Did Friedman's advocacy for free markets and deregulation overlook their potential negative consequences, such as financial instability and social inequality?

Okay, let's talk about this fascinating question. It's not just an economic issue; it's deeply intertwined with everyone's life.

Friedman's Theory: Remedy or Poison?

To put it simply, Milton Friedman was like a very famous old Chinese doctor, prescribing a potent medicine called the “free market”. He believed many modern economic ailments – such as inefficiency and lack of innovation – stemmed from "the government," acting like an overbearing parent with too many rules (i.e., excessive "regulation").

His core idea is simple: Let the market play on its own; stop giving arbitrary orders.

He believed the market was like a super-intelligent system. With countless people freely buying, selling, and competing, prices would act like signal lights, automatically telling people what should be produced more and what less. This, he argued, would lead to the most efficient resource allocation, maximize social dynamism, and bring prosperity for everyone. Furthermore, he saw economic freedom as the foundation of personal liberty: the less the government intervened, the freer each individual would be.

Sounds great, doesn't it? This prescription was adopted by many countries over the past few decades and did indeed spur economic growth and prosperity in certain respects.

However, just like any medicine has side effects, Friedman's prescription also produced two widely feared "aftereffects": financial instability and social inequality.

Side Effect #1: Financial Instability (A Casino Without a Referee)

The "deregulation" Friedman advocated was particularly pronounced in the financial sector. His logic was simple: let banks, investment firms, and other financial institutions compete freely; those with the best services and highest returns would survive.

So, where's the problem?

Picture the financial markets as a giant poker casino.

Before Deregulation: The casino has strict rules: limits on how much you can borrow to place bets, which games are forbidden, and so on. A "casino manager" (government/regulators) is on duty, watching to prevent cheating or reckless gambling that could collapse the entire casino.
After Deregulation: The manager is told, "Mind your own business, let them play freely." Then, some bold players (financial institutions) start engaging in extremely high-risk games. They place enormous bets using borrowed money – often borrowed multiple times over (high leverage) – because the potential winnings are astronomical.

At first, everyone might make money, and the casino booms. But as soon as one big player loses everything and cannot repay, they drag down the players who lent them money. Like dominoes, they fall one after another. Ultimately, the entire casino can collapse because of this reckless gambling.

The 2008 Global Financial Crisis is the quintessential example. Many believe it was precisely the excessive "deregulation" in finance that enabled bankers to play high-risk "financial games," leading to the bursting of the bubble and a worldwide disaster. Ordinary people didn't gamble, yet they ended up footing the bill for rebuilding the casino (through unemployment, recession).

Therefore, critics argue that Friedman's theory was overly naive regarding finance. He believed market participants were rational and would manage risks themselves. But in reality, faced with huge temptations of profit, "greed" often defeats "rationality." Without external, enforced constraints, systemic risks become inevitable.

Side Effect #2: Social Inequality (An Uneven Starting Line)

Friedman argued that in a free market, your income is determined by your ability and effort – which is fair. Those who can do more, get more.

But this notion of "fairness" sparks intense controversy.

Imagine life as a 100-meter race.

Friedman's Ideal: Everyone starts on the same line. The gun fires, and the fastest win. That's natural and right. The government shouldn't interfere, say, by giving special help to slower runners.
Reality: The starting line isn't the same for everyone. Some are born near the finish line (like heirs to wealth); some wear professional running shoes (with access to the best education); while others must run barefoot, perhaps even starting 50 meters behind the line (born into poverty, lacking good education and healthcare).

In a completely "free" market, this disparity grows. The wealthy possess more resources (capital, education, connections) to earn even more, while the poor might not even afford the "tickets" to change their fate (like quality education or basic healthcare). The market itself is "blind"; it values only efficiency and profit, showing no concern for "fairness" or "justice."

The result is what we see today: widening wealth inequality. "Winner-takes-all" dynamics intensify, social classes solidify, and it becomes increasingly difficult for ordinary people to change their fortunes through effort alone. This isn't just an economic issue; it can fuel various social tensions.

Friedman himself did consider this problem, proposing solutions like a "negative income tax" to provide a safety net for the poor. However, this cannot fully resolve the structural inequality generated by the competitive market process itself.

To Summarize

So, back to your question: Did Friedman's theory overlook these negative consequences?

You could say it "overlooked" them, or "underestimated" them. He placed excessive faith in the market's self-correcting ability and human rationality, underestimating how real-world factors like greed, information asymmetry, and unequal starting conditions could distort the market and lead to disastrous outcomes.
Viewed differently, it's not that he was wholly blind to them, but rather that he considered the side effects of "government intervention" to be worse. He believed a bloated, inefficient, or even corrupt government caused far greater harm to society than the market's own fluctuations. His "free market" prescription was intended to cure the "big government disease."

Ultimately, it's like driving a car. Friedman emphasized the importance of the engine (the market), arguing that a sufficiently powerful engine would make the car go fast. But his critics remind us that you also need steering and brakes (effective regulation) and a good suspension system (social safety nets). Otherwise, the car might either crash out of control, or jolt the passengers right off on a bumpy road.

Today, a broad consensus exists: We need both the dynamism of the market and effective government regulation. The key isn't whether to regulate, but "how to regulate" – how to find the optimal balance between these forces. This is arguably a more complex and vital question than Friedman's theory itself.