Editor’s note: This essay is an excerpt of the new Hoover Press book Milton Friedman on Freedom, edited by Robert Leeson and Charles G. Palm. It originally appeared in the “New Individualist Review” in 1962.
There is a strong tendency for all of us to regard what is as if it were the “natural” or “normal” state of affairs, to lack perspective because of the tyranny of the status quo. It is, therefore, well, from time to time, to make a deliberate effort to look at things in a broader context. In such a context anything approaching a free society is an exceedingly rare event. Only during short intervals in man’s recorded history has there been anything approaching what we would call a free society in existence over any appreciable part of the globe. And even during such intervals, as at the moment, the greater part of mankind has lived under regimes that could by no stretch of the imagination be called free.
This casual empirical observation raises the question whether a free society may not be a system in unstable equilibrium. If one were to take a purely historical point of view, one would have to say that the normal, in the sense of average, state of mankind is a state of tyranny and despotism. Perhaps this is the equilibrium state of society that tends to arise in the relation of man to his fellows. Perhaps highly special circumstances must exist to render a free society possible. And perhaps these special circumstances, the existence of which account for the rare episodes of freedom, are themselves by their nature transitory so that the kind of society we all of us believe in is highly unlikely to be maintained even if once attained.
This problem has, of course, been extensively discussed in the literature. In his great book, Lectures on Law and Public Opinion in the Nineteenth Century, written at the end of the nineteenth century, A. V. Dicey discusses a very similar question. How was it, he asks, that toward the end of the nineteenth century there seemed to be a shift in English public opinion away from the doctrine of liberalism and toward collectivism, even though, just prior to the shift, individualism and laissez-faire were at something like their high tide, seeming to have captured English public opinion and seeming to be producing the results that their proponents had promised in the form of an expansion of economic activity, a rise in the standard of life, and the like?
As you may recall, Dicey dates the change in public opinion in Britain away from individualism and toward collectivism at about 1870–90. Dicey answers his question by essentially reversing it, saying that in its original form it may be a foolish question. Perhaps the relevant question is not why people turned away from individualism toward collectivism but how they were induced to accept the queer notion of individualism in the first place. The argument for a free society, he goes on to say, is a very subtle and sophisticated argument. At every point, it depends on the indirect rather than the direct effect of the policy followed. If one is concerned to remedy clear evils in a society, as everyone is, the natural reaction is to say, “let us do something about it,” with the “us” in this statement in a large number of cases be translated into the “government,” so the natural reaction is to pass a law. The argument that maybe the attempt to correct this particular evil by extending the hand of the government will have indirect effects whose aggregate consequences may be far worse than any direct benefits that flow from the action taken is a rather sophisticated argument. And yet this is the kind of argument that underlies a belief in a free or laissez-faire society.
If you look at each evil as it arises, in and of itself, there will almost always tend to be strong pressures to do something about it. This will be so because the direct effects are clear and obvious, while the indirect effects are remote and devious, and because there tends to be a concentrated group of people who have strong interests in favor of a particular measure whereas the opponents, like the indirect effects of the measure, are diffused. One can cite example after example along this line. Indeed I think it is true that most crude fallacies about economic policies derive from neglecting the indirect effects of those policies.
The tariff is one example. The benefits that are alleged to flow from a tariff are clear and obvious. If a tariff is imposed, a specified group of people, whose names can almost be listed, seem to be benefited in the first instance. The harm that is wrought by the tariff is borne by people whose names one does not know and who are unlikely themselves to know that they are or will be harmed. The tariff does most harm to people who have special capacities for producing the exports that would pay for the goods that would be imported in the absence of a tariff. With a tariff in effect, the potential export industry may never exist, and no one will ever know that he might have been employed in it or who would have been. The indirect harm to consumers via a more inefficient allocation of resources and higher prices for the resulting products is spread even more thinly through the society. Thus the case for a tariff seems quite clear on first glance. And this is true in case after case.
This natural tendency to engage in state action in specific instances can, it would seem, and this is Dicey’s argument, be offset only by a widespread general acceptance of a philosophy of noninterference, by a general presumption against undertaking any one of a large class of actions. And, says Dicey, what is really amazing and surprising is that for so long a period as a few decades, sufficiently widespread public opinion developed in Britain in favor of the general principle of nonintervention and laissez-faire as to overcome the natural tendency to pass a law for the particular cases. As soon as this general presumption weakened, it meant the emergence of a climate of opinion in favor of specific government intervention.
Dicey’s argument is enormously strengthened by an asymmetry between a shift toward individualism and a shift away from it. In the first place, there is what I have called the tyranny of the status quo. Anyone who wants to see how strong that tyranny is can do no better, I believe, than to read Dicey’s book now. On reading it he will discover how extreme and extensive a collectivist he is, as judged by the kinds of standards for governmental action that seemed obvious and appropriate to Dicey when he wrote his lectures. In discussing issues of this kind, the tendency always is to take what is for granted, to assume that it is perfectly all right and reasonable and that the problem to argue about is the next step. This tends to mean that movements in any one direction are difficult to reverse. A second source of asymmetry is the general dilemma that faces the liberal: tolerance of the intolerant. The belief in individualism includes the belief in tolerating the intolerant. It includes the belief that the society is only worth defending if it is one in which we resort to persuasion rather than to force and in which we defend freedom of discussion on the part of those who would undermine the system itself. If one departs from a free society, the people in power in a collectivist society will not hesitate to use force to keep it from being changed. Under such circumstances it is more difficult to achieve a revolution that would convert a totalitarian or collectivist society into an individualist society than it is to do the reverse. From the point of view of the forces that may work in the direction of rendering a free society an unstable system, this is certainly one of the most important strengths of Dicey’s general argument.
Perhaps the most famous argument alleging the instability of a free enterprise or capitalist society is the Marxian. Marx argued that there were inherent historical tendencies within a capitalist society that would tend to lead to its destruction. As you know, he predicted that as it developed, capitalism would produce a division of society into sharp classes, the impoverishment of the masses, the despoilment of the middle classes, and a declining rate of profit. He predicted that the combined result would be a class struggle in which the class of the “expropriated,” or the proletarian class, would assume power.
Marx’s analysis is at least in part to be regarded as a scientific analysis attempting to derive hypotheses that could be used to predict consequences that were likely to occur. His predictions have uniformly been wrong; none of the major consequences that he predicted has in fact occurred. Instead of a widening split among classes, there has tended to be a reduction of class barriers. Instead of a despoilment of the middle class, there has tended to be, if anything, an increase in the middle class relative to the extremes. Instead of the impoverishment of the masses, there has been the largest rise in the standard of life of the masses that history has ever seen. We must therefore reject his theory as having been disproved.
The lack of validity of Marx’s theory does not mean that it has been unimportant. It had the enormous importance of leading many, if not a majority, of the intellectual and ruling classes to regard tendencies of the kind he predicted as inevitable, thereby leading them to interpret what did go on in different terms than they otherwise would. Perhaps the most striking example has been the extent to which intellectuals and people in general have taken it for granted that the development of a capitalist society has meant an increased concentration of industrial power and an increase in the degree of monopoly. Although this view has largely reflected a confusion between changes in absolute size and changes in relative size, in part I think it was produced by the fact that this was something they were told to look for by Marx. I don’t mean to attribute this view solely to the Marxian influence. But I think that in this and other instances, the Marxian argument has indirectly affected the patterns of thinking of a great many people, including many who would regard themselves as strongly anti-Marxian. Indeed, in many ways the ideas have been most potent when they have lost their labels. In this way, Marx’s ideas had an enormous intellectual importance, even though his scientific analysis and predictions have all been contradicted by experience.
In more recent times, Joseph Schumpeter has offered a more subtle and intellectually more satisfactory defense of essentially the Marxian conclusion. Schumpeter’s attitude toward Marx is rather interesting. He demonstrates that Marx was wrong in every separate particular, yet proceeds both to accept the major import of his conclusions and to argue that Marx was a very great man. Whereas Marx’s view was that capitalism would destroy itself by its failure, Schumpeter’s view was that capitalism would destroy itself by its success. Schumpeter believed that large-scale enterprises and monopolies have real advantages in promoting technological progress and growth and that these advantages would give them a competitive edge in the economic struggle. The success of capitalism would therefore, he argued, be associated with a growth of very large enterprises and with the spread of something like semi-monopoly over the industrial scene. In its turn, he thought that this development would tend to convert businessmen into bureaucrats. Large organizations have much in common whether they are governmental or private. They inevitably, he believed, produced an increasing separation between the ultimate owners of the enterprises and the individuals who were in positions of importance in managing the enterprises. Such individuals are induced to place high values upon technical performance and to become adaptable to a kind of civil service socialist organization of society. In addition, this process would create the kind of skills in the managerial elite that would be necessary in order to have a collectivist or governmentally controlled society. The development of this bureaucratic elite, with its tendency to place greater and greater emphasis on security and stability and to accept centralized control, would tend, he believed, to have the effect of establishing a climate of opinion highly favorable to a shift to an explicitly socialized and centralized state.
The view that Schumpeter expressed has much in common with what Burnham labeled a managerial revolution although the two are not by any means the same. There is also much in common between Schumpeter’s analysis and the distinction that Veblen drew in his analysis of the price system between the roles of entrepreneurs and engineers, between “business” and “industry.” There are also large differences. Veblen saw the engineer as the productive force in the society, the entrepreneur as the destructive force. Schumpeter, if anything, saw matters the other way. He saw the entrepreneur as the creative force in society and the engineer as simply his handmaiden. But I think there is much in common between the two analyses with respect to the belief that power would tend to shift from the one to the other.
For myself, I must confess that while I find Schumpeter’s analysis intriguing and intellectually fascinating, I cannot accept his thesis. It seems to me to reflect in large part a widespread bias that emphasizes the large and few as opposed to the small and numerous, a tendency to see the merits of scale and not to recognize the merits of large numbers of separate people working in diverse activities. In any event, so far as one can judge, there has been no striking tendency in experience toward an increasing concentration of economic activity in large bureaucratic private enterprises. Some enormous enterprises have of course arisen. But there has also been a very rapid growth in small enterprises. What has happened in this country at least is that the large enterprises have tended to be concentrated in communication and manufacturing. These industries have tended to account for a roughly constant proportion of total economic activity. Small enterprises have tended to be concentrated in agriculture and services. Agriculture has declined in importance and in the number of enterprises, while the service industries have grown in both. If one leaves government aside, as Schumpeter’s thesis requires one to do, so far as one can judge from the evidence, there seems to have been no particularly consistent tendency for the fraction of economic activity that is carried on in any given percentage of the enterprises to have grown. What has happened is that small enterprises and big enterprises have both grown in scale, so that what we now call a small enterprise may be large by some earlier standard. However, the thesis that Schumpeter developed is certainly sophisticated and subtle and deserves serious attention.
There is another direction, it seems to me, in which there is a different kind of a tendency for capitalism to undermine itself by its own success. The tendency I have in mind can probably best be brought out by the experience of Great Britain, which tends to provide the best laboratory for many of these forces. It has to do with the attitude of the public at large toward law and toward law obedience. Britain has a wide and deserved reputation for the extraordinary obedience of its people to the law. It has not always been so. At the turn of the nineteenth century, and earlier, the British had a very different reputation as a nation of people who would obey no law or almost no law, a nation of smugglers, a nation in which corruption and inefficiency was rife, and in which one could not get very much done through governmental channels.
Indeed, one of the factors that led Bentham and the Utilitarians toward laissez-faire (this is a view that is also expressed by Dicey) was the self-evident truth that if you wanted to get evils corrected, you could not expect to do so through the government of the time. The government was corrupt and inefficient. It was clearly oppressive. It was something that had to be gotten out of the way as a first step to reform. The fundamental philosophy of the Utilitarians or any philosophy that puts its emphasis on some kind of a sum of utilities, however loose may be the expression, does not lead to laissez-faire in principle. It leads to whatever kind of organization of economic activity is thought to produce results that are regarded as good in the sense of adding to the sum total of utilities. I think the major reason the Utilitarians tended to be in favor of laissez-faire was the obvious fact that government was incompetent to perform any of the tasks they wanted to see performed.
Whatever the reason for its appeal, the adoption of laissez-faire had some important consequences. Once laissez-faire was adopted, the economic incentive for corruption was largely removed. After all, if governmental officials had no favors to grant, there was no need to bribe them. And if there was nothing to be gained from government, it could hardly be a source of corruption. Moreover, the laws that were left were for the most part, and again I am oversimplifying and exaggerating, laws that were widely accepted as proper and desirable: laws against theft, robbery, murder, and so on. This is in sharp contrast to a situation in which the legislative structure designates as crimes what people individually do not regard as crimes or makes it illegal for people to do what seems to them the sensible thing. The latter situation tends to reduce respect for the law. One of the unintended and indirect effects of laissez-faire was thus to establish a climate in Britain of a much greater degree of obedience and respect for the law than had existed earlier. Probably there were other forces at work in this development, but I believe that the establishment of laissez-faire laid the groundwork for a reform in the civil service in the latter part of the century—the establishment of a civil service chosen on the basis of examinations and merit and of professional competence. You could get that kind of development because the incentives to seek such places for purposes of exerting improper influence were greatly reduced when government had few favors to confer.
In these ways the development of laissez-faire laid the groundwork for a widespread respect for the law, on the one hand, and a relatively incorrupt, honest, and efficient civil service, on the other, both of which are essential preconditions for the operation of a collectivist society. In order for a collectivist society to operate, the people must obey the laws and there must be a civil service that can and will carry out the laws. The success of capitalism established these preconditions for a movement in the direction of much greater state intervention.
The process I have described obviously runs both ways. A movement in the direction of a collectivist society involves increased governmental intervention into the daily lives of people and the conversion into crimes of actions that are regarded by the ordinary person as entirely proper. These tend in turn to undermine respect for the law and to give incentives to corrupt state officials. There can, I think, be little doubt that this process has begun in Britain and has gone a substantial distance. Although respect for the law may still be greater than it is here, most observers would agree that respect for the law in Britain has gone down decidedly in the course of the last twenty or thirty years, certainly since the war, as a result of the kind of laws people have been asked to obey. On the occasions I have been in England, I have had access to two sources of information that generally yield quite different answers. One is people associated with academic institutions, all of whom are quite shocked at the idea that any British citizen might evade the law, except perhaps for transactions involving exchanging pounds for dollars when exchange control was in effect. It also happens that I had contact with people engaged in small businesses. They tell a rather different story, one that I suspect comes closer to being valid, about the extent to which regulations were honored in the breach and taxes and customs regulations evaded; the one thing that is uniform among people or almost uniform is that nobody or almost nobody has any moral repugnance to smuggling, certainly not when he is smuggling something into some country other than his own.
The erosion of the capital stock of willingness to obey the law reduces the capacity of a society to run a centralized state, to move away from freedom. This effect on law obedience is thus one that is reversible and runs in both directions. It is another major factor that needs to be taken into account in judging the likely stability of a free system in the long run.
I have been emphasizing forces and approaches that are mostly pessimistic in terms of our values in the sense that most of them are reasons why a free society is likely to be unstable and to change into a collectivist system. I should like therefore to turn to some of the tendencies that may operate in the other direction.
What are the sources of strength for a free society that may help to maintain it? One of the major sources of strength is the tendency for extension of economic intervention in a wide range of areas to interfere directly and clearly with political liberty and thus to make people aware of the conflict between the two. This has been the course of events in Great Britain after the war and in many other countries. I need not repeat or dwell on this point.
A second source of strength is one that has already been suggested by my comments on law obedience. In many ways perhaps the major hope for a free society is precisely that feature in a free society tha makes it so efficient and productive in its economic activity, namely, the ingenuity of millions of people, each of whom is trying to further his interests, in part by finding ways to get around state regulation. If I may refer to my own casual observation of Britain and France a few years after the war, the impression that I formed on the the basis of very little evidence but that seemed to me to be supported by further examination was that Britain at the time was being economically strangled by the law obedience of her citizens while France was being saved by the existence of the black market. The price system is a most effective and efficient system for organizing resources. As long as people try to make it operate, it can surmount a lot of problems. There is the famous story about the man who wrote a letter to Adam Smith saying that some policy or other was going to be the ruin of England. And Adam Smith, as I understand the story, wrote back and said, “Young man, there is a lot of ruin in a nation.”
This seems to me an important point. Once government embarks on intervention into and regulation of private activities, this establishes an incentive for large numbers of individuals to use their ingenuity to find ways to get around the government regulations. One result is that there appears to be a lot more regulation than there really is. Another is that the time and energy of government officials are increasingly taken up with the need to plug the holes in the regulations that the citizens are finding, creating, and exploiting. From this point of view, Parkinson’s Law about the growth of bureaucracy without a corresponding growth of output may be a favorable feature for the maintenance of a free society. An efficient governmental organization, not an inefficient one, is almost surely the greater threat to a free society. One of the virtues of a free society is precisely that the market tends to be a more efficient organizing principle than centralized direction. Centralized direction in this way means always having to fight something of a losing battle.
Very closely related to this point and perhaps only another aspect of it is the difference between the visibility of monopolistic action, whether governmental or private, and of actions through the market. When people are acting through the market, millions of people are engaging in activities in a variety of ways that are highly impersonal, not very well recognized, and almost none of which attracts attention. On the other hand, governmental actions, and this is equally true of actions by private monopolies, whether of labor or industry, tend to be conducted by persons who get into the headlines, to attract notice. I have often conducted the experiment of asking people to list the major industries in the United States. In many ways, the question is a foolish one because there is no clear definition of industry. Yet people have some concept of industry, and the interesting thing is that the result is always very similar. People always list those industries in which there is a high degree of concentration. They list the automobile industry, never the garment industry, although the garment industry is far larger by any economic measure than the automobile industry. I have never had anybody list the industry of providing domestic service, although it employs many more people than the steel industry. Estimates of importance are always biased in the direction of those industries that are monopolized or concentrated and so are in the hands of few firms. Everybody knows the names of the leading producers of automobiles. Few could list the leading producers of men’s and women’s clothing or of furniture, although these are both very large industries. So competition, working through the market, precisely because it is impersonal, anonymous, and works its way in devious methods, tends to be underestimated in importance; the kinds of personal activities that are associated with government, with monopoly, with trade unions, tend to be exaggerated in importance.
Because this kind of direct personal activity by large organizations, whether governmental or private, is visible, it tends to call attention to itself out of all proportion to its economic importance. The result is that the community tends to be awakened to the dangers arising from such activities and such concentration of power before they become so important that it is too late to do anything about them. This phenomenon is very clear for trade unions. Everybody has been reading in the newspapers about the negotiations in steel and has learned that there is a labor problem in the steel industry. The negotiations usually terminate in some kind of wage increase that is regarded as attributable to the union’s activities. In the postwar period, domestic servants have gotten larger wage increases without anyone engaging in large-scale negotiations without anyone’s knowing that negotiations were going on and without a single newspaper headline, except perhaps to record complaints about the problem of finding domestic servants. I think that trade unions have much monopoly power. But I think that the importance of trade unions is widely exaggerated, that they are nothing like as important in the allocation of labor or the determination of wage rates as they are supposed to be. They are not unimportant—perhaps 10 or 15 percent of the working force have wages now some 10 or 15 percent higher than they otherwise would be because of trade unions; the remaining 85 percent of the working class have wages something like 4 percent lower than they would otherwise be. This is appreciable and important, but it does not give unions the kind of power over the economy that would make it impossible to check their further rise.
The three major sources of strength I have suggested so far are the corroding effect of the extension of state activities and state intervention on attitudes toward the enforcement of the law and on the character of the civil service; the ingenuity of individuals in avoiding regulation; and the visibility of government action and of monopoly. Implicit in these is a fourth, namely, the general inefficiency in the operation of government.
These comments have been rather discursive. I have been attempting simply to list some of the forces at work tending to destroy a free society once established and tending to resist its destruction. I have left out of consideration the force that in some ways is our most important concern, namely, the force of ideas, of people’s attitudes about values and about the kind of social organization that they want. I have omitted this force because I have nothing to say about it that is not self-evident.
No very clear conclusion can be drawn from this examination of the forces adverse and favorable to a free society. The historical record suggests pessimism, but the analysis gives no strong basis for either great optimism or confirmed pessimism about the stability of a free society if it is given an opportunity to exist. One of the most important tasks for liberal scholars to undertake is to examine this issue more fully in the light of historical evidence in order that we may have a much better idea of what factors tend to promote and what factors to destroy a free society.
Credit: New Individualist Review 2 (Summer 1962): 3–10. Copyright © 1962 by Liberty Fund, Inc. Reprinted courtesy of the New Individualist Review and Liberty Fund, Inc.