Dr. Friedman, Professor of Economics, University of Chicago, needs no introduction to FREEMAN readers. This article was first published in two parts in The New York Times on October 28 and 29, 1971. © 1971 by The New York Times Company. Reprinted by permission.
Most discussion of the wage price freeze and the coming Phase II controls has been strictly economic and operational: were they needed, will they work, how will they operate. I have recorded my own opposition to them in three columns in Newsweek.
There has been essentially no discussion of a much more fundamental issue. The controls are deeply and inherently immoral. By substituting the rule of men for the rule of law and for voluntary cooperation in the marketplace, the controls threaten the very foundations of a free society. By encouraging men to spy and report on one another, by making it in the private interest of large numbers of citizens to evade the controls, and by making actions illegal that are in the public interest, the controls undermine individual morality.
One of the proudest achievements of Western civilization was the substitution of the rule of law for the rule of men. The ideal is that government restrictions on our behavior shall take the form of impersonal rules, applicable to all alike, and interpreted and adjudicated by an independent judiciary rather than of specific orders by a government official to named individuals. In principle, under the rule of law, each of us can know what he may or may not do by consulting the law and determining how it applies to his own circumstances.
The rule of law does not guarantee freedom, since general laws as well as personal edicts can be tyrannical. But increasing reliance on the rule of law clearly played a major role in transforming Western society from a world in which the ordinary citizen was literally subject to the arbitrary will of his master to a world in which the ordinary citizen could regard himself as his own master.
Contract or Status?
The ideal was, of course, never fully attained. More important, we have been eroding the rule of law slowly and steadily for decades, as government has become more and more a participant in economic affairs rather than primarily a rulemaker, referee, and enforcer of private contracts. It was, after all, the development of the private market that made possible the original movement from a world of status to a world of voluntary contract. As government has tried to replace the market in one area after another, it has inevitably been driven to restore a world of status.
The freeze and even more the pay board and price board of the Phase II controls are clearly another massive step away from the rule of law and back toward the rule of men. True, the rule of men will be under law but that is a far cry from the rule of law — Stalin,
Hitler, Mussolini, and now Kosygin, Mao, and Franco all rule under law.
The price that you and I may charge for our goods or our labor or that we may pay others for their goods or their labor will now be determined, not by any set of legislated standards applying to all alike, but by specific orders by a small number of men appointed by the President. And if governmental edict is to replace market contract, there is no alternative. There are millions of prices, millions of wage rates arrived at by voluntary agreements among millions of people. The collectivistic countries have been unable in decades to find simple rules enabling prices and wages to be established by any alternative impersonal mechanism.
Politics and Patriotism
We are not likely to succeed. And we are not trying. Instead, the appeal is to the patriotism, civic responsibility, and judgment of political appointees, must of whom represent vested interests. How do patriotism and judgment determine that the price of a widget may rise 2.8 per cent but the price of a wadget, only 0.3 per cent; the wage of a widgeteer by 2 per cent but of a wadgeteer, by 10 per cent? Clearly they do not.
Arbitrary judgment, political power, visibility — these are what will matter.
The tendency for such an approach to violate human freedom is even more clearly exemplified by the present situation with respect to dividends. The President has requested firms not to raise dividends — he has no legal power to do more. The request has been accompanied by surveillance, a calling down to Washington and public lambasting of the handful of corporations that did not conform, and a clear, implied threat to use extralegal powers. These measures have no legal basis at all. Yet I know of only one small company that has had the courage to refuse to cooperate on grounds of principle.
The full logic of the system will not work itself out this time. Our strong tradition of freedom, the ineffectiveness of the controls, the ingenuity of the people in finding ways around them — these will lead to the collapse of the controls rather than to their hardening into a full-fledged straitjacket. But nonetheless, it is disheartening to see us take this further long step on the road to tyranny so lightheartedly, so utterly unaware that we are doing something fundamentally in conflict with the basic principles on which this country is founded. The first time, we may venture only a small way. But the next time, and the next time?
A Nation of Informers
Enforcement of the price and wage controls, as of the freeze, must depend heavily on encouraging ordinary citizens to be informers — to report "violations" to government officials.
When you and I make a private deal, both of us benefit — otherwise we do not have to make it. We are partners, cooperating voluntarily with one another. The terms, so long as they are mutually agreeable, should be our business. But not any longer. Big Brother is looking over our shoulders. And if the terms do not correspond with what he says is O.K., one of us is encouraged to turn in the other. And to turn him in for doing something few people have ever regarded and do not now regard as in any sense morally wrong; on the contrary, for doing something that each of us regards, when it affects us, as our basic right. Am I not entitled to sell my goods or my labor for what I consider them worth as long as I do not coerce anyone to buy? Is it morally wrong for Chile to expropriate the property of Anaconda Copper — i.e., to force it to sell its copper mines for a price less than its value; but morally right for the U.S. government to force the worker to sell his labor for less than its value to him and to his employer?
By any standards, the edicts of the pay board and the price board, like the initial freeze, will be full of inequities and will be judged to be by ever increasing numbers of people. You believe that you are entitled to a pay raise, your employer agrees and wishes to give you one, yet the pay board says no. Will there not be a great temptation to find a way around the ruling? By a promotion unaccompanied by any change in duties but to a job title carrying a higher permitted pay. Or by your employer providing you with amenities you formerly paid for. Or by one or another of the innumerable stratagems — legal, quasilegal, or illegal — that ingenious men devise to protect themselves from snooping bureaucrats.
Two Wrongs = Two Wrongs
In general, I have little sympathy with trade unions. They have done immense harm by restricting access to jobs, denying excluded workers the opportunity to make the most of their abilities, and forcing them to take less satisfactory jobs. Yet surely in the present instance they are right that it is inequitable for the government retroactively to void contracts freely arrived at. The way to reduce the monopoly power of unions is to remove the special legal immunities they are now granted, not to replace one concentrated power by another.
When men do not regard governmental measures as just and right they will find a way around them. The effects extend beyond the original source, generate widespread disrespect for the law, and promote corruption and violence. We found this out to our cost in the 1920′s with Prohibition; in World War II with price control and rationing; today with drug laws. We shall experience it yet again with price and wage controls if they are ever more than a paper facade.
One feature of price and wage controls makes their effect on individual morality especially vicious. Because these controls distort the use of resources, the evader benefits not only himself but society. The more rigorously the controls are enforced, the more harm they do. They render behavior which is immoral from one point of view socially beneficial. They thus introduce the kind of fundamental moral conflict that is utterly destructive of social cohesion.
Our markets are far from completely free. Monopoly power of labor and business means that prices and wages are not wholly a product of voluntary contract. Yet these blemishes, real and important though they are, are minor compared to replacing market agreements by government edict, compared to giving arbitrary power to a small number of appointed officials, compared to inculcating in the public contempt for the law.
The excuse for the destruction of liberty is always the plea of necessity — that there is no alternative. If indeed, the economy were in a state of crisis, of a life and death emergency, and if controls promised a sure way out, all their evil social and moral effects might be a price that would have to be paid for survival. But not even the gloomiest observer of the economic scene would describe it in any such terms. Prices rising at 4 per cent a year, unemployment at a level of 6 per cent —these are higher than we would like to have or than we need to have, but they are very far indeed from crisis levels. On the contrary, they are rather moderate by historical standard. And there is far from uniform agreement that wage and price controls will improve matters. I happen to believe that they will make matters worse after an initial deceptive period of apparent success. Others disagree. But even their warmest defenders recognize that they impose costs, produce distortions in the use of resources, and may fail to reduce inflation. Under such circumstances, the moral case surely deserves at least some attention.
The Abolition of Private Property
A government that sets out to abolish market prices is inevitably driven towards the abolition of private property; it has to recognize that there is no middle way between the system of private property in the means of production combined with free contract, and the system of common ownership of the means of production, or Socialism. It is gradually forced towards compulsory production, universal obligation to labor, rationing of consumption, and, finally, official regulation of the whole of production and consumption.
LUDWIG VON MISES, The Theory of Money and Credit