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Schools of Thought in Classical Liberalism, Part 2: Milton Friedman and the Chicago School - YouTube
Channel: Learn Liberty
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Now I want to look at Milton Friedman and
the Chicago school.
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Milton Friedman, of course, the famous former
president of the American Economic Association,
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Nobel Prize winner, wrote best-selling books,
Capitalism and Freedom and Free to Choose,
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the latter of which was turned into a popular
television series.
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They approach the question by using an empirical
methodology.
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That is, for them it’s about testing the
power of theories.
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So they approach it by presenting a hypothesis:
we predict that X will result in Y.
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So for example, if you increase the minimum
wage, the result of that will be that lower-skilled
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workers will find it more difficult to find
employment.
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And you can test that with empirical evidence.
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Why do they think government should be limited?
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It’s because they believe that there is
such a thing as market failure—markets sometimes
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fail—but there’s also such a thing as
government failure, that governments often
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fail.
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And they say if you compare those two things,
usually government failure is much greater
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than market failure.
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So whereas what happens in so much public
debate, they identify, politicians identify
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a market failure and therefore assume that
a perfect government can come in and solve
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that problem.
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Whereas the Chicago school says, that’s
not right.
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What we need to do is to compare imperfect
markets, with all the imperfections the Chicago
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school recognizes, with imperfect government,
with all of the problems that government have.
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And they say, normally when you do these two
things, government failure is so much greater
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than market failure.
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So what there is is a gap between the intentions
of policymakers and the actual results and
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consequences of what they advocate.
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Sometimes, for example, policies lead to the
opposite to that of which was intended.
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Perverse incentives.
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For example, the idea of rent control is to
provide more opportunities for poorer people
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to provide housing.
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But by reducing the price of rental property,
what you actually do is reduce the supply
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of rental property.
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It actually makes it more difficult for poor
people to find housing.
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It has the opposite effect to what’s intended.
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Then there are many other government policies,
which might actually achieve their goals,
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the positive, intended consequences of polices,
but it ignores the negative, unintended consequences
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of those policies.
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So for example, raising the minimum wage,
there are some people who benefit from that;
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they get a higher income because of it.
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But it ignores the negative, unintended consequences.
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That is, larger numbers of people can’t
get jobs at all.
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And so we need to compare both the positive
consequences, which were intended, and the
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negative, unintended consequences.
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And the Chicago school argues that normally
the negative, unintended consequences are
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greater than the positive, intended ones.
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But it’s an empirical question; we have
to examine what the evidence say.
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And why is there this gap between intentions
and consequences?
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They argue it’s because policymakers’
failure to take into account the importance
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of self-interest in explaining peoples’
behavior.
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They ignore human nature.
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What should be the role of government according
to the Chicago school?
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Well, Milton Friedman identifies four main
areas of government responsibility.
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First of all, to protect us from our enemies,
both internal and external enemies.
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We need a military to provide us with defense
against our foreign enemies; we need a police
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force that the government provides to protect
from our internal enemies, such as criminals.
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Secondly, government should provide the administration
of justice in order to achieve peaceful reconciliation
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of conflict.
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Inevitably, if you live in a society with
other people, we will come into conflict with
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each other.
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We will disagree about certain things; that’s
a contract, what the meaning of a contract
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is.
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One possible way of resolving any sort of
conflict is, easy, we could beat up with the
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other person.
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Presumably, though, we don’t want to live
in a society where every time there is a disagreement,
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we try and have a physical fight with the
other person.
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So we want some neutral arbiter that we can
go to that is not connected with either side,
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and they will be an arbiter and say, yes,
this is what the contract means; this means
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you were right and the other person is wrong.
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So it’s the job of the government to provide
these courts that we can go to.
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The third area that Friedman argues is that
there are some things, not many, but there
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are some things that the marketplace, through
voluntary exchange, cannot provide satisfactorily.
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They take two different forms.
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First of all are what economists call public
goods.
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This is not the same thing as necessarily
being good for the public; public goods for
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economists have a very particular meaning.
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Public goods have two characteristics.
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First of all, you can’t exclude people from
the benefits of this program.
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And the second thing is they’re nonrival.
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The fact that I consume more of it does not
mean that you have less of the product.
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Best probably illustrated by an example: the
classic example of a public good is defense.
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I’m not yet an American citizen, but I live
on American soil.
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Suppose that I didn’t want to pay my taxes
towards defense.
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I would prefer to be defended by Her Majesty
the Queen and therefore I’m not going to
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pay my taxes for defense.
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The problem with that is I do live on American
soil.
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That means the American military are going
to defend me whether I want it or not.
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I can’t be excluded from American defense.
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But it’s nonrival.
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The fact that I am protected means, the protection
of me doesn’t mean any less protection for
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anyone else.
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So that’s a classic case for a public good.
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I could say, well I don’t want to pay for
it, but I will still benefit from it.
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But it doesn’t mean any less for anyone
else.
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So if you left it, just not going to work
in the voluntary system; people would simply
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not contribute to public goods.
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So it’s an argument you have to have the
government that provides the public goods.
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The second main area that Chicago school will
talk about are negative externalities.
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That is, when people interact with each other,
it may have consequences for third parties.
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The classic case of that is pollution.
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I may be producing a good, but I produce pollution,
which then affects the people who live in
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the neighborhood.
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So it’s argued, Chicago school says we need
some way of controlling these negative externalities,
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such as pollution.
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More controversially, Freedman argues that
the poor are a negative externality.
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That is that we don’t want to live in a
society where we walk down the streets where
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there are people begging and starving on the
streets.
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So he argues it’s a negative externality
to live in a world where there are lots of
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poor people, and therefore he justifies, as
dealing with a negative externality, some
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form of social safety net.
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And the fourth area he says that government
needs to act is to protect the irresponsible,
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those that we assume are not capable of looking
after themselves.
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Classic case of that of course are children;
we assume they’re not in a position to make
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decisions for themselves.
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Normally we can allow parents to make their
decisions, but we have to keep an eye.
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Not all adults treat children properly.
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And then we assume that there are some people
who are mentally incapable of making decisions
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on their behalf; the government has to make
sure that their interests are protected.
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So Friedman is very clear, these are the four
areas that government should be active in
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or necessary to carry out.
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They’re important, but they’re still significantly
limited.
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This approach is often called the Social Market
Approach.
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Friedman believes that what governments, governments
have these responsibilities, but as far as
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possible, they should use market mechanisms
to achieve these ends.
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So for example, it is a responsibility of
government to make sure every child is educated,
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but that does not mean that government has
to provide the schools.
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Government, for example, could give vouchers
or some form of school choice, private schools,
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but parents can chose whichever school they
want to go to.
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So government has a social responsibility;
it doesn’t necessarily have to directly
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provide what those social responsibilities
are.
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