“The Role of Prices” in a Free Market from ‘Free to Choose’ (Friedman, 1980)

29 11 2012

In their book “Free to Choose: A Personal Statement” (published by Harcourt Brace Jovanovich, Inc. 1980) authors Milton and Rose Friedman address the role of prices in a promoting the efficient use of a society’s resources.

Following of some quotes from Chapter 1 – The Power of the Market (pages 9-37) that are particularly relevant in today’s economic environment:

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On the relative merits of “voluntary cooperation” as opposed to “command” economic systems….

“Just as no society operates entirely on command principle, so none operates entirely through voluntary cooperation. Every society has some command elements. These take many forms.  They may be as straightforward as military conscription or forbidding the purchase and sale of heroin or cyclamates or court orders to named defendants to desist from or perform specified actions.” (page 11)

“It makes a vast difference what the mix is – whether voluntary exchange is primarily a clandestime activity that flourishes because of the rigidities of a dominant command element, or whether voluntary exchange is the dominant principle of organization.” (page 11)

“A predominantly voluntary exchange economy …. has within it the potential to promote both prosperity and human freedom. It may not achieve its potential in either respect, but we know of no society that has ever achieved prosperity and freedom unless voluntary exchange has been a dominant principle of organization.” (page 11).  

The authors go on to say that “voluntary exchange is not a sufficient condition for (personal and economic) prosperity and freedom”, but that it is a necessary condition.

THE ROLE OF PRICES (beginning on page 13)

“The key insight of Adam Smith’s Wealth of Nations is misleadingly simple: if an exchange between two parties is voluntary, it will not take place unless both believe they will benefit from it.  Most economic fallacies derive from the neglect of this simple insight, from the tendency to assume that there is a fixed pie, that one party can gain only at the expense of another.” (page 13)

“Adam Smith’s flash of genius was his recognition that the prices that emerged from voluntary transactions between buyers and sellers – in short, in a free market – could coordinate the activity of millions of people, each seeking his own interest, in such a way as to make everyone better off.  It was a startling idea then, and it remains one today, that economic order can emerge as an unintended consequence of the actions of many people, each seeking his own interest.” (pages 13-14)

Prices perform three functions in organizing economic activity: first, they transmit information; second, they provide an incentive to adopt those methods of production that are least costly and thereby use available resources for the most highly valued purposes; third, they determine who gets how much of the product-the distribution of income. These three functions are closely interrelated.” (page 14)

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The accompanying 10 part PBS TV Series titled “Free to Choose” involving Milton Friedman can be accessed at the following website: http://miltonfriedman.blogspot.com/

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