International Endowment for Democracy
www.internationalendowmentfordemocracy.org    or    www.iefd.org

From Democratic Theory: Essays in Retrieval
(London: Oxford University Press)

By C.B. Macpherson
1973

Professor Friedman's demonstration that the capitalist market economy can coordinate economic activities without coercion rests on an elementary conceptual error. His argument runs as follows, He shows first that in a simple market model, where each individual or household controls resources enabling it to produce goods and services either directly for itself or for exchange, there will be production for exchange because of the increased product made possible by specialization. But

since the household always has the alternative of producing directly for itself, it need not enter into any exchange unless it benefits from it. Hence no exchange will take place unless both parties do benefit from it. Cooperation is thereby achieved without coercion. (Capitalism and Freedom, p. 13; hereafter CF)

So far, so good. It is indeed clear that in this simple exchange model, assuming rational maximizing behavior by all hands, every exchange will benefit both parties, and hence that no coercion is involved in the decision to produce for exchange or in any act of exchange.

Professor Friedman then moves on to our actual complex economy, or rather to his own curious model of it:

As in that simple model, so in the complex enterprise and money-exchange economy, cooperation is strictly individual and voluntary provided: (1) that enterprises are private, so that the ultimate contracting parties are individuals and (2) that individuals are effectively free to enter or not to enter into any particular exchange, so that every transaction is strictly voluntary. (CF, p. 14)

One cannot take exception to proviso (1): it is clearly required in the model to produce a cooperation that is "strictly individual." One might, of course, suggest that a model containing this stipulation is far from corresponding to our actual complex economy, since in the latter the ultimate contracting parties who have the most effect on the market are not individuals but corporations, and moreover, corporations which in one way or another manage to opt out of the fully competitive market. This criticism, however, would not be accepted by all economists as self-evident: some would say that the question who has most effect on the market is still an open question (or is a wrongly posed question). More investigation and analysis of this aspect of the economy would be valuable. But political scientists need not await its results before passing judgment on Friedman's position, nor should they be tempted to concentrate their attention on proviso (1). If they do so they are apt to miss the fault in proviso (2), which is more fundamental, and of a different kind. It is not a question of the correspondence of the model to the actual: it is a matter of the inadequacy of the proviso to produce the model.

Proviso (2) is "that individuals are effectively free to enter or not to enter into any particular exchange," and it is held that with this proviso "every transaction is strictly voluntary." A moment's thought will show that this is not so. The proviso that is required to make every transaction strictly voluntary is not freedom not to enter into any particular exchange, but freedom not to enter into any exchange at all. This, and only this, was the proviso that proved the simple model to be voluntary and noncoercive; and nothing less than this would prove the complex model to be voluntary and noncoercive. But Professor Friedman is clearly claiming that freedom not to enter into any particular exchange is enough: "The consumer is protected from coercion by the seller because of the presence of other sellers with whom he can deal. . . . The employee is protected from coercion by the employer because of other employers for whom he can work . . ." (CF, pp. 14-15).

One almost despairs of logic, and of the use of models. It is easy to see what Professor Friedman has done, but it is less easy to excuse it. He has moved from the simple economy of exchange between independent producers to the capitalist economy, without mentioning the most important thing that distinguishes them. He mentions money instead of barter, and "enterprises which are intermediaries between individuals in their capacities as suppliers of services and as purchasers of goods" (CF, pp. 13-14), as if money and merchants were what distinguished a capitalist economy from an economy of independent producers. What distinguishes the capitalist economy from the simple exchange economy is the separation of labor and capital, that is, the existence of a labor force without its own sufficient capital and therefore without a choice as to whether to put its labor in the market or not. Professor Friedman would agree that where there is no choice there is coercion. His attempted demonstration that capitalism coordinates without coercion therefore fails.

Since all his specific arguments against the welfare and regulatory state depend on his case that the market economy is not coercive, the reader may spare himself the pains (or, if an economist, the pleasure) of attending to the careful and persuasive reasoning by which he seeks to establish the minimum to which coercion could be reduced by reducing or discarding each of the main regulatory and welfare activities of the state. None of this takes into account the coercion involved in the separation of capital from labor, or the possible mitigation of this coercion by the regulatory and welfare state. Yet it is because this coercion can in principle be reduced by the regulatory and welfare state, and thereby the amount of effective individual liberty be increased, that liberals have been justified in pressing, in the name of liberty, for infringements on the pure operation of competitive capitalism...

The argument that competitive capitalism is necessary to political freedom is itself conducted on two levels, neither of which shows a necessary relation.

1. The first, on which Friedman properly does not place very much weight, is a historical correlation. No society that has had a large measure of political freedom "has not also used something comparable to a free market to organize the bulk of economic activity" (CF, p. 9). Professor Friedman rightly emphasizes "how limited is the span of time and the part of the globe for which there has ever been anything like political freedom" (CF, p. 9); he believes that the exceptions to the general rule of "tyranny, servitude and misery" are so few that the relation between them and certain economic arrangements can easily be spotted. "The nineteenth century and early twentieth century in the Western world stand out as striking exceptions to the general trend of historical development. Political freedom in this instance clearly came along with the free market and the development of capitalist institutions" (CF, pp. 9-10). Thus, for Professor Friedman, "history suggests... that capitalism is a necessary condition for political freedom" (CF, p. 10).

The broad historical correlation is fairly clear, though in cutting off the period of substantial political freedom in the West at the "early twentieth century" Friedman seems to be slipping into thinking of economic freedom and begging the question of the relation of political freedom to economic freedom. But granting the correlation between the emergence of capitalism and the emergence of political freedom, what it may suggest to the student of history is the converse of what it suggests to Professor Friedman: i.e., it may suggest that political freedom was a necessary condition for the development of capitalism. Capitalist institutions could not be fully established until political freedom (ensured by a competitive party system with effective civil liberties) had been won by those who wanted capitalism to have a clear run: a liberal state (political freedom) was needed to permit and facilitate a capitalist market society.

If this is the direction in which the causal relation runs, what follows (assuming the same relation to continue to hold) is that freedom, or rather specific kinds and degrees of freedom, will be or not be maintained according as those who have a stake in the maintenance of capitalism think them useful or necessary. In fact, there has been a complication in this relation. The liberal state which had, by the mid-nineteenth century in England, established the political freedoms needed to facilitate capitalism, was not democratic: that is, it had not extended political freedom to the bulk of the people. When, later, it did so, it began to abridge market freedom. The more extensive the political freedom, the less extensive the economic freedom became. At any rate, the historical correlation scarcely suggests that capitalism is a necessary condition for political freedom.

2. Passing from historical correlation, which "by itself can never be convincing," Professor Friedman looks for "logical links between economic and political freedom" (CF, pp. 11-12). The link he finds is that "the kind of economic organization that provides economic freedom directly, namely, competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other" (CF, p. 9). The point is developed a few pages later. The greater the concentration of coercive power in the same hands, the greater the threat to political freedom (defined as "the absence of coercion of a man by his fellow men"). The market removes the organization of economic activity from the control of the political authority. It thus reduces the concentration of power and "enables economic strength to be a check to political power rather than a reinforcement" (CF. p. 15).

Granted the validity of these generalizations, they tell us only that the market enables economic power to offset rather than reinforce political power. They do not show any necessity or inherent probability that the market leads to the offsetting of political power by economic power. We may doubt that there is any such inherent probability. What can be shown is an inherent probability in the other direction, i.e., that the market leads to political power being used not to offset but to reinforce economic power. For the more completely the market takes over the organization of economic activity, that is, the more nearly the society approximates Friedman's ideal of a competitive capitalist market society. Where the state establishes and enforces the individual right of appropriation and the rules of the market but does not interfere in the operation of the market, the more completely is political power being used to reinforce economic power.

Professor Friedman does not see this as any threat to political freedom because he does not see that the capitalist market necessarily gives coercive power to those who succeed in amassing capital. He knows that the coercion whose absence he equates with political freedom is not just the physical coercion of police and prisons, but extends to many forms of economic coercion, e.g., the power some men may have over others' terms of employment. He sees the coercion possible (he thinks probable) in a socialist society where the political authority can enforce certain terms of employment. He does not see the coercion in a capitalist society where the holders of capital can enforce certain terms of employment. He does not see this because of his error about freedom not to enter into any particular exchange being enough to prove the uncoercive nature of entering into exchange at all.

The placing of economic coercive power and political coercive power in the hands of different sets of people, as in the fully competitive capitalist economy, does not lead to the first checking the second but to the second reinforcing the first. It is only in the welfare-state variety of capitalism, which Friedman would like to have dismantled, that there is a certain amount of checking of economic power by political power.

The logical link between competitive capitalism and political freedom has not been established.


  
 
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