How Milton Friedman was Wrong But Still Won Arguments

I still remember vividly a video of the libertarian economist Milton Friedman in a noisy factory in Hong Kong. He addressed the viewer about their possible perception of the working conditions of the workers.

He suggested to us the viewer that we were possibly appalled by the conditions of the workers and that we might be inclined to suggest government regulation to improve conditions.

Milton Friedman tried to explain to us, why we were wrong. This was in a series called “Free to Chose,” where Friedman tried to argue how free market economics was all about giving people choices.

His analysis of the Hong Kong factory, was that regulations mandating better working conditions was wrong, because it deprived workers of choice. In his view of the free market, people had preferences and a prudent capitalist would always bring to market a service or product that satisfy a need or preference among consumers.

Hence in his hypothetical world there is a buffet of factory jobs available which workers can chose from: Do you want the low safety high pay options, or perhaps you like the medium safety with medium pay options? Of course as anybody knows there is no plurality of choice like that in the work place. Milton Friedman would use that to argue that it doesn’t exist in the market, because nobody wants those choices. Essentially circular argumentation. We know people want this very much because workers have gone on strike and to the polls to push for safer and more humane work environments.

So what exactly is going wrong. Why is the market not providing the choices workers want?

Because of incomplete or assymetric information. Factory owners know well what work conditions are, but prospective employees don’t. No worker gets to go on a tour of each potential factory they want to work and and checkout conditions. We end up with the problem of peach and lemon cars I described earlier in my stories about failures of capitalism. In that story I explained how the peaces (the good cars) get crowded out and we are left with just lemons. This happens because buyers can’t know if it is a peach, so they are only willing to pay lemon prices. In this context a factory with good working conditions is a peach, but it will get crowded out by lemon factories, that is those with bad working conditions. This effect doesn’t happen for wages because they are much easier to compare.

And even if we had perfect information, it would not really solve the problem because workers are in a poor negotiation position when getting hired. A company has much stronger bargaining power than a single worker. A single worker can thus not demand better conditions. That is why the fight for better working conditions have almost always happened through unions. You join a union after you join a workplace, not before. The fight for better conditions thus happen after you get employed. Having the “fight” happen in the market as Milton Friedman wants it, doesn’t work.

Milton Friedman doesn’t want government to mandate work conditions and minimum pay for the whole country because that takes away individual choice. However there is a simple alternative to this. In countries with strong influential unions such as Nordic and Germanic countries, there is usually no minimum wage mandated by government. Minimum wages are instead usually decided industry wide through negotiation between unions and employers. This allows more local flexibility in wages and work conditions.

When unions lose influence we tend to see the task of maintaining minimum wages and working conditions being offloaded to government.

The question of information asymmetry often comes up in other Friedman arguments. There is a famous one with a young Michael Moore speaking of the unethical behavior of Ford selling a car they know is faulty rather than spending 13 dollars per car to fix it. Perfect safety is of course impossible to achieve, but making that the issue is the wrong focus. The issue here is that we can see company in a free market will not voluntarily divulge critical information about the safety of their product to consumers. That means consumers are not able to make an informed choice. If another car maker makes a safer car costing 13 dollars more, this company can not benefit from safety conscious consumers buying their car because Ford is covering up the flaws of their car.

Milton Friedman always tries to make the case that everything gets worse when government gets involved, but in this case, clearly it would have been better if government regulation required Ford to make public such information.

Of course Milton Friedman won this argument because he got Michael Moore onto his turf. Michael Moore not being an economist could not frame his objection in terms of information asymmetry.