Wednesday, July 6, 2011

Capitalism and Freedom

Yesterday I finished reading Capitalism and Freedom by Milton Friedman. I liked it. As Friedman writes in the introduction,
[The book's] major theme is the role of competitive capitalism-the organization of the bulk of economic activity through private enterprise operating in a free market-as a system of economic freedom and a necessary condition for political freedom.
The book was published in 1962, but the ideas are still powerful and worth considering. His thinking shows why he is one of most influential economists of the last century. I will summarize his ideas in three areas.

Taxes
Friedman would restructure taxes so they are only applied to individuals. He would require companies to report their earnings to their shareholders who would then be required to report their share based on their ownership stake on their personal tax returns. This would stop the unequal taxing of income based on its source and tax it at its final destination, the individual receiver. Since the taxes are being reported by the individuals who own the companies, the corporate tax would be abolished. Next, he would remove all income tax deductions and loopholes. He would institute a flat tax, with the first several thousand in earnings tax exempt.

This system would have many advantages. The uniform tax rate would discourage moving income between securities to reduce the tax rate. The tax code would be understandable so many more people could file their own taxes without paying accountants or buying tax software every year. I think this would also go a long way toward making politics better. Industries would not lobby for changes in the tax code to benefit them because all taxes would be bundled with individuals rates and all deductions would be abolished.

Education
Friedman advocates that parents who wish to send their children to private schools be paid a sum equal to what would be spent on educating their children in a public school. This money could then be used at approved educational institutions. If the state has the goal of ensuring every child is educated, it should allow the money allocated for each child to follow that child. This would remove the requirement that private school parents pay twice for education, once through taxes for public schools and a second time for the education they actually receive. This would give parents of limited means a wider range of choices in schools for their children.

Licenses for occupations
Friedman writes about the negative effects of licensure in any occupation. Aside from limiting a person's choice of profession and the consumer's options, license boards can easily become an interest group that protects the interests of practitioners instead of people outside the profession. He specifically attacks the American Medical Association for their efforts to limit the number of doctors and consequently keep the costs of medical care high. This would benefit practicing doctors by keeping their wages high.

While I enjoyed reading the book, I liked Hayek's Road to Serfdom better.

Throughout the book Friedman raises some good questions. Even if you disagree with his conclusions, they are questions worth answering.

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