you disaggregate the institution of “the market” but aggregate the institution of “the state”? For intellectual consistency, you should apply the same lens to both institutions.
Then the existence of international trade must really be confusing.
Jon Murphy
Sep 1 2021 at 10:44am
You ought to study up on common law. Much of the Western World has systems of law where government is not a setter, but rather an enforcer.
KevinDC
Sep 1 2021 at 2:53pm
You say:
This is something people often think by default – and it’s something economists have been trying to get people to look beyond for as long as economics has existed as a discipline. We don’t see little and big markets that exist separately or sealed off from each other, or distinct from one another. Early on in The Wealth of Nations, Adam Smith tries to make that point clear by describing everything necessary for a woolen coat to be made – forgive the long quotation, but the whole thing is worth a read:
In short, Smith is pointing out that each of the inputs for a wool coat requires their own inputs, and each of those other inputs require inputs, and the workers needed at each stage require on workers in other stages, and so on, fractally outward, in a manner which “exceeds all computation.” There is no “market for wool coats” existing independently of or distinctly from these “other markets.” I mean, where does this wool coat market exist? Is it only at the point where wool coats are sold? Does it extend to rasing the sheep, the forging of sheers, the wool spinners, those who mine the oar and coal to make the needed tools, those who acquire the dyes for the wool, the ship builders who transport all these materials, the people who create the lumber for these ships…at what point in this vast web of interconnected workers, tools, services, and traders do you draw a line and say “This is where the ‘market for wool coats’ is”? There is no real boundary as far as I can see. Some kind of law or price control impacting lumber collection or coal mining or tariffs on foreign dyes or docking fees for shipping, or the wages for the workers in any of these industries, is going to impact the “market for wool coats” – because it’s all just the market.
Phil H
Sep 1 2021 at 3:27pm
Right, but look: that’s a vast and complex system. And by complex, I mean complex in some kind of mathsy way that I definitely don’t understand. Complex in the butterfly effect kind of a way.
You can’t hold these two things to be true simultaneously: (1) the world economy is a large and complex holistic thing that no-one can predict because of its complexity (hence the need for markets); and (2) and perturbation of this economy by people will damage price signal mechanisms. Those two things don’t make sense together, because a system of that size is chaotic. If you want to look at the world economy as this massive, unpredictable system, then any perturbation of it would simply get added into the chaos. It won’t make any difference to the power of price signals.
Conversely, if you look at markets as more discrete things, with fairly bounded sets of inputs and outputs (like the stock market, or commodities markets, or some retail sector) then you can see distinctive patterns, signalling mechanisms, and price responsiveness. Less chaos, smooth functions. And within those systems, I agree that things like taxes do dampen price signals. But those discrete systems are the outcome of a limited number of institutional choices, and those institutions can be changed, to change market outcomes without interfering in the market mechanism (because you’re changing the framing of the market, not the operation of the market itself).
Jon Murphy
Sep 1 2021 at 3:44pm
As far as I know, nobody holds those two viewpoints, or even one of those.
The argument for markets is not that “the world economy is a large and complex holistic thing that no-one can predict.” Economists make predictions all the time. As do people. Friedman’s point is not about prediction, but interrelationships. “Complex” doesn’t mean “unpredictable.”
Your second point doesn’t make any sense to me: how is unease about the economy related to anything?
KevinDC
Sep 1 2021 at 5:47pm
Sure you can – in fact, it’s quite easy to do so.
It won’t make a difference to the power of price signals, sure, but it will make a huge difference as to the content of those price signals, and the behavior incentivized by them. For example, when Nixon imposed price controls in an attempt to control inflation, farmers responded by drowning their chickens en masse because they couldn’t cover the costs of bringing their chickens to market anymore under the newly imposed price caps. Certainly the power of the new, controlled price signals was not diminished! But their information and incentives carried by those signals was pretty drastically changed.
Thomas Strenge
Aug 31 2021 at 8:49pm
Also, one should not argue from the specific to make judgment for the general case. That’s like saying just because the spina bifida patient with no arms and no legs cannot find health insurance, that none of us can find health insurance.
The patent and copyright protections are not good examples to measure the efficacy of markets.
Neel Chamilall
Sep 1 2021 at 8:26am
Hi David,
Will a video of your talk be available later? Thanks.
David Henderson
Sep 1 2021 at 1:57pm
I’m not sure, but I’ll ask.
Floccina
Sep 1 2021 at 11:47am
IMHO quote 2 is ignored too much when people complain about the loss of manufacturing jobs. Most of those manufacturing jobs were very hard work in bad conditions, maybe they paid closer to high skilled jobs than the retail and hospitality jobs of today but the work conditions were worse and the jobs were harder and more monotonous.
David Henderson
Sep 1 2021 at 1:57pm
No need to be humble. You nailed it.
David Henderson
Sep 1 2021 at 5:44pm
To KevinDC,
Great passage. I had forgotten it, which reminds me that I probably could use a rereading of major parts of The Wealth of Nations.
That segment could be titled “I, Coat.”
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