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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: 6 / 7)

Nobel Prize in Economics

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  Milton Friedman

You're saying that the free market is a harsh master, that if you fail, you fail.

Milton Friedman: Absolutely.

You bear the consequences of your own action. Now we don't have a free market. Don't kid yourself. And the biggest enemies of the free market, the two biggest enemies of the free market are two separate groups -- my academic colleagues and business people. Business people are enemies of free markets not friends. The academic people are all in favor of freedom for themselves except even now they're not even in favor of that with this politically correct nonsense that's going on. But historically, academic people have always been in favor of freedom for themselves. They want to say what they want, write what they want, do whatever research they want. But they're all against freedom for everybody else. They think they know what's better for the society, the poor people than the poor people do. They think they can run the economy better than the businesses can. The business people are just the opposite. They're all in favor of freedom for everybody else and at the drop of a hat you can get any leading businessman to give you an eloquent speech on the virtues of a free market. But when it comes to their own business, they want to go down to Washington and get a special tariff to protect their business. They want a special tax deduction. They want a tax subsidy. And Chrysler is on the verge of failing, which it should have done. It should have been allowed to fail. Chrysler goes down and exercises political influence and tries to get the government to lend it money to subsidize it. So businessmen in general -- not all, there have been some notable exceptions -- and I don't want to include everybody. But in the main, most businessmen are enemies of free markets. The real beneficiaries of free markets are the invisible man, the small consumer, the ordinary worker. Those are the real people who benefit from free markets. But unfortunately, they don't have the kind of political clout that a PAC, political action committee that business has.

Well, you see, you know about the Keating Five. It's an excellent example of the point I'm trying to make.

Well, you know what people will always say in these circumstances, that government needs to come in in a crisis like this because it's necessary to save jobs.

Milton Friedman: Yes, they always say that. But the actual fact is almost always to lose jobs and not to save them.

I shouldn't put it that way. The affect is to save some jobs at the expense of losing more other jobs.

See, the problem is--one of the great economists of the 19th century was Alfred Marshall. And he has a sort of model for one of his books, the seen and the unseen. And it's a marvelous model for this.

What happens in economics over and over again is that there are two sets of effects on any action, the immediately visible affects and the widespread invisible affects. And the widespread invisible affects are often much more important than the visible ones, but people don't see them. Let me give you very simple examples. We have a quota in the amount of sugar that can be imported from various countries. The visible affect of that is that there are about a couple of hundred thousand growers of beet sugar who benefit greatly from it, who were able to keep on growing beet sugar. They don't benefit so greatly, but most of the money goes into paying the expenses of growing beets. And indeed, if there were no such quota, they would find some thing else to do. But in the short run, it would appear the visible affect is that they are able to have a market they would otherwise not have. The invisible affect is that every consumer in the United States pays twice as much for the sugar he or she buys as a world price. Now, you're a consumer, how much attention do you pay to the fact that you pay twice as much for sugar as you ought to? Is the fact that you pay twice as much for sugar as you ought to going to lead you to go down to Washington and testify against the sugar quota? Are the beet sugar farmers going to go down to Washington and testify in favor of the sugar quota? It's a typical example of the seen versus the unseen. The concentrated visible versus the dispersed invisible. And the major reason why roughly half the income of this country is controlled by governmental agencies instead of by the people who earn it, is because of this contrast between the visible and the invisible.

We talk about the majority government. It is a majority government. But it's a very funny kind of a majority. It's a majority made up of a whole bunch of minorities.

You've got one-tenth of 1 percent of the people who are beet sugar growers. They're part of the vast majority. You've got another two-tenths of a percent--maybe 1 or 2 percent of the people who are in the textile industry. And they make us pay twice the world price for shirts and for other things because of textile tariffs and textile agreements around the world.

And so down the line you've got all of these special interests. You've got labor unions. You've got these and those. And each one separately is a little minority but they all get together. Each minority is more interested in its own little problem than what happens with the rest of the country. And so it's willing to give its vote to the other thing if they'll give it -- it's a case of log rolling.

So what we have is a log rolling majority in which the majority of the people are not in fact represented. Is there any doubt in your minds -- suppose you were able to get an effective poll from the people at large on this question: the government imposes quotas on the import of sugar; the result of that is that X-thousand farms are able to grow beet sugar who otherwise would not, and that you are paying twice the world price for sugar -- are you in favor of this?

Is there any doubt to you in your mind that a majority would say they're opposed to it?

Let me give you another example which is much more important and much more dramatic. Of course the most socialized industry in the United States is the military. The next to the military, the most socialized industry is schooling.

Nine out of 10 youngsters -- leave for a moment the colleges and universities aside, although it's true for them too, but let's stick to elementary and secondary schooling. Everybody recognizes that over the course of decades the amount of money that's going into that in real terms after adjustments for inflations -- it's been going up per student very sharply. And everybody recognizes that the quality of education has been going down. There's not the slightest doubt.

All socialist enterprises are the same whether you take them in Russia, in Poland or Czechoslovakia or in the United States. Socialized enterprises produce poor quality products at high prices with much conferred special benefits on small growers. That's the characteristics.

This is looking good. And so you were saying there's one aspect of education.

Milton Friedman: I was going to discuss one aspect of education which brings out very well the problem of how the political interests of small groups will dominate the wide interests of the large groups.

One proposal for privatizing education for improving it is one that I made first close to 30 years ago in a book that was published -- well, it was in an article first -- then the book that was published just about 30 years ago is a voucher system, which has gotten a lot of attention, which is simply the idea that parents should be able to decide what school their children go to. What you should do is to say to every parent -- if you send your child to a public school, to a government school, it's costing the taxpayer now roughly abut $4,000.00 to $5,000.00 per student. So if you decide to send them to any other kind of a school, we'll give you a voucher worth $3,000.00 so we can make some money out of it too. Let's say, just for example, by which you can choose any school you want, governmental, private, non-profit, profit-making, Catholic, Jewish, Protestant, whatever, any school you want. The parent should have the choice. Those of us who are in the upper income classes have that choice now, because we can afford to pay twice for schooling, once through taxes and once directly toward tuition. People who are hurt by the present system are the poor people, and the people who are hurt worst are those in the inner cities who cannot get a decent education for their children. Now the voucher system, there have been some, quite a large number of public opinion polls about how people feel toward them, various proposals feel including the voucher system. In every poll that has been taken, the group which gives the largest majority in favor of the voucher system are the blacks. The blacks vote two to one in favor of the voucher system. There is not a single black leader who has come out in favor of the voucher system.

I once tried to persuade Jesse Jackson. I happened to be riding on a private plane with him from somewhere to Washington -- I've forgotten from where -- and I got him started on it. And he acted as if he'd never heard of the idea, but of course he had. Well, wonderful, splendid idea. Will you send your own children? Well, several of them are going to private schools, of course. Well, at any rate, you never heard another word from Jesse Jackson in favor of the voucher system. Why? Because where do the black leaders get their political clout? From being able to appoint people to school boards, from being able to get jobs in the school system for some of their people. They can get support out of the voters by voting for more money for education. But if once a voucher system were adopted, they would no longer have any political clout. And that is why every attempt to get a voucher system -- and there have been many of them -- has been destroyed and frustrated by the people with invested interest in not having it, in particular, the officials of the teachers' trade unions, by the state employees' unions and the political people like Jesse Jackson and other such political leaders. But the reason I cite this example -- and I think it's so dramatic -- is because of the unwillingness of the black leaders to support something of which the major beneficiaries would be the people they're supposedly representing.

So for all of the examples you've cited here in the last few moments, for a young person who is looking at how society is organized and trying to get this in his or her mind, you're saying that governmental interference in the economy and management of things necessarily leads to vested interests?

Milton Friedman: No. [It] is necessarily controlled by vested interests. There's a pot of money there in every one of these cases and just as bees will go to honey, people will go to a pot of money. And the people who will be most effective in getting control of that pot of money are people who are trying to grab it for themselves rather than people who are trying to spend it on behalf of somebody else.

Everybody wants to spend somebody else's money. And nobody spends somebody else's money as carefully as he spends his own. And that's a fundamental principle.

There's only one way in my opinion in which you can exercise control over this process and that's by effective constitutional limitation backed by public opinion.

If it's not backed by public opinion, it will do no good.

Put this limitation on spending?

Milton Friedman: No, much broader than limitation on spending. Limitation on spending would be one step. But a much broader limitation -- we have free speech because of the First Amendment of the Constitution.

In our book, "Free to Chose" we listed the amendments we would like to save to the Constitution. They're much broader than that. Such as, Congress shall make no laws prohibiting any trades between consenting individuals with respect to goods that it's legal to trade. Now, that would eliminate all tariffs. It would eliminate the sugar quota, that you may not see off-hand that it would. But it would if you think about it a little because individuals includes foreign individuals and not only domestic individuals.

So, no, no, I would really like much broader constitutional limitations. There are many other things you can think of. For example, you might have a constitutional amendment that nobody can be elected to Congress and Senate unless he's more than sixty years of age. That would eliminate the people, the possibility of people being elected to Congress in order to be able to get benefits after they leave Congress. You see that's the defect -- I happen to be in favor of term limitation proposals simply because maybe that's a possible thing you can get. But the defect of term limitation proposals is if you have young people who enter Congress and they're limited to 12 years, they'll use those 12 years to get brownie points with people on the outside who will give them a job later. So it would be much more effective to limit the legislature to people [over sixty] or to make it a part-time job or an unpaid job. Anyway, there are lots of solutions. I'm not going to go through the solutions here. Our books, "Free to Chose" and an earlier one, "Capitalism and Freedom," are much better from that point of view than what I can say here. But what I will say you will not solve these problems by taking them up on a one by one basis. You will never get rid of the sugar quotas by having sugar consumers testify against it. You might get a constitutional amendment that there shall be no tariffs or other interferences with foreign trade, which lumps everything together so people can see that they have a real interest in it. But if you're trying to do it piece by piece you'll get killed every time.

You talked about various governmental approaches that you think are ineffective, sometimes worse than that. The one approach that you do think is effective and with which you are most associated is monetary policy. What is it that monetary policy does...?

Milton Friedman: Oh, no, no, excuse me, you have misinterpreted by position. I would like to get rid of the Federal Reserve, too. I would like to have money controlled by a computer. However, that's not what's happening. And, I'm a realist. You're going to have a Federal Reserve System. And therefore, it's relevant to ask, given that there's a Federal Reserve System even though it would be a better world if we could get rid of them, how should Federal Reserves operate?

So I've been concerned with monetary policy by trying to see how to make it less harmful than it is likely to be. I don't want to say that government -- it's necessary -- there are certain things that it is essential for government to do. I'm not an anarchist. I believe in a government, but a limited government. And the government should be limited, in my opinion, to very simple functions. Number one, to be defending the country against foreign enemies. I have tried for a long time to see how to make national defense a private enterprise, and I've never succeeded. It's easy to see how to privatize schooling, but I don't know how to privatize national defense. So I'm reconciled to the fact that we're going to have to pay twice as much as we should have to pay in order to get them to fight the national defense. Because anything government does, on the average -- there are some things that are more, some less -- on the average anything government does costs twice as much as if it were being done by private enterprise. So one function of government is protect the country against foreign enemies, national defense. The second function of government and one which it performs very, very badly is to protect the individual citizen against abuse and coercion by other citizens, to keep you from being hit over the head and mugged on the street, your house broken into and so on. And I believe that the government performs that function very ineffectively because it's doing so many things it has no business doing.

The third function of government, and a very important function, is to define the rules of the game we play. What's private property? If an airplane flies 10,000 feet over your house, is he violating your private property? If he flies 10 feet over your house, is he violating your private property?

There is nothing natural about where the lines should be drawn. So we have to have some mechanism for making the rules about that and that is an appropriate government function.

And fourth, it's appropriate for government to provide a mechanism for adjudicating disputes about the meaning of those rules, a judicial system.

Milton Friedman Interview Photo
Those are the four essential functions of government, in my opinion, and those are the only functions that are essential. There may be some other areas in which if you started with nothing more than that, you might -- government might conceivably do more good than harm. But from where you are now, if you could only move back in that direction, it would be marvelous. But there is no way you're going to do it. So, the best you can hope for is that you can hold down government, keep it where it is, and let the private economy expand so that government becomes a smaller and smaller fraction of it. And even that is a very optimistic expectation though it's possible.

But going back to monetary policy, what is monetary policy concerned with? It's concerned fundamentally with what happens to the quantity of money. What's money? There is again no natural definition of money.

The first thing money is whatever you use to engage in transactions, whatever it is that people are willing to accept, not because they want it, but because they know that somebody else will accept it in return for something they want. And you know in the history of the world, you can hardly name a commodity that has not been used as money at one time or another.

There's an island in the Pacific which uses great big stones as money, the Island of Yap. There are parts of Africa and India which for many centuries used calry shells, little shells that you pick up on the beach, as money.

The colonies of Virginia and North Carolina and so on, those seven grouped colonies, for many years used tobacco as money. But of course, the thing that has mostly been used as money historically have been silver and gold as monies.

But we've gotten beyond that and now we use pieces of paper as money. The pieces of paper in your pocket, the equivalent of those deposits which you have in your bank on which you think you can write checks and other people will accept your checks, or you can go down to ATM and withdraw some cash, so that the sum of the paper you carry around in your pocket and one or another class of deposits -- they are very different deposits -- is money.

And the question is, who determines how much money there is?

In our present system, there are 19 people who sit around a table in Washington once every two weeks who have the power, the unlimited power, to double the quantity of money over the next year or to cut it in half over the next year. Those 19 people are the seven members of the Federal Reserve Board and the 12 presidents of the Federal Reserve Banks or the regional Federal Reserve Banks. Only five of those 12 presidents have a vote on that open market committee at any time, but all 12 attend every meeting and influence the action that occurs. They have the unquestioned power to do this, and it was the way they exercised that power during the Great Depression that was responsible for the depth of the depression. It was the way they exercised that power during the 1970s that was responsible for the inflation during the 1970s and is fundamentally responsible for the savings and loan debacle. The Federal Reserve over the whole of its existence has done much more harm than good. Yet, I want to give a tribute to Alan Greenspan, the present chairman of the Federal Reserve. As it's penance for my sins I have read the statement of every chairman of the Federal Reserve since its beginning to Congress -- when he reports to Congress. And I hate to tell you how many of those I've read. Until Alan Greenspan came along, in not a single one of those did any chairman ever say, we may have made a mistake. Every one of those reports, when times are good in prosperity they say, we're responsible for what good times you have. In bad times, they say, the times are bad in spite of us; we did everything we could to offset it. Even in the depth of the depression in 1932 and '33, the chairman of the Federal Reserve Board was saying, you cannot imagine how much worse things would have been if we hadn't done our duty. But Alan Greenspan is the first chairman of the Federal Reserve who in public testimony before Congress said, we may have made a mistake. And I give him very high marks for that.

So, as I say, this has been a system which has done far more harm than good. And I'm concerned with the question of how can we rein them in so that they do less harm and more good? And the problem is to exercise accountability, to make them accountable. And there are various ways in which this could be done. The main thing I've always argued for and I'm not sure it's the best way -- and indeed, a former student of mine has suggested what I now think is a better way.

What I've always argued for is requiring them keep the quantity of money growing at a steady and relatively slow rate. Now, that's -- they've departed from that, and every single mistake has been connected with the departure from that. And almost always after -- there are one or two occasions on which the departure was justified. But most of the time it has not been. And the problem is how do you get that rule in law and how do you make it accountable? How do you make it in the self-interest of the members of the board to follow the rule? As I say, there are various other ways that have been suggested, but that's the essential problem is to impose rules which will keep the quantity of money from either growing very rapidly or declining very rapidly. Either the one or the other is bad. If it grows too rapidly you have inflation. If it declines too rapidly, you have depression. You're not going to get rid of minor recessions. But even the present recession, in which we are in now as we talk, has unquestionably been made deeper than it need be because over the past four months the Federal Reserve has let the money supply grow at a very, very low rate, much too low of a rate, a lower rate. If the rate at which it's been growing over the past four months were maintained indefinitely we would get not stable prices, but declining prices. And what we ought to aim for is a rate of growth for the money supply which gives you relatively stable prices.

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