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If you like Milton Friedman's story, you might also like:
Gary Becker,
George H.W. Bush,
Paul H. Nitze,
John Sexton
and Lech Walesa

Milton Friedman's recommended reading: The Scarlet Plague

Related Links:
Nobel Prize
Hoover Institution
Friedman Foundation

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Milton Friedman
Milton Friedman
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Milton Friedman Interview (page: 5 / 7)

Nobel Prize in Economics

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  Milton Friedman

What do you think of the challenge posed to the American economy by the competition of growing economies like Japan's?

Milton Friedman: I think there's been a great myth about Japan and the United States. Japan has done very well, but it is not Japan, Inc. It's not a miracle run by the Japanese Ministry for Industry and Trade. And that supposed miracle has collapsed, of course, in the last few years. You had a bubble economy, with a stock market that was way out of line. It's come down, it's been cut in half. Japan is experiencing a severe recession. Output has been going down, not up. It's not a miracle country at all. And most important of all, if you ask the important question, "What is the level of living of the people of Japan?" not "What are these numbers about national income, or GNP, or balance of trade?" but "How well do the people in Japan live?" You discover that they don't live that well. The level of living, as best we can judge it, in Japan is about two-thirds to three-quarters of that in the United States.

Go back to the reference to manufacturing. Employment in manufacturing has been going down, but manufacturing output has been going up sharply, because productivity has been increasing. The problem in Japan is that they have a limited number of industries: those which were involved in the export industry, which were doing very well, like electronics, automobiles, and so on. On the other hand, their distribution system is very backward. The domestic services for people are not what they should be. Housing is small, land is scarce, it's a different kind of a world. Japan is not a model for us to follow at all. On the contrary, Japan did well ten, 20 years ago when government in Japan was much smaller.

It's an interesting phenomenon. Government spending in Japan, as a fraction of income, has been coming up. It used to be much less than ours, now it's about equal. As it approached ours, the rate of growth in Japan has gone down sharply. It was going up at a rate of about eight or ten percent a year, and then five percent a year, and then four percent a year, and now it's going backward, minus. It will recover. The people of Japan are very industrious. They're very hardworking. They have a relatively good educational system. So I'm not running Japan down, but it's not a giant that we have to worry about.

It's been argued that NAFTA, the North American Free Trade Agreement, is simply an attempt by the United States to make use of another country's labor resources, without having to adopt their people and their problems. Do you see it that way?

Milton Friedman: Not at all. On the contrary, as far as NAFTA is concerned, it really is a minor thing, from the point of view of the United States. After all, the United States is a very much larger economy than Mexico. The main beneficiary for NAFTA will be Mexico and the people in Mexico, not the people in the United States. There's no doubt in my mind that that is the net effect. Mexico is doing very well by reducing the role of government, by introducing free market ideas, cutting tariffs, getting government out of business, privatizing banks and other businesses that government had taken over. NAFTA will be a little extra push for them, which will help them much more. It will help us a little, but a trifle. You know, nothing is good unless both parties benefit from it, and both Mexico and the United States will benefit from it.

If NAFTA proves to be profitable for the U.S., do you think the Free Trade Agreement will expand to include South America and other countries?

Milton Friedman: I would hope so. NAFTA is misnamed, it's not a Free Trade Agreement, it's a Managed Trade Agreement. I supported NAFTA, as a lesser of evils, but it would be better if we in the United States would simply reduce our tariffs across the board for everybody in the world. As far as Latin America is concerned, it's been showing remarkable changes. Beginning with Chile, going on to Mexico, now Argentina, one country after another in Latin America has unilaterally been lowering its tariffs, opening its markets up. If we are sensible, we certainly will go as rapidly as we can to expand NAFTA to include all of the rest of the Latin American countries. I believe that that is what will happen.

What do you think about the image of business in America today? A lot of people see the interests of business as being in some way opposed to those of the larger community, or of not doing enough for the community.

Milton Friedman: I think what business is doing is creating the goods and services we use. I think it's misleading to talk about "business." People are what matter. And the people who are in business are a sample of the people at large. And you might just as well ask, "Are other people around doing things for us?" There's nothing more important they're doing than providing the food on the table, the clothes that we wear, and everything else. Why is it that we're so much better off today in those areas than we were when I was growing up? It's primarily because of the efforts of private business.

Yet, as a nation, fewer and fewer of our resources are being devoted to that kind of activity, and we're wasting money trying to do things we can't do. We're wasting money on agricultural experimentations in every county, even though there's no agriculture there.

There are critics in Canada and elsewhere who say that our farm subsidies in the United States constitute a trade barrier. That they're a sort of hidden tariff.

Milton Friedman: They're absolutely right. I want to tell you a fact. The number of farmers in the United States is many fewer now than it was in 1950, but the number of employees in the Department of Agriculture is greater.

Formerly Communist countries, particularly in Eastern Europe, are trying to reform their economies. What policies do you think would be the most applicable for countries like the Czech Republic and Poland to increase the value of their currency?

Milton Friedman Interview Photo
Milton Friedman: I don't think they should increase the value of their currency. What you want to do is keep your currency having a relatively constant value. The Czech Republic is showing a very good example to the rest of the world. The Czech Republic has been doing a remarkable job, in my opinion. Of all of the Eastern European countries it's probably been doing the best job. It has gone farthest in selling off state enterprises and converting them into private enterprises. The important thing is to have a currency which does not inflate, which keeps its value. The only way you can do that is by not printing too much of it. There's one reason for inflation, and that's creating too much money.

Unfortunately, Poland has not been doing a good job in that respect. Hungary has been doing a moderate job, but I think the Czech Republic is doing the best job. I hope they don't imitate the United States. The United States is not the right model. The right model for them is a much more free enterprise society. I would say, Hong Kong before the Chinese takeover is the best model. Or the way Czechoslovakia was in 1938 or '39. People forget that in 1938 or '39 Czechoslovakia was one of the wealthiest countries in the world, with one of the highest incomes. It only took 40 years for Communism to reduce it to the status of a third world country.

During the last few years, much of the world has turned away from government-run economies and collectivism, and toward a stronger belief in individualism and private markets. Do you think we in the United States are leading this movement, or are we going in the wrong direction?

Milton Friedman: No, we're going the wrong way. Everybody agrees that capitalism has been a success. Everybody agrees that socialism has been a failure. The conclusion therefore? We need more socialism. Now how do you make any sense out of that? You can't, and yet that's exactly what's been happening. Government has been getting bigger. Most of the proposals that are before Congress would involve more government involvement. The health care program is an obvious case. Why? The simple answer is because the people no longer run the government. The government has become a self-generating monstrosity. We don't have government of the people, by the people, for the people. We have government of the people, by the bureaucracy, for the bureaucracy. And (in saying) the bureaucracy, I include members of Congress. Because being a member of Congress has become a lifetime career. Incumbents -- it's very difficult to displace them.

In order to change that, in order to follow the rest of the world and move in the direction that we ourselves pioneered, toward a greater role for free markets and for individuals, we need to change the incentives under which our government operates. In my opinion, the most promising movement at the moment (1991) to produce such a change is the term limits movement, which has been moving like wildfire. State after state has passed a term limit amendment to its constitution. So I'm very optimistic about the long run, because I think the public at large recognizes what's wrong. That people know the government is too big and needs to be cut down. And sooner or later, the people are going to have their say.

Now a lot of the criticism that you have taken during your professional career for that ideological part of your life, for that ideological part of your life has been from people who would suggest and who are probably irritated because they thought you were saying you knew the answers.

Milton Friedman: Of course I'm saying I know the answers! I don't deny that. But I don't have any right to make you agree with me. All I have the right to do and to present as best I can my side of the case and to try to persuade you. And of course, I know the answers. But I also know they may be wrong. And if you can persuade me they're wrong, then I'll gladly shift my view. And you have just as much right to your view that you know as the answer as I do in my view that I do. Now obviously, what's involved all along is that when you say you know the answers, it's about some things. And the degree of confidence that you have will vary enormously. If you express yourself, as people often do, on things that they have no confidence--well, they should have a degree of confidence in what they say. If I say, for example, that the war in the Gulf is going to be over in a week, I don't have any great confidence in that. Who am I? I'm not a military expert. I don't know what's going on. But nonetheless, I am entitled to make a judgment, provided that I recognize the tentative character of it. On the other hand when I say if you put a lot of money you're going to have inflation, my confidence in that is enormously higher because I can cite hundreds of examples to show that that is exactly what happened and essentially no examples on the other side, but still I might be wrong. There might be something that comes a long that alters that. So I don't doubt them, but still, I have a great deal of confidence in it.

There might be some variable somewhere.

Let me ask you in that vein, how you came to have such strong views about government interference in the economy. Were there any personal influences, personal experiences that were an influence in your thinking? Or is it largely a result of academic insights into what has happened?

Milton Friedman: The later. So far as my personal experiences are concerned, as I mentioned before, the New Deal was a great benefit to men. The New Deal gave me my first job after that. In fact, the New Deal as I say, may well have been harmful for the economy though it was very beneficial for me.

I got a job there with more money than I had ever earned before. I was able to work on things I was interested in. Was able to write some articles that were published and establish a bit of a scientific reputation. And again, after I left Washington in the mid-'30s, I went back and worked at the Treasury for two years from '41 to '43. Worked as a mathematical statistician for two years from '43 to '45.

So that -- I personally have been a beneficiary of governmental activity. So there's nothing personal in there whatsoever. It's entirely the result of what I believe is evidence and analysis -- theory and analysis.

It was the depression, which you mentioned a moment ago, was a time of economic and personal tragedy.

Milton Friedman: Absolutely.

And the federal government came to the rescue to some extent, stepping in to create jobs to help people through that time as you said, before you got one of your early jobs. But you hate government management of the economy.

Milton Friedman: But let's look at that depression a little more.

The depression was caused by government. It was the result of bad government. It was the result of government actions not working the way they were intended to. The Federal Reserve System was established in 1914 for the purpose of preventing things like the Great Depression. And yet, its existence was responsible, in my opinion, for the depth of the depression. So that you cannot look at the aftereffect without looking at what came before given that you made the terrible mistakes that lead to the Great Depression. I have never criticized the remedial actions that were taken immediately thereafter to help the people who were so badly hurt. That was a desirable thing. And it was the reaction to it. The bad things about the New Deal were not those. The bad things about the New Deal was not the Works Progress Administration which offered temporary jobs, the Civilian Conservation Corps. That was not the bad things. Those were the good. The bad things about the New Deal were the more permanent changes introduced in the institutions of the country. One of them has recently come home to roost in the Federal Savings and Loan Insurance Corporation. And that's a strict New Deal consequence. That was established then. Why was it established? If a private organization makes a mistake, does things badly, it will lose money and it will have to go out of business. If a public organization does things badly and a governmental organization does things variedly and makes bad mistakes, it will be expanded. It will be expanded because they will say, well, it's all because we just didn't have enough resources. Or else, it will be allowed to stay and another organization will be set up to do what it was supposed to do. That is this case. The Federal Reserve System was established to prevent the kind of bank runs and bank failures that happened during the Great Depression. But they made it worse, much worse? Milton Friedman: By not doing what they were setting up to do. They were supposed to provide the liquidity and instead they reduced liquidity. The quantity of money in the United States failed by a third between 1929 and 1933. The Federal Reserve System at all times during that period had the power to prevent that decline. And it was established for the purpose of preventing that from happening. It didn't do it. And so what happened? The Federal Reserve System wasn't abolished unfortunately, but the Federal Deposit Insurance [Corporation] was created to do what the Federal Reserve System was supposed to do, to prevent bank runs.

To clean up after them?

Milton Friedman: Right, to clean up after the mess that had been left. And they're both there, and that's the major problem with government.

I have never argued that government initiatives may not be just as good as private initiatives. The problem with government is not in the things it tries but in the absence of any mechanism for recognizing error. What you need -- what the private system abounds in -- is survival of the fittest. What the governmental system abounds in is expansion of the mistakes. And there is no mechanism for eliminating governmental agencies which either have -- no longer needed or have behaved perversely. If you're trying to think back and ask yourself, how many government agencies can you think of that have ever been abolished, you can count those on the fingers of one hand. One of the government agencies that was abolished was there once existed a system of personal savings where the Post Office had savings. How come it became abolished? Because when it was passed, the law was passed, and it could not pay--it was limited to paying interest at the maximum of 2 percent. Now during the Great Depression, that was wonderful because it was safe. And Postal Savings deposits expanded, became very large. So during the later '30s, and particularly after the war, when interest rates started going up and above 2 percent, everybody took their money out of Postal Savings. There was no more money in there, and it was allowed to die. Now, that's one of the very few examples of a government agency that has been eliminated. Can you name any others?

Very few.

Milton Friedman: Somebody mentioned the other day that the Reconstruction Finance Corporation, which was established in 1931 or '32, may have been allowed to die. I'm not sure about that one. But there are very few you can name.

They are a handful, yes.

Milton Friedman: On the other hand, we have no difficultly in naming businesses enterprises that have gone broke.

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