------------ EH.NET BOOK REVIEW --------------
Published by EH.NET (November 2006)
Mark Wynne, Harvey Rosenblum and Robert Formaini, editors, _The
Legacy of Milton and Rose Friedman's Free to Choose: Economic
Liberalism at the Turn of the Twenty-First Century_. Dallas: Federal
Reserve Bank of Dallas, 2004. vii + 251 pp. $ (hardback), ISBN: Info:
0-9763494-1-8
Reviewed for EH.NET by Ranald Taylor and Robert Leeson, Department of
Economics, Murdoch University.
This book is a collection of papers presented at a conference held at
the Federal Reserve Bank of Dallas in October 2003. It is a tribute
to Milton and Rose Friedman's _Free to Choose_. The papers have a
dominant theme: competitive markets can solve many of the problems
associated with education, environmental degradation, taxation,
cultural diversity, globalization, financial markets and monetary
stability. The book is organized into six sessions, each devoted to
particular issues which the Friedmans have raised in _Free to Choose_.
Session one sets the tone of the book by revisiting Milton Friedman's
organizing argument: that competition ensures economic freedom and
that the appropriate role of a government in a free society is to
ensure that competitive markets function freely. Eric Hanushek and
Paul Peterson examine the coexistence of what they believe to be the
declining state of the public school system in the U.S. and rising
real spending per pupil. Hanushek argues for a competitive
market-based funding system in the form of vouchers. Resistance to
vouchers, he believes, derives from an old ideology. Hanushek argues
that it is easier to defeat communism than to overcome the education
establishment's resistance to meaningful reform of the public school
system.
Advocates of 'sustainable development' advocate changes in virtually
every aspect of consumption and production. In session two Terry
Anderson and Laura Huggins argue that sustainable development theory
is vague and "operationally vacuous" (p. 58). They challenge the two
fundamental pillars of sustainable development: 'running out' of
resources will leave future generation with less, and market
processes are the causes of these depletions. According to Anderson,
Huggins and Richard Stroup, the over consumption of natural resources
is primarily linked to ill-defined property rights rather than the
operation of the market system. Property rights, they argue, provide
the structures that are necessary for development, innovation,
conservation and the discovery of new resources. They maintain that
countries with greater economic freedom and rule of law tend to have
higher environmental standards than countries where the rule of law
is weak.
One of the themes of _Free to Choose_ was that government has grown
far beyond the size necessary for the protection of liberty. In
session three, William Niskanen constructs a model to estimate the
optimal level of expenditure for government services relative to GDP.
His estimate (10 percent of GDP) provides support for smaller
governments. Liqun Liu, Andrew J. Rettenmaier and Thomas R. Saving
argue that falling birth rates and rising life expectancy have made
the current social security system unsustainable. Their analysis of
the costs and benefits of a transition to a privately-funded system,
suggests that during the transition period there would be a cost
involved in the form of lower consumption. However, in the longer
term, they argue, the transition would make the country as a whole
better off by enhancing the nation's capital stock.
In session four, Tyler Cowen deals with the implications of _Free to
Choose_ for culture, diversity and aesthetics. Globalization and free
trade benefit both cultural diversity and the creative arts, Cowan
argues: periods of greater freedom in international trade tend to be
periods of greater cultural diversity and creativity.
Peter J. Boettke examines the impact of _Free to Choose_ on global
movement toward free markets during the period from 1979 to 2003.
During this period, communism collapsed in the Second World, the
Third World began to reject development planning, and many First
World countries reformed their welfare states. Boettke notes that
much post-communist privatization was inspired by Friedman's writings.
Gregory Chow uses the central themes of _Free to Choose_ to examine
post-1978 reforms in China, sensing progress in all areas. With
reference to education, Chow claims that there is probably a greater
degree of freedom of choice in education in China than the U.S. (he
argues that about 40 percent of all spending on education in China
comes from private sources compared to an average of 12 percent in
the OECD countries).
Session five has a topical immediacy given that the Grameen Bank and
its founder, Muhammad Yunus, were jointly awarded the 2006 Nobel
Peace Prize. Luigi Zingales argues that access to finance is crucial
to promote competition and economic freedom. Zingales describes the
fate of two Bangladeshi women (one with access to finance, the other
without). The second found it extremely difficult to develop her
stool making business; the first obtained a small loan from the
Grameen Bank to acquire a Nokia cellular phone. The phone made a huge
difference in her life and the lives of her fellow villagers by
bringing information at low cost to farmers and tradesman. The phone
reduced business costs facilitating profits about twice the average
national monthly income.
Zingales argues that although financing is a risky and complex
activity, riddled with adverse selection and moral hazard, it is
government intervention that is the main obstacle: "In spite of the
enormous challenges intrinsic to the financing activity, human
ingenuity, when allowed to work freely, is able to devise many
mechanisms to enlarge access to finance. It cannot, however, overcome
the power of the government, when this is determined to block
finance. Unfortunately, governments are too often captured by rich
incumbents, who stand to gain very little and risk a lot from the
development of finance" (p. 188).
Allan H. Meltzer itemizes twenty-five specific policy proposals
initiated by Milton Friedman (some of which have been adopted and
many of which have not) to minimize government intervention. He looks
at some of the successes (ending the military draft, floating the
dollar, the abolition of interest rate ceiling on bank deposits) and
some partial successes (lowering tariff barriers, deregulation
various industries in the U.S., the introduction of a school voucher
system in certain U.S. states).
Ben S. Bernanke examines eleven of Friedman's key monetarist
propositions. According to Bernanke, Friedman's counter-revolution is
still very much alive: "one can check to see if an economy has a
stable monetary background only by looking at macroeconomic
indicators such as nominal GDP growth and inflation. On this
criterion it appears that modern central bankers have taken Milton
Friedman's advice to heart" (p. 213).
The last session traces the relationship between economic freedom and
growth performance. The Friedmans believe that economically free
countries would grow more rapidly and achieve higher income levels
than less free countries. To test their hypothesis, they saw the need
to develop a scientific instrument that could be used to quantify the
degree of economic freedom across a large number of countries. James
Gwartney pioneered the construction of indexes to proxy economic
freedom. Based on the Economic Freedom of the World (EFW) index
(taking into account of private ownership, voluntary exchange,
personal choice, and free entry into markets), Gwartney and Robert
Lawson report that a one-unit increase in the EFW index enhanced
growth by 0.71 percentage points over the period 1980-2000: "Friedman
was right" (p. 232).
As a conclusion to the book, Raghuram G. Rajan offers some
reflections on whether the free market tide may retreat (in Latin
America, for example). Rajan argues that the growing backlash against
pro-market reforms is driven by elites who tend to undermine equality
of opportunities by opposing widespread access to markets.
This is a fascinating book -- a must read for Friedman fans. One of
Friedman's strengths was (and is) his intense curiosity about the
strengths and weaknesses of the arguments and unexamined assumptions
of his opponents. Some of those who have documented the progress of
his ideas have been struck by the initial lack of reciprocity in this
respect (in the early days his ideas were often dismissed as Chicago
eccentricity). Friedman was a dominant figure among the first
generation of post-war libertarians: this salute by some of the
second generation provides an insight into the dynamics of the ideas
that he developed and propagated.
Ranald Taylor is the author of "Can Labour-Savings, Capital-Intensive
Production Techniques Reduce Unemployment Rates in Developing
Countries?" _Australian Journal of Labour Economics_ (2004). He is
currently working on a project tracing the evolution of technological
progress since Adam Smith.
Robert Leeson is the co-author (with W.J. Darity and W. Young) of
_Economics, Economists and Expectations: From Microfoundations to
Macroapplications_ (Routledge: 2004) and is currently editing Milton
Friedman's _Collected Writings_.
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Published by EH.Net (November 2006). All EH.Net reviews are archived
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