Capitalism and Freedom summary

You’ve probably heard politicians arguing that the government needs to intervene in the economy to ensure that it functions properly. You might also have come across the notion that free-market capitalism is inherently unstable and causes financial crises when it’s left to its own devices. Both ideas are popular among advocates of big government, but they’re rooted in bad economics.

To understand why, we have to look at where they came from. In the aftermath of the Great Depression, a new consensus emerged. Economists began arguing that boosting government expenditure with an eye to correcting market contractions was the best way of promoting stability. At its most basic, this boils down to a theory promoted by the British economist John Maynard Keynes that every dollar of government spending creates another dollar of increased wealth for private individuals.

Spending isn’t the only way governments intervene in markets – there’s also monetary policy. The outcome, however, is the same: the more governments intervene in economic life, the worse the results.

Take the Great Depression. The severity of the crisis was amplified by the government’s mismanagement of the money supply via the Federal Reserve, the US central bank. Between July 1929 and March 1933, the money supply dropped by a third. The Federal Reserve, which had a free hand in making policy, actively decided to do nothing. That error transformed what would have been a minor contraction into a full-blown crisis.

Most people agree that governments have a legitimate role to play in education. While it’s true that state education provides society with a productive labor force, governments should restrict their focus to “K-12” schooling – education from kindergarten to twelfth grade.

Why? Well, that’s where the neighborhood effect comes in. That’s a way of describing how individual actions affect other people regardless of whether they’ve consented or not. This can be positive or negative. In the case of K-12 schooling, the neighborhood effect is clear: an educated society benefits everyone to a much greater extent than living in an uneducated society. If people couldn’t read, write or do basic arithmetic, social life as we know it would break down.

Monopolies emerge when companies gain so much control over a given product or service that they can determine the price at which it’s sold rather than the free market. That makes monopolies the ultimate enemy of economic freedom. So how do they arise?

The root of the problem is the absence of competition in markets. But let’s define our terms here. In a free-market capitalist economy, “competition” isn’t about mindless rivalry, that is, the desire to beat opponents or drive them out of the market. Rather, it’s about the number of alternatives in economic life. A healthy, competitive economy is one in which individuals have numerous choices about which goods and services they wish to voluntarily exchange.

In the societies of the past, people were born into a class or caste that determined what kind of work they could do. That meant that it was virtually impossible to earn large amounts of money. Capitalist society is different. Anyone can do any job they please. As a result, people have access to much higher potential incomes. This creates the conditions for social mobility and a wealth of opportunities – features unique to capitalist societies.

But if people are to be truly free when it comes to choosing their occupations – and destinies – the government needs to stop policing and redistributing incomes. After all, there’s a good reason why some jobs are more handsomely rewarded than others. Folks who work in difficult or unappealing jobs deserve to be paid more than those in cushier positions. When the government regulates incomes, fewer people will want to do these difficult jobs, causing labor shortages in various economic sectors.

Social welfare programs invariably claim to reduce inequality. Time and again, however, they fail in their stated objectives and actually end up making society less egalitarian.

Take public housing. Run by an inefficient bureaucracy rather than efficiency maximizing market forces, public housing programs not only reduce the overall supply of housing, but confine poor people to a small number of dangerous neighborhoods.