Milton Friedman Interview (page: 7 / 7)
Nobel Prize in Economics
Now the Fed is talking about paying more attention to money growth.
How is it that just a steady increase in the supply of money can have such a positive affect on our economic life?
Milton Friedman: It doesn't have a positive affect on our economic life. It eliminates a negative affect. Fluctuations in the rate of growth in the quantity of money produce uncertainty. They go up and prices start to go up, and no individual businessman knows whether the price rise is because his product is in more demand and he should reduce it or because there's more money around and there's going to be general inflation. He won't learn about that for months.
And so, let me see if I can describe it in what I think is a proper kind of a metaphor. Consider listening to the radio. The problem that bothers you is static. What matters for the economy is what happens to relative prices and relative demands. What you want is a system under which if people suddenly decided what they want more of one thing and less of another--they want more computers and fuel automobiles--that's reflected in prices, relative prices. The price of computers goes up, the price of automobiles goes down, the producers of computers have an incentive to produce more computers, the producers of automobiles have an incentive to produce fewer automobiles.
That's what the price system is like and that's what it's for. Now the affect of these fluctuations in the quantity of money is to introduce static into the signals that are coming out from the price system. It's as if when you listen to radio, somebody is deliberately introducing static into that thing so you can't hear anything very clearly. And that's exactly what these fluctuations in the money supply do.
A stable rate of monetary growth would not be a positive good. It would simply set a stable background against which the market could operate, and it would eliminate the static, the uncertainty that these short-term movement introduce.
Let me shift a bit. We were talking about the American economy, or Western economies perhaps, where there is some uncertainty but a great deal less uncertainty than we find in many other economies in the world.
Milton Friedman: I don't believe there's less uncertainty. But you know, 50 percent socialism doesn't have the same affect as 100 percent socialism. Uncertainty -- government harm doesn't all come from uncertainty, excuse me. I was citing the particular case of monetary policy, and in the case of monetary policy, the harm which it does is for uncertainty. But the harm -- consider another government policy, the government on the one hand subsidizes the growers of tobacco. On the other hand, it spends the taxpayers' money to propagandize against smoking. The right hand and the left hand are offsetting one another. You're wasting resources. The government is spending the taxpayers' money to keep the price of milk at twice what it need be, a fluid milk, by milk marketing orders, dairy controls, farm price supports. At the same time, it's subsidizing food stamps and school lunches to enable people to pay that high price of milk. What it's spending with this hand is off-setting what it's doing with this hand. So most government expenditures are doing harm not because they're creating uncertainty, but because they're equivalent -- they're the equivalent of hiring people to dig holes and hiring other people to fill those holes up, because they're producing no economic product.
Look, at the present time in the United States, governments at all levels are spending an amount of money equal to 43 percent of the national income. Is there a citizen of the United States who thinks he's getting 43 percent of his welfare from what the government is doing? People find it hard to believe that. Why? Because that government activity is so wasteful and so inefficient that the 50 percent or so that the private sector is providing accounts for 90 percent of his welfare of the things he really uses and can use.
Is the government -- it isn't the fact that the government is wasting money on delivering mail inefficiently because it has a monopoly. It's not producing uncertainty. It's just wasting the taxpayers' money, and you can go down the line.
So that I don't want it to be thought that the main problem with government is that it produces uncertainty. That's the main problem with the monetary policy, but not with government in general.
All right, let me shift to another part of the world. In the late 1970s, early '80s, you anticipated a shift to -- I won't say free markets, because I know you won't buy that -- to freer markets, if you will, around the world. And that happened in the late 1980s--
Milton Friedman: Right.
-- and the early 1990s. What made you anticipate -- after decades of governments around the world going in the other direction -- what made you anticipate it at that time?
Milton Friedman: Because the intellectual atmosphere was changing.
It's an interesting phenomenon that policy follows opinion but only with about a 20 years lag. And the first example of that of course was the reaction to the Great Depression because during the whole of the 1920s and even earlier, intellectual opinion had been shifting towards socialism -- in Britain with the Fabian Society -- in the United States. People don't realize that every economic platform, every economic plank of the socialist party platform of 1928 is now part of law. So intellectual opinion was shifting toward socialism. Public opinion was not a valuable thing. The Great Depression had the major affect it did because it made people -- public opinion -- accept that intellectual opinion, and say, oh we had a Great Depression because of the private enterprise system failed on us, and we need to call government to our aid. And these intellectual who were talking about having government play a larger role are really right. And so policies started to shift toward bigger and bigger government and more centralized government. But as it did so, people started getting disillusioned. And particularly, small groups of intellectuals around the world started getting disillusioned. And intellectual opinion started to shift the other way. Let me give you a dramatic example. Ronald Reagan was preaching the same thing in 1964 when he spoke on behalf of Goldwater as he was preaching when he was elected President in 1980. He could not have been elected on that platform in 1964. He is the first President, only President in my lifetime, who was elected not because he was saying what the people wanted to hear, but because people had come around to wanting to hear what he was saying.
He hadn't changed his opinions. But the public at large was getting fed up with what? With higher and higher taxes. With what? With inflation produced by government. With what? Increasing rules and regulations and governmental bureaucratic controls.
So public opinion was beginning to share what had been happening in intellectual opinion. And once public opinion starts moving in that direction, with a lag of a decade or two, policy will follow. And that's why I was very optimistic that there was going to be a greater role for markets, more optimistic than was justified. We haven't achieved as much as I would have anticipated or expected. We have moved somewhat in that direction. But the greatest successes in that area have not come in the West. And indeed -- well I'll come back to that -- but they have come in the East obviously. The fall of the Berlin Wall, the end of communism in Poland and Czechoslovakia and Hungary is the most hopeful thing for human life, human policy, that has happened in my life time. It carries with it, however, problems for the United States. On the whole, I think it's been a bad thing for the United States because it's introduced complacency in the United States. We've been inclined to say, huh, look at this. These people -- our system has been working and theirs hasn't. And therefore, what we've been doing, everything we've been doing must be right. I summarize this in the form of three propositions that are widely believed. Number one, socialism is a failure. Everybody believes that now. Number two, capitalism has been a success in enabling people to have a higher level of income and a higher degree of freedom. Everybody believes that. Proposition number three, therefore, the United States needs more socialism. Hard to render that consistent with the first two propositions, and yet it's what people believe.
You don't hear talk in Washington about having more capitalism. You hear talk in Washington about how we need to have more government spending on schools. We need to have a stricter enforcement of drug prohibition. We need to have a child care method. We need to have the government pass clean air acts.
But if they were really taking lessons of what's happening in Eastern Europe, they would be saying or the people would be requiring their representatives in Washington to say we should abolish Amtrak, we should get rid of farm subsidies, we should eliminate tariffs, we should cut the government down to size. But that's not what anybody is saying, although that's the lesson that is taught.
Milton Friedman: The problems of the United States are exactly the same as the problems with the Soviet Union, with Poland, and the others. The difference is that they were 100 percent socialist and we're only 50 percent socialist. But just as their 100 percent socialism produced problems that was beyond belief, every major problem in the United States, in my opinion, is coming from the 50 percent of our society that's socialist. I've mentioned education, which I think is -- people talk about problems like budget deficits, like foreign trade deficits, and so on. Those aren't the real problems in the United States. The real problems in the United States are in education -- which is disgraceful. We are spending more money on education per capita than any other country in the world and we need to privatize them. The second major problem in the United States arises out of the attempt to prohibit the use of drugs. Drugs are a terrible curse. I'm not suggesting that they're a good thing or anything. But far more harm is being done by trying to -- by making them illegal than good. We are creating -- we are destroying our inner cities, we're destroying the life of people, we're killing people because of the wars being fought by the drugs. Because why? Because we create such enormous profit opportunities which would otherwise not exist.
And more than that, I find it hard how anybody can justify the United States destroying a country like Colombia, in Latin America, because we can't enforce our own laws. If we could enforce our own laws, there would be no problem in Colombia. But we can't enforce them. And so we destroy Colombia. How can you justify that? It's disgraceful. And it will go on and on and on -- but there's no question in my mind that far more harm than good is being done.
And let's hear what happened: less drug addiction and less harm from drug addiction in a world in which it was decriminalized than in the present world.
We went through this once with prohibition in the 1920s and '30s. Why do we have to go through it again? Because people seem not to be able to learn from experience. That's another problem that's traceable to government.
The savings and loan debacle? Traceable to government, obviously. It was the inflation of the '70s plus a set of rules and regulations under which the government said to the savings and loans, we'll play heads you win, tails I lose. So, that now, we have a problem of infrastructure. It's a fascinating thing. In the 1930s, out here in San Francisco, they were able to build the Golden Gate Bridge and the Bay Bridge. People say we couldn't afford to do that now. But we're three times as wealthy now as we were then. How come we could afford to do it then? The answer is, because the government wasn't doing all the other things it has no business doing. And you could go down the line. So the problems we have are primarily problems created by ourselves, by that socialist sector, of exactly the same character as the problems created in Eastern Europe by a 100 percent socialist sector.
And that's why, when I was in Poland not a few months ago and I gave a talk there, the title of my talk was "Why the United States is Not the Right Model for Poland." The right model for Poland is the United States 100 years ago, or Hong Kong before the Chinese started taking it over more recently.
And as a right model, we can afford all the nonsense and the harm that government is doing because we had 100 years of a real free market on which to build up our wealth and therefore were wealthy enough to afford to waste half of our product. But Poland isn't wealthy enough to do that. Czechoslovakia isn't wealthy enough to do that.
If you want to see the power of institutions, just look at how it is that 30 years of socialism can convert Czechoslovakia from one of the wealthiest countries in the world -- which it was in the 1930s. It had higher income than Britain, it was on a level with the United States. Thirty or 40 years of socialism could convert Czechoslovakia from one of the wealthiest countries in the world to a Third World country. Forty years of socialism can produce a West and East Germany -- coming from the same background, the same source, starting from the same point -- which are as wide apart as they are. And if we keep on with our 50 percent socialism and make it 60 and 70, it will do the same -- have the same destructive effects in this country.
Let me ask you one more question along this line, then I want to get in some general questions before we run out of time.
You talk about the U.S. 100 years ago and the economy, but many people would say, ah, yes, those were the days that led to robber barons.
Milton Friedman: They would say so.
Why is this?
Milton Friedman: The government has taken over responsibility for it. People say why should I have to contribute to that, the government is doing that; I'm paying tax money.
So what's happened? It's not that people have become less willing to make voluntary grants, but they've gone in a different direction. People now give money to museums, to art institutes, to symphony orchestras and so on, but they don't give money to help the poor, because that's -- the government's taken over that function. Whereas before 1914, a much larger fraction of all donations were of that kind and were of a personal kind, in which people took a personal interest.
There's an enormous amount of voluntary activity going on in this country. Charitable. But some of it is co-opted by the government, is essentially a contribution to governmental functions -- like assisting in the government schools, in the inefficient government schools. And much of it goes into the kinds of other activities I've described, which really have a wholly different purpose -- cultural, as opposed to eleemosynary.
Let me shift a little bit and ask you why a young person, why your grandchildren, people who are coming into college in these days, should be excited or interested in economics and public service.
Milton Friedman: I don't know what you mean by public service. What does public service mean? Tell me. I have somebody, a young boy, who is working in the Safeway grocery store as a clerk. Isn't he performing a public service? What do you mean by public service? You mean government service? He should be disinterested in government service, I would hope.
He should be interested in public service; namely, what he should really be interested in is doing what will enable him, as a person, to develop his own capacities and his own qualities in the most effective way. And if he does that, he will confer the greatest public service he can.
And what about economics?
Milton Friedman: Economics is one discipline among many. I'm not saying every young man. There isn't room for everybody in economics. Some people will find they're interested in economics, some people are interested in physics, some people are interested in mathematics. The important thing is for people to try to find an activity in which, as I said before, they are going to get paid for doing something they enjoy doing. They ought to try to find an activity in which they want to work overtime.
What I'm asking you, though, in a way, is what is it about economics that contributes to society? As an individual who's thinking about that as a career, as a profession, what is it that they will be contributing?
You've talked about this in a number of ways, but let me ask it again in case there's something that you haven't been able to say.
What advice would you give a young person who hopes to have a life of achievement, who wants to achieve something?
Milton Friedman: You do what you -- you develop your own capacities. You do what you want to do. Don't do anything because you think it's going to help other people. Because you may be wrong. How the devil do you know what's good for other people? But you know what's good for you. You know what you really enjoy doing. You know what you're talents are and what your qualities are. You develop your own qualities and your own talents. And the sum of a lot of people doing that will be a beautiful society. And don't waste your efforts on how to tell other people what's good for them.
You've spent your whole life evaluating, researching, and talking about the government policies that affect economic system.
Milton Friedman: No, I haven't. That's been an avocation.
Milton Friedman: And I've spent the greater part of my life in trying to develop a better understanding of how the world works.
Well, that's really what I want to ask you, which is what fascinates you so about economic systems?
How much of economics is really psychology, looking at people's behavior?
Milton Friedman: Very little. Oh, it's human behavior, but it's not psychology.
Milton Friedman: And the reason it's not is because psychology is concerned with the individual. Economics is concerned with a collection of people, and that's why it's not psychology. It's because it's average behavior that we're looking at, whereas the psychologist is looking at the individual. And the aberrations that will be of most interest to the psychologist will average out from the point of view of the economist. So it's not about psychology.
But it is about human behavior.
Milton Friedman: It's about human behavior, but average human behavior. Human behavior in groups, in the mass.
Let me ask you one last thing before we go. One thing that many people whose views are widely known, one of the experiences that seems to be common is that people in other places, whether it's here or abroad, take their ideas and use them, cite them, but in ways that may not agree with your original intent.
For instance, in Chile, when the military dictatorship took over and changed the way the economy was operating. They were often saying -- people were saying, ah, this is the Chicago School model.
Milton Friedman: Well, it was in the economy. I don't believe that -- I wrote and talked and objected strenuously to the political policies that General Pinochet was following. But he was following the correct economic policies. And Chile is today the healthiest country in Latin America. And today it's also a democratic country and the dictatorship has been overthrown. And it's been overthrown because they followed the right economic policies. Pinochet didn't realize it, but he was sowing the seeds of his own destruction. The real miracle in Chile is that a dictatorship was willing to follow good economic policies.
Most dictatorships are not willing to do that, and the reason is very simple. Good economic policies come from the bottom up -- the consumers, the individual workers are the people who determine what happens. But a dictatorship is from the top down. And top-down people don't want to accept bottom-up policies. And that's why I wrote in Newsweek back at that time, contemporaneously, that the real miracle in Chile was that Pinochet was willing to follow good economic policies.
You believe that there is a very tight connection between economic--
Milton Friedman: Absolutely. If you follow good economic policies -- well, it's a very complicated connection.
Good economic policies will establish conditions that will permit political freedom. But political freedom will sometimes lead to the destruction of the economic policies. Just as in the United States, the good economic policies -- or good economic system -- not the policies, the institutions. The institutions of private property, which is the essence, and freedom to trade and freedom to buy and sell created the conditions which supported political freedom in the United States throughout its history. But political freedom in the United States has now been producing the conditions which over the last 50 years destroyed much of the economic system. Took over half of them. So that time and again, just as people are suicidal in their impulses, just as business enterprises are suicidal in their impulses. They favor government policies, like tariffs and subsidies, which will destroy the very basis of their existence. And they are suicidal. So that the relationship between -- I must say, this is one area in which I have changed my views drastically over the years. I used to say that economic freedom is a necessary but not a sufficient condition for political freedom. That's a true statement. But I also used to believe that economic freedom and political freedom went together in a sense that political freedom contributed to economic freedom and vice versa. I no longer believe that. I believe there's a very strong tendency that has to be fought all the time for political freedom to lead to the destruction of economic freedom. Now let me emphasize: I believe very strongly in freedom, both political and economic. But I think you have to be more sophisticated. You have economic freedom and you have human freedom, and you can have human freedom without political freedom. And then you have political freedom in the sense in which we mean it that people can vote for their own leaders. Hong Kong is a marvelous case in point: No political freedom whatsoever, but yet the most extensive human freedom. Probably no place on earth where people were freer to speak, to write, to talk, to say anything they wanted before the Chinese took over from the British. Pure accident, because of the accidental colonial people who were appointed to govern. So you can have human freedom without political freedom. You can have economic freedom without political freedom. But you cannot have political freedom without a large measure of economic freedom.
Thank you, Dr. Friedman, for sharing your ideas with us here today.
Well, you're welcome.
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This page last revised on Jun 08, 2009 13:40 EST