Free To Choose

Adam Smith’s 1776 book The Wealth of Nations introduces to the world the basic concepts that underlie modern economic theory. Smith’s most famous insight is that private citizens, while working for their own account and trading voluntarily with others, inadvertently also benefit society as a whole. This process Smith calls “an invisible hand” which, in his words, promotes from the worker “an end which was no part of his intention. […] By pursuing his own interest he frequently promotes that of the society more effectually than when he really intends to promote it” (2).

The Friedmans point to many modern examples of private, “selfish” transactions between parties that benefit themselves while at the same time adding to the general prosperity of society. Over time, these voluntary actions cause prosperity to grow and spread out across society. The Friedmans also cite numerous instances of governmental interference with that process, purportedly to improve things but usually to benefit special interests at the expense of taxpayers and consumers. Taxes meant to help one group also harm another; rules meant to prevent shoddy products also limit consumer options; trade restrictions that save one industry also harm many others.

The difference between government programs and private trade is that one is compulsory while the other is voluntary. Government programs tend to reduce prosperity, despite good intentions, while private transactions tend to increase it, despite the apparent selfishness of the parties involved. The benefits of Smith’s “invisible hand” course through Free to Choose.

Economist Aaron Director has shown that government programs tend to benefit the middle class at the expense of both the upper and lower classes. Redistributive efforts thus fail to help the needy and instead often make their situation worse. The Friedmans offer several cases where Director’s Law warps government programs. In Social Security, “the poor tend to pay taxes for more years and receive benefits for fewer years than the rich” (107). In housing for struggling middle-income families, “[s]pacious and luxurious apartments are rented at subsidized rates to families who are ‘middle-income’ only by a most generous use of that term” (111). In higher education, “those of us who are in the middle- and upper-income classes have conned the poor into subsidizing us on the grand scale” (183). In environmental issues, “the people who would benefit most from the reduction of pollution are better off, financially and educationally, than the people who would benefit most from the lower cost of things that would result from permitting more pollution” (216).

The Friedmans write that “[t]he educational establishment is up in arms in defense of its existing powers and privileges” (188). The steel industry wants to protect its grip on the American market, so it resists free trade from foreign steelmaking countries. Other industries support consumer product regulation because it tends to deter small competitors who can’t afford the red tape.

The Friedmans bring up many instances where government programs set up to increase fairness end up privileging a select few. Government schools offer “free” education, but parents who would rather send their children to private schools must pay twice—public school taxes and private fees—to educate their children. In plying their trade, long-distance truckers need an expensive permit meant to control cutthroat price wars, but the permit restricts competition, so the permitted trucking companies can charge more.

Major government projects are launched with support from groups that would most benefit from them, and this usually includes producers of any products or services to be subsidized. Once on the books, most such programs evolve into boondoggles for contractors and vendors. It thus becomes extremely difficult to modify or repeal them, even if widely unpopular, due to resistance from special interests, not to mention the regulators who enjoy the power and prestige of administering those programs.