Robert L. Hetzel

English

Research Papers in Economics

L
iberty was a fundamental ethical value for Milton
Friedman, the Nobel Prize-winning economist who
died late last year. Unlike some other classical liber-
als, however, he did not defend liberty as an absolute right.
Rather, he viewed it as a necessary condition for a peaceful
and prosperous social order. Central to the functioning of
such a society were free markets and limited government.
In 1946, when Friedman began teaching at the University
of Chicago, the prevailing intellectual consensus was strongly
opposed to markets. For Friedman, free markets depended
upon property rights broadly construed: Everyone should
have the ability to bring his physical and human capital into
competition with anyone else. As Friedman explained, mar-
kets decentralize the allocation of resources through the
information and incentives provided by the price system. The
self-interest of producers assures that the market provides 
the goods that individuals choose to consume and also that
resources are allocated efficiently across competing uses.
Critics of a market-based economy argued that it cannot
create a caring society. Such a society depends upon individ-
ual acts of kindness and the caring of voluntarily formed
groups — family, fraternal, and religious organizations. It
would appear logical to add government to this list by plac-
ing economic activity under the control of a benevolent
government. Surely, replacing the selfish motives of market
actors with the selfless motives of government employees
would create a more compassionate society.
Friedman followed F.A. Hayek in challenging this logic.
The price system economizes on the information needed by
individual actors to make decisions optimal for the entire
economy. Because the central planner cannot possess all the
knowledge required to make a complex economy function,
only a free-market economy can create wealth. Moreover,
government, by its very nature, is not voluntary; it is 
coercive. Invariably, supposedly benevolent, egalitarian 
governments institute policies that primarily benefit those
who exercise power, not the masses, as promised. Friedman
compared as “controlled experiments” East Germany with
West Germany and North Korea with South Korea. In
Friedman’s view, government needed to wield some coercive
power to carry out basic tasks such as national defense, but
that power should be held sharply in check. 
Free markets were also criticized for not exhibiting the
competition necessary for their survival. A decade of high
unemployment during the Great Depression followed by
high employment during wartime led to the widespread
belief that the price system had failed and that only govern-
ment could provide a remedy. For the public, free enterprise
crashed when the banks crashed in the Depression.
Friedman challenged this view on two levels. First, he and
Anna Schwartz explained the Great Depression as a failure of
monetary policy, not the market system. Second, Friedman
spent his life illustrating the usefulness of the competitive
market model for understanding economic phenomena —
both in the classroom and through books, magazine columns,
and television appearances aimed at the general public. 
Friedman demonstrated that government intervention in
the marketplace frequently produced unintended and coun-
terproductive results. For example, he criticized the wage and
price controls imposed by President Nixon on Aug. 15, 1971,
predicting correctly that they would lead to shortages.
Friedman also relentlessly demonstrated the relationship
between high money growth and inflation, arguing that 
“inflation is always and everywhere a monetary phenomenon.”
As a result, when monetary policy became inflationary again
toward the end of the 1970s, the public no longer believed that
private greed created inflation. Fed Chairman Paul Volcker
then had the public and political support necessary to 
implement a policy of disinflation. Without Friedman’s 
continual advocacy of policies to restrain money growth, the
United States might have continued to suffer from periodic
bouts of inflation and controls that would have destabilized
the economy and eroded limitations on government power.
When I was an undergraduate at the University of
Chicago in 1964, I heard a speech by a famous political 
scientist, Hans Morgenthau, who argued that because mod-
ern economies are so complicated they require extensive
government planning and control. Many years later, 
I recounted this story to Friedman, who laughed and replied
that Morgenthau had accused him of fighting the wars of the
19th century. Friedman willingly accepted the comparison to
the 19th century English economists who had defended free
trade during the Corn Law debates. 
Friedman can rightly be compared to the Enlightenment
philosophers of the 18th century, such as Jefferson and
Voltaire, as well. He believed that individuals could identify
common ground and through reasoned discourse come to
agreement — and spent his life engaged in such discussions.
If the 21st century is to be an age of human progress rather
than conflict between people with different religious and
ideological views, it will be because of efforts made by indi-
viduals such as Milton Friedman who believed that the
world can be a place of reason and prosperity rather than
conflict and hardship. RF
Robert L. Hetzelis a senior economist and policy advisor at
the Federal Reserve Bank of Richmond. He was a student of
Milton Friedman’s at the University of Chicago. 
BY ROBERT L. HETZEL Milton Friedman and Liberty
64 Region Focus • Winter 2007
OPINION
RF Fall Winter 07v42-sig3-INT  2/27/07  8:47 AM  Page 64

Opinion: Milton Friedman and liberty

http://www.richmondfed.org/publications/research/region_focus/2007/winter/pdf/opinion.pdf

Opinion: Milton Friedman and liberty

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