The Foundation for Economic Education’s goal from the very beginning was to promote, what Leonard E. Read called, the freedom philosophy. Understanding the principles of economics is a crucial step to understanding why freedom works. The tools of economics can illustrate why many policies have the opposite effect of their stated goals. This is exactly what FEE’s second ever publication, Roofs or Ceilings? The Current Housing Problem, set out to do for rent control.
Written by Milton Friedman and George Stigler early in their careers, the pamphlet explains through economics why the choice is between having less, and poorer quality housing through price ceilings (rent control’s means), or to have more, and better quality roofs over our heads through the use of price rationing, i.e. letting the market work. And Friedman and Stigler do an exceptional job with this task.
Despite certain positive effects, such as introducing a young Murray Rothbard to the works of FEE, the pamphlet was met with much controversy. Ayn Rand viewed Roofs or Ceilings? as, “the most dreadful thing ever put out by a conservative organization… I never expected that from Leonard Read. He was really my last hope of a conservative who would act on the proper principles, and take some positive practical action for our cause; and it is awfully hard to see a last hope go.” She even referred to Friedman and Stigler, both future Noble prize winners who are as much known for their work in the freedom movement as for their economics, as the “two reds!”
Rand’s complaint boils down to the absence of morality and justice within the pamphlet’s argument. For her, the pamphlet views government rationing by command as the moral equivalent of rationing by a free price system, with efficiency being the difference. In other words, it does not state that it is always and everywhere wrong for the government to ration. Efficiency should come second to morality and justice.
The problem with Rand’s critique is that this requires a value judgment, which economics cannot provide as a positive science. All economics is value free, it tells us what is and not what should be. Mises’s argument on the impossibility of socialism for example does not say socialism is wrong, but that it is impossible for it to achieve its ends due to the inability to provide economic calculation. This is no different from Friedman and Stigler’s argument against rent control.
Still, many within FEE, including Read himself, found Friedman and Stigler’s soft-core approach to liberty within the pamphlet to be troublesome. Specifically, Read and others at FEE were concerned about a paragraph on page 10, which seems to suggest the authors agree with the goal of equalizing income. And seem to suggest a need for “long-term measures” to achieve this goal. Read asked Friedman and Stigler to remove the paragraph but they refused. So, in response the Foundation inserted a footnote spelling out its objections. It states:
“Editors note: The authors fail to state whether the ‘long-term measures’ which they would adopt go beyond eliminating special privilege, such as monopoly now protected by government. In any case, however, the significance of their argument deserves special notice. It means that, even from the standpoint of those who may put equality above justice and liberty, rent controls are the height of folly.”
On page 11 there is another example of Friedman and Stigler’s willingness to use the power of government to “solve” a problem. One objection to free markets in housing is that the rise in rents means an inflation. They correctly point out that even if this is true it is better to attack the threat at its source. Friedman and Stigler use confusing language and say the source is an increase in family income but this would be an indirect result of an increase in the money supply. What’s troubling is their proposed solutions: heavy taxation, governmental economies, and controlling the stock of money. Most free market economists, and certainly all the hard-core ones, would suggest only the latter.
The problem is the Chicago School’s separation of the micro and macro spheres of economics. They view them as sharply separate and independent worlds, with micro being determined by the forces of supply and demand and best left free and alone. Macro, on the other hand, is a world of aggregates that don’t always line up and are thus best left to the control of the state. This way, if problems such as uneven distribution of wealth and inflation exist, taxation becomes a real solution, as it doesn’t, after all, effect the micro sphere.
But in reality it does. As Peter Boettke often says, there are macroeconomic problems but only microeconomic solutions. This is because macro and micro spheres are integrated and intertwined. It is impossible to give the macro sphere to the state in order to manipulate social ends and retain freedom at the micro level. Taxes inject systematic theft into the micro level, distort the market signals and lead to a host of negative consequences for many in the economy.
Maybe it is best if these problems, in an otherwise excellent pamphlet, are simply forgotten, but I think this would be a mistake. We need to understand why they are wrong, so we don’t continue to make the same mistakes of regulating liberty to a footnote or losing it completely to fix some mystical aggregate.