Milton's Myth #1: Free Enterprise Equals Economic Freedom

✑ ROBIN HAHNEL | 2,318 words
‟We find Friedman’s concept of economic freedom inadequate.

A point-by-point response to Milton Friedman’s claims about the purported virtues of free market capitalism that have grown to become popular myths. This week, myth number 1: free enterprise provides economic freedom, unleashes people’s economic creativity and promotes political freedom. (All of Milton's myths here).

Originally published in chapter ten of Hahnel's book The ABC's of Political Economy: A Modern Approach (Pluto Press, 2014).
About the author (click)
Robin Eric Hahnel (1946) is Professor Emeritus of Economics at American University in Washington DC. He has published on marxian economics, liberating theory, economic crises , ecological issues and “participatory economics”. He has frequently contributed to Znet and is the co-director of Economics for Equity and the Environment.

W hen Milton Friedman published Capitalism and Freedom (University of Chicago Press) in 1964 free market capitalism1 was not yet ascendant. In the post WWII era Keynesian, social democratic capitalism was more dominant, and government regulation and guidance of the economy was generally considered necessary, prudent, and desirable. So Friedman was writing as a dissident when he argued that only free market capitalism can provide economic freedom, promote political liberty, allocate resources efficiently, motivate people successfully, and reward people fairly, and government intervention was usually unnecessary and counterproductive.

By 2002 when the first edition of The ABCs of Political Economy was published neoliberal capitalism stood triumphant over the demise of not only centrally planned Communism, but social democratic, Keynesian capitalism as well. Friedman’s disciples were more confident than ever that free market capitalism was the best economy possible. Deregulation, privatization, and dismantling the social safety net had become the order of the day. Keynesians had been successfully isolated and silenced, and only a scattered tribe of “heterodox economists” any longer challenged Milton Friedman’s claims about the virtues of free market capitalism.

What a difference twelve years can make! While neoliberal capitalism still clings to power almost everywhere in 2014, and especially within the economics profession, there are now many who doubt that free market capitalism is truly the best economic system for the vast majority. Six years after the worst financial crash in four generations the global financial system remains without adequate regulation, and is just as dangerous as it was before the collapse of Lehman Bros. Five years after the largest drop in GDP since the Great Depression unemployment remains high in all the advanced economies with no end in sight. And despite overwhelming evidence that we are on course to unleash disastrous climate change, carbon emissions continue to rise everywhere. While the tongues of all but a few critics were tied in 2002, there are now many voices bemoaning the loss of hard won reforms neoliberals assured us were counterproductive, no longer necessary, or unaffordable. Every day more people are realizing that we are on course for an ecological disaster of Biblical proportions. As our “old economies” continue to fail us, there is rising interest in a potpourri of initiatives that are self-consciously not business-as-usual economics, called the “new” or “future” economy. And finally, there is a notable stirring of renewed interest in alternatives to capitalism altogether. However, it is still instructive to begin a careful evaluation of free market capitalism with a point-by-point response to Milton Friedman’s claims about its purported virtues that have grown to become popular myths about capitalism. After which we can see where criticisms raised by protest movements in Europe and the US during the past five years fit into the long, historic debate over the pros and cons of laissez faire capitalism.

Myth 1: Free Enterprise Equals Economic Freedom

Friedman says the most important virtue of free enterprise is that it provides economic freedom, by which he means the freedom to do whatever one wishes with one’s person and property – including the right to contract with others over their use of your person or property. He says economic freedom is important in and of itself, but also important because it unleashes people’s economic creativity and promotes political freedom.

Political economists believe that people should control their economic lives, and only when they do so is it possible to tap their full economic potential. We also believe economic democracy promotes political democracy. But we find Friedman’s concept of economic freedom inadequate, his argument that free enterprise allows people to control their economic lives highly misleading, his claim that free enterprise is efficient, rather than merely energetic, unpersuasive, and his conclusion that free enterprise promotes political democracy preposterous.

In Chapter 2 I argued it is important for people to control their economic lives irrespective of the quality of decisions they make. In other words, beside efficient and equitable outcomes we want workers and consumers to have input into economic decisions in proportion to the degree they are affected by those decisions – we want economic self-management. Friedman plays on the obvious truth that it is good when people are free to do what they want to substitute the concept “economic freedom” for a more meaningful definition of economic democracy. Since this distortion is at the core of capitalist mythology it is important to treat it seriously.
‟If employers are free to use their productive property as they see fit, then their employees are not free to use their laboring capacities as they see fit. If the wealthy are free to leave their children large bequests, then new generations will not be free to enjoy equal economic opportunities.
The first problem with Friedman’s concept of economic freedom is that in capitalism there are important situations where the economic freedom of one person conflicts with the economic freedom of another person. If polluters are free to pollute, then victims of pollution are not free to live in pollution free environments. If employers are free to use their productive property as they see fit, then their employees are not free to use their laboring capacities as they see fit. If the wealthy are free to leave their children large bequests, then new generations will not be free to enjoy equal economic opportunities. If those who own banks are free from a government imposed minimum reserve requirement, ordinary depositors are not free to save safely. So it is not enough simply to shout “let economic freedom ring” – as appealing as that may sound.

Related: Also by Robin Hahnel: "What should we demand from our economy?"

In capitalism whose economic freedom takes priority over whose is settled by the property rights system. Once we realize economic freedom as defined by Friedman is meaningless without a specification of property rights – that it is the property rights system in capitalism which dictates who gets to decide what – the focus of attention shifts to where it should have been in the first place: How does the property rights system distribute decision-making authority? Does the property rights system distribute control over economic decisions equitably? Does it give people decision- making authority in proportion to how much they are affected by an economic decision? Or, by giving priority to property rights over human rights, and by distributing property ownership unequally, does a property rights system leave most people little control over their economic destinies and award a few control over the economic fates of the many?

So the first problem with Milton Friedman’s way of conceptualizing the notion that people should control their own economic lives is that it merely begs the question and defers all problems to an unspecified property rights system. The second problem is that while Friedman and other champions of capitalism wax poetic on the subject of economic freedom, they have remarkably little to say about what is a better or worse property rights system. Most of what little they do say reduces to two observations: (1) Whatever the distribution of property rights, it is crucial that property rights be clear cut and complete, since otherwise there will be inefficiency due to “property right ambiguity.” (2) Since, in their opinion, it is difficult to argue that any distribution of property rights is preferable to any other on moral or theoretical grounds, there is no reason in their opinion to change the distribution of property rights history bequeathed us, except perhaps, in cases of theft or outright fraud. In sum, Friedman defends the property rights status quo and considers only clarification of ambiguities a legitimate area for public policy. What is entirely lacking is any attempt to develop criteria for better and worse distributions of property rights, not to speak of discussion of how property rights might be distributed to best approximate economic self-management.

However, conservatives’ silence on the issue of what, besides clarity and respecting the status quo, constitutes a desirable system of property rights does not extend to the issue of employer versus employee rights. According to Friedman there is no conflict between employees’ and employers’ economic freedoms as long as employment contracts are agreed to by both parties under competitive conditions. As long as the employment relation is voluntary, and as long as labor markets are competitive so nobody is compelled to work for a particular employer, or compelled to hire a particular employee, the economic freedoms of all are preserved according to Friedman and his conservative followers. In their eyes, when an employee agrees to work for an employer she is merely exercising her economic freedom to do with her laboring capacities as she sees fit. She could use her “human capital” herself if she wished. But if she is offered what she decides is a better deal – relinquishing her right to use her laboring capacities to another for an agreed wage payment – she should be free to do so. What’s more, if she were prohibited from making this choice her economic freedom would be violated, just as the economic freedom of the employer to use his productive property as he sees fit would be violated if he were barred from hiring employees to work with it under his direction. Accordingly, Friedman concludes that union shops, where a majority of employees have voted that all employees must become members of the union, which represents them collectively in bargaining with their employer, are violations of employee as well as employer economic freedom under capitalism. And worse still is socialism’s ban on private enterprise, which Friedman criticizes as the ultimate violation of people’s economic freedom to hire and be hired by one another should they so choose.

The first problem with this defense of private enterprise as the cornerstone of economic freedom is that not all people have, or could ever have, an equal opportunity to become employers rather than employees. In real capitalist economies a few will become employers, the vast majority will work for someone else, and some will be self-employed. Moreover, who will be employers, employees, or self-employed is determined for the most part neither randomly nor by people’s relative preferences for self-managed versus other-directed work. In the corn model in Chapter 3 we discovered that only under egalitarian distributions of seed corn would relative preferences for self-managed work determine who become employers and who become employees. Under inegalitarian distributions those with more seed corn become employers and those with less become employees irrespective of people’s relative preferences for self-management or aversions to being bossed around. One of the most profound insights provided by the simple corn model is that while it is true, in a sense, that employees “choose” alienated labor, they do not necessarily do so because they have a weaker desire for self-management than those they go to work for. The distribution of wealth “tilts” the private enterprise playing field so that some will benefit more by becoming employers and others will benefit more by becoming employees independent of work preferences.
‟Not all people have, or could ever have, an equal opportunity to become employers rather than employees.
The answer to this criticism by the champions of private enterprise is that anyone who wants to work badly enough for herself can borrow in the credit market whatever is necessary to become self-employed or an employer. But this line of reasoning (1) assumes more than any real capitalism can offer – credit on equal terms for all – and (2) ignores that even competitive credit markets can impose a steep price on the poor for self-management that the wealthy are not required to pay. In a world with uncertainty and imperfect information – not to speak of patents and technological and financial economies of scale – those with more collateral and credentials will receive credit on preferential terms while the rest of us will be subject to credit rationing in one form or another. To expect any different is to expect lenders to be fools. So being referred to the credit market is not going to level the playing field for the poor. And even if all did receive credit on equal terms, our simple corn model in Chapter 3 demonstrates that the poor who avoid the status of employer by borrowing in credit markets – where we generously assumed anyone could borrow as much as she wanted at the market rate of interest and nobody has access to credit for less – effectively pay their wealthy creditors for the right to manage their own laboring capacities – a right that should be as “inalienable” as the right to vote on political issues. The buck must stop somewhere: Those without wealth to begin with have an uphill road to avoid employee status in capitalist economies, with or without credit markets, no matter how close to perfect those credit markets might be.

Cartoon advertised by Liberty Motors & Engineering Corporation, Baltimore, Maryland. Fortune, February 1944, p. 88. Cartoon by Edmund Duffy. (flickr)

But even if the capitalist playing field were level, and even if the probability of becoming an employer rather than an employee was exactly the same for everyone, this would not mean the employer–employee relationship was a desirable one. Of course random assignment would be a far sight better than having relative wealth determine who will boss and who will be bossed. But is it better than having neither bosses nor bossed, and instead all enjoy self-management? Here is a useful analogy: A slave system where slaves apply to be slaves for slave masters of their choice is better than one where slave owners trade slaves among themselves. A slave system where people are assigned randomly to be slaves or slave masters is better than one where blacks are slaves and whites are slave owners. But abolition of slavery is better than even the least objectionable kind of slavery. The same holds for wage slavery: A labor market where employees are free to apply to work for employers of their choice is better than one where employers trade employees among themselves, as Curt Flood argued in his landmark suit against Major League Baseball in 1970. A system where who become employers and who become employees is truly a random walk is better than one where the wealthy predictably become the employers and the poor predictably become employees. But abolition of wage slavery – replacing the roles of employer and employee with self-management for all – is better than even the least objectionable system of private enterprise.


1 Laissez faire capitalism, free market capitalism, and neoliberal capitalism are different terms that have been used in different eras and settings for the same kind of capitalism. I will use these labels interchangeably, while acknowledging that there are sometimes differences.


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