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The power of the market


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Friedman's essay

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The power of the market

  1. 1. 1 "The Power of the Market" by Milton Friedman The Listener, 21 February 1980, pp. 229-231 © Immediate Media Company London Limited Just over 350 years ago, in 1624, the director of the Dutch colonies in America arrived at Manhattan Island, a 22-square-mile swamp covered with forests, and bought it from the Canarsee Indians, who lived there, for 24 dollars’ worth of cloth and trinkets. At first, growth was very slow, and at the end of five years there were just 300 people living in New Amsterdam, a town at the edge of an empty continent. In the years that followed, though, it proved a magnet for millions of people from the other side of the Atlantic—people who were driven by fear and poverty, who were attracted by the promise of freedom and plenty. They fanned out over the continent and built a new nation with their sweat, their enterprise and their vision of a better future. For the first time in their lives many were truly free to pursue their own objectives, and that freedom released the human energies which created the United States. The immigrants, clad in their best clothes, eager and expectant, carrying what little they owned, poured ashore. But, though they were poor, they all had a great deal of hope. Once they had landed, they often found not an easy life but a very hard life. But, for many, there were friends and relatives to help them get started, to help them make a home, get a job, settle down in the new country. Life was hard but opportunity was real. There were many rewards for hard work, enterprise and ability. There were few government programmes to turn to, and nobody expected them. But there were also few rules, and there were no regulations, no licences, no permits, no red tape to restrict them. They found, in fact, a free market. And most of the immigrants thrived on it. Many people still come to the United States, driven by the same pressures and attracted by the same promise. You can find them, for example, in Chinatown in New York, one of the centres of the garment industry and a place where hundreds of thousands of newcomers from distant countries have had their first taste of life in the new country. The people who live and work there are like the early settlers: they want to better their lot and they are prepared to work hard to do so. They are not going to stay in Chinatown for ever or even for very long. On the contrary, they and their children will make a better life for themselves as they take advantage of the opportunities that a free market provides for them. The irony is that workrooms in Chinatown violate many of the standards that we now regard as every worker’s right. They are poorly ventilated, overcrowded, and the workers accept less than the union rate—every rule in the book is broken. But if they were closed down who would benefit? Certainly not the people who work in them. Their lives may seem pretty tough compared with our own, but that is only because our parents or grandparents went through that stage for us; we are able to start at a higher point. But during the past 50 years we have been squandering that inheritance by allowing government to control more and more of our lives, instead of relying on ourselves. We need to rediscover the From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.
  2. 2. 2 old truths that the immigrants knew in their bones: what economic freedom is and the role it plays in preserving personal freedom. That is why I went to Hong Kong, a place where there is an almost laboratory experiment in what happens when government is limited to its proper function and leaves people free to pursue their own objectives. If you want to see how the free market really works, Hong Kong is the place to go. Apart from its great harbour, it is a place with hardly any natural resources. Yet this absence has not prevented rapid economic development. Ships from all nations go to Hong Kong to trade—because there are no duties, no tariffs on imports or on exports. And the power of the free market has enabled its industrious inhabitants to transform what was once barren rock into one of the most thriving and successful places in Asia. Indeed, aside from its harbour, the only other important resource of Hong Kong is people—over 4.5 million of them. Like America a century ago, Hong Kong, during the last few decades, has been a haven for people who sought the freedom to make the most of their own abilities. Many of them are refugees from countries which don’t allow the economic and political freedom that is taken for granted in Hong Kong. Despite rapid population growth, despite the lack of natural resources, the standard of living in Hong Kong is one of the highest in all of Asia. People work hard but Hong Kong’s success is not based on the exploitation of workers. Wages in Hong Kong have gone up fourfold since the Second World War—and that is after allowing for inflation. The workers are free—free to work what hours they choose, free to move to other jobs if they wish. The market gives them that choice. It also determines what they make. Competition from places like South Korea and Taiwan has made cheap products, like plastic toys, less profitable, so Hong Kong businessmen have been adapting. They have been developing more sophisticated products and new technology that can match anything in the West or the East. And their employees have been developing new skills. The thriving, bustling, dynamic city of Hong Kong has been made possible by the free market; indeed, the most free in the world. The free market enables people to go into any industry they want, to trade with whomever they want, to buy in the cheapest markets around the world, to sell in the dearest markets around the world. But, most important of all, if they fail, they bear the cost. If they succeed, they get the benefit. And it is that atmosphere of incentive that has induced them to work, to adjust, to save, to produce a miracle. This miracle has not been achieved by government action, by someone sitting in one of those tall buildings, telling people what to do. It has been achieved by allowing the market to work. The market tells producers not only what to produce but how best to produce it, through another set of prices—the cost of materials, the wages of labour, and so on. For example, if the workers at a picture-framer’s establishment could earn more doing something else, their employer would soon find a way to mechanise his picture-framing production. The highly skilled workers at an ivory carver’s establishment are some of the best paid in Hong Kong, but the conditions in which they work are hot, sticky and extremely noisy. They could induce their employer to improve working conditions by offering to work for less. But they would rather accept the conditions, take the high wages and spend them as they wish—that’s their choice. From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.
  3. 3. 3 The best known statement of the principles of a free market—the kind of free market that operates in Hong Kong—was written on the other side of the world, 200 years ago, in Scotland, by Adam Smith, who taught at the University of Glasgow. His brilliant book, The Wealth of Nations, was based on the lectures he gave there. The basic principles underlying the free market, as Adam Smith taught them to his students, are really very simple. Take, for example, a lead pencil. There is not a single person in the world who could make a pencil. A remarkable statement? Not at all. The wood from which it is made comes from a tree. To cut down that tree, it took a saw. To make the saw, it took steel. To make the steel, it took iron ore. The black centre—we call it lead but it is really graphite, compressed graphite—I am not sure where it comes from but I think it comes from some mines in South America. The red top—the eraser, a bit of rubber—probably comes from Malaya, where the rubber tree isn’t even native; it was imported from South America by some businessmen with the help of the British government. The brass ferrule? I haven’t the slightest idea where it came from, or the yellow paint, or the paint that made the black lines, or the glue that holds it together. Literally thousands of people co-operate to make a pencil, people who don’t speak the same language, who practise different religions, who might hate one another if they ever met. When you go down to the store and buy a pencil, you are, in effect, trading a few minutes of your time for a few seconds of the time of all those thousands of people. What brought them together and induced them to co-operate to make that pencil? There was no commissar sending out orders from some central office. It was the magic of the price system. The impersonal operation of prices that brought them together and got them to co-operate to make the pencil so that you could have it for a trifling sum. That is why the operation of the free market is so essential, not only to promote productive efficiency but even more to foster harmony and peace among the peoples of the world. Human and political freedom has never existed and cannot exist without a large measure of economic freedom. Those of us who have been so fortunate as to have been born in a free society tend to take freedom for granted, to regard it as the natural state of mankind. It is not—it is a rare and precious thing. Most people throughout history, most people today, have lived in conditions of tyranny and misery, not of freedom and prosperity. The clearest demonstration of how much people value freedom is the way they vote with their feet when they have no other way to vote. Hong Kong is very far from Utopia. It has its slums, its crime, its desperately poor people. But the people are free. That is, after all, why so many of them have gone there, despite having to live in leaky houseboats in one of Hong Kong’s many small harbours. In Hong Kong they have the freedom and the opportunity to better themselves, to improve their lot—and many succeed. There is appalling poverty in Hong Kong, it is true, but the conditions of the people have been getting better over time. They are far better off now than they were when they first came across the border from China, and that poverty, appalling to us because we are accustomed to much higher standards of life, is not poverty as viewed by most of the people in the world; it is a poverty to which they would aspire, a state of affairs that they would like to achieve. There is an enormous amount of poverty in the world everywhere. There is no system that is perfect. There is no system that is going to completely eliminate poverty, in whatever sense. The question is: which system has the greatest chance? Which is the best arrangement for enabling From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.
  4. 4. 4 poor people to improve their lives? And on that the evidence of history speaks with a single voice. I do not know any exception to the proposition that, if you compare like with like, the freer the system the better off the ordinary poor people have been. Ask yourself what it is that assures workers in a shirt factory in Hong Kong a good wage—not high by Western standards but high enough to enable them to live far better than most people in the world. It is not the government or trade unions that do it. These workers do well because there is competition for their labour and skills. When a businessman faces trouble—a market threatens to disappear or a new competitor arises—there are two things he can do. He can turn to the government for a tariff or a quota or some other restriction on competition or he can adjust and adapt. In Hong Kong the first option is closed—Hong Kong is too dependent on foreign trade, so the government has simply had to adopt a policy of complete non-interference. That is tough on some individuals, but it is extremely healthy for the society as a whole. Only the businessmen who can adapt, who are flexible and adjustable, survive, and they create good employment opportunities for the rest. The complete absence of tariffs or any other restrictions on trade is one of the main reasons why Hong Kong has been able to provide such a rapidly rising standard of life for its people. Even Communist China recognises Hong Kong’s success. It has set up shop there and now accepts the universal symbol of capitalism—the credit card. And the Bank of China, the official bank of Communist China, is the largest bank in Hong Kong. There is no doubt that Communist China recognises the power of the market. In all this the government of Hong Kong has played an important part not only by what it has done but as much by what it has refrained from doing. It has made sure that laws are enforced and contracts honoured. It has provided the conditions in which a free market can work. Most importantly, it has not tried to direct the economic activities of the colony. In Hong Kong, the impersonal forces of a free market-place, where people are free to buy from whom they want, to sell to whom they want, to work for whom they want, operate. In the United States, prices are the key. The prices that people are willing to pay for products determines what is produced. The prices that have to be paid for raw materials, for the wages of labour and so on, determine the cheapest way to produce these things. And, in addition, these self-same prices, the wages of labour, the interest on capital and so on, determine how much each person has to spend on the market. It is tempting to try to separate this final function of prices from the other two, to think that, somehow or other, you can use prices to transmit the information about what should be produced, without using those prices to determine how much each person gets. Indeed, government activity over the past few decades has been devoted to little else. But that is a very serious mistake. If what people get is not going to be determined on what they produce and how they produce it and how successfully they work, what incentive is there for them to act in accordance with the information that is transmitted? There is only one alternative force: some people telling other people what to do. The fundamental principle of a free society is voluntary co-operation. The economic market— buying and selling—is one example. But it is only one example. Voluntary co-operation is far broader than that. Take an example that, at first sight, seems about as far away as you can get From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.
  5. 5. 5 from the subject at hand: the language we speak, the words we use, the complex structure of our grammar. No government bureau designed that. It arose out of the voluntary interaction of people seeking to communicate with one another. Or consider some of the great scientific achievements of our time: the discoveries of an Einstein or a Newton, the inventions of a Thomas Alva Edison or an Alexander Graham Bell, or even consider the great charitable activities of a Florence Nightingale or an Andrew Carnegie. These were not done under orders from a government office. They were done by individuals deeply interested in what they were doing, pursuing their own interests and co-operating with one another. This kind of voluntary co- operation is built so deeply into the structure of our society that we tend to take it for granted. Yet the whole of our Western civilisation is the unintended consequence of that kind of a voluntary co-operation, of people co-operating with one another to pursue their own interests, yet in the process building a great society. 11/13/12 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.