The Role Of Government In Classical Economics

Arguably the most powerful idea in classical economics is how the free market enables unanimity without forcing conformity. In simple terms, the market lets people make their own choices without needing everyone to agree or follow the same lifestyle. This isn’t the case with some public services like national defensewhere customization isn’t possible. You can’t have one person more protected than another. For things like this, we need collective decisions through voting and government action.

But the more topics we hand over to political decision-making, the greater the pressure on social unity. When politics gets involved in deeply personal or controversial areas, history shows it can lead to serious conflicts—like religious wars or civil unrest. That’s why the market is such a valuable tool: it reduces how many decisions need to be made by force or by voting.

Ideally, everyone agreeing—unanimity—is the best option. But it’s often too slow and unrealistic. That’s why we use majority rule as a shortcut. It’s not perfect, but it’s practical. Still, for serious issues like freedom of speech, we require more than a simple majority—we want deep, widespread support. That’s the point of a constitution: to define principles that most people strongly agree on and to protect individual freedom from being overruled by temporary majorities.

While we all want as much freedom as possible, absolute freedom isn’t realistic. Anarchy may sound nice in theory, but it doesn’t work in a world where people have flaws. Sometimes freedoms conflict. For example, your freedom to play loud music might affect your neighbor’s freedom to sleep peacefully. Sorting out these conflicts is one of the key challenges for any society.

Even the word “freedom” can be unclear. In America, anyone is free to start a business. But that doesn’t mean existing businesses can block others from entering the market. Property rights also bring up questions. For example, if I own land, do I have the right to stop airplanes from flying over it? Does it depend on how loud or low they fly? We need clear laws to define these boundaries.

A particularly tricky area is monetary policy. There’s no universal agreement on how involved the government should be. But in general, organizing economic life through voluntary exchange requires a few government roles:

• Maintaining law and order

• Enforcing contracts

• Defining property rights

• Providing a stable monetary system

In short, government should just apply the rules of the game, not play the game.

Still, there are some exceptions—situations where voluntary exchange fails or becomes too costly. One example is monopoly. A monopoly means people don’t have real alternatives, so exchange is no longer voluntary. Friedman believes monopolies often arise because of government protection or collusion among businesses. The answer? Cut government incentives and apply antitrust laws.

There’s also the case of technical monopolies—like water or electricity companies—where it’s more efficient to have just one provider due to high fixed costs. Friedman lists three possible approaches:

1. Private monopoly

2. Public monopoly

3. Public regulation

He finds all three problematic, but reluctantly leans toward private monopoly. Personally, I disagree. If freedom is built on voluntary exchange, then technical monopolies challenge the core of that freedom. I would argue that public monopoly—despite its issues—is more aligned with preserving voluntary exchange in such cases. Moreover, private monopoly is often very problematic. To see a real world example check out our article about a monopoly in the UK, Thames Water.

Friedman points out that public ownership might be acceptable if the service is essential. But he criticizes unnecessary government involvement, like the U.S. Postal Service monopoly. Private companies once handled mail better than the government. But when they outperformed the state, laws were passed to make it illegal for anyone but the government to deliver letters. Friedman believes opening up mail delivery to competition would improve it quickly.

Another limitation to voluntary exchange is “neighborhood effects.” That’s when one person’s actions affect others who didn’t agree to it—like dumping waste into a river, which harms everyone downstream. These situations make fair trade impossible and often require government intervention.

Friedman says some services—like roads and city parks—are hard for private companies to provide fairly. City roads have too many entrances for toll booths to be practical, so we use gas taxes. But long highways could be run privately with tolls. Likewise, city parks benefit people in subtle ways, like improving nearby property values. These benefits are hard to charge for, so public involvement makes sense. On the other hand, national parks with gates and long visits could be run by private firms.

However, Friedman warns that not every case labeled a “public benefit” should automatically involve government. Many so-called neighborhood effects are used as excuses for unnecessary control.

Even when the government steps in to fix a problem, it often creates new problems. Sometimes it’s hard to tell whether the original issue or the government’s “solution” is worse. These choices should be made case by case—and with caution.

Importantly, government intervention always comes with a cost to freedom. Even if it’s helpful in the short term, it can pose a long-term threat to liberty. So, for every policy proposal, we need a balance sheet: list the pros and cons, and give extra weight to anything that threatens freedom. Back when the government was small, adding a little control didn’t seem risky. But today, with governments already large, even small additions can become dangerous.

What About People Who Aren’t Fully Responsible?

Friedman notes that not everyone is ready for full freedom—like children or those with severe mental illness. In these cases, some paternalism is needed. For example, while we’d like to rely on voluntary support for those struggling with mental health, that doesn’t always work. If someone else benefits from a madman being taken care of, they may not be willing to contribute voluntarily—so the government must step in.

Children are even more complex. We usually treat the family as the main unit in society, not just the individual. We do this more out of practicality than pure principle. Parents are usually the best people to care for their children and raise them into responsible adults.

But parents don’t have complete freedom. Children are future citizens with rights of their own. You can think of them as both a choice made by parents (like “consumption”) and as individuals with growing rights. Once they exist, they have value beyond their parents’ freedom.