Key Terms and Definitions for “Capitalism and Freedom” by Milton Friedman

by Danny Fenster

This chapter is a free excerpt from Quicklet on Capitalism and Freedom.

Anti-Trust Laws: A body of laws that prohibit anti-competitive behavior, such as monopoly. These are intended to keep markets competitive, which is a fundamental requirement for Friedman’s vision of free markets.

Balance of Payments: The recorded balance sheet a nation keeps when trading internationally. This includes exports and imports, loans and investments, and currency exchanges.

Central Planning: The practice of giving control to a central authority, generally the government, for planning the movement of goods, the price of goods, etc. The goal of this practice is to achieve predetermined outcomes, rather than letting the market act independently.


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Anti-Trust Laws: A body of laws that prohibit anti-competitive behavior, such as monopoly. These are intended to keep markets competitive, which is a fundamental requirement for Friedman’s vision of free markets.

Balance of Payments: The recorded balance sheet a nation keeps when trading internationally. This includes exports and imports, loans and investments, and currency exchanges.

Central Planning: The practice of giving control to a central authority, generally the government, for planning the movement of goods, the price of goods, etc. The goal of this practice is to achieve predetermined outcomes, rather than letting the market act independently.

Classical Liberalism: The political philosophy devoted to limited government and freedom of the individual. It was largely a European movement of the nineteenth century, beginning with Adam Smith. Friedman was part of a twentieth-century revival of these ideas.

Commodity Standard: A monetary standard in which the value of the currency is based on and tied to a tangible commodity, such as gold or other precious metals.

Fair Employment Laws: Laws that make it illegal to discriminate based on age, race, gender, sexual orientation or any number of other factors of identity. Friedman sees these laws as the unjustified and dangerous use of the government’s coercive powers and instead advocates for free discussion to convince citizens and employers not to discriminate against these factors.

Fiscal Policy: The policies related to government spending and tax collecting. Friedman generally disdains expansive fiscal measures, advocating for limited government spending and low taxes.

Free Market: Competitive markets free of monopoly or government intervention, in which prices are set by the voluntary exchange of individuals agreeing on the terms of exchange. Voluntary exchange is the centerpiece of a free market, which requires full knowledge on both sides of the exchange and the absence of any coercion.

Free Trade: A market of international trade, free of government intervention such as price controls or trade quotas or restrictions, something Friedman advocates for. Many controls and quotas remain, though the twentieth century has seen a decrease in such policies.

Monetarism: A policy which advocates for the government’s role in controlling the amount of currency in circulation. This is in contradistinction to fiscal measures and is the method Friedman chooses. He advocates that the government increase the amount of money in circulation by a small amount annually.

Monopoly: A single enterprise or individual that comes to dominate an entire industry as the sole-seller of a good. Monopolies can have the power to coerce buyers or artificially set prices. This is a major threat to competition, and thus to free markets.

Neighborhood Effects: The effects an exchange or voluntary agreement has on parties not involved in the agreement. Perhaps the most cited example is the effect pollution might have on a community when a single landowner sells mining rights to a mining company.

Paternalism: Government intervention that effects the lives of individuals, usually against their will, which is said to be for the good of the individual. Examples include state requirements that motorcyclists wear helmets or automobile drivers and passengers wear seatbelts. Friedman is strongly against this sort of policy.

Price Supports: A governmental attempt to keep the price of a good higher than a free market would set it, usually by subsidies or price controls. Friedman is adamantly against this sort of government interference in the free market.

Progressive Tax: A tax policy in which taxes increase as an individual’s taxable base increases--in effect, higher taxes on the wealthy. Friedman advocates a flat tax, in which all are taxed a set percentage of their taxable base.

Tarifs: Taxes on imports or exports, usually to increase government revenue or to protect domestic jobs when goods can produced cheaper abroad. This inhibits international competition, and Friedman thinks whoever can sell goods the cheapest ought to be able to.

Trade Quotas: A limit set on the amount of a particular good that can be imported into a country. This is also to protect the domestic jobs of those who produce that given good in the home country. Again, this is a restriction on free international markets, which Friedman ardently opposes.

Tyranny of the Status Quo: The tendency of policy makers, politicians, and the general public, to accept as unchangeable, what has been in the recent past, and is now currently the norm. Incidentally, this is also the title of another book written by Friedman and his wife Rose.

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