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Capitalism and Freedom

Capitalism and Freedom

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by Milton Friedman, Rose D. Friedman, Rose D. Friedman (Other)

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In the classic bestseller, Capitalism and Freedom, Milton Friedman presents his view of the proper role of competitive capitalism—the organization of economic activity through private enterprise operating in a free market—as both a device for achieving economic freedom and a necessary condition for political freedom. Beginning with a discussion


In the classic bestseller, Capitalism and Freedom, Milton Friedman presents his view of the proper role of competitive capitalism—the organization of economic activity through private enterprise operating in a free market—as both a device for achieving economic freedom and a necessary condition for political freedom. Beginning with a discussion of principles of a liberal society, Friedman applies them to such constantly pressing problems as monetary policy, discrimination, education, income distribution, welfare, and poverty.

"Milton Friedman is one of the nation's outstanding economists, distinguished for remarkable analytical powers and technical virtuosity. He is unfailingly enlightening, independent, courageous, penetrating, and above all, stimulating."-Henry Hazlitt, Newsweek

"It is a rare professor who greatly alters the thinking of his professional colleagues. It's an even rarer one who helps transform the world. Friedman has done both."-Stephen Chapman, Chicago Tribune

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University of Chicago Press
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The University of Chicago Press
Copyright © 2002 The University of Chicago
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ISBN: 978-0-226-26421-9

Chapter One
The Relatíon between Economíc Freedom and Polítícal Freedom

It is widely believed that politics and economics are separate and largely unconnected; that individual freedom is a political problem and material welfare an economic problem; and that any kind of political arrangements can be combined with any kind of economic arrangements. The chief contemporary manifestation of this idea is the advocacy of "democratic socialism" by many who condemn out of hand the restrictions on individual. freedom imposed by "totalitarian socialism" in Russia, and who are persuaded that it is possible for a country to adopt the essential features of Russian economic arrangements and yet to ensure individual freedom through political arrangements. The thesis of this chapter is that such a view is a delusion, that there is an intimate connection between economics and politics, that only certain combinations of political and economic arrangements are possible, and that in particular, a society which is socialist cannot also be democratic, in the sense of guaranteeing individual freedom.

Economic arrangements play a dual role in the promotion of a free society. On the one hand, freedom in economic arrangements is itself a component of freedom broadly understood, so economic freedom is an end in itself. In the second place, economic freedom is also an indispensable means toward the achievement of political freedom.

The first of these roles of economic freedom needs special emphasis because intellectuals in particular have a strong bias against regarding this aspect of freedom as important. They tend to express contempt for what they regard as material aspects of life, and to regard their own pursuit of allegedly higher values as on a different plane of significance and as deserving of special attention. For most citizens of the country, however, if not for the intellectual, the direct importance of economic freedom is at least comparable in significance to the indirect importance of economic freedom as a means to political freedom.

The citizen of Great Britain, who after World War II was not permitted to spend his vacation in the United States because of exchange control, was being deprived of an essential freedom no less than the citizen of the United States, who was denied the opportunity to spend his vacation in Russia because of his political views. The one was ostensibly an economic limitation on freedom and the other a political limitation, yet there is no essential difference between the two.

The citizen of the United States who is compelled by law to devote something like 10 per cent of his income to the purchase of a particular kind of retirement contract, administered by the government, is being deprived of a corresponding part of his personal freedom. How strongly this deprivation may be felt and its closeness to the deprivation of religious freedom, which all would regard as "civil" or "political" rather than "economic", were dramatized by an episode involving a group of farmers of the Amish sect. On grounds of principle, this group regarded compulsory federal old age programs as an infringement of their personal individual freedom and refused to pay taxes or accept benefits. As a result, some of their livestock were sold by auction in order to satisfy claims for social security levies. True, the number of citizens who regard compulsory old age insurance as a deprivation of freedom may be few, but the believer in freedom has never counted noses.

A citizen of the United States who under the laws of various states is not free to follow the occupation of his own choosing unless he can get a license for it, is likewise being deprived of an essential part of his freedom. So is the man who would like to exchange some of his goods with, say, a Swiss for a watch but is prevented from doing so by a quota. So also is the Californian who was thrown into jail for selling Alka Seltzer at a price below that set by the manufacturer under so-called "fair trade" laws. So also is the farmer who cannot grow the amount of wheat he wants. And so on. Clearly, economic freedom, in and of itself, is an extremely important part of total freedom.

Viewed as a means to the end of political freedom, economic arrangements are important because of their effect on the concentration or dispersion of power. The kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other.

Historical evidence speaks with a single voice on the relation between political freedom and a free market. I know of no example in time or place of a society that has been marked by a large measure of political freedom, and that has not also used something comparable to a free market to organize the bulk of economic activity. Because we live in a largely free society, we tend to forget how limited is the span of time and the part of the globe for which there has ever been anything like political freedom: the typical state of mankind is tyranny, servitude, and misery. The nineteenth century and early twentieth century in the Western world stand out as striking exceptions to the general trend of historical development. Political freedom in this instance clearly came along with the free market and the development of capitalist institutions. So also did political freedom in the golden age of Greece and in the early days of the Roman era.

History suggests only that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition. Fascist Italy and Fascist Spain, Germany at various times in the last seventy years, Japan before World Wars I and II, tzarist Russia in the decades before World War I-are all societies that cannot conceivably be described as politically free. Yet, in each, private enterprise was the dominant form of economic organization. It is therefore clearly possible to have economic arrangements that are fundamentally capitalist and political arrangements that are not free.

Even in those societies, the citizenry had a good deal more freedom than citizens of a modern totalitarian state like Russia or Nazi Germany, in which economic totalitarianism is combined with political totalitarianism. Even in Russia under the Tzars, it was possible for some citizens, under some circumstances, to change their jobs without getting permission from political authority because capitalism and the existence of private property provided some check to the centralized power of the state.

The relation between political and economic freedom is complex and by no means unilateral. In the early nineteenth century, Bentham and the Philosophical Radicals were inclined to regard political freedom as a means to economic freedom. They believed that the masses were being hampered by the restrictions that were being imposed upon them, and that if political reform gave the bulk of the people the vote, they would do what was good for them, which was to vote for laissez faire. In retrospect, one cannot say that they were wrong. There was a large measure of political reform that was accompanied by economic reform in the direction of a great deal of laissez faire. An enormous increase in the well-being of the masses followed this change in economic arrangements.

The triumph of Benthamite liberalism in nineteenth-century England was followed by a reaction toward increasing intervention by government in economic affairs. This tendency to collectivism was greatly accelerated, both in England and elsewhere, by the two World Wars. Welfare rather than freedom became the dominant note in democratic countries. Recognizing the implicit threat to individualism, the intellectual descendants of the Philosophical Radicals-Dicey, Mises, Hayek, and Simons, to mention only a few-feared that a continued movement toward centralized control of economic activity would prove The Road to Serfdom, as Hayek entitled his penetrating analysis of the process. Their emphasis was on economic freedom as a means toward political freedom.

Events since the end of World War II display still a different relation between economic and political freedom. Collectivist economic planning has indeed interfered with individual freedom. At least in some countries, however, the result has not been the suppression of freedom, but the reversal of economic policy. England again provides the most striking example. The turning point was perhaps the "control of engagements" order which, despite great misgivings, the Labour party found it necessary to impose in order to carry out its economic policy. Fully enforced and carried through, the law would have involved centralized allocation of individuals to occupations. This conflicted so sharply with personal liberty that it was enforced in a negligible number of cases, and then repealed after the law had been in effect for only a short period. Its repeal ushered in a decided shift in economic policy, marked by reduced reliance on centralized "plans" and "programs", by the dismantling of many controls, and by increased emphasis on the private market. A similar shift in policy occurred in most other democratic countries.

The proximate explanation of these shifts in policy is the limited success of central planning or its outright failure to achieve stated objectives. However, this failure is itself to be attributed, at least in some measure, to the political implications of central planning and to an unwillingness to follow out its logic when doing so requires trampling rough-shod on treasured private rights. It may well be that the shift is only a temporary interruption in the collectivist trend of this century. Even so, it illustrates the close relation between political freedom and economic arrangements.

Historical evidence by itself can never be convincing. Perhaps it was sheer coincidence that the expansion of freedom occurred at the same time as the development of capitalist and market institutions. Why should there be a connection? What are the logical links between economic and political freedom? In discussing these questions we shall consider first the market as a direct component of freedom, and then the indirect relation between market arrangements and political freedom. A by-product will be an outline of the ideal economic arrangements for a free society.

As liberals, we take freedom of the individual, or perhaps the family, as our ultimate goal in judging social arrangements. Freedom as a value in this sense has to do with the interrelations among people; it has no meaning whatsoever to a Robinson Crusoe on an isolated island (without his Man Friday). Robinson Crusoe on his island is subject to "constraint," he has limited "power," and he has only a limited number of alternatives, but there is no problem of freedom in the sense that is relevant to our discussion. Similarly, in a society freedom has nothing to say about what an individual does with his freedom; it is not an all-embracing ethic. Indeed, a major aim of the liberal is to leave the ethical problem for the individual to wrestle with. The "really" important ethical problems are those that face an individual in a free society-what he should do with his freedom. There are thus two sets of values that a liberal will emphasize-the values that are relevant to relations among people, which is the context in which he assigns first priority to freedom; and the values that are relevant to the individual in the exercise of his freedom, which is the realm of individual ethics and philosophy.

The liberal conceives of men as imperfect beings. He regards the problem of social organization to be as much a negative problem of preventing "bad" people from doing harm as of enabling "good" people to do good; and, of course, "bad" and "good" people may be the same people, depending on who is judging them.

The basic problem of social organization is how to co-ordinate the economic activities of large numbers of people. Even in relatively backward societies, extensive division of labor and specialization of function is required to make effective use of available resources. In advanced societies, the scale on which coordination is needed, to take full advantage of the opportunities offered by modern science and technology, is enormously greater. Literally millions of people are involved in providing one another with their daily bread, let alone with their yearly automobiles. The challenge to the believer in liberty is to reconcile this widespread interdependence with individual freedom.

Fundamentally, there are only two ways of co-ordinating the economic activities of millions. One is central direction involving the use of coercion-the technique of the army and of the modern totalitarian state. The other is voluntary co-operation of individuals-the technique of the market place.

The possibility of co-ordination through voluntary co-operation rests on the elementary-yet frequently denied-proposition that both parties to an economic transaction benefit from it, provided the transaction is bi-laterally voluntary and informed.

Exchange can therefore bring about co-ordination without coercion. A working model of a society organized through voluntary exchange is a free private enterprise exchange economy-what we have been calling competitive capitalism.

In its simplest form, such a society consists of a number of independent households-a collection of Robinson Crusoes, as it were. Each household uses the resources it controls to produce goods and services that it exchanges for goods and services produced by other households, on terms mutually acceptable to the two parties to the bargain. It is thereby enabled to satisfy its wants indirectly by producing goods and services for others, rather than directly by producing goods for its own immediate use. The incentive for adopting this indirect route is, of course, the increased product made possible by division of labor and specialization of function. Since the household always has the alternative of producing directly for itself, it need not enter into any exchange unless it benefits from it. Hence, no exchange will take place unless both parties do benefit from it. Co-operation is thereby achieved without coercion.

Specialization of function and division of labor would not go far if the ultimate productive unit were the household. In a modern society, we have gone much farther. We have introduced enterprises which are intermediaries between individuals in their capacities as suppliers of service and as purchasers of goods. And similarly, specialization of function and division of labor could not go very far if we had to continue to rely on the barter of product for product. In consequence, money has been introduced as a means of facilitating exchange, and of enabling the acts of purchase and of sale to be separated into two parts.

Despite the important role of enterprises and of money in our actual economy, and despite the numerous and complex problems they raise, the central characteristic of the market technique of achieving co-ordination is fully displayed in the simple exchange economy that contains neither enterprises nor money. As in that simple model, so in the complex enterprise and money-exchange economy, co-operation is strictly individual and voluntary provided: (a) that enterprises are private, so that the ultimate contracting parties are individuals and (b) that individuals are effectively free to enter or not to enter into any particular exchange, so that every transaction is strictly voluntary.


Excerpted from CAPITALISM AND FREEDOM by MILTON FRIEDMAN Copyright © 2002 by The University of Chicago. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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Meet the Author

Milton Friedman (1912–2006) was an economist who taught at the University of Chicago for more than three decades. He was a recipient of the Nobel Memorial Prize in Economic Sciences, and is known for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy. He was a principal founder of what has come to be known as the Chicago School of Economics. He was a well-known public champion of laissez-faire capitalism.
In 1962 the University of Chicago Press published Capitalism and Freedom, one of the most influential books of the twentieth century. In 1998 the Press published Two Lucky People, the memoir by Milton and Rose Friedman of their joint lives and work. In reviewing the book in the New York Times Book Review, David Brooks wrote: “This is a book that restores your faith in reasoned discourse.… There really are people who believe in scholarly exchange as a way to discover truth.”

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Capitalism and Freedom 4 out of 5 based on 0 ratings. 20 reviews.
Guest More than 1 year ago
Apparently Mr. Price has decided to demonstrate to the rest of the voting public exactly why Democrats can't seem to grasp even the basic fundamentals of economics. At least you admit you havn't bothered to read this 200 page classic before condeming it because it doesn't fit your 'reality doesn't emotionally suit my ego so I will simply deny it's existence' method of analysis. If you had simply bothered to read Friedman's section on monopolies you would have seen why Schumpeter's written works are finally serving a purpose worthy of them, as doorstops. The only entity in a free-market that has the POWER to ENFORCE a monopoly is the government. Just because a monopoly exists says nothing about it's behavior. If the monopoly exists because of a 'market inefficiency', as you call it, then by definition, others in a free market will notice it's higher than average rates of return and competitors will be drawn into the marketplace. The only way monopolies have ever been maintained is through regulatory bodies, created to appease misguided people such as yourself, and then manipulated by the company to 'seek protection' from competition. To claim that the depression was caused because 'the distribution of wealth got so far out of wack that we had the Depression' is so fundamentally flawed in its logic, that I could expound for 30 pages and not near the end of my criticism. For the sake of brevity, the depression was created because of gross mismanagement of the monetary supply. The federal government, in its infinite lack of wisdom, responded to a 1/3 decrease in the monetary supply by further tightening the monetary supply and enforcing wage controls. In closing, before you keep expounding calls for socialist participation in any way, shape or form in this country, I suggest you examine two things: 1. Look into the unempoyment and economic growth rates of our more 'progressive' European counterparts, they average twice the unemployment rate with half the growth. And before you start babbling about how great Sweden is, it would probably be helpful to know that they really didn't start instituting their 'social programs' until the 1970's, their economy is almost purely free-market, and their governmental debt to GNP ratio makes our countries debt look like the cost of tank of gas. From what I hear, these spending-oriented programs have been, for the most part, enjoyable for the Swedes, it's just unfortunate that enemployment rests in the 13% range, they have negative growth, the government 'employs' a frightening percentage of their population, and they're rocketing toward bankruptcy 2. If you want to learn a political/economic lesson from the 20's, research the emergance of this little group called the National Socialist Party which brought us such lovely folks as Hitler (I suggest reading Friedrich Hayek's 'The Road To Serfdom' for starters. I'm sure it's another classic you havn't bothered to read but feel compelled to comment on because 'what sounds emotionally appealing' is a more than sufficient substitute, in the reactionary leftist world, for such time-wasting activities like aquiring actual knowledge.)
Guest More than 1 year ago
Thank God for this timeless voice for Liberty. This classic work effectually reconciles the ideals and mechanics of true political Freedom for generations not yet born. This book is indespensible for any serious student of political science. In genius and in importance of statement it rivals the Declaration of Independence itself.
Anonymous More than 1 year ago
Milton Friedman was a key researcher on the effect of Keynes' fiscal policies 1930-1950, and pioneered the development of the monetary policies which subsequently stabilized the economy until they were abandoned around 2004. This book makes the case for economic freedom in a readable, non-technical manner. His remarks on the Rule of Law are very thought-provoking. Complements Hayek's "Road to Serfdom".
Guest More than 1 year ago
JEFFERSON VS. HAMILTON....our individual , personal freedom without federal supervision . ....... wasn't over slavery ;ie , states effecting their freedom of choice
Guest More than 1 year ago
Republican or Democrat, they are just different socialist parties fighting for different interests (being bought by different social organizations). You either have organized labor (socialists, communists--democrats) or you have organized capital (gov't. controlled industry, fascism-republicans) take your pick. The irony is they both end up with gov't. control/planning for every individual decision. We need to take a look at how we became the economic leader...through liberalism (individualism is a better defintion--not liberal in the american political sense). We don't need socialism to fix everything. Look at Europe/Germany (of today). We don't need gov't, control of industry. Look at Japan (present) and Germany (of the past --Hitler). Take off the blinders and approach the problem with no preconceptions/mispreconceptions.
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Anonymous More than 1 year ago
Written by icon of self reliance and intellect...a grow up and smell the coffee seminar.....should be required reading for all college students.
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Guest More than 1 year ago
As much as I agree with many of Mr. Friedman's points, his style of writing leaves a lot to be desired. He was an academic, and writes like one. This book reads with all the zip of your new blender's instruction manual. That being said, this book is a great defense of the individual against overbearing society, one that seeks to make him little more than a stupefied child. While his chapter 'Distribution of Income' is full of contradictions, the rest of the book tends to hit the mark logically. I would highly recommend a reader interested in the subject of freedom instead read 'The Road to Serfdom', a much better argued and much better written book.
Guest More than 1 year ago
I have not read the book, but since the last reviewer used this forum to spout political propoganda, I feel the need to respond. Ted, you should also understand that there needs to be a balance between capitalism and socialism in our country (not communism,but socialism. There is a huge difference). As the great economist Joseph Schumpeter said, 'capitalism cannot exist without an oxygen tank.' What he means is that on its own capitalism leads to market inefficiencies (i.e. monopoly). We must have a mixed economy, not pure capitalism or communism, for they both yield horrible outcomes. That is why Democrats and Republicans are both needed. They help to balance economic policy so that it does not go too far in one direction. (As it did during the 20's when your party, the Republicans were in office. The distribution of wealth got so far out of wack that we had the Depression. This maldistribution of wealth was a result of republican policies favoring business).
DavidCA More than 1 year ago
Its a curious thing that Milton Friedman's policies have only been able to be adopted by iron fisted dicators (Chile) or threats by the IMF; Poland, South Africa, Russia, Asia. Only by forcing populations to adopt Milton Friedman's policies have they been implemented. And those who have experienced his brand of economics have voiced their extreme displeasure. Well except the dictators who profit nicely from the privatization of their countries resources and industries. So much for "freedom". Well the freedom to enter poverty in larger numbers after Freidman's polices are used.
Guest More than 1 year ago
Milton Friedman's book entitled 'Capitalism and Freedom' presents the ideological foundations of the prevailing greed-driven ethos of Corporate Globalization. According to Friedman, and his disciples, 'capitalism' complements democracy. As Capitalism is Not Democracy critically presents, 'capitalism' in fact, undermines democracy. Capitalism promotes the development of 'capitalistocracy', rather than democracy. I would respectfully recommend 'Capitalism is Not Democracy' for readers who are seeking progressive alternatives to the prevailing context of so-called 'economic progress', which creates mass poverty on a global scale, and ensuing social malaise, crime, and conditions for political extremism which promotes terrorism. According to the author of 'Capitalism is Not Democracy', we need to re-think and reconstruct the economic system in order to serve the quality-of-living of all human beings, with prejudice, rather than the mercenary commercial profit interests of elite 'owners of capitalism', in Friedman's corporate capitalist dystopia. The 'Capitalism is Not Democracy' book, ISBN: 1894934636, presents a comprehensive critique of capitalistocracy that is associated with Corporate Globalization. Indeed, the Big Business-oriented 'Globalization' context is systematically undermining vital human rights, social justice, and environmental protection. This book also presents a progressive alternative economic system to the current context of Corporate Globalization, which is destroying the quality of human survival internationally