Free Market Wins

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īG  June 23, 2004

Milton Friedman

Economic is a subject which, like many other sciences, does not emit of controlled experiments, but it does emit of natural experiments, and we rely a great deal upon those natural experiments. The fall of the Berlin Wall 15 years ago brought to an end one of the most dramatic natural experiments ever conducted, the natural experiment between a collectivist society and a free market society, between two ways of organizing economic activity, from the top down or from the bottom up. That experiment ended conclusively and decisively.

It also produced an enormous expansion in freedom around the world, everywhere. More people has been set free from central control in the past 15 years than in almost any other period in human history. But that also launched a new natural experiment on the alternative routes from central planning to capitalism. How do we go from a centrally planned society to a free market society?

When I was first asked that question about 15 years ago, I had a very simple, straightforward answer - three words: Privatize, privatize, privatize.

It has to be accompanied at least by two more things : Providing a legal framework for private property and providing a reasonably stable monetary policy.

There is a tendency for the newly changing countries to look at the successes as their models, to ask at the U.S., to look at Britain, to look at other advanced countries. But I believe this is a serious mistake.

Currently in the U.S., government spends about 40% of our national income. In Britain it is higher than that. When the U.S. was first started back in the 18th century, and for the next century and a half, government spending never exceeded more than about 10 percent of national income. If in those early days the U.S. Government has been spending 40% of the national income, I can assure you the U.S. would never have developed.

The proper model for the countries that are now trying to make their way is not the U.S. of today, not the Britain of today; it is  the U.S. of 200 years ago, the Britain of 200 years ago, a time when government played a much, much smaller role and individual initiative played a much larger role.

As a citizen, I am delighted by the growth of freedom that we have seen in the past decade and a half. As a scientist, I am fascinated by the new evidence we still get from the many experiments that are going on around.

History shows that there is a very long lag between changes in the climate of opinion on the one hand and changes in political practice on the other. Adam Smith published "Wealth of Nations" in 1776, the same year of the Declaration of Independence. You did not get the opening up of trade, the end of the Corn Law, until about 70 years later.

And indeed, it took about 100 years before the lesson of Adam Smith became embedded in the British movement toward free trade and free enterprise.

In the U.S., the climate of opinion had become overwhelmingly socialist by the end of the thirties; certainly by the end of World War II, and that cumulative opinion had not so far had any effect, or much effect, on the structure of the economy.

In 1946, you could have said that the climate of opinion in the U.S. was socialist, but actual practice was free market. Government spending ws much smaller than it is now, and government intrusion into our lives was much less.

But then the lag effect of that rise in opinion toward socialism started to become effective. And we hd galloping socialism in the U.S., from 1946 to about 1980, and creeping socialism for the period thereafter. And that was the effect of the opinion changes that had occurred in the prior 30 or 40 years.

Well, the same situation is arising today. If you look at the climate of opinion in the U.S., there has been a vast change between 1945 or so, when it was overwhelmingly socialist, and today, when everybody, everybody, professors-to-be, believe in free markets and private liberty, private individual freedom and limited government. But that's the talk, and the lag is showing up in practice.

As I said, in 1946 you could say opinion was socialist, practice was private market. Today you could say opinion is private enterprise, practice is socialist. Government spending is close to 40 percent of national income. We have a book of rules and regulations. The Federal Register has some 80,000 pages in it. But that lag, that opinion change, is starting to work.

Our major problem is no longer to persuade people that free markets and limited government and private property are essential prerequisites for prosperity and freedom. Our problem is really to persuade people to practice what they preach. And that's a much more difficult task.