Now I want to look at Milton Friedman and the Chicago school.
Milton Friedman, of course, the famous former president of the American Economic Association,
Nobel Prize winner, wrote best-selling books, Capitalism and Freedom and Free to Choose,
the latter of which was turned into a popular television series.
They approach the question by using an empirical methodology.
That is, for them it’s about testing the power of theories.
So they approach it by presenting a hypothesis: we predict that X will result in Y.
So for example, if you increase the minimum wage, the result of that will be that lower-skilled
workers will find it more difficult to find employment.
And you can test that with empirical evidence.
Why do they think government should be limited?
It’s because they believe that there is such a thing as market failure—markets sometimes
fail—but there’s also such a thing as government failure, that governments often
fail.
And they say if you compare those two things, usually government failure is much greater
than market failure.
So whereas what happens in so much public debate, they identify, politicians identify
a market failure and therefore assume that a perfect government can come in and solve
that problem.
Whereas the Chicago school says, that’s not right.
What we need to do is to compare imperfect markets, with all the imperfections the Chicago
school recognizes, with imperfect government, with all of the problems that government have.
And they say, normally when you do these two things, government failure is so much greater
than market failure.
So what there is is a gap between the intentions of policymakers and the actual results and
consequences of what they advocate.
Sometimes, for example, policies lead to the opposite to that of which was intended.
Perverse incentives.
For example, the idea of rent control is to provide more opportunities for poorer people
to provide housing.
But by reducing the price of rental property, what you actually do is reduce the supply
of rental property.
It actually makes it more difficult for poor people to find housing.
It has the opposite effect to what’s intended.
Then there are many other government policies, which might actually achieve their goals,
the positive, intended consequences of polices, but it ignores the negative, unintended consequences
of those policies.
So for example, raising the minimum wage, there are some people who benefit from that;
they get a higher income because of it.
But it ignores the negative, unintended consequences.
That is, larger numbers of people can’t get jobs at all.
And so we need to compare both the positive consequences, which were intended, and the
negative, unintended consequences.
And the Chicago school argues that normally the negative, unintended consequences are
greater than the positive, intended ones.
But it’s an empirical question; we have to examine what the evidence say.
And why is there this gap between intentions and consequences?
They argue it’s because policymakers’ failure to take into account the importance
of self-interest in explaining peoples’ behavior.
They ignore human nature.
What should be the role of government according to the Chicago school?
Well, Milton Friedman identifies four main areas of government responsibility.
First of all, to protect us from our enemies, both internal and external enemies.
We need a military to provide us with defense against our foreign enemies; we need a police
force that the government provides to protect from our internal enemies, such as criminals.
Secondly, government should provide the administration of justice in order to achieve peaceful reconciliation
of conflict.
Inevitably, if you live in a society with other people, we will come into conflict with
each other.
We will disagree about certain things; that’s a contract, what the meaning of a contract
is.
One possible way of resolving any sort of conflict is, easy, we could beat up with the
other person.
Presumably, though, we don’t want to live in a society where every time there is a disagreement,
we try and have a physical fight with the other person.
So we want some neutral arbiter that we can go to that is not connected with either side,
and they will be an arbiter and say, yes, this is what the contract means; this means
you were right and the other person is wrong.
So it’s the job of the government to provide these courts that we can go to.
The third area that Friedman argues is that there are some things, not many, but there
are some things that the marketplace, through voluntary exchange, cannot provide satisfactorily.
They take two different forms.
First of all are what economists call public goods.
This is not the same thing as necessarily being good for the public; public goods for
economists have a very particular meaning.
Public goods have two characteristics.
First of all, you can’t exclude people from the benefits of this program.
And the second thing is they’re nonrival.
The fact that I consume more of it does not mean that you have less of the product.
Best probably illustrated by an example: the classic example of a public good is defense.
I’m not yet an American citizen, but I live on American soil.
Suppose that I didn’t want to pay my taxes towards defense.
I would prefer to be defended by Her Majesty the Queen and therefore I’m not going to
pay my taxes for defense.
The problem with that is I do live on American soil.
That means the American military are going to defend me whether I want it or not.
I can’t be excluded from American defense.
But it’s nonrival.
The fact that I am protected means, the protection of me doesn’t mean any less protection for
anyone else.
So that’s a classic case for a public good.
I could say, well I don’t want to pay for it, but I will still benefit from it.
But it doesn’t mean any less for anyone else.
So if you left it, just not going to work in the voluntary system; people would simply
not contribute to public goods.
So it’s an argument you have to have the government that provides the public goods.
The second main area that Chicago school will talk about are negative externalities.
That is, when people interact with each other, it may have consequences for third parties.
The classic case of that is pollution.
I may be producing a good, but I produce pollution, which then affects the people who live in
the neighborhood.
So it’s argued, Chicago school says we need some way of controlling these negative externalities,
such as pollution.
More controversially, Freedman argues that the poor are a negative externality.
That is that we don’t want to live in a society where we walk down the streets where
there are people begging and starving on the streets.
So he argues it’s a negative externality to live in a world where there are lots of
poor people, and therefore he justifies, as dealing with a negative externality, some
form of social safety net.
And the fourth area he says that government needs to act is to protect the irresponsible,
those that we assume are not capable of looking after themselves.
Classic case of that of course are children; we assume they’re not in a position to make
decisions for themselves.
Normally we can allow parents to make their decisions, but we have to keep an eye.
Not all adults treat children properly.
And then we assume that there are some people who are mentally incapable of making decisions
on their behalf; the government has to make sure that their interests are protected.
So Friedman is very clear, these are the four areas that government should be active in
or necessary to carry out.
They’re important, but they’re still significantly limited.
This approach is often called the Social Market Approach.
Friedman believes that what governments, governments have these responsibilities, but as far as
possible, they should use market mechanisms to achieve these ends.
So for example, it is a responsibility of government to make sure every child is educated,
but that does not mean that government has to provide the schools.
Government, for example, could give vouchers or some form of school choice, private schools,
but parents can chose whichever school they want to go to.
So government has a social responsibility; it doesn’t necessarily have to directly
provide what those social responsibilities are.