Capitalism and Freedom: on Budget & Economy

Government's role is only to determine the rules

The existence of a free market does not of course eliminate the need for government. On the contrary, government is essential both as a forum for determining the "rules of the game" and as an umpire to interpret and enforce the rules decided on. What the market does to reduce greatly the range of issues that must be decided through political means and thereby to minimize the extent to which government need participate directly in the game. The characteristic feature of action through political channels is that it tends to require or enforce substantial conformity. The great advantage of the market, on the other hand, is that it permits wide diversity.

Government caused Great Depression, and recessions since

These arguments were particularly potent during and after the Great Depression of the 1930's. These arguments are thoroughly misleading. The fact is that the Great Depression, like most other periods of severe unemployment, was produced by government mismanagement rather than by any inherent instability of the private economy. A governmentally established agency--the Federal Reserve System--had been assigned responsibility for monetary policy. In 1930 and 1931, it exercised this responsibility so ineptly as to convert what otherwise would have been a moderate contraction into a major catastrophe.

Fed should grow money supply by 3%-5% and nothing else

As matters now stand, while this rule would drastically curtail the discretionary power of the monetary authorities, it would still leave an undesirable amount of discretion in the hands of the Federal Reserve with respect to how to achieve the specific rate of growth.

I should like to emphasize that I do not regard my particular proposal as a be-all and end-all of monetary management, as a rule, which is somehow to be enshrined for all future time. It seems to me to be the rule that offers the greatest promise of achieving a reasonable degree of monetary stability in the light of our present knowledge.

Repeal recession spending once expansion begins

Unfortunately, the balance wheel is unbalanced. Each recession, legislators hasten to enact federal spending programs of one kind or another. Many of the programs do not in fact come into effect until after the recession has passed. The haste with which spending programs are approved is not matched by an equal haste to repeal them or to eliminate others when the recession is passed and expansion is under way. On the contrary, it is then argued that a "healthy "expansion must not be "jeopardized" by cuts in governmental expenditures. The chief harm done by the balance-wheel theory is therefore that it has continuously fostered an expansion in the range of governmental activities at the federal level and prevented a reduction in the burden of federal taxes.