Economics of David D. Friedman’s “The Machinery of Freedom”: Some similarities and dissimilarities to the Austrian school

I just recently finished reading the 3rd edition of David D. Friedman’s book The Machinery of Freedom: Guide to a Radical Capitalism, which was published in 2014. The 1st and 2nd editions were published in 1973 and 1989 respectively.

The book attempts to explain how an anarcho-capitalist society might work in the future and draws from historical examples to demonstrate how various societies have already provided even the most widely-accepted minimal functions of government (police, courts, military) either within the borders of nation states but without their help or entirely without their existence. Societies and legal systems I noted from the book include: Saga period (medieval) Iceland (ch. 44), Rominchal gypsies (ch. 49), Somalialand (ch. 49), traditional Jewish and Islamic law, some others based on feud law (ch. 49), and the Comanche Native American tribe (ch. 52). In the case of medieval Iceland, it lasted almost 400 years as semi-stateless (from the years 870-1263CE): privately enforced legal rules and without an executive branch of government. As if that’s not fascinating enough, an equally interesting topic covered was the economic analysis of law, which Friedman covers in further detail in another book: Law’s Order: What Economics Has to Do with Law and Why It Matters, which I also look forward to reading.

What I wish to provide in a little detail here is how Friedman’s Chicago school approach to economics (drawing only from this particular book) differs from approaches of the Austrian school of economics. I say “approaches” (plural) because there is no unanimous agreement on every point within the Austrian school of thought nor or any other – at least there shouldn’t be or people have stopped thinking for themselves.[1]

In college I took the required mainstream economics courses like any other student and did a few independent studies in economics in addition to that. But it wasn’t until after college that I began to study the Austrian school on my own. So while I read through The Machinery of Freedom, for my own reference, I recorded things I noted about how his approach to economics differed from what I’ve learned from the Austrian school. Since economist friends of mine have already asked me about Professor Friedman’s economics, I decided to publish it here in case it may be helpful to others. Back in 2010 I also read about half of his book Hidden Order: The Economics of Everyday Life, but I had not, at that time, read much Austrian economics, so I would be unqualified to use material from that book in this analysis without reading it again.

The occurrences in which Friedman’s approach shares similarities with the Austrian school is by no means intended to say that he is in full agreement with any particular Austrian economist. In fact, as I understand it, he is quite proud to be Chicago. 🙂
Similarly, regarding the occurrences in which Friedman’s approach seems to diverge from the Austrian school, I don’t point them out in order to critique them myself.

All page numbers below correspond to the 3rd edition (print) of the book. I should mention that since it was published using Amazon’s Print-on-Demand, as far as I know, the author can make changes to the book at any time without this 3rd edition becoming a 4th. Therefore the page numbers I have provided below may also change.

 

Occurrences in which David Friedman seems to share similarities with the Austrian approach to economics in The Machinery of Freedom:

  1. Pg. 44: Critique of Marx – I have not read Eugen von Böhm-Bawerk’s books myself as of yet, but from what I understand, Friedman’s critique of Marx is the same as (or very close to) the critique that Böhm-Bawerk gave. Quoting Friedman in The Machinery of Friedman: “…paying for tools today and waiting for years to get the money back is itself a productive activity and that the interest earned by capital is the corresponding payment.”
  2. Pg. 45: Time preference – Although this concept is understood well in neoclassical economics, as far as I understand, it originates with Böhm-Bawerk.[2] This concept is key in the Austrian school and is used to explain interest rates. Here I quote Friedman: “Thus ten dollars today is worth more than ten dollars tomorrow. This is why interest rates exist, why, if I borrow ten dollars from you today, I must give back a little more than ten dollars tomorrow.”
  3. Pg. 49: Subjective theory of value – This concept goes back to Carl Menger’s critiques of David Ricardo and the classical economists’ “invariable measure of value.” It has, however, made its way into neoclassical economics.[3]
  4. Pg. 102: Socialist economic calculation debate – Friedman refers to Mises’ contributions to the socialist economic calculation debate and Mises’ book Socialism: An Economic and Sociological Analysis.
  5. Pg. 143: Rothbard quote – Friedman quotes Rothbard on limited government. He obviously does not endorse Rothbard’s economics, but Austrians might be interested to know it.[4]
  6. Pgs. 215-6: Denationalization of money – Every Austrian I am aware of supports the denationalization of money (although many strongly disagree with some of Hayek’s suggestions on the subject). Given that we live in a world of central banking and fiat money, some Austrians argue that since money is controlled by nation states it should at least be backed by gold, silver or some other “sound money” as to limit government spending, etc.

 

Occurrences in which David Friedman seems to disagree with the Austrian (or at least Misesian) approach to economics in The Machinery of Freedom:

  1. Pgs. 166-7: A priori theory of property rights – Hans-Hermann Hoppe has produced such a theory.
  2. Pgs. 212 & 277: Gross national product (GNP) – Friedman uses gross national product (GNP). Austrians don’t tend to like these macroeconomic statistics.[5] However, I’ve noticed in the past that if you go to the Mises Wiki and lookup particular countries (Albania for example), you will find GDP statistics referencing the World Bank as a source. 🙂
  3. Pgs. 256 & 263: Perfect competition – Friedman uses the concept “perfect competition.” Israel Kirzner in particular argues that the concept of perfect competition is contrary to the real meaning of competition. See one of Kirzner’s lectures on this here.
  4. Pgs. 259-60: Rationality and prediction – The rationality subject would require me to go a little more in depth than I am willing to here, but for those interested in a more in-depth analysis, see my paper with Carmelo Ferlito On Human Rationality and Government Control. Regarding prediction, Friedman states “The central assumption of economics is rationality, that individual behavior can best be predicted by assuming that each individual takes those actions that best achieve his objectives.”[6] Austrians make predictions of their own all the time (predicting an economic bubble will burst, for example), but the emphasis, when predictions do occur, is on “qualitative, theoretical pattern predictions about the discoordinating consequences of interventionism.”[7]
  5. Pgs. 281-2: Mixing labor with land as a justification for property rights – Friedman disagrees with Locke’s mixing labor with land as a sufficient justification for property rights. He revises Locke’s justification and argues that by mixing labor with land one acquires ownership of what one’s labor produced because one owns their own labor, but this does not provide justification for ownership of the land itself. Friedman admits that his revised version of Lockean appropriation “has its problems.”[8] Stephan Kinsella’s book Against Intellectual Property is also critical of Locke’s “mixing land with labor.” But Kinsella seems to disagree with Friedman on the point of owning one’s labor: “[T]here is no need to maintain the strange view that one ‘owns’ labor in order to own things one first occupies. Labor is a type of action, and action is not ownable; rather, it is the way that some tangible things (e.g., bodies) act in the world.”[9] Kinsella quotes from an article by Tom G. Palmer: “occupancy, not labor, is the act by which external things become property.”[10]
  6. Bonus: Rothbard and banking (not in the book) – In order to be fair to Professor Friedman’s work, I sent him an email with a rough draft of this blog post before publishing so that he could correct any misunderstandings I might have had about his ideas. He replied with one particular disagreement he has with Rothbard that did not make it to The Machinery of Freedom. I quote his email response to me here: “One disagreement with Rothbard… is over how a private monetary system would work. I would expect it to be fractional reserve, which Rothbard argued, I think implausibly, was necessarily fraudulent and so should be illegal. But Rothbard’s position is not, I believe, shared by all Austrians, perhaps not by most.”
    For those interested in more detail (from an anti-fractional reserve perspective), see chapter 11 (“A critical note on fractional-reserve free banking”) of Jesús Huerta de Soto’s book The Theory of Dynamic Efficiency. Huerta do Soto points out in a footnote that, “the recent interest in free banking and the development of the Fractional-Reserve Free Banking School stems from the book published by Friedrich A. Hayek in 1976 entitled… Denationalization of Money: The Argument Refined” (pg. 311).

 

Points that did not fit neatly into the categories above:

  1. Pgs. 265-7 & 320: Intellectual property rights (IPR) – It seems to be the overwhelming consensus among Austrians to not view IP as legitimate property (due to its artificial scarcity) and therefore not support monopoly privilege by the state. I tend to agree. In the book Against Intellectual Property, author Stephan Kinsella writes that “David Friedman analyzes and appears to endorse IP on ‘law-and-economics’ grounds, a utilitarian institutional framework.” Friedman doesn’t come out in favor of or against IPR in The Machinery of Freedom. He does analyze some costs and benefits of IPR in chapter 54 and concludes that chapter by stating that the desirability of IP laws is outside the scope of the chapter. However, he refers readers to two books: Against Intellectual Monopoly by Michele Boldrin and David Levine and his own book Future Imperfect, which includes a discussion on how IP protection can be provided “in other ways, for instance by contract.” Also, in the final chapter of The Machinery of Freedom (ch. 66), Friedman gives an encryption-based market solution for identifying original authors of work.
  2. Pg. 13: Use of the term “consumer sovereignty” – This one actually has little to do with Austrian economics except for the fact that Mises used the term consumer sovereignty in Human Action,[11] so I know Austrians that have read Human Action might be interested to know that Friedman also used it in The Machinery of Freedom. Rothbard strongly disagreed with what the term implied.[12] William Harold Hutt (not an Austrian) coined it in the 1930s.

Footnotes:

[1] In his introduction to the 2nd edition, scholar’s edition of Murray Rothbard’s Man, Economy, and State, Joseph T. Salerno quotes Rothbard from the preface of the revised edition (pg. xlviii), published in 1993:

“It has indeed become evident in recent years that there are three clashing paradigms within Austrian economics: the original Misesian or praxeological paradigm, to which the present author adheres; the Hayekian paradigm, stressing ‘knowledge’ and ‘discovery’ rather than praxeological ‘action’ and ‘choice,’ and whose leading exponent now is Professor Israel Kirzner; and the nihilistic view of the late Ludwig Lachmann, an institutionalist anti-theory approach taken from the English ‘subjectivist’ Keynesian G.L.S Shackle.”

[2] See The Austrian School of Economics: A History of Its Ideas, Ambassadors, & Institutions by Eugen Maria Schulak & Herbert Unterköfler (pg. 34):

“Böhm-Bawerk… had already thoroughly considered the relationship between the present and the future by posing the question: why is a debtor prepared to pay the creditor interest for a loan on top of paying back the amount of the loan itself? He answered this by explaining that future goods have a lower value than present goods, and the result is a difference in value between the present and the future: between loan and repayment.”

[3] According to the 2nd edition of Mark Skousen’s book The Making of Modern Economics: The Lives and Ideas of the Great Thinkers (pgs.185-6), Menger refused to reprint or translate his original ideas on the law of imputation, marginal analysis and subjective theory of value. Eugen Böhm-Bawerk and Friedrich Wieser were responsible for disseminating them.

[4] Note: In Appendix II of The Machinery of Freedom Friedman lists the Ludwig von Mises Institute in the section “Organizations and Institutes.” He mentions that “They [the Mises Institute] tend to follow the views of Rothbard and, perhaps as a result, to be critical of mine” (pg. 352).

[5] See Man, Economy, and State pg. 491: “Many writers have fallen into the trap of assuming that they can, in a similar way, add up the entire capital value of the nation or world and arrive at a meaningful figure. Estimates of National Capital or World Capital, however, are completely meaningless. The world, or country, cannot sell all its capital on the market. Therefore, such statistical exercises are pointless. They are without possible reference to the very goal of capitalization: correct estimation of potential market price.”

Note: I’ve still used GDP & GNP in my own writings and know other Austrians that do too. However imperfect, it still gives us a quick number to look at and understand that the US economy is enormous when compared to North Korea.

[6] Emphasis is mine.

[7] See Jesús Huerta de Soto’s The Austrian School: Market Order and Entrepreneurial Creativity, pg. 3.

Also, I will point out that as a free market economist and anarchist, Friedman is obviously not arguing that economists should treat humans as perfectly rational so that their behavior can be predicted so that government-employed economist social engineers or legislators can intervene in the market. (To emphasize again: I am not critiquing Friedman here). But to many mainstream economists, rationality and prediction serve precisely this purpose. To quote Nassim Nicholas Taleb’s book The Black Swan (2nd ed., pg. 184):

“…if you believe in free will you can’t truly believe in social science and economic projection. You cannot predict how people will act. Except, of course, if there is a trick, and that trick is the cord on which neoclassical economics is suspended. You simply assume that individuals will be rational in the future and thus act predictably. There is a strong link between rationality, predictability, and mathematical tractability. A rational individual will perform a unique set of actions in specified circumstances… Rational actors must be coherent: they cannot prefer apples to oranges, oranges to pears, then pears to apples… In orthodox economics, rationality became a straightjacket. Platonified economists ignored the fact that people might prefer to do something other than maximize their economic interests… I would not be the first to say that this optimization set back social science by reducing it from the intellectual and reflective discipline that it was becoming to an attempt at an ‘exact science.’ By ‘exact science,’ I mean a second-rate engineering problem for those who want to pretend that they are in the physics department—so-called physics envy. In other words, an intellectual fraud.”

[8] Friedman admits “Speaking as an economist, I find the rules implied by this argument to be inefficient ones. But they at least provide a justification for enforcing a form of property rights in land that is consistent with the libertarian view of rights” (pg. 282).

[9] See Stephan Kinsella’s Against Intellectual Property, pg. 38.

[10] Palmer’s article “Are Patents and Copyrights Morally Justified?” cites Georg W.F. Hegel.

[11] See Human Action, pg. 270 (scholar’s edition):

“Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of the market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him… They make poor people rich and rich people poor. They determine precisely what should be produced, in what quality, and in what quantities. They are merciless egoistic bosses, full-of whims and fancies, changeable and unpredictable. For them nothing counts other than their own satisfaction.”

[12] See Man, Economy, and State pg. 630 (2nd edition, scholar’s edition):

“‘Sovereignty’ is the quality of ultimate political power; it is the power resting on the use of violence. In a purely free society, each individual is sovereign over his own person and property, and it is therefore this self-sovereignty which obtains on the free market. No one is ‘sovereign’ over anyone else’s actions or exchanges. Since the consumers do not have the power to coerce producers into various occupations and work, the former are not ‘sovereign’ over the latter.”

 

See also: