Free to Choose Chapter 2: The Tyranny of Controls

Every country says it wants to protect its workers. Every government says tariffs and controls are there to help ordinary people. Friedman says: look at the results, not the speeches. In almost every case, the people these controls claim to protect are the ones who pay the highest price.

This is post 4 in my Free to Choose retelling series.

The Oldest Trick in the Book

Friedman opens Chapter 2 with a quote from Adam Smith that is over 200 years old, and it still hits hard. Smith wrote that if a foreign country can make something cheaper than we can, we should buy it from them and spend our effort on things we do better. Smith called it basic common sense. He said the only reason anyone would argue otherwise is “the interested sophistry of merchants and manufacturers” – meaning the people who profit from blocking competition.

That was 1776. Nothing has changed.

Steel companies want tariffs on foreign steel. Textile makers want quotas on imported fabric. Sugar producers want limits on sugar imports. Every one of them frames it as protecting American jobs, defending the economy, or keeping the nation secure. None of them say what is really happening: they want the government to shield them from competition so they can charge higher prices.

And here is the part Friedman finds most interesting. We all do it. We complain about “special interests” ruining the economy – until the special interest is ours. The steel worker wants protection for steel. The farmer wants subsidies for crops. The taxi driver wants licenses that keep new drivers out. In the words of the comic strip Pogo: “We have met the enemy and he is us.”

The result is a maze of restrictions that makes almost everyone worse off. We lose more from the protections that serve other people’s interests than we gain from the ones that serve ours.

Exports Are the Price, Imports Are the Prize

One of Friedman’s sharpest points in this chapter flips a common belief upside down. Most people think exports are good and imports are bad. Politicians celebrate when exports rise and worry when imports grow. Friedman says this is completely backwards.

Think about it. We cannot eat, wear, or enjoy the things we send to other countries. We eat bananas from Central America. We wear Italian shoes. We drive German cars. We watch shows on Japanese televisions. Our gain from trade is what we import. Exports are just the price we pay to get those imports.

When politicians talk about a “favorable balance of trade,” they mean we exported more than we imported. But in your personal life, would you prefer to pay more and get less? Of course not. Yet that is exactly what a “favorable” trade balance means at the national level.

The word “protection” itself is misleading. Protection from foreign competition really means exploiting the consumer. It means you pay more for steel, more for clothes, more for sugar, so that a specific group of producers can avoid competing.

The Low-Wage Myth

The most popular argument for tariffs goes like this: foreign workers earn much less than American workers, so their products are unfairly cheap, and we need tariffs to level the playing field.

Friedman dismantles this step by step.

American workers earn higher wages because they are more productive. If an American worker produces one and a half times as much as a Japanese worker, then American wages will buy about one and a half times as much. The high wages reflect high productivity. They are not some artificial number that needs defending.

But here is the key insight. Even if American workers were more productive at everything, it would still make sense to trade. Friedman uses a simple analogy. Imagine a lawyer who types twice as fast as her secretary. Should she fire the secretary and type her own letters? No. If she is twice as good at typing but five times as good at law, both of them are better off when she practices law and the secretary types.

This is what economists call comparative advantage. You focus on what you do best relative to other things, and let others do the rest. It was figured out more than 150 years ago. It still works.

And what about the worry that cheap foreign goods will flood our market and we will have nothing to sell? Friedman walks through the logic. If Japan could sell us everything cheaper, we would pay them in dollars. But what would they do with those dollars? They cannot spend them in Japan. Eventually they need to buy something from us, or invest in our economy, or sell the dollars to someone who will. The exchange rate adjusts until trade roughly balances. No central planner needed.

Who Really Pays for Subsidies

Another common complaint: foreign governments subsidize their producers, giving them an unfair advantage. Friedman’s response is unexpected.

If a foreign government taxes its own citizens to make their products cheaper for us, who exactly is the victim? Their citizens pay higher taxes. Our consumers get cheaper goods. Friedman asks: was it noble when America sent goods abroad as foreign aid, but somehow wrong when other countries effectively send us discounted products?

The foreign country’s taxpayers have a right to complain. American consumers should be thanking them.

Yes, some American producers will lose business. That is a real cost, and Friedman does not deny it. But he points out that businesses never complain when unexpected events give them windfall profits. The free enterprise system is a profit and loss system. You cannot have the upside without accepting the downside.

The India-Japan Experiment

The most powerful section of this chapter compares two countries that started from remarkably similar positions but chose opposite paths.

Japan in 1867, after the Meiji Restoration. India in 1947, after independence from Britain. Both were ancient civilizations with rigid social structures. Both experienced a major political change. Both had ambitious leaders determined to modernize.

If anything, India had the advantage. It inherited a trained civil service, modern factories, an excellent railroad system, and leaders educated at top Western universities. Japan had been isolated from the world for centuries. It had almost no one who could speak a Western language. Its physical resources were poor – mostly mountains with a thin strip of usable land along the coast. India was nine times larger with far more farmland.

India also received enormous foreign aid after independence. Japan got nothing. It had to finance its own development.

The results were dramatically different.

Japan chose free markets. The Meiji government did intervene – it sent students abroad, imported foreign experts, built some pilot factories. But it never tried to control the total direction of the economy. An international treaty even prevented Japan from raising tariffs above 5 percent for the first three decades. That restriction, resented at the time, turned out to be a gift. Japan’s economy grew rapidly. Living standards rose. The country became a global power within a generation.

India chose central planning. Its leaders saw capitalism as synonymous with imperialism. They launched Soviet-style five-year plans. The government controlled imports, exports, investment, wages, and prices. You needed a government permit to build a factory. Tariffs and quotas walled off foreign competition. Self-sufficiency was the goal.

The result was stagnation. The gap between rich and poor widened. Per capita income barely moved. The poorest third of the population probably got poorer. Black markets and smuggling became the only way to get things done, undermining respect for law while ironically keeping the economy from total collapse.

Friedman points out a deep irony. Japan’s Meiji rulers cared mostly about national power, not individual freedom. Yet they adopted free-market policies. India’s leaders were passionately devoted to individual freedom and democracy. Yet they adopted the central planning model. The rulers who cared less about freedom created more of it. The rulers who cared more about freedom destroyed it.

East Germany, West Germany, and the Free Market Miracle

Friedman uses the two Germanys as his most vivid example. Same people. Same culture. Same technical knowledge. Split in two by war. One side chose markets. The other chose central planning.

On the west side of the Berlin Wall: brightly lit streets, shops full of goods from around the world, people speaking freely about anything. On the east side: empty streets, gray buildings, dull store windows. Wartime damage still unrepaired after thirty years. The only question worth asking is: which side had to build a wall with armed guards, minefields, and dogs to keep its citizens from leaving?

West Germany’s recovery looked like a miracle. In 1948, economist Ludwig Erhard introduced a new currency and abolished almost all wage and price controls – on a Sunday, because he knew the Allied occupation authorities would have stopped him if their offices had been open. Within days, shops filled with goods. Within months, the economy was booming.

The pattern repeated everywhere Friedman looked. Malaysia, Singapore, Taiwan, Hong Kong, and Japan – all relying on markets – were thriving. India, Indonesia, and Communist China – all relying on central planning – were stagnant. Annual income per person in the market economies ranged from $700 to $5,000. In the planned economies, it was under $250.

Controls Eat Freedom

The final section of Chapter 2 shifts from foreign examples to the United States. Friedman argues that economic controls do not just reduce economic efficiency. They erode all freedoms – speech, press, even religion.

He gives a striking example. Oil industry executives, privately furious about federal regulations, refused to speak up publicly. When a senator berated them for “obscene profits,” not one pushed back. Not one left the room. Why? Because the government had enormous power over their businesses. IRS audits, regulatory harassment, threats of breakup – these were effective tools of intimidation.

It was not just business executives. Academics who depended on government grants kept quiet about their real views on government funding. The press, dependent on government as a news source and regulator, pulled its punches. In Britain, unions backed by government-granted legal immunities shut down the London Times to suppress a story.

Even religious freedom was not safe. Amish farmers had their property seized because they refused to pay Social Security taxes on religious grounds. Church schools were cited for truancy violations because their teachers lacked government-approved credentials.

Friedman’s point is that freedom is one whole. You cannot slice off economic freedom and expect the rest to survive. When the government controls your livelihood, it has leverage over your speech. When it controls your industry, it has leverage over your press. When it controls your permits and licenses, it has leverage over every choice you make.

At the time Friedman wrote, over 40 percent of American income was spent by government at various levels. He proposed a thought experiment: imagine a “Personal Independence Day” – the day each year when you stop working to pay government expenses and start working for yourself. In 1929, that day would have been February 12. By 1980, it had moved to about May 30.

Key Takeaway

Chapter 2 of Free to Choose makes a case that is uncomfortable but hard to argue with on the evidence. Trade restrictions do not protect workers. They protect specific producers at the expense of all consumers. Central planning does not lift the poor. It traps them. And economic controls, once started, spread into every corner of life – your job, your speech, your religion, your freedom. The countries that trusted free markets prospered. The countries that trusted government planners stagnated. The pattern held across continents, cultures, and decades. Friedman is not saying government should do nothing. He is saying it should stop doing the things that make everyone poorer and less free.

Book: Free to Choose by Milton and Rose Friedman | ISBN: 978-0-15-633460-0

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Next up: Chapter 3 - The Anatomy of Crisis - How the Federal Reserve caused the Great Depression.