Friday, July 20, 2007

Milton Friedman's Elegant Tombstones

"Professor Friedman's demonstration [in Capitalism and Freedom] that the capitalist market economy can coordinate economic activities without coercion rests on an elementary conceptual error. His argument runs as follows. He shows first that in a simple market model, where each individual or household controls resources enabling it to produce goods and services either directly for itself or for exchange, there will be production for exchange because of the increased product made possible by specialization. But '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. Cooperation is thereby achieved without coercion'...So far, so good. It is indeed clear that in this simple exchange model, assuming rational maximizing behavior by all hands, every exchange will benefit both parties, and that no act of coercion is involved in the decision to produce for exchange or in any act of exchange.

Professor Friedman then moves on to our actual complex economy, or rather to his own curious model of it:
'As in [the] simple model, so in the complex enterprise and money-exchange economy, cooperation 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 exchange is strictly voluntary...'
...Proviso (b) is 'that individuals are effectively free to enter or not to enter into any particular exchange', and it is held that with this proviso 'every exchange is strictly voluntary'. A moment's thought will show that this is not so. The proviso that is required to make every transaction strictly volunatry is not freedom not to enter into any particular exchange, but freedom not to enter into any exchange at all. This, and only this, was the proviso that proved the simple model to be voluntary and noncoercive; and nothing less than this would prove the complex model to voluntary and noncoercive. But Professor Friedman is clearly claiming that freedom not to enter into any particular exchange is enough: 'The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal...The employee is protected from coercion by the employer because of other employers for whom he can work...'

One almost despairs of logic, and of the use of models. It is easy to see what Professor Friedman has done, but it is less easy to excuse it. He has moved from the simple economy of exchange between independent producers, to the capitalist economy, without mentioning the most important thing that distinguishes them. He mentions money instead of barter, and 'enterprises which are intermediaries between individuals in their capacities as suppliers of services and as purchasers of goods'...as if money and merchants were what distinguished a capitalist economy from an economy of independent producers. What distinguishes the capitalist economy from the simple exchange economy is the separation of labor and capital, that is, the existence of a labor force without its own sufficient capital and therefore without a choice as to whether to put its labor in the market or not. Professor Friedman would agree that where there is no choice there is coercion. His attempted demonstration that capitalism coordinates without coercion therefore fails...

...The logical humanist liberal will regret that ... and the fallacies make Capitalism and Freedom not a defense but an elegant tombstone of liberalism." -- C. B. Macpherson, "Elegant Tombstones", Canadian Journal of Political Science, March 1968.

1 comment:

Gabriel said...
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