MOLDAVAN STATE UNIVERSITY

Department of Economic Sciences

COURSE WORK

on the History of economic doctrines, on the topic:

« MILTON FRIEDMAN »

Completed: 2nd year student,

groups 19-1 Peeva Veronica

Checked:

Chisinau 2002

Introduction

1. Milton Friedman. Brief biography.

2. Monetarist recipes for improving the economy

3. Milton Friedman's Criticism of the International Monetary Fund

References

Introduction

Milton Friedman is an American economist, winner of the 1976 Nobel Prize in Economics, awarded "for his research in the field of consumption, history and theory of money."

The name of M. Friedman, a Nobel laureate in modern economic theory, is usually associated with the leader of the “Chicago monetary school” and the main opponent of the Keynesian concept of state regulation of the economy.

M. Friedman is multifaceted in his work and, which is very important, his scientific interests also cover the field of methodology of economic science.

1. Milton Friedman.

Brief biography.

Milton Friedman

Milton Friedman was born on July 31, 1912 in New York into a family of immigrants from Eastern Europe. Shortly after his birth, the family moved to Rahway, New Jersey. His mother worked in a haberdashery store, and his father, as Friedman later recalled, “tried unsuccessfully to achieve results in hopeless trading operations.” The family had small and unstable incomes and could not get out of poverty.

At the age of 16, Milton Friedman was admitted to Rutgers University through a competitive selection process with the right to receive a partial scholarship.

In 1932, he was awarded a bachelor's degree in two disciplines - economics and mathematics. M. Friedman continued his specialization in economics at the University of Chicago. After receiving a master's degree from the University of Chicago in 1933, Friedman moved on to a graduate internship at Columbia University (New York).
At the end of 1934, he began working at the University of Chicago as a research assistant. In the summer of 1935, M. Friedman took part in a large-scale consumer budget research project for the US National Committee on Natural Resources.

During the Second World War, Friedman participated in the development of tax policy on behalf of the Ministry of Finance and conducted research on military statistics.

In 1945-1946 he teaches economics at the University of Minnesota. Then M. Friedman returned to the University of Chicago and became an assistant professor of economics, remaining in this position to this day.

With the assistance of the NBER, Friedman began work that lasted many years on the creation of monetary theory. His subsequent contribution to the theory and practice of economic science is accompanied by the receipt of unexpected results; he becomes a fruitful researcher and leads the so-called. "Chicago School" economists.

In 1950, he worked in Paris as a consultant on the implementation of the Marshall Plan, which provided for the restoration of the war-ravaged economies of Western Europe. In his book “The Theory of the Consumption Function,” published in 1957, M. Friedman formulated and substantiated his theory of “constant consumption income.”

In 1951, Friedman was awarded the John Bates Clark Medal of the American Economic Association.

In 1956, under his editorship, a collection of articles, “Research in the Field of Quantitative Theory of Money,” was published.

In 1963, Friedman published the fundamental work “The Formation of the US Monetary System,” written together with Anna Schwartz. In this book, he defends the position according to which, in long-term periods, major changes in economic life are associated primarily with the money supply and its movement. “The economy is dancing to the tune of the dollar, repeating the dance of the dollar,” says M. Friedman. All major economic shocks, including the Great Crisis of 1930, are attributed by Friedman to the effects of monetary policy rather than to the instability of the market economy. According to Friedman, the influence of money on economic activity is not an external (exogenous) factor of the economy, but, most likely, on the contrary, an internal (endogenous) factor. Following the monetarist school, he considers the demand for money to be one of the most important drivers of the economy. Friedman's monetary concept, in the words of the American economist G. Ellis, led to the “rediscovery of money” due to almost universally growing inflation, especially in the last period.

Friedman's views on the importance of laissez-faire economic policy became widely known through his book Capitalism and Freedom (1962) and his regular column in Newsweek magazine beginning in 1966.

In 1967, M. Friedman was elected president of the American Economic Association.

In 1969-1973 He was an economic adviser to US President Richard Nixon. He earned recognition as an adviser to President Richard M. Nixon, despite his differences with him on the issue of establishing strict price and wage controls in 1971. F.'s views on the importance of non-intervention by the state in social policy became widely known through constant publications in a column assigned to him in Newsweek magazine since 1966, as well as through the earlier publication of the book “Capitalism and Freedom” (1962). His popular book "Free to Choose" (1980) even provided the title for a television series of talks he gave on social and economic issues.

In 1976, Milton Friedman was awarded the Nobel Prize in Economics "for his achievements in the analysis of consumption, the history of money, and the development of monetary theory, and for his practical demonstration of the complexity of economic stabilization policies."

In his Nobel lecture, he returned to a topic raised back in 1967 when addressing the American Economic Association - to the denial of Keynes's remark regarding the stable relationship between the rate of inflation and unemployment. He came to the conclusion that over a long period the Phillips curve still shifts upward, subject to a natural increase in unemployment.

In his opinion, the reason for this phenomenon was the acceptance of the growth of unemployment as an increasing parameter instead of interpreting it as a constant numerical constant. For the short term, in his opinion, inflationary monetary and fiscal policy could only temporarily reduce the unemployment rate, since workers and corporations, out of habit, strive to increase income levels, which ultimately cannot but contribute to an increase in the price level (and, accordingly, an increase in unemployment).

Despite the fact that many of M. Friedman's views on economic theory and public policy are considered controversial, he, as the English economist John Barton put it, “provided us with a foundation for future research in macroeconomics.”

In 1977, M. Friedman left the University of Chicago, where he taught for many years, and began working as a senior researcher at the Hoover Institution at Stanford University in California.
In 1980, his book “Freedom of Choice” was published (and became popular), which gave the title to a series of conversations he conducted on television on social and economic issues.

In 1981-1984. M. Friedman was an economic adviser to US President Ronald Reagan.

Milton Friedman has been awarded honorary degrees from many American and foreign universities and academies.

M. Friedman’s work is multifaceted and, what is very important, his scientific interests also cover the field of methodology of economic science. Indeed, for many years, in their discussions on this problem, economists have not done without analyzing Friedman’s essay “Methodology of Positive Economic Science” (1953), as well as without the essays on a similar topic written by L. Robbins (1932), R. Heilbroner (1991) and M. Allais (1990), or the famous lecture given by P. Samuelson at the ceremony of awarding him the Nobel Prize in Economics (1970 ), and etc.

However, it is precisely from the positivist methodological essay of M. Friedman that one can draw extraordinary judgments that economic theory as a set of substantive hypotheses is accepted when it can “explain” factual data, only from which it follows whether it is “correct” or “wrong” and whether it will be "accepted" or "rejected"; that facts, in turn, can never “prove a hypothesis,” since they can only establish its fallacy. At the same time, his solidarity with those scientists who consider it unacceptable to present economic theory as descriptive rather than predictive, turning it into simply mathematics in disguise, is obvious. According to M. Friedman, to assert the diversity and complexity of economic phenomena means to deny the transient nature of knowledge, which contains the meaning of scientific activity, and therefore “any theory necessarily has a transient nature and is subject to change with the progress of knowledge.” At the same time, the process of discovering something new in familiar material, the Nobel laureate concludes, must be discussed in psychological rather than logical categories and, when studying autobiographies and biographies, stimulate it with the help of aphorisms and examples

2. Milton Friedman:

monetarist recipes

economic recovery.

What is monetarism? What are its postulates, the reasons for its influence?

Monetary means monetary (money - money, monetary - monetary). According to the definition of Bernard Yves and Colley Jean-Claude, monetarism is a current of economic thought that assigns money a decisive role in the oscillatory movement of the economy. Monetarism is a science not only about money. The focus of the representatives of this school is on monetary categories, monetary instruments; however, they are not just interested in the monetary mechanism, the banking system, monetary policy, and foreign exchange relations. Monetarists look at these processes to identify the relationship between the money supply and output. In their opinion, banks are the leading regulatory instrument, with the help or with the direct participation of which changes in the money market are transformed into changes in the market for goods and services.

Milton Friedman (born 1912) is an American economist. Born in New York. Graduated from Rutgers University (USA). In 1933 he received a master's degree, and in 1940 his work “Income from Independent Private Practice” was published (together with S. Kuznets).

In 1945-1946, M. Friedman taught economics at the University of Minnesota. Since 1948 - in Chicago. In 1950, he participated in the implementation of the Marshall Plan.

In 1971-1974, M. Friedman was an adviser to American President R. Nixon on economic issues.

In 1976 awarded the Nobel Prize.

The main works of M. Friedman are the books “The Theory of the Consumption Function” (1957), “The Formation of the Monetary System in the USA” (1963), which set out the main provisions of the theory of monetarism.

If we compare the Keynesian and monetary systems, then the first is theoretically (like, for example, Marxism) more complex. Keynes's theory is more developed in terms of categories, patterns, effects, methodology; at one time it sounded like a new word, like a revolution. Monetarists, on the other hand, return to the old values ​​of the free market in new historical conditions (hence counter-revolution, neo-conservatism). According to J. Tobin, Friedman argues on the principle “after this, therefore because of this” - an increase in the money supply by 4% will give an increase of 3%, and that Friedman’s statement “money matters” is interpreted as “only money matters.” The Friedman model is one-factor, works on the principle “input is money, output is GNP growth,” and there is no mechanism of cause-and-effect relationship. According to Tobin, Friedman, although he substantiated everything statistically, there is no theoretical proof. Despite this, since the mid-70s. Almost all developed countries are implementing the recommendations of monetarism, i.e. The annual percentage growth of the money supply averages 4%. It is impossible to maintain this pace strictly year by year, since there are wars (in Iraq, Iran, etc.), natural disasters, presidential elections, the reunification of Germany, structural, currency and other crises. But Friedman recommends leveling the indicator on average over 5–10 years (if in one year it is 6%, then in another it should be 2%, for example, etc.)

Friedman explains the cause of the crisis of 1929–1933. the fact that the money supply then decreased by a quarter of the required quantity. Naturally, it is difficult to agree with this “simple” explanation.

However, Friedman has theoretical blocks of his concept that explain the real situation more clearly than Keynesian approaches. So, since about 1967. Friedman uses the concept of “natural rate of unemployment,” which allows him to explain the phenomenon of simultaneous growth in unemployment and inflation in the 60s and 70s. Let's look at the essence of the matter. In the post-war period, with the help of Keynesian recommendations, high (record) employment was achieved in Western countries. But gradually, and then more and more, prices began to rise. The problem arose of clarifying the new relationship between inflation and unemployment. The fact is that before the onset of “stagflation,” Keynesians relied on the ideas of the “Phillips curve” (1958), the meaning of which is to establish an inverse relationship between wages and unemployment. According to this curve, 3.5% unemployment produces 6–7% inflation. It is possible, the Keynesians believed, to choose a maneuver in which pumping up demand through a budget deficit, although it will lead to “creeping inflation,” will maintain employment at an effective level. But after the recession of 1969–1971. unexpectedly for Keynes's supporters, the pattern no longer worked. Keynesians did not find a reasonable explanation for this. Friedman found the reason by introducing the concept of frictional and institutional unemployment within the framework of the “natural rate of unemployment.”

Taking Walras's “pure market” as a basis, in which unemployment is voluntary and depends on individual assessments of the burden of work and the usefulness of leisure, Friedman introduced the friction factor and the factor of institutional unemployment into the model. He classified as frictional a change of job due to a change of place of work, profession, place of residence, etc. Institutional unemployment depends on the presence of a trade union and the state. Trade unions fight against layoffs and for wage standards (for example, an hourly maximum), and the state increases leisure time with subsidies and benefits. This is where another few percent of unemployment comes from, which, as Friedman calculated, was about 6% in the 70s and 7% in the 80s. Above this level there is forced unemployment, below this there is idle unemployment. Friedman showed in his graph, based on the Phillips curve, that the factors described above turn the Phillips curve into a vertical (inelastic) straight line, i.e. attempts to reduce unemployment below its “natural rate” lead to inflation. This was the explanation for stagflation, which became generally accepted.

To reduce unemployment, Friedman (like other monetarists on other occasions) proposes to leave the matter to the market (“clear the market”), i.e. to help job seekers not with benefits, but with information about job vacancies, to retrain for the necessary professions, to reduce all kinds of charitable events and government assistance programs. All this is a typically monetarist, conservative approach, of which Friedman became a classic during his lifetime.

M. Friedman is the author of the theory of permanent income (developed back in 1957 in the work “The Theory of the Consumer Function”). As in his other works, in this too Friedman follows the rule of provability and verifiability (verifiability). If Keynes believed that as income increases, the “propensity to save” increases, then Friedman and other monetarists showed (including empirically based on budget data) that the consumption function depends not only on income, but also on accumulated capital, on the “effect competition or imitation”, on the relativity of income (i.e. its distribution and the position of the consumer on the social ladder).

The theory of permanent (constant, long-term, continuous) income became the main one in the development of monetarist countercyclical policy.

The theory of monetarism is built on the quantity theory of money and is characterized by the following provisions:

The main regulator of social life is the issue of money;

The amount of money in circulation is determined autonomously;

The velocity of money circulation is strictly fixed;

The issue of money is stable;

A change in the quantity of money has an equal and mechanical effect on the prices of all commodities;

The possibility of influence of the monetary sphere on the real process of reproduction is excluded;

Since changes in the money supply affect the economy with a delay and this can lead to disruptions, short-term monetary policy should be abandoned.

The main postulates of monetarism:

There is an instant reflection of new information on the supply and demand curves, that is, equilibrium prices and production volumes immediately react quickly to changes in the situation (the emergence of new technology, changes in economic policy);

The number of government regulators is reduced to a minimum (except for tax and budget regulation);

The rational nature of the behavior of economic entities;

Providing complete information to form expectations of the state of the economy by subjects of economic relations;

The need for perfect competition operating in all markets;

There is an instant reflection of new information on the supply and demand curves, that is, equilibrium prices and production volumes immediately react quickly to changes in the situation (the emergence of a new technology, a change in economic policy).

The positive contribution of monetarism to economic theory consists in a deep study of the mechanism of the reverse impact of the monetary world on the commodity world, monetary instruments and monetary policy on economic development. Monetarist concepts serve as the basis of monetary policy as a direction of government regulation.

A change in the price level (and the value of nominal income) is the result of a change in the money supply. There is a direct connection between the growth rate of the quantity of money and the growth rate of nominal income through the mechanism of the quantity theory of money. In other words, the quantity theory of money establishes a direct connection between the growth of the money supply in circulation and the growth of commodity prices.

A change in the quantity of money has a contradictory effect on the interest rate: an increase in the supply of money will first cause a decrease in the interest rate, and then an increase in costs and inflation increases the demand for loans, which leads to an increase in the interest rate.

In long-term equilibrium, money is neutral, that is, the long-term proportionality between money and prices is based on the stability of money demand.

In short and medium periods of time (5-7 years), money is not neutral and can cause real changes in the economy. Because of its short-term impact on output, money is important in determining the real level of employment and income.

M. Friedman believed that budget policy is not particularly important (it is enough to consider only the revenue side of the budget). Monetary and monetary policies are critical. But you should not work them out in detail, as this may cause destabilization.

M. Friedman proceeds from the fact that measured income (Y) and measured consumption (C) consist of permanent and temporary components:

M. Friedman defines permanent income (Yp) as the income that the consumer hopes to receive for quite a long time. Its value depends on the consumption horizon of the individual, the amount of accumulated capital, as well as on place of residence, age, profession, education, race and nationality. In a word, this is the income that the consumer expects to receive throughout his life, based on his age, education, and current consumption pattern.

Temporary or transitory income (Yt) “reflects the influence of all the “other” factors that a person classifies as random, although they may, from another point of view, be the predictable results of the action of such forces as, for example, cyclical changes in business activity.” 3. The source of temporary income can be very different: from an unexpected inheritance to winnings at cards. At the same time, M. Friedman especially emphasizes the element of unforeseenness and surprise when receiving temporary income: only in this case will this type of income not be able to seriously influence long-term consumer behavior.

One of the central points of the theory of permanent income is the assertion that the temporary component of income does not affect consumption. M. Friedman believes that all temporary income received goes to savings, and the level of long-term consumption is determined by permanent income.

Since consumption is based on the expected long-term level of income, it is also influenced by factors such as the level of long-term interest rates, the amount of accumulated capital, and consumer tastes.

In general, M. Friedman believes that people are neutral in relation to the future, that is, the propensity to consume remains unchanged from year to year. If the consumer strives to maintain consumption at some constant level, then consumption becomes a function not only of permanent income, but also of the interest rate:

And M. Friedman defines permanent income itself as equal to the product of capital (both human and other) and the interest rate:

M. Friedman believes that the motives for creating savings exist not only in a state of uncertainty. Thus, given complete certainty, savings perform two functions: first, they smooth out the flow of income, making consumption more uniform; secondly, they bring profit in the form of interest income.

In a state of economic uncertainty, savings create a reserve. M. Friedman believes that investing in “tangible assets”, that is, in physical capital, is more reliable than in human capital due to the remoteness in time of income2.

So, in general, the permanent income model is written as follows:

Cp = k(i,w,u)Yp.

An important conclusion of monetarism is that the value of GNP, which reflects the level of economic activity in the economy, ultimately follows with a certain time lag the dynamics of the money supply.

This statement corresponds to the methodology of the quantitative theory of money (QTM), which proves the existence of a causal relationship “money – prices” or “money – income”. Within the framework of CTD, there were several approaches to show how this connection “works”, through what mechanisms the influence of the level of money supply on the level of prices and income occurs. The most famous and closest to the ideas of monetarism was the transaction version of Irwin Fisher, which served as the starting point for M. Friedman’s development of his version of CTD - the theory of nominal income.

I. Fischer explained the presence of this connection using his exchange equation:

Where: M – money supply;

V – circulation speed;

P – price level;

Q – quantity of goods.

Therefore, M. Friedman sets the task of studying, first of all, the nature of the demand for money and the factors that determine it, since it is the demand for the money supply on the part of consumers and producers that determines the volume of real money supply in circulation and the speed of its turnover.

Based on this, as part of his analysis, M. Friedman examines the nature of the velocity of circulation of the money supply and answers the question of what is the mechanism of the influence of the money supply on the price level and nominal income. The methodological basis for its analysis is the theory of permanent income and the conclusions drawn on its basis. In developing his version of QTD, M. Friedman underwent a peculiar evolution from the analysis of the demand for money (in which he is based on the methodology and conclusions of I. Fisher) in his early works “The Quantitative Theory of Money: A New Rethinking” (1956), “The Demand for Money: Some Theoretical and Empirical Results" (1959) to a complete model of the theory of nominal income, in which he demonstrated the operation of the "transmission mechanism", in the works "Theoretical Framework for Monetarist Analysis" (1968) and "The Monetarist Theory of Nominal Income" (1971).

Friedman proposes the following version of the theory of nominal income:

The first equation (1) is the money demand function, presented as the product of the price level P, the value of the total expected return from a set of different assets.

The second equation (2) is the money supply Ms, which is a function of the set of interest rates R, the level of total nominal income Y (GNP at current prices). The ellipses indicate the level of economic uncertainty and changes of a political nature, that is, something that is difficult to formalize.

Equation (3) is the condition of equilibrium in the money market (equality of demand and supply of money).

Equation (4) is the equation for the rate of interest. This equation is a synthesis of the ideas of I. Fisher on nominal and real interest rates and J.M. Keynes that the current market interest rate is largely determined by the level of interest rates expected over the long term. r is the market interest rate, k0 is the difference between the expected real interest rate and the expected (permanent) growth rate of real income; y* – “constant” or expected growth rate of nominal income Y.

In Friedman's model, the main factor that disturbs the equilibrium in the money market is an unpredictable increase in the supply of money. As a result, business agents are reviewing the structure of their asset portfolios. They increase the demand for some assets and reduce it for others, which in turn leads to an increase in prices for some assets and a decrease in others and, consequently, to a decrease in the profitability of the former, that is, a decrease in interest rates.

This stimulates the demand for loan capital, and as a result, the interest rate begins to rise. However, as time passes, it returns to the equilibrium level. M. Friedman assigns a secondary role to the influence of interest rate changes.

The main effect of the shifts manifests itself primarily in the area of ​​prices, provided that production makes maximum use of the resources available in the economy.

Thus, the transmission of impulses from the money supply to the level of nominal income occurs through the mediation of changes in the price level. Consumers adjust to changing levels of money supply, circulation and prices by changing their "cash balance"

Friedman is an even more unique person in economics. Many call him the leading economist of the twentieth century, while others rank him number two after Keynes.

Friedman's achievements are best thought of as attacks on Keynesianism. The most important, in Friedman’s own opinion, of his theories is set out in the book “The Theory of the Consumption Function”; she argues that people, when choosing how much to consume, look not at current income, as Keynes believed, but at “permanent income,” recognizing that spending everything today may not be the best strategy, and people are planning not only for themselves, but also for their children and grandchildren. As a result, a change in income at the moment may not lead to a consumption boom, and government policy will be in vain. Friedman himself believed that this theory was just a logical continuation of his famous article on the methodology of economics. There he argued what many of our commentators do not want to understand, namely, that a person or company does not have to know economics in order to act in accordance with its laws. The firm maximizes profit not because its owner has studied economics, but due to a kind of economic natural selection, as a result of which ineffective entrepreneurs themselves leave the market. Friedman used billiard players as a metaphor: they play as if they knew physics and geometry, which is not at all necessary. In the same way, people do not eat up all their current income, simply because the instinct of self-preservation teaches them to do so.

The second battle concerned the relationship between unemployment and inflation. Milton Friedman and Nobel laureate Edmund Phelps predicted that the link between inflation and unemployment would break down if the government tried to exploit it. This theory is especially interesting because it made specific predictions that became historical facts in the 1970s. Keynesians are still trying to explain why their original model was correct, but governments have learned their lesson and are not playing with inflation.

Most people know Friedman as the founder of monetarism, one of the trends in macroeconomics, which claims that inflation is always and everywhere a monetary phenomenon. Indeed, the supply of money was one of the main themes in his work, including the monumental work A Monetary History of the United States, co-written with Anna Schwartz, which upended understanding of the causes of the Great Depression (the authors believed that it was caused mainly by the Fed's inept monetary policy) and on the role of monetary policy in economic management. Keynes believed that the state should use only fiscal policy to stabilize, but now most authorities in developed countries are far from this. Until recently, Friedman himself was of the opinion that monetary policy should not only be independent of the government, but also independent of anyone else: he proposed simply increasing the money supply by 3 - 4% per year. Mainstream economists no longer support such a radical position, but still, any central banker owes his success largely to Friedman’s monetary revolution.

The book “Freedom to Choose” by one of the most influential modern economists, Milton Friedman and his wife Rose Friedman, is one of the most famous works of liberal thought of the second half of the 20th century. Defending the values ​​of individual, economic and political freedom, the authors provide convincing evidence of the ineffectiveness of bureaucracy and the redundancy of its interference in the life of society using the example of state social security systems, education, financial regulation, and licensing of various goods and activities.

Milton Friedman, Rose Friedman. Freedom to choose: our position. – M.: New publishing house, 2007. – 356 p.

Download a short summary in the format or

The history of the United States is the story of an economic, but also a political, miracle made possible by the application of two sets of ideas that, by a curious coincidence, were formulated in documents published in the same year, 1776. One set of ideas found expression in The Wealth of Nations, the masterpiece that made the Scotsman Adam Smith the father of modern economics. Another set of ideas was embodied in the Declaration of Independence, in which Thomas Jefferson expressed the prevailing mentality of his countrymen. She proclaimed the formation of a new nation that, for the first time in history, established the principle that every individual has the right to be guided by his personal values: “We proceed from these self-evident truths, that all men are created equal, and are endowed by their Creator with certain unalienable rights, that among these are life.” , freedom and the pursuit of happiness."

Economic freedom is the most important prerequisite for political freedom. By allowing people to organize together without coercion or central control, it limits the reach of political power. In addition, a free market ensures that power is dispersed and thus prevents the government from becoming too strong.

Jefferson's ideal, formulated in his first inaugural address in 1801, was "a wise and thrifty government, which would restrain men from injuring one another, and would in all other respects leave them free to divide their efforts between labor and improvement."

With the advent of the Great Depression of the early 1930s, attitudes toward the state began to change. The cause of the depression was the failure of the government in the monetary sphere, where it had exercised power since the beginning of the republic. However, government responsibility for the depression was not accepted then or now. Instead, the depression was widely interpreted as the failure of free market capitalism. This myth enticed the public to subscribe to the changed intellectual view of the mutual responsibility of individuals and government. Whereas previously the emphasis had been on man's responsibility for his own destiny, man was now seen as a pawn influenced by forces beyond his control. The view that the role of government is to act as an arbitrator to keep people from committing violence against each other has been replaced by one that sees government as a father figure with the responsibility of coercing people to help others.

One policy followed another to "regulate" the "distribution of our efforts between labor and improvement," turning Jefferson's dictum on its head. A person who intends to serve only the public interest through government intervention is “directed by an invisible hand” to promote private interests, although this goal “was not his intention.”

We must recognize why attempts to replace voluntary cooperation with centralized control can cause so much harm. We have the opportunity to push a change in public opinion towards greater trust in private initiative and voluntary cooperation, rather than its opposite - totalitarian collectivism.

Chapter 1. Market power

No society operates entirely on command principles, and similarly, none relies solely on voluntary cooperation. The big difference is what the combination is: whether voluntary exchange is an inherently illegal activity that thrives due to the inflexibility of the dominant command element, or whether voluntary exchange is the dominant principle of the organization, supplemented to a greater or lesser extent by command elements. Illegal voluntary exchange can keep a command economy from collapsing, can help it survive for a while and even make some progress. However, it is unlikely to undermine the tyranny on which a predominantly command economy rests. On the other hand, an economy dominated by voluntary exchange has the potential for prosperity and personal freedom. It may not reach its full potential in any respect, but we know of no society that has achieved prosperity and freedom in which voluntary exchange is not the dominant principle of organization.

The key idea of ​​A. Smith's book The Wealth of Nations is deceptively simple: if an exchange between two parties is voluntary, then it will take place only if each party is confident that it is benefiting from it. A. Smith's brilliant insight was that economic order could emerge as the unintended result of the actions of many people pursuing their own interests, which was amazing in his time and remains so to this day.

The role of prices. In the process of organizing economic activity, prices perform three functions: they transmit information; create incentives for the introduction of less expensive production methods and, thus, allow available resources to be directed to the most significant purposes; determine who gets and how much, i.e. distribute income. Anything that prevents prices from freely reflecting supply or demand conditions will affect the accuracy of the information. Private monopoly, i.e. control of a product by one producer or cartel is one example. This does not prevent the transmission of information through the price system, but it distorts the transmitted information.

Today, the government is the main obstacle to the free market system, which it disrupts through tariffs and other restrictions on international trade, fixing or otherwise influencing individual prices in the domestic market, including wages, government regulation of certain industries, monetary and fiscal policies , causing volatile inflation, and many other measures.

For organizing production, the most important information is information about relative prices, i.e. the price of one product compared to another. High inflation, and especially volatile inflation, drowns out this information with meaningless clutter. A manufacturer's income—what it receives from its activities—is defined as the difference between sales and costs. He compares one with the other and produces such a volume of output that a small increase in production gives an equal increase in his costs and his profits. Rising prices shift this limit.

Only people can earn income, and they extract it through the market from the resources they own in the form of corporate capital, securities, land or their own abilities. In countries like the United States, the main productive resource is people's personal abilities, what economists call "human capital." Approximately three-quarters of all market-based income in the United States is in the form of employee compensation (wages and salaries plus fringe benefits).

The amount of each type of resource we own is partly a matter of chance and partly of choice made by us or others. Chance determines our genes and, accordingly, our physical and mental abilities. Chance determines the nature of the family and cultural environment into which we are born and, accordingly, the opportunities to develop our physical and mental abilities. But choice also plays an important role. Our decisions about how to use our resources, whether to work hard or not, to take this or that job, to open this or that business, to save or spend - all this can lead to waste or, conversely, to the increase and improvement of resources.

In every society, no matter how it is organized, there is always dissatisfaction with the distribution of income. We all find it difficult to understand why we should receive less than those who seem to us to be less deserving, or why we should receive more than many others whose needs seem just as great and whose merits are no less. The grass seems greener in distant pastures, so we blame the current system. In a command system, envy and dissatisfaction are directed at the rulers. In a free market system they are aimed at the market. One consequence of this was an attempt to separate the function of income distribution from other functions of the price system - transmitting information and creating incentives. Much of the activity of governments in the second half of the 20th century in the United States and other countries that relied heavily on the market was aimed at changing the mechanism of distribution of income generated by the market in order to achieve a different, more equal distribution of income.

As much as we might like it, it is impossible to use prices to convey information and create incentives to act on that information without using prices to influence the distribution of income.

Adam Smith's "invisible hand" is usually thought of in relation to the buying and selling of goods and services for money. But economic activity is by no means the only area of ​​human life where the unintended result of the cooperation of many people pursuing their own interests is a complex and subtle structure. Consider, for example, language. The values ​​of a society, its culture and customs - all this develops in the same way on the basis of voluntary exchange, spontaneous interaction, the evolution of a complex structure through trial and error, acceptance and rejection. No monarch has ever decreed that the music enjoyed by the people of Calcutta should be fundamentally different from the music enjoyed by the people of Vienna.

Structures created through voluntary exchange, be it language, scientific discoveries, musical styles, or economic systems, take on a life of their own. They have the ability to take different forms under the influence of circumstances. Voluntary exchange may produce uniformity in certain respects and diversity in others. This is a delicate process, the general principles of operation of which are quite easy to understand, but almost impossible to predict with accuracy its results. These examples point not only to the wide possibilities of voluntary exchange, but also to the need for a broader understanding of what “self-interest” is. A narrow preoccupation with the economic market has led to a narrow understanding of “self-interest” as myopic selfishness, as an exclusive interest in immediate material reward.

Economics has always been accused of drawing far-reaching conclusions from the completely unrealistic concept of “economic man,” who is merely a calculating machine that responds only to monetary incentives. This is a huge mistake. “Self-interest” is not myopic selfishness. These are actually the interests of the participants, their values, the goals they pursue.

What should be the role of government? It is difficult to give a better answer to this question than Adam Smith did more than two centuries ago: a prince has only three duties to perform, first, to protect society from the violence and invasion of other independent societies; secondly, to protect, as far as possible, every member of the community from injustice and oppression on the part of other members, or the duty to establish the good administration of justice, and thirdly, to create and maintain certain public works and institutions, the creation and maintenance of which cannot be in the interests of individuals or small groups, because the profits from them can never pay the costs of the individual or small group, although they can often pay them more than the large society.”

The central problem in achieving and maintaining a free society is precisely that of ensuring that the coercive powers granted to government for the purpose of preserving liberty are limited to that function and do not become a threat to liberty. We must improve the way we study the benefits and costs of government interventions and require that the benefits outweigh the costs before we take action.

The fourth duty of government, which Adam Smith does not explicitly mention, is to protect the “incompetent” members of the community.

In 1928, federal government spending was approximately 3% of national income.

Our society is what we make of it. We can shape our institutions. Material and human factors limit the alternatives available to us. But no one can stop us from building a society that relies primarily on voluntary cooperation to organize economic and other activities. A society that preserves and enhances the freedom of man, that shows government its place, keeping it our servant and not allowing it to become our master.

Chapter 2. The Tyranny of Control

Discussing tariffs and other restrictions on international trade in The Wealth of Nations, Adam Smith wrote: What seems reasonable in the course of any private family, can hardly be unreasonable in the whole kingdom. If any foreign country can supply us with any commodity at a cheaper price than we ourselves are able to manufacture it, it is much better to buy it from her with some part of the product of our own industrial labor applied in the field in which we possess some advantage... In any country, the bulk of the people are always interested in buying everything they need from those who sell it the cheapest. This position is so obvious that it seems ridiculous to prove it, and it would never have been called into question if the cunning, self-interested arguments of merchants and industrialists had not clouded the common sense of mankind.

Today, merchants and industrialists are far from alone in “self-interest.” In fact, there is hardly a single person who is not associated with “cunning, self-serving arguments” in one area or another. In the immortal words of Poggio, “we have met the enemy, and they are us.” We condemn “special interests,” but not when it is our “special interest.” We lose more from measures taken to benefit other "special interests" than we gain from measures taken to benefit our own "special interests."

Regulation of foreign trade is usually defended, especially in relation to underdeveloped countries, as an important means of promoting development and progress. For a poor country, free trade at home and abroad is the best way to improve the welfare of its citizens. The economic regulations that spread to the United States in the mid-twentieth century not only limited our freedom to use our own economic resources, but also impacted our freedoms of speech, press, and religion.

International trade. Today, as always, tariffs enjoy strong public support under the euphemism "protection" - a good label for bad things. Proponents of import tariffs take it for granted that job creation is always desirable, regardless of what the worker in the job will do. This is fundamentally wrong. Another misconception that is rarely questioned is that exporting is good and importing is bad. The truth is the opposite. We cannot eat, wear or enjoy goods that we have sent to other countries. We eat Central American bananas, wear Italian shoes, drive German cars, watch Japanese TV. Our gain from foreign trade lies in the goods that we import into the country. Exports are the price we pay for imports.

“Protectionism” actually means exploitation of the consumer. A “favorable trade balance of a country” actually means that exports exceed imports, i.e. the amount of goods exported abroad is greater than those imported. Running your own household, you probably prefer to pay less for more, although in foreign trade this would be called an “unfavorable balance of trade.”

Another source of “unfair competition” is subsidies provided by foreign governments to their manufacturers, which allows them to sell their goods in the United States at prices below cost. Let's assume this is true. In the end, who loses and who wins? In order to pay subsidies to their producers, foreign governments must tax their citizens. It is the taxpayers of these countries who actually pay for the subsidies. American consumers benefit from this. They receive cheaper televisions, cars and other subsidized goods. Should we complain about this peculiar foreign aid?

Why is it that when the United States sent free goods and services abroad in the form of Marshall Plan aid and later in the form of foreign aid, it was "noble", but when foreign countries give us indirect help in the form of selling goods and services below their value, it is "ignoble"? It is the citizens of these foreign countries who have every reason to be dissatisfied. They must suffer a decline in living standards to the benefit of American consumers and those of their fellow citizens who own or work for businesses in subsidized industries. Obviously, if such subsidies are introduced unexpectedly or haphazardly, the owners and workers of American industries producing similar goods will be negatively impacted. However, this is a normal risk associated with doing business. Entrepreneurs never complain about unusual or random events that bring them luck.

The free enterprise system is a profit and loss system. Any measures to facilitate adaptation to unexpected changes must be applied impartially in both domestic and foreign trade. In any case, violations are usually temporary. Let's say that for some reason the Japanese decided to heavily subsidize the steel industry. Unless additional tariffs or quotas are imposed, US steel imports will increase sharply. This would lower US steel prices and force producers to cut production, causing unemployment in the steel industry. On the other hand, steel products will become cheaper. Consumers of these products will have extra money that they can spend on other goods. The demand for other goods will increase, and therefore employment in the factories that produce them will increase.

The end result is not a net decrease in employment, but a gain in total output due to the fact that workers who can no longer produce steel will produce other products. A similar misconception arising from a one-sided view of the problem is the demand for the introduction of tariffs in order to increase employment. Imposing tariffs on textile imports will increase production and employment in the domestic textile industry. However, foreign manufacturers who can no longer sell textiles in the United States will receive fewer dollars. Now they will be able to spend less money in the US. Exports will fall to balance the decline in imports. Employment in the textile industry will increase, but employment in exporting industries will decrease. A shift in employment towards less productive sectors will lead to an overall decline in output. In fact, the need to confront foreign competition rather than sit behind government barriers would do more to develop a stronger and more efficient steel industry than we have today.

Let's consider the argument about the need to protect the dollar and the inadmissibility of its depreciation in relation to other currencies. This is a completely imaginary problem. If exchange rates are determined in a free market, they can be set at any equilibrium market level. The price of the dollar, if freely determined, performs the same functions as other prices. It conveys information and creates incentives to act on that information because it affects the distribution of income received by market participants. So why all the fuss about the “weakness” of the dollar? The immediate reason is that exchange rates are not determined in the free market. Central banks intervene on a large scale to influence the exchange rates of their currencies.

In the international arena, economic structures are intertwined with political ones. Freedom of international trade promotes harmonious relations between nations having different cultures and institutional structures, just as freedom of trade within a country promotes harmonious relations between people having different beliefs, views and interests.

Wherever we found any appreciable degree of personal freedom, a certain degree of progress in material comfort available to ordinary citizens, and a widely shared hope of further progress in the future, we also found that economic activity was carried on on free market principles. Where the state assumed control over every aspect of citizens' economic activity, where detailed, centralized economic planning reigned, ordinary citizens were politically shackled, had a low standard of living, and had little ability to influence their own destinies. Meanwhile, the state could prosper and create majestic monuments.

The most striking example is the contrast between East and West Germany, once part of one state, and then divided into two parts by the vicissitudes of war. These two parts were inhabited by people of the same blood, the same culture, the same level of education and qualifications. Which one has prospered? Over the past 50 years in the United States, we have come a long way toward expanding the role of government in the economy. This intervention came at a high economic cost. The restrictions placed on our economic freedom threaten to end two centuries of economic progress.

An essential part of economic freedom is the freedom to choose how to use our income. Currently, federal, state and local governments manage more than 40% of our income on our behalf.

The power of the majority in a number of cases is a necessary and desirable means [of achieving goals]. However, this is very different from the amount of freedom you have when shopping in a supermarket. When you go into a voting booth once a year, you almost always vote for a package, not for individual program items. When you vote every day at the supermarket, you get exactly what you choose, just like any other shopper. The ballot box creates consensus without unanimity; the market is unanimity without agreement. That is why it is advisable to use the ballot box only for decisions for which consent is essential.

Another important part of economic freedom is the freedom to use the resources we have. Today, you cannot freely offer your services as a lawyer, doctor, dentist, plumber, barber, gravedigger, or many other jobs without first obtaining permission or a license from a government official. You cannot work overtime under mutually agreeable conditions between you and your employer unless they comply with the rules and regulations set by government officials. Restrictions on economic freedom inevitably have an impact on freedom in general, even on such areas as freedom of speech and the press. Freedom is one and indivisible, and everything that infringes on freedom in any one area of ​​our life affects freedom in other areas. Freedom cannot be absolute. Yes, we live in an interconnected society. Certain restrictions on our freedom are necessary in order to avoid even greater restrictions. However, we have gone much further than this. The urgent need today is to lift restrictions, not increase them.

Chapter 3. Anatomy of a crisis

The Depression, which began in mid-1929, was a disaster of unprecedented proportions for the United States. In the realm of ideas, the consequence of the depression was the public's conviction that capitalism was an unstable system, doomed to increasingly serious crises. The public subscribed to a view that was gaining increasing acceptance among intellectuals that government should play a more active role to counter the instability created by unregulated private industry.

The Depression also led to far-reaching changes in the views of professional economists. The economic collapse destroyed the long-held belief, gained strength in the 1920s, that monetary policy was a powerful tool for maintaining economic stability. Views have shifted to almost the opposite extreme - "money doesn't matter." John Maynard Keynes, one of the greatest economists of the twentieth century, put forward an alternative theory (for more details, see, for example,). The Keynesian revolution not only captured the minds of professional economists, but also provided an attractive justification and prescription for widespread government intervention in the economy.

We have a "fractional reserve banking system." Such a system functions perfectly as long as everyone is confident that he can get money from his deposit at any time, and therefore turns to the bank for cash only when he really needs it. Typically, new cash deposits roughly balance withdrawals, so a small reserve is sufficient to cover the temporary difference. But when each depositor tries to get the entire deposit amount in cash, the situation changes radically - panic arises.

How can you stop the panic that has begun? One of the methods used to stop the panic used during the crisis of 1907 was the agreed restriction of payments by banks. Banks remained open, but they agreed among themselves that they would not issue cash to depositors' demands. Instead, they operated through accounting records. They accounted for checks written by some of their depositors to other depositors, reducing the amounts of deposits recorded on their books in the accounts of some depositors and increasing the amounts in the accounts of other depositors. Another way is to enable reliable banks to quickly convert their assets into cash, not at the expense of other banks, but by providing them with additional cash.

Twelve regional banks, established by the Act and supervised by the Board of Governors of the Federal Reserve System in Washington, were authorized to act as “lenders of last resort” to commercial banks. They could make such loans both in cash - in Federal Reserve Bank notes, which they were authorized to issue - and in the form of deposit credits in their account books, which they could also create with the magic of the accounting pen.

After the Federal Reserve failed in the early 1930s to cope with the tasks assigned to it when it was created, an effective way to prevent panic was adopted in 1934. The Federal Bank Deposit Insurance Corporation was created to guarantee the safety of deposits up to a certain upper limit. Insurance gives depositors confidence in the safety of their deposits. Under these conditions, bankruptcy or financial difficulties experienced by an unreliable bank do not cause an influx of demands for the return of deposits to other banks. After 1934, there were bank failures and influxes of claims against individual banks, but they did not cause the previous banking panic.

The Federal Reserve has remained entirely consistent in only one respect. She blamed all problems on external factors beyond her control, and took credit for all the good things. In this way, it perpetuates the myth that the private economy is unstable, even though its own behavior consistently suggests that in reality government is the main source of economic instability.

Chapter 4. From cradle to grave

The 1932 presidential election served as a political watershed for the United States. From the founding of the Republic until 1929, government spending at all levels never exceeded 12% of national income. Since 1933, government spending has been at least 20% of national income, and now it is more than 40%, and two-thirds of it is federal spending. By this measure, the federal government's role in the economy has increased roughly tenfold over the past half-century. The New Deal, which emerged in the 1930s, included programs aimed at reforming the fundamental principles of the economy. Some were abolished when the Supreme Court declared them unconstitutional, most notably the National Recovery Administration and the Agricultural Adjustment Administration. Other institutions still exist, such as the Securities and Exchange Commission, the National Labor Relations Board, and the national minimum wage.

The New Deal was interrupted by World War II, which at the same time helped strengthen its foundation. One of the first pieces of legislation passed in the post-war years was the Employment Act (1946), which made the government responsible for maintaining “maximum employment, output and purchasing power,” effectively making Keynesian policy the law. The war's impact on public opinion mirrored that of the Depression. The latter convinced people that capitalism was flawed, and the war convinced people that centralized control was effective. Both conclusions are wrong. The Depression was caused by the mistakes of the government, not private entrepreneurs. As regards war, it is necessary to distinguish between a temporary increase in the control of the government with one main goal, shared by almost all citizens, who are ready to make great sacrifices in its name; It is quite another thing for the government to constantly control the economy in order to promote a vague idea of ​​a “common interest” formed on the basis of the completely different and significantly divergent goals of citizens.

By the end of the war, central economic planning seemed to be the way of the future. This conclusion was passionately supported by those who saw it as the dawn of a world of abundance distributed equally. This was no less desperately feared by those who saw in this a turn towards tyranny and poverty. To date, neither the hopes of some nor the fears of others have come true. The government has expanded greatly. Today, government expansion takes the form of welfare programs and regulatory activities. As Allen Wallis put it on a slightly different occasion, socialism, which “suffered intellectual bankruptcy after its arguments for the socialization of the means of production were refuted for a century, now seeks to socialize the results of production.”

Hardly anyone can question two apparently contradictory phenomena: widespread dissatisfaction with the results of the frenetic social welfare activity and the unrelenting pressure for further expansion of this activity. The goals were always noble, but the results were disappointing. Everyone agrees that Social Security programs are a hell of a mess, riddled with fraud and corruption.

A negative income tax is an attractive alternative to the current welfare system. The idea of ​​a negative income tax has been widely supported by people and groups of varying political orientations. In one form or another, the idea of ​​a negative income tax has been put forward by three US presidents, but this idea does not seem politically feasible in the foreseeable future.

Unemployment insurance is, in essence, recognition by the state of its obligation to insure a person against damages associated with lack of work. The national insurance law is consistent with the doctrine of socialism and is hardly compatible with liberalism.

England and Sweden, long exemplars of prosperous welfare states, began to experience increasing difficulties. Dissatisfaction grew in both countries. England encountered increasing difficulties in financing growing government expenditures. Dissatisfaction boiled over in dramatic fashion in the form of the Tories' landslide election victory in 1979, won on Margaret Thatcher's promise to fundamentally change the course of government.

Today in the United States, nine out of ten workers pay taxes to fund benefits for those who do not work. An individual worker does not “earn” Social Security for himself and his family in the same sense as an individual contributing to a private pension fund. He "earns" his protection only in the political sense by satisfying certain administrative requirements to qualify for benefits. Today's retirees receive far more than the actuarial equivalent of the taxes they themselves paid and those paid for them by their employers. Young people who now pay social taxes will be promised far less than the actuarial equivalent of the taxes they and their employers paid. Social Security is in no way an insurance program in which individual contributions can buy equivalent insurance benefits. As even its most ardent supporters admit, “the relationship between contributions (i.e., payroll taxes) and benefits received is extremely tenuous.” Social insurance is rather a combination of a special tax and a special social transfer program.

Social Security's long-term financial problems stem from one simple fact: the number of Social Security benefit recipients has grown and continues to grow faster than the number of workers paying premiums out of their earnings. The social insurance program involves the redistribution of income from young to old. To a certain extent, such redistribution has occurred throughout human history: children provided support to their elderly parents or relatives. Indeed, in many poor countries with high infant mortality rates, such as India, the desire to provide offspring to support them in old age is the main reason for high fertility rates and large families. The difference is that the social insurance system is compulsory and impersonal, while the previous practice was voluntary and personalized.

The country is increasingly divided into two classes of citizens: those who receive benefits and those who pay for them.

From small beginnings during the New Deal years, government housing programs grew rapidly. The Department of Housing and Urban Development was created in 1965. It now employs 20,000 people and spends more than $10 billion a year. Public housing buildings often turn into slums and hotbeds of crime, especially youth crime. The most striking example is the public housing project in San Luis, Pruitt-Igo. It degraded to such an extent that part of it had to be blown up. At the time, only 600 of the 2,000 apartments were occupied, and it looked like an urban war theater.

How can young people be expected to develop good qualities and values ​​when they live in an area populated entirely by broken families and almost everyone living on welfare?

Dr. Gammon in his report developed the theory of bureaucratic crowding out: the more bureaucratic the organization, the more useless work crowds out useful work - an interesting extension of Parkinson's laws. Why are the results of all welfare programs so disappointing? Without a doubt, their goals were humane and noble. Why were they not achieved? When you spend money, it can be your own money or someone else's money; you can also spend it on yourself or on someone else. Combining these two pairs of alternatives gives us four possibilities (Figure 1).

Category I: you are spending your money on yourself. Let's say you are shopping at a supermarket. Obviously, you are very interested in spending your money sparingly and getting the most value for every dollar you spend. Category II: you are spending your money on someone else. For example, you are buying Christmas gifts. You are also interested in spending money sparingly. Category III: you spend other people's money on yourself, for example, having lunch at the expense of the company. You don't care much about cutting costs, but you are interested in getting as much for your money as possible. Category IV: you are spending someone else's money on someone else. You pay for someone's lunch at the company's expense. You don't care about saving money, or about feeding your guest dinner.

All social security programs fall under category III. In our opinion, it is this characteristic of social security spending that is the main source of its failure. Lawmakers vote on how to spend other people's money. The bureaucrats who administer the programs also spend other people's money. It's no surprise that program costs are rising rapidly. But that's not all. The temptation to take other people's money is great. Many, including the bureaucrats who administer the programs, will try to spend the money on themselves rather than on someone else. This temptation to succumb to corruption or fraud is strong and cannot always be resisted or suppressed. This explains the fact that so many programs benefit middle- and high-income groups rather than the poor for whom they were supposedly designed. In addition, the net gain of recipients of a particular transfer will always be less than the total amount of the transfer. Costs associated with lobbying legislators and regulators, contributions to political campaigns, etc. are a net loss that harms taxpayers and benefits no one.

These two consequences of the pursuit of subsidies help explain the pressure for ever-increasing spending, ever-increasing numbers of programs. Initial measures failed to achieve the goals set by the big-hearted reformers who promoted social programs. From this they conclude that the measures taken were not enough.

Qualities such as independence and the ability to make independent decisions atrophy in subsidy recipients.

You can only spend other people's money by taking it away, like the government does. The use of force is thus at the heart of the welfare state - a worthless means that leads to the perversion of good ends. What needs to be done? It is worth sketching out the basic elements of such a program, not in the vain hope that it will be adopted in the near future, but to provide a vision of the direction in which we should move, a vision that can guide the accumulating changes.

The program consists of two critical components: 1) reforming the existing social security system by replacing the patchwork of specialized programs with a single comprehensive cash income supplement program, i.e. introduction of a negative income tax combined with ordinary income tax; 2) collapsing the social insurance system without refusing to fulfill current obligations, which will gradually force people to take care of their own future.

The reform will provide a guaranteed minimum for all people in need, regardless of the reasons for it, and at the same time will cause as little harm as possible to their character, independence or interest in improving their situation. Equally important, a negative income tax would free up the vast army of bureaucrats running the many social welfare programs.

A negative income tax will help to eliminate the current demoralizing situation in which individuals, i.e. the bureaucrats who administer the programs control the destinies of other people. This will help eliminate the existing division of people into two classes: those who pay contributions and those who receive support from social funds.

Chapter 5: Created Equal

In the early decades of the United States, “equality” meant equality before God; "freedom" meant the freedom to control one's own life. Equality was then increasingly interpreted as "equality of opportunity" in the sense that no one should be arbitrarily deprived of the right to use his abilities to pursue his goals. Neither equality before God nor equality of opportunity conflicts with the freedom to control one's own life.

A completely different understanding of equality has emerged in the United States in recent decades - equality of outcome. All people should have the same standard of living or income. Equality of results is in clear conflict with freedom. Efforts to ensure this equality have been the primary reason for the ever-increasing role of government and the government's restrictions on our freedom.

The key to what T. Jefferson and his contemporaries understood by equality lies in the following provision of the Declaration: “All men are created equal, and are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.” Equality before God, i.e. personal equality is important precisely because people are not the same. Because people have different values, tastes and abilities, they choose completely different lifestyles. Personal equality requires respecting people's right to control their own lives, rather than imposing someone else's values ​​or judgments on them. Jefferson had no doubt that some people were superior to others, that they constituted an elite. But this did not give them the right to dispose of others. If the elite did not have the right to impose its will on others, then no other group, not even the majority, had such a right.

The government was called upon to protect this right both from its fellow citizens and from external threats, and not to grant unlimited power to the majority.

Chapter 6. What's wrong with our schools?

We have always been justifiably proud of the wide availability of school education, and the role that public schools have played in creating favorable conditions for the assimilation of new members of our society, preventing fragmentation and discord, and creating conditions for people from different cultural and religious backgrounds to , lived together in harmony.

Professor West has convincingly shown that the transition of education to government control in England, as in the United States, was the result of pressure from teachers, officials and well-meaning intellectuals, not from parents. He concludes that government control over education has led to a decline in the quality and diversity of school education.

In the mid-19th century, the public school system was interpreted not as “socialist”, but simply as “American.” The US Constitution greatly limited the powers of the federal government, and therefore it did not play a significant role. State governments largely handed over control of schools to local communities. Close parental control over the political leadership of the school system partially replaced the competitive environment and ensured that the most widely shared wishes of parents were implemented.

After the Depression, there was a rapid shift in power from the local community to larger units—city, county, state, and, more recently, the federal government. Dr. Max Gammon proposed the theory of bureaucratic replacement; in his words, “In a bureaucratic system, increased spending is necessarily accompanied by a reduction in output... Such systems act as “black holes” in the economic universe, simultaneously sucking in resources and reducing “output.”

This theory is fully applicable to the analysis of the consequences of the increasing bureaucratization and centralization of the public school system in the United States. During the period from the 1971-1972 to 1977-1978 school years, the total number of teaching staff in US public schools increased by 8%, the cost of teaching per student in dollar terms increased by 58% (11% adjusted for inflation). Costs have clearly increased. The number of students decreased by 4%, the number of schools also decreased by 4%. At the same time, the quality of education has decreased even more.

In school education, parents and children are consumers, while teachers and school administrators are producers. The centralization of school education led to the consolidation of departments, a decrease in the ability of consumers to choose, and an increase in the power of producers. In the field of school education, only people with high incomes retained the freedom to choose. We can send our children to private schools, essentially paying for their schooling twice: first by paying the taxes that fund the public school system, and then a second time by paying tuition.

School education should not remain in this state. One way to significantly improve learning is for all parents to have more control over their children's learning. A simple and effective way to provide parents with more choice while maintaining existing funding sources is through vouchers.

Suppose the government tells you, “If you waive the cost of your child's education, we will give you a voucher, a piece of paper that can be exchanged for the amount of money indicated on it, but only if you use it to pay for your child's education.” child in one of our approved schools." Thanks to this, each parent will have more choice. Public schools will be forced to compete with each other and with private schools. One of the benefits of the voucher plan is to encourage a gradual transition to direct parental funding for education.

A large market will emerge that will attract many participants, both those currently working in public schools and those employed in other fields. Many new schools will be created by non-profit groups. Others will be created for profit. It is impossible to predict the final structure of the school industry. Competition will determine it. One guess we can make is that the only schools that will survive are those that can meet the needs of their customers - just like restaurants and bars. Competition will take care of this.

The obvious selfish interest of education officials is the main obstacle to the introduction of market competition in the field of school education.

In America today, the problems in higher education are the same as in primary and secondary education: quality and equity. However, the absence of a requirement for compulsory higher education greatly changes matters. Students have a wide choice of colleges and universities if they want to continue their education. Wide choice mitigates the quality problem, but exacerbates the equity problem.

Quality. Since no one attends college or university against their will, there are no educational institutions that do not meet, at least to a minimal extent, the requirements of students. However, at government-funded universities, enrollment is low and only 50% of students graduate. In private educational institutions the picture is completely different. The college sells tuition and students buy it. As in most private markets, both parties have an interest in being useful to each other.

Private colleges also receive income from memorials and academic activities. Donors give because they want to contribute to the development of their desired causes. In addition, buildings named after them, professors' salaries and scholarships also perpetuate the memory of these individuals, and therefore we consider them memorials. It is our impression that the educational performance of universities in general is the more satisfactory the greater the role played by the market.

Justice. Two main arguments are commonly used to justify taxpayer funding of higher education. One is that higher education provides “social benefits” that exceed the benefits accruing to the students themselves. The second argument is that government funding is necessary to ensure “equal educational opportunity.”

If higher education makes people more economically productive, they also reap the rewards in the form of higher wages, so they have a vested interest in receiving training. Adam Smith's "invisible hand" forces private interests to serve the public interest. Subsidizing education distorts private interests and thereby contradicts the public interest. It is the additional students who would attend college if tuition were subsidized who believe that the benefit they receive is less than the cost. Otherwise, they would pay the costs themselves.

It is highly desirable that every young person - regardless of his parents' income, social status, place of residence or race - should have the opportunity to obtain a higher education, provided that he is prepared to pay for it either immediately or after graduation from his higher income, which will be obtained through higher education.

Spending on education is similar to investing in a newly created small business and is an investment in a risky enterprise. The most satisfactory way of financing such enterprises is not a fixed loan, but investment in shares, i.e. “purchase” of a share in the enterprise and receiving a share in the income in return. In relation to education, an analogue of this would be to “purchase” a share of an individual's future earnings, advancing him the funds needed to finance his education, provided that he agrees to pay the investor a predetermined share of his future earnings. In this way, the investor will be able to get back more from the relatively successful people than his initial investment, which will compensate him for the losses he will suffer due to the losers. Although, in our opinion, there is no legal impediment to the conclusion of private contracts on this basis, we believe that they have not become widespread due to the difficulty and expense of collecting money from debtors over a long period of time.

In 1955, Milton Friedman published a proposal for "equity" financing of higher education, administered by a government agency that would provide funding or assistance in financing vocational training to any person who met certain minimum requirements. He will provide some limited annual sum for a specified number of years with the condition that this money will be spent on education in one of the recognized educational institutions. In return, the recipient will promise to pay the government, in each subsequent year, a certain percentage of earnings in excess of a certain amount for each thousand dollars received from the government. These payments can be easily combined with the payment of income tax and thus reduce additional administrative costs to a minimum.

Chapter 7. Who protects the consumer?

It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their observance of their own interests. We appeal not to their humanity, but to their selfishness, and we never tell them about our needs, but about their benefits. No one but a beggar wants to depend chiefly on the goodwill of his fellow citizens.
Adam Smith. An Inquiry into the Nature and Causes of the Wealth of Nations

Can we rely entirely on Adam Smith's "invisible hand"? A succession of economists, philosophers, reformers and social critics argue that we cannot. Selfishness will cause sellers to deceive their customers. They will take advantage of the ignorance and ignorance of their customers to cheat them and sell them a worthless product. In addition, critics argue that if market forces are relied upon, the consequences of the transaction may affect people not involved in it. The air we breathe and the water we drink may be affected. It is argued that the market should be complemented by other mechanisms that would protect the consumer from himself and from selfish sellers, and would protect each of us from the side effects of market transactions.

This criticism of the “invisible hand” is fair. The question is whether the mechanisms recommended or adopted in addition to the market are fit for purpose, or whether, as is often the case, the cure will be more dangerous than the disease.

Whatever their stated goals, all social movements of the last two decades have one thing in common. All of them are aimed against economic growth. Agencies created in response to the demands of social movements are imposing large costs on one industry after another to meet increasingly detailed and expansive government demands. They oppose the release and sale of certain goods; they require investments to be made for non-productive purposes in accordance with conditions set out by government bureaucrats.

The history of the Interstate Commerce Commission is a clear illustration of the natural logic of government intervention. Real or imagined evil entails the requirement to take appropriate action. A political coalition is being formed that includes sincere, well-intentioned reformers and equally sincere interest groups. The incompatibility of coalition members' goals is misinterpreted using high-minded rhetoric. The coalition is lobbying Congress (or the state legislature) to pass legislation. The preamble pays tribute to the rhetoric, and the body of the law grants the power to “do something” to government officials. The bright-hearted reformers celebrate their triumph and turn their attention to new things. Interest groups get to work to benefit from these powers. As a rule, they succeed in this. Success breeds new problems that require expanding the scale of government intervention. The bureaucracy exacts its tribute in such a way that even the original special interests no longer benefit. Ultimately, the results turn out to be completely opposite to the goals of the reformers and, moreover, the goals of the interest groups themselves are not achieved. However, this type of activity is so firmly entrenched and there are so many legal interests associated with it that repealing the original legislation is almost impossible. Instead, demands are made for more and more laws to overcome the consequences caused by the previous law, and a new cycle begins.

Without a doubt, protecting people from harmful and useless drugs is desirable. However, it is equally desirable to stimulate the development of new drugs and to make new drugs available to those who need them as quickly as possible. As often happens, one great goal comes into conflict with another great goal. Safety and caution, on the one hand, can mean death, on the other.

There is now considerable evidence that the FDA's regulatory activities are harmful, that they have done more harm by inhibiting progress in the production and distribution of useful drugs than they have done good by protecting the market from harmful and ineffective drugs. The Agency's top priority is avoiding risk, which is why we have safer drugs, but none that are more effective.

It is no coincidence that the Agency, despite the best intentions, through its actions discourages the development and marketing of new and potentially useful drugs. Put yourself in the shoes of the FDA official responsible for approving or disapproving a new drug. You can make two mistakes: 1. Approving a drug that has an unexpected side effect that will cause death or serious ill health for a relatively large number of people. 2. To refuse approval of a drug that could save the lives of many people or relieve great suffering and has no adverse side effects. If you make the first mistake and approve, for example, thalidomide, your name will appear on the front pages of all newspapers. You will fall into severe disgrace. If you make a second mistake, who will know? Even with the best intentions in the world, you would unwittingly ban many good drugs or delay their approval to avoid even the remote possibility of letting a drug into the market that would have the side effect of making headlines.

There is a widespread misconception that the behavior of social organisms can be shaped by their own will. This is the fundamental mistake of many so-called reformers. This explains why they so often believe that people are to blame and not “the system”; that the problem can be solved by “throwing out the crooks and putting in their place well-meaning people.” This also explains why reforms, after their goals have clearly been achieved, often do not go in the right direction.

Consumer Product Safety Commission. Obviously, the goal of making goods safer is a noble one, but at what cost is it achieved and what are the criteria for achieving it? “Unjustified risk” is hardly a scientific term that can be objectively defined. A “safer” bike may be slower, heavier, and more expensive than a less “safe” one. By what criteria can the Commission bureaucrats determine how much speed can be sacrificed, how much weight can be added, and how much additional cost can be imposed on the consumer in order to gain some (what exactly?) amount of additional safety?

Most of these questions cannot be answered objectively, and yet they need to be answered unambiguously when developing and issuing standards. The answers will partly reflect the arbitrary judgments of government officials responsible for these issues, less frequently the judgments of consumers or consumer societies interested in the product in question, but mainly the influence of the manufacturers of that product.

When products come to market in the normal course of things, there is always room for experimentation, trial and error. Of course, bad products are produced, mistakes are made, and unexpected defects are discovered. However, mistakes are usually made on a small scale and can be gradually corrected. Consumers can experiment on their own and decide which properties they like and which they don’t. When the government, represented by the Commission, comes into play, the situation changes. Many decisions must be made before a product undergoes massive trial and error in use. Standards cannot be adapted to the diversity of needs and tastes. They must uniformly meet all needs. Consumers are inevitably deprived of the opportunity to experiment with a variety of alternatives. Mistakes will still be made, and in this case they will almost certainly be big ones.

The environmental movement is responsible for one of the fastest growing areas of federal government intervention. Established in 1970 “to protect and improve the physical environment,” the Environmental Protection Agency has gained increasing power and authority. The standards it sets impose costs of tens of billions of dollars a year on industry, local and state governments. About one-tenth to one-quarter of spending on new capital equipment is aimed at pollution control.

Preserving the environment and preventing excessive pollution are real issues in which the government has an important role to play. When it is easy to identify all the costs and benefits of any action, as well as the people who suffer and benefit from it, the market provides excellent tools to ensure that only those actions are carried out whose benefits outweigh the costs for all participants. But when the costs and benefits or the people affected cannot be identified, then there is a failure of market regulation in the form of side effects or harm to the “third party.”

Government intervention is one way we can try to compensate for market failure and make more efficient use of what we are willing to pay to maintain clean air, water and land. Unfortunately, the same factors that make markets fail also make it difficult for governments to make satisfactory decisions. In general, it is no easier for the government than for market participants to determine who suffered or benefited, and to assess the magnitude of the damage or benefit of each of them. Attempts to use government to correct market failures have often led to market failures being replaced by government failures.

We should not talk about “eliminating pollution”, but about the need to create mechanisms for agreeing on an “acceptable” level of pollution, i.e. a level at which the gains from reducing pollution are somewhat greater than the sacrifices made in the form of other nice things (houses, clothes, etc.) that would have to be given up in order to reduce pollution. If we go further, we will sacrifice more than we gain.

The quest to control pollution takes the same approach as regulating railroads and trucking, regulating food and drugs, and ensuring the safety of industrial products. This system lacks effective mechanisms to balance costs and benefits. By reducing the problem to the issuance of directives carried out under the threat of force, the system creates a situation involving crime and punishment, rather than buying and selling; operates in terms of “right or wrong” rather than “more or less.” As a result, the system has the same defects as similar regulation in other areas.

Many economists agree that a much more effective way to control pollution than the current method of targeted regulation and control is to impose market discipline by charging for discharges.

Perfection is impossible in this world. There will always be low quality products, charlatans and scammers. But in general, market competition, when given room to do so, protects consumers better than alternative government mechanisms that are increasingly being imposed on the operation of the market.

Another market invention is the trademark. It is in the interests of General Electric, General Motors, Westinghouse or Rolls-Royce to have a reputation for producing trustworthy and reliable products. Quality is the source of their high reputation, which can have a greater influence on the price of a company than the plants and factories it owns.

Chapter 8. Who protects the employee?

If Gallup polls asked the question, “Who is responsible for making workers better off?” the most common answer would be “unions,” followed by “government,” although “no one” and “don’t know” might predominate. However, the history of the United States and other Western countries over the past two centuries demonstrates the fallacy of such answers.

in the United States, more than three out of four workers are nonunion workers. Identifying the interests of a “trade union” with the interests of its members is a fallacy. Of course, in most trade unions there is a connection, and quite a close one, between these interests. However, there are many cases in which trade unionists - either legally or through abuse and misappropriation of trade union funds - have benefited themselves at the expense of their members. This substitution of concepts is the cause and consequence of the general tendency to overestimate the influence and role of trade unions. Trade union actions are always visible and widely covered by the press. The “bargaining and conventions of the market,” in Adam Smith's terminology, by which the earnings of most workers in the United States are determined, are much less visible, attract less attention, and, as a result, their importance is greatly downplayed.

Despite the appearance that unions protect low-wage workers from exploitation by employers, the reality is different. The most successful unions invariably include workers in skilled jobs who would earn high wages without unions. These unions make high pay even higher. British schoolteachers and municipal employees clearly illustrate the general principle. Their unions do not negotiate with the taxpayers on whose money they live. They deal with government officials. The weaker the connection between taxpayers and the officials with whom unions deal, the greater the tendency for officials and unions to collude at the expense of taxpayers. This is another example of what happens when people spend other people's money on other people. This is why municipal employee unions are stronger in large centers like New York City than in small towns, and why teachers' unions have become more powerful as control of schools and education spending has become more centralized and more distant from local community.

The key to understanding this situation is the most basic principle of economics. The law of demand says: the higher the price of a product, the fewer people want to buy it. Making any type of labor more expensive will result in fewer jobs of that type. If carpentry costs are increased, the number of houses built will decrease, and the houses being built will use methods and materials that require less carpentry work.

A successful union reduces the available number of jobs in the area it controls. As a result, individuals who would like to get jobs at union wages are unable to do so. They are forced to look for another job. A greater supply of labor in other jobs will lead to lower wages in those jobs.

How do unions manage to impose high rates? One way is through violence or the threat of violence: threatening to destroy employers' property or beat them if they hire non-union members. The easier way is to force the government to provide assistance. Another way to impose wage rates is through minimum wage laws. Advocates of these laws portray them as a way to help low-income people. In fact, they only harm them. Despite all the rhetoric about helping the poor, they are demanding an even higher minimum wage to better protect their members from competition.

Minimum wage laws force employers to discriminate against people with low qualifications. Consider a teenager with little education and low qualifications whose services cost, say, only $2 an hour. He may agree to work for such a salary in order to acquire higher qualifications and get a higher-paying job in the future. However, the law requires that he be hired only if the employer agrees to pay him $2.90 an hour (1979). Unless the employer is willing to add 90 cents for charity to the teenager's $2 worth of services, he won't get the job. It has always been a mystery to us why it would be better for a young person not to be hired for a job that pays $2.90 an hour than to be hired for a job that pays $2.00 an hour.

We believe that the minimum wage law is one of the most discriminatory laws against black people. First, the government creates schools in which many young people, mostly blacks, are taught so poorly that they cannot acquire the qualifications to earn a good living. The government then punishes them a second time by preventing them from offering their labor at low wages that would encourage employers to train them on the job. And all this in the name of helping the poor.

An alternative to imposing wage rates is to directly limit the number of those who could occupy a given job. Health care is an excellent example, since much of the work of public health organizations has been aimed at limiting the number of practicing physicians. Successful population control, like imposing wage rates, requires government assistance.

For most workers, the most reliable and effective protection is having multiple employers. Due to the need for his services, the employer is interested in paying him the full cost of his labor. If his own employer does not do this, someone else will readily do it. Competition for his services is the real protection of the employee. When workers receive higher wages and better working conditions in a free market, when they receive increases as a result of competition between firms for better workers and as a result of competition between workers for better jobs, these higher wages are not paid at the expense of others. They can only be a consequence of increased labor productivity, increased investment, and an increase in the diversity of qualifications and skills. The whole pie gets bigger, with a bigger slice going to the employee, but also the employer, the investor, the consumer and even the tax collector. This is how the free market distributes the fruits of economic progress among people. This is the secret of the enormous improvement in working people's conditions over the last two centuries.

Chapter 9. The Cure for Inflation

Money. The existence of a generally accepted medium of exchange is based on agreement, which owes its existence to the mutual recognition of what is to some extent a fiction. An agreement or a fiction is not an ephemeral thing. Although the value of money is based on fiction, money performs an extremely useful economic function. At the same time, it is a kind of veil. The "real" forces that determine the wealth of a nation are the abilities of its citizens, their diligence and ingenuity, the resources at their disposal, the manner of their economic and political organization, etc.

Amazingly different things have been used as money at one time or another. The word pecuniary comes from the Latin pecus, meaning "cattle", one of many things that were used as money. Objects used as money had one thing in common - they were accepted in a certain place and at a certain time in exchange for other goods and services with the confidence that others would accept them in the same way.

A faster growth in the quantity of money compared to the quantity of goods and services leads to inflation, to an increase in prices expressed in this money. Today, when the universally recognized means of exchange have nothing to do with goods, the amount of money is determined in every large country by the government. The government, and it alone, is responsible for any sudden increase in the amount of money. It was this fact that was the main source of confusion about the causes of inflation and the means to cure it.

No government wants to take responsibility for causing inflation. Government officials always find some excuse: greedy businessmen, demanding unions, wasteful consumers, Arab sheikhs, bad weather, and any other reason that has at least a semblance of plausibility. Without a doubt, businessmen are greedy, trade unions are demanding, consumers are wasteful, Arab sheikhs have inflated oil prices, and the weather is often bad. All this can lead to an increase in prices for individual goods, but cannot cause an increase in the price level. This may lead to temporary spikes in inflation up or down, but it cannot cause permanent inflation for one very simple reason: none of the purported culprits have a printing press at their disposal.

Why do modern governments increase the amount of money so quickly? Why do they cause inflation, understanding all its dangers? Inflation occurs when the quantity of money increases significantly faster than production, and the faster the quantity of money per unit of output increases, the higher the rate of inflation. In the United States, the accelerated growth in the amount of money in circulation over the past fifteen years has occurred for three interrelated reasons: due to the rapid growth of government spending; due to the government's full employment policy; due to misguided Federal Reserve policies.

Funding government spending by increasing the amount of money is usually extremely attractive to the President and Congress. This gives them the ability to increase government spending - handing out candy to voters - without legislating additional taxes and borrowing from the public.

Inflationary return. Financing government spending by increasing the amount of money seems like magic, like drawing a substance out of thin air. Let's take a simple example: the government builds a road, paying for the cost with freshly printed Federal Reserve notes. It appears that everyone is feeling better. Road builders receive a salary and can buy food, clothing and pay for housing. Nobody pays higher taxes. At the same time, a new road appeared where there was none before. Who paid for this? The answer is that all the owners of the money paid for the road.

Additional money leads to higher prices if it is used to induce workers to build a road rather than engage in some other productive activity. These price increases continue as the extra money circulates in the flow of spending, which moves from workers to sellers of goods, from those sellers to others, and so on. Rising prices mean that the money people previously had can now buy less than before. The extra money printed is equivalent to a tax on cash. If additional money causes prices to rise by 1%, then each money holder ends up paying a tax of 1% of their cash balances. The physical equivalent of these taxes are the goods and services that could have been produced with the resources used to build the road.

John Maynard Keynes wrote about inflation after the First World War: “There is no more ingenious or surer means of overthrowing the existing foundations of society than by corrupting the currency. This process brings all the hidden forces of economic laws to the side of destruction and does it in such a way that not one person in a million is able to make a diagnosis.”

The analogy between inflation and alcoholism is instructive. When an alcoholic drinks, first there is a positive effect; negative consequences come the next morning. When a country plunges into inflation, the initial effect appears to be positive. More money allows those who have access to it - these days primarily the government - to spend more without forcing anyone to spend less. Jobs are increasing, business is picking up, and almost everyone is happy—at first. This is a positive consequence. Increased spending then leads to higher prices: workers find that their earnings, even though they have increased in dollar terms, have less purchasing power; businessmen find that their costs have increased so much that additional sales will not be as profitable as expected unless prices can be raised further. Negative consequences begin to appear: rising prices, reduced demand, inflation combined with stagnation.

Treatment for alcoholism is easy to prescribe: stop drinking. But it is difficult to implement because this time the negative consequences come before the positive ones. An alcoholic who quits drinking experiences severe torment until he reaches a happy state when the irresistible desire to drink disappears. The situation is exactly the same with inflation. The initial side effect of a slowdown in money growth is painful: slower economic growth and a temporary increase in unemployment that is not initially accompanied by a drop in inflation. The beneficial effect manifests itself after about a year or two in the form of reduced inflation, economic recovery, and the creation of the potential for rapid non-inflationary growth.

History knows no examples of inflation being brought to an end without an intervening period of slower economic growth and increased unemployment. On this empirical basis rests our judgment that there is no way to avoid the side effects of inflation treatment. However, they can be mitigated. The most important way to mitigate side effects is to slow inflation gradually but steadily - the rate must be announced in advance and followed steadily to inspire confidence.

Graduation is needed to give people time to readjust their agreements, and also to encourage them to do so. Many people are locked into long-term contracts—employment, lending, production, or construction—that include expectations of likely inflation rates. These long-term contracts make it difficult for inflation to fall sharply and mean that such attempts will result in large losses for many. If people are given time, these contracts will be completed, renewed or renegotiated, and thus they will be able to adapt to the new situation. Another tool that has proven effective in mitigating the adverse side effects of inflation treatments is the inclusion of an automatic inflation adjustment mechanism known as a sliding scale in long-term contracts.

For example, loans are typically made in a fixed dollar amount for a fixed period of time at a fixed annual interest rate, say $1,000 per year at 10%. The alternative is to set the interest rate not at 10%, but at, say, 2% plus the inflation rate, so that at 5% inflation the interest rate would be 7%; with inflation of 10% the rate will be 12%. Or you can agree that the debt should be repaid taking into account inflation. In our simplified example, the borrower would owe $1,000 adjusted for inflation plus a 2% drawdown fee. At 5% inflation he would owe $1,050, and at 10% inflation he would owe $1,100; in both cases, 2% will be added for the loan.

Chapter 10. The tide is changing

Our own history provides clear evidence of the importance of an intellectual climate. This climate shaped the activities of a remarkable group of men who met in 1787 at Independence Hall in Philadelphia to write the constitution of the new country which they had taken part in creating. They were immersed in history and were enormously influenced by contemporary English public opinion. They viewed the concentration of power, especially in the hands of government, as the greatest danger to freedom. Based on this, they prepared a draft Constitution. This document was aimed at limiting the power of the government, maintaining the decentralization of power, and giving the individual control over his own life.

Later in the 19th century and the first decades of the 20th century, the intellectual climate in the United States began to change. There has been a shift from a belief in individual responsibility and reliance on the market to a belief in community responsibility and reliance on government. Once a change in public opinion became widespread, as it did after the Great Depression, a Constitution created under the influence of a completely different intellectual climate could, at best, only slow down the increase in government power, but not prevent it.

Today, inflation, high taxes and sheer inefficiency, bureaucracy and over-regulation resulting from the increased role of government force people to take the initiative into their own hands, to find ways around the obstacles put in place by the government. Pat Brennan became something of a celebrity when she and her husband took on the United States Postal Service in 1978. They opened a business in the basement of a home in Rochester, New York, ensuring that packages and letters in downtown Rochester were delivered same day and at lower prices than the Postal Service. Soon their business began to flourish. Of course they broke the law. The Postal Service sued them, they went all the way to the Supreme Court and lost. Local businessmen provided them with financial support.

Pat Brennan stated the following: I think we are in for a silent rebellion, and we may just be getting started. Look, people are standing up to the bureaucrats, although a few years ago they did not even dare to think about it in fear that the authorities would crush them... People are beginning to understand that their fate is their own business, and not someone there in Washington, to whom they completely indifferent. So this is not a question of anarchy, but the fact that people are beginning to look at the power of bureaucrats in a new way and reject it.”

Directed interests versus unorganized interests. Fragmentation of power and inconsistent government policies are rooted in the political realities of a democratic system that operates on the basis of specific and detailed legislation. Such a system tends to give excessive political power to small groups with clearly focused interests, to place greater emphasis on the obvious, direct and immediate consequences of government action than to the perhaps more important but hidden, indirect and distant consequences, to set in motion a process that brings sacrificing the general interest, putting it at the service of special interests, and not vice versa. In politics, the "invisible hand" operates exactly the opposite of Adam Smith's "invisible hand". People who intend to promote a general interest are led by the "invisible political hand" to promote a special interest, contrary to their own intentions.

Consider the government's program to favor the merchant marine by providing subsidies for shipbuilding and trading operations, and assigning most coastal shipping to American-flagged vessels. The cost to taxpayers is estimated at about $600 million, or $15,000 per year for each of the industry's 40,000 employees. Shipowners, managers and workers are very interested in the adoption and implementation of these measures. They spend lavishly on lobbying and political donations. On the other hand, if you divide $600 million by the population of 200 million, that's $3 per person per year, or $12 for a family of four. How many of us would vote against a candidate for Congress just because he imposed these costs on us? How many of us would think it wise to spend money to prevent these measures from being taken, or even to spend time getting information about such things?

Bureaucracy. A New England town meeting is the image that immediately comes to mind. The people who are managed know and can control the people who manage; each person can express their point of view; The agenda is short so that everyone can get enough information about both important and minor issues. As the scope and role of government expands—to cover a larger area or population, or to perform a broader set of functions—the connection between the governed and those who govern is weakened.

The bureaucracy necessary for the functioning of government grows ever larger and wedges itself further between citizens and the representatives they choose. It becomes, on the one hand, a mechanism by which special interests can achieve their goals, and, on the other, a bearer of an independent special interest, thus acting as an important component of the new class,

Almost a hundred years ago A.V. Dicey explained why rhetorical appeals to the general interest are so persuasive: “The beneficial effects of government intervention, especially in legislative form, appear directly, immediately and, so to speak, demonstrably, while the harmful consequences of it are revealed only gradually and indirectly and are outside the field.” our vision. Therefore, most people will inevitably view government intervention with undue favor.”

In our opinion, we need the equivalent of the First Amendment to limit the power of government in the economic and social spheres - a kind of economic bill of rights. A written constitution is neither necessary nor sufficient for the development or preservation of a free society. Although Great Britain always had only an "unwritten" constitution, it became a free society. Many Latin American countries, whose constitutions repeat the United States Constitution almost word for word, have not succeeded in establishing a free society. For a written or unwritten constitution to be effective, it must be supported by public opinion, the majority of the population and its leaders. When the intellectual climate of a society changes, politics also changes.

As the tide of public opinion supporting New Deal liberalism peaked, the national debate generated by the development of such a Bill of Rights would ensure that public opinion would swing toward freedom rather than totalitarianism. It will spread a better understanding of the problems caused by the increased role of government and possible solutions to them.

Limitation of taxes and budget expenditures. Adoption of the amendments will limit the budget and lead to changes in the basic conditions in which legislators make decisions. The goal is to force special interests to compete with each other for a share of a fixed pie, rather than allowing them to collude with each other and increase the pie to the detriment of taxpayers.

Gradually reducing the share of our income that is spent by government will be a major contribution to the development of a freer and stronger society. But this will be only one step in this direction. Many of the most destructive types of government control over our lives do not require large expenditures from the government: for example, controls on tariffs, prices and wages, licensing of employment, regulation of production and consumption. In this regard, the most promising thing seems to be the establishment of general rules limiting the powers of government.

International trade. Today, the Constitution provides: “No State, without the Consent of Congress, shall lay any Duty or Duty on imports or exports, except as may be absolutely necessary to execute the inspection laws of the State.” The amendment may be stated as follows: “Congress shall impose no duties or imposts on imports or exports, except as may be absolutely necessary for the execution of the inspection laws.” An attack on all tariffs consolidates our interests as consumers against our special interests as producers.

Control over wages and prices.“Congress shall make no law abridging the freedom of sellers of goods or labor to fix the prices of their products or services.”

Employment licensing.“No State shall make or enforce any law which shall abridge the right of any citizen of the United States to engage in any occupation or profession of his choice.” All three previous amendments can be replaced by a single amendment that takes as its model the Second Amendment to the Constitution (guaranteeing the right to keep and bear arms): “The right of the people to buy and sell lawful goods and services upon mutually acceptable terms and conditions shall not be infringed by Congress or any -or the state."

Taxation. On paper, tax rates are highly differentiated - from 14 to 70%. But there are so many loopholes and special privileges in the law that high rates are almost just an appearance. A low flat rate of less than 20% on all income will bring more revenue to the budget than the existing cumbersome structure.

The corporate income tax also suffers from many shortcomings. This is a hidden tax that the population, without realizing it, pays through prices when purchasing goods and services. It creates double taxation of corporate income: the first time on the corporation, the second time on the shareholders after the distribution of income. It penalizes capital investment and thus hinders productivity growth. It must be cancelled.

What is needed here is an amendment repealing the existing Sixteenth Amendment authorizing taxes on income, and replacing it with the following: “Congress shall have power to lay and collect taxes on the income of individuals, from whatever source the same may be derived, without apportioning such taxes among the States and without regard to which -or censuses or estimates of the population, provided that a single tax rate applies to all income in excess of professional and business expenses and a fixed personal allowance. The word "person" excludes corporations and other artificial persons."

Inflation protection. What is needed is an expansion of the Fifth Amendment's provision that “no person shall be deprived of life, liberty, or property, without due process of law; private property shall not be taken for public use without just compensation.” The corresponding amendment would provide that: “All contracts between the United States Government and other parties entered into in dollars, and all dollar amounts contained in Federal laws, shall be adjusted annually to reflect changes in the general price level of the preceding year.”

Conclusion. The two interrelated ideas of individual freedom and economic freedom found their greatest realization in the United States. These ideas are still with us in many ways. We are thoroughly saturated with them. They form the basis of our existence. But we deviated from them. We have begun to forget the fundamental truth that the greatest threat to human freedom is the concentration of power in the hands of government or anyone else. Fortunately, we are awakening. We are once again aware of the dangers of an over-controlled society, we are coming to understand that good ends can be corrupted by bad means, and that trust in the ability of free people to control their own lives in accordance with their own values ​​is the surest path to realizing the fullest potential of a great society.

(English) Milton Friedman; July 31, 1912, Brooklyn, New York, USA - November 16, 2006, San Francisco, USA) - American economist, winner of the 1976 Nobel Prize "for his achievements in the field of consumption analysis, the history of monetary circulation and the development of monetary theory, as well as a practical demonstration of the complexity of economic stabilization policy.”

Graduated from the University of Chicago; PhD from Columbia University; professor at Chicago and Cambridge (1953-1954). President of the American Economic Association in 1967. Awarded the J.B. Clark Medal (1951). Milton Friedman's wife, Rose (Rose) Friedman (1910-2009), was also a famous economist. In honor of the scientist, the Cato Institute has awarded the Milton Friedman Award for the Advancement of Freedom since 2002.

Milton Friedman was born on July 31, 1912 in the Brooklyn borough of New York into a family of recent Jewish emigrants from Beregovo (Austro-Hungarian Empire, now Ukraine).

Graduated from Rutgers (1932) and Chicago (1934) universities. In 1932 he became a bachelor in economics and mathematics. During his studies, his views were influenced by assistants from the department and future chief economists of America - Arthur Burns, who later became director of the US Federal Reserve System, and Homer Jones, one of the recognized experts in the field of interest rate theory. Thanks to Homer Jones, Friedman wrote his thesis on economics and received recommendations for in-depth study of this field at the university. In 1933, he received his master's degree and completed a graduate internship at Columbia University.

In the fall of 1934, Friedman again moved to the University of Chicago, where he worked as a research assistant until 1935. He then became a staff member of the US National Natural Resources Committee, took part in a large-scale consumer budget research project for the committee, and in 1937 began a long-term association with the National Bureau of Economic Research, where he worked as an assistant to Simon Kuznets.

For some time Friedman taught at the University of Wisconsin (1940). In 1940, Kuznets and Friedman completed a joint study, "Income from Independent Private Practice" ( Income From Independent Professional Practices), which became the basis of Friedman's doctoral dissertation.

From 1941 to 1943, Friedman worked at the US Treasury Department in a tax research group. Until the end of World War II, he served as deputy director of the Military Statistical Research Group at Columbia University.

After the war ended, Friedman received his doctorate and returned to the University of Chicago to work as a professor of economics (1946).

In 1950, Friedman advised on the strategy for implementing the Marshall Plan, developed by J. Marshall, and came to Paris, where he defended the idea of ​​floating exchange rates. He predicted that the fixed exchange rates introduced as a result of the Bretton Woods agreements would eventually collapse, as did the European economy in the early 1970s.

Milton Friedman was awarded the 1976 Nobel Prize in Economics "for his achievements in the analysis of consumption, the history of money, and the development of monetary theory, and for his practical demonstration of the complexity of economic stabilization policies."
In his Nobel speech, he returned to a topic raised back in 1967 when addressing the American Economic Association - the denial of Keynes's remarks regarding the stable relationship between the rate of inflation and unemployment. Friedman came to the conclusion that over a long period the Phillips curve still shifts upward, subject to a natural increase in unemployment.

On November 16, 2006, Milton Friedman died in San Francisco, California of a heart attack at the age of 94.
A number of Friedman's works were created in collaboration with his wife of 68 years, economist Rose Friedman.

Scientific achievements

Friedman is a representative of a trend in economic science called monetarism. The scientist’s works are devoted to the structure of income and consumption, money circulation, the problem of “human capital” and the contradictions of economic stabilization, the relationship between inflation and the unemployment rate. Friedman is the most prominent defender of classical liberalism, a free market free from any government intervention.

Friedman recommends completely abandoning a consistent monetary policy, which still leads to cyclical fluctuations, and adhering to the tactics of constantly increasing the money supply, and empirically, the American scientist came to the conclusion that the optimal growth of money in the economy should be 4% per year. In A Monetary History of the United States (1963), Friedman and Anna Schwartz analyzed the role of money in economic cycles, particularly during the Great Depression. Subsequently, Friedman and Schwartz co-authored the monumental study Monetary Statistics of the United States ( Monetary statistics of the United States, 1970) and "Monetary Trends in the United States and the United Kingdom" ( Monetary trends in the United States and the United Kingdom, 1982).

Nevertheless, Friedman himself considers his main achievement in economic theory to be the “Theory of the Consumer Function,” which states that people in their behavior take into account not so much current income as long-term income.

Friedman is also known as a consistent supporter of classical liberalism. In his books Capitalism and Freedom and Freedom to Choose, he argues that government intervention in the economy is undesirable. Despite his enormous influence in American politics, of the 14 points he proposed in Capitalism and Freedom, only one has been implemented in the United States - the abolition of compulsory conscription.

Criticism

Friedman's views (as well as the Chicago School of Economics in general) are sharply criticized by Marxists (including Western), leftists, anti-globalists, especially Naomi Klein, who considers him to be responsible for the negative phenomena in the economy of Chile during the Pinochet dictatorship and in Russia during the Yeltsin presidency .

In their opinion, a completely free market leads to the impoverishment of the vast majority of people, the unprecedented enrichment of large corporations, the removal of the education system from state control leads to the transformation of the school into a business, in which a full-fledged education becomes inaccessible to many citizens, a similar situation is observed in medicine.

Scientific works

"Capitalism and Freedom" ( Capitalism and Freedom, 1962)

"The Role of Monetary Policy" ( The Role of Monetary Policy. 1967)

"Money and Economic Development" ( Money and economic development, 1973)

"Freedom of choice" ( Free to Choose, 1980).