A Nobel Laureate on the American Economy

Host: Richard D. Heffner
Guest: Milton Friedman
Title: “A Nobel Laureate on the American Economy VTR: 5/31/77

I’m Richard Heffner, your host on The Open Mind. My guest today is perhaps this country’s foremost economist, Milton Friedman of the University of Chicago, of Newsweek magazine, and of wherever it is that persons of brilliance and concern gather to discuss the fate of individual liberty in the midst of ever-expanding governmental responsibilities. Well, that’s the way I introduced Professor Friedman on The Open Mind two years ago. Since then he has been as brilliant, has delighted still more discerning citizens of the world, has become a Nobel laureate, and is here today to pick up where we left off.

Professor Friedman, we were saying two years ago, literally, we left off on the road to serfdom. I was looking back at the transcript of our program together, and we did leave off on the road to serfdom, the road to an overabundance of interference in the lives of most individuals. And you said, “I really do think the chance is a good deal less than 50 percent that we’ll be able to avoid it.” And by avoiding it you were referring to this road to serfdom. Now, two years later, have you changed your mind? Is it still 50 percent? Is it 40 percent, 60 percent, or what?

FRIEDMAN: I am sorry to say that I haven’t changed my mind. I wish I could say I had a favorable direction. I think the odds at the moment are still less than 50 percent. In the past two years there have been some favorable developments from this point of view and some unfavorable ones. If you start with the unfavorable ones first, the developments in Great Britain have been very unfavorable from this point of view. Britain has been in an increasing crisis economically. And that is threatening the political stability of Great Britain. Great Britain, after all, is a fount for most of our ideas on political freedom and liberty. And if Britain were to go, that would not be a good thing from the point of view of the world as a whole or the US in particular. On the continent of Europe, Italy and France seem to be on the verge of moving toward governments in which the communist party will either be dominant or will play a large role. They may yet escape that fate. But certainly the possibility of that development today is larger than it was two years ago. At home in the United States, on the unfavorable side, the energy program development is from a fundamental point of view the most threatening at the moment to the preservation of a free society.

HEFFNER: Why do you say that?

FRIEDMAN: Because the plans that are being made and the programs that are being offered with respect to it are programs fundamentally for nationalizing or the equivalent of nationalizing the production, distribution, consumption of energy. If you look at the program that has been proposed by various groups, not necessarily only those by the Carter administration, they are programs for turning over control over the production and distribution of energy to governmental bureaucracies. That’s a move in the direction of a corporate state. It’s a move of replacing private initiative and voluntary action by compulsory governmental action. Those are the unfavorable developments.

On the favorable side, if I may start with what I think has been the most favorable development of the past two years and one that many people will not find favorable, it’s been what’s happened New York City. Now, that’s very unfavorable for the citizen of New York.

HEFFNER: Tell me about that. I am a citizen of New York.

FRIEDMAN: But for the country as a whole it’s been the most dramatic element that has shaken the confidence of the public at large in the virtues of big government, of paternalistic government, of social welfare measures. Here is New York City. The most welfare state oriented electorate in the country. The city which has the largest government spending per person. A city which has the greatest problems of any city in the country, in which government spending far from solving problems has created or exacerbated them. Now, from the point of view of the public at large, the experience of Britain should have been just as great a cautionary tale. But Britain is a long way off; it’s a different country. New York is close to home; everybody knows about New York and is aware of New York. And therefore the problems of New York City have had, I think,, a very healthy effect on the attitudes of the public at large toward the role that government should play in their lives.

Similarly, on a number of a wide range of other issues there has been increasing disillusionment with what government can accomplish. We all know from all the polls that governmental agencies, whether it be the Congress or the White House or the bureaucracy, rank very low in public esteem. There has been a gathering tax revolt, a gathering reaction against big spending by government. It is this reaction against big spending, this decline in confidence that the way to solve a problem is to throw money at it which has been the major political force behind what commentators have been describing as Mr. Carter’s fiscal conservatism. Now, that’s a good trend. Much more fundamental and much more important potentially from the long run is what’s been happening in the world of ideas. The ideas of socialism, of collectivism, of central planning, of the welfare state, which were for so long the dominant ideology of the intellectual community, have become increasingly discredited. That line of thinking is dead. It has nothing to offer to a young, hopeful man who is trying to look for something to believe in and to have faith in. The ideas and individualism of freedom, of each person doing his own thing, the idea that maybe you have a better society if people tend to their own knitting rather than everybody trying to tend to everybody else’s. Those ancient and honorable ideas are having a resurgence. They have a much better hearing today on campuses, among the intellectual community in general than they did even as short a time ago as two years. That intellectual development, I think, is all to the good. But whether it will be able to stop the road to serfdom, stop us from going all the way down to the road serfdom is a real question, because once you get an avalanche going, if that’s the right image, once you get a big car going down the road it has an enormous amount of inertia. And it takes something really to stop it and turn it around. And the real problem is whether the changing climate of ideas can take effect soon enough before it is overwhelmed by the onrushing behemoth of the state.

HEFFNER: Professor Friedman, I’m interested in what you say as what you see as a shift in ideas away from the welfare state, away from socialism, away from stateism. Yet I had the occasion recently to look at a series of reports that indicated what citizens in this fair city, New York, were thinking about, what they were concerned about. And I was fascinated to note – now, this isn’t two years ago, this is very recently – to note that they are still concerned about the services that they want, additional services. They want more, they want more, they want more. And perhaps on the campuses, perhaps you and your friends are terribly much aware of what the “gimmes” have done to us. But what indication is there that really at the depth of this society, at the basic level of this society, people are moving away from an insistence upon more and more social services?

FRIEDMAN: Well, maybe there isn’t, and maybe you’re right. In which case that pessimistic evaluation that we started out with is supported. But I think one must distinguish between common opinion at a moment and the underlying movement of intellectual ideas which only determines common opinion after a very long lag. Now, of course, most people most times would like to get something for nothing. They…always have the gimmes, in your very evocative term. But yet – and New York, of course, is exceptional, as I said before, New York is the most welfare-oriented electorate in the country – and yet even the people in New York, I suspect, are more aware than they were before about the price, the cost, the consequences of trying to get things by that device of getting it through government. And undoubtedly the majority of the people have not been moved. General public ideas are much slower to move than intellectual ideas. That’s a fortunate thing. The public at large never moved as far in the direction of socialism and collectivism as the intellectual community did. They preserved a kind of a stability which kept us from going even faster than we did. One of the reasons in my opinion why Britain went so much faster toward a completely socialized state than we have gone is because the intellectual and ruling communities in Britain are more homogeneous and more nearly one. Well fortunately we have a much more diversified and varied set of elites. So I think the public at large never went as far as the intellectuals in that direction. And I am sure they are slow in turning around and going back the other way. I’m not saying that there has been any major trend in the public opinion at large, but only that in the intellectual community, in the community of the youngsters and young people who are coming up; no change in the older ones either.

You know, human beings have certain very common characteristics. It’s very hard for anybody to change his mind after he’s gotten to the age of 25 or 30 and gets set in his ways. It’s always fascinating to me. I had an interview this morning, a radio interview with a group of youngsters from a radio program called “Focus on Youth.” They were lively, energetic, bright; they were a wonderful group. They had a guest book in which they asked me to write a message and my name. And soothe message I wrote was “How is it that these bright, energetic, brilliant, dynamic young people turn within such few years into such deadly dull, unimaginative inactive adults?”

HEFFNER: You mean the rest of us?

FRIEDMAN: The rest of us. All of us. You’ve noticed this, I’m sure. You’re on the campus, on Rutgers. Haven’t you always been impressed by the contrast between…the liveliness and active minds of the young graduate students and of the opposite on the part of the settled, permanent tenured instructors?

HEFFNER: Well, we could argue that point out, Professor Friedman, at some point.

FRIEDMAN: I don’t want to overstate it. There’s an element to it. Well, going back to the main point, I believe it is true, and I’m sure you’re right and many people will believe that government owes them something. The point is that the first step in people’s conversion is never with respect to their own privileges but always with respect to somebody else. Everybody always knows he’s an exception. You ask people, “Do you think government should be cut down to size?” “Oh, of course.” “How about the program you benefit from?” “Oh, well, that’s a special case. That needs more money.” So I don’t believe there’s any contradiction between people saying “Gimme”, on the one hand; and these same people acting in another capacity to as to hold down the rate of growth in the state.

HEFFNER: You know, I would ask you the same question that I asked you a couple of years ago, and that is, why do you hold on, as it seems to me you do, hold on almost for dear life, to a kind of optimism despite all the things that you see and comment on in front of you? Why not recognize the situation for what it is, as you describe it so well, and then perhaps point ourselves in a different direction?

FRIEDMAN: Down the same road. There’s no different direction down that road. Don’t kid yourself. There just is no different direction down that road. This isn’t a strange road. We, you and I, who have been lucky enough to have been born in a free society, take freedom for granted as if it’s a natural phenomenon. But let me ask you, what fraction of the human race today lives in free societies?

HEFFNER: Tiny, tiny, tiny percentage.

FRIEDMAN: Over history, what fraction at any moment of time ever lived in free societies?

HEFFNER: Even tinier.

FRIEDMAN: Even tinier.

HEFFNER: I’m leading you down the garden path, Professor Friedman.

FRIEDMAN: No, you’re not. No, you’re not. It is true that the normal condition of mankind is tyranny and misery. We’ve escaped. We’ve been extraordinarily fortunate to escape into an island of freedom and prosperity. If we do not maintain that island of freedom, of prosperity, if we do not maintain the essential features of this society which made that freedom and prosperity possible, there isn’t a wide range of alternatives. We go to misery and tyranny, to the normal state of mankind. Why am I optimistic? Because we’re also ignorant. If we could really predict the future, you couldn’t be optimistic. But we’ve seen historically time and again that people have tried to make long-range predictions and not been very good at it. The human race is a funny thing. It’s always turning up surprises on you. People are capable of doing things you wouldn’t have expected to; of rising to the circumstance. And I suppose I maintain my optimism partly because my innate character is optimistic. But partly because the consequences of not recognizing our state of affairs, of not acting in time to check, seem to me so horrendous that I cannot but believe unless people realize the alternative before them they won’t take measures to make sure it doesn’t happen.

HEFFNER: Well, what took us into this little island of time in which we are so different or have enjoyed a difference from all the history of mankind?

FRIEDMAN: Well, that’s a very interesting question, and it’s one that can be spread more broadly. It’s a subject I’ve been very much interested in. From time to time in man’s history there have been golden ages. The fifth century B.C. in Greece, the Renaissance in Italy, the first Elizabethan period in England, the nineteenth century in Britain. We’re in the midst of what I regard as a golden age in the United States, the nineteenth and early twentieth centuries. Now, the interesting question is how is it here, to take it out of our own context, here’s the Greek peninsula. I refer to it as Peloponnesian, and somebody reminded me that it is not. What is it? It’s a different peninsula. At any rate, the area where…

HEFFNER: We’ll accept it as such.

FRIEDMAN: Okay. It was the same people there in the sixth century B.C. and in the fifth century B.C., the same people in the fourth century as in the fifth century. Why is it in the fifth century you have this sudden flowering, this enormously productive and brilliant period; it disappears in the fourth, third, second century B.C.? Why is it? Same people. Well, I think in many ways the fundamental explanation – and now I’m simplifying and conjecturing; this isn’t a solid, well-sustained hypothesis – is that some accident comes along which wipes the slate clean of restraints that have been holding people back. In our own golden age it’s very clear what that was. It was a new continent, with new people coming, with a new form of government, with a Constitution, the Declaration of Independence. It was an opportunity in which people were unrestrained and in which the natural instincts for people to improve their lot were given freest and fullest reign.

Well, what happens, and the reason these golden ages tend to be relatively brief, the reason they last 100 years, 150 years at most, is that as time passes the slate gets filled up. It’s very much easier to introduce restrictions and restraints than it is to remove them. It’s easier to pass a low than it is to repeal a low. And so over the course of time you tend to impose these chains and restraints on yourselves, mostly for good reasons. The initial objectives are always good. That doesn’t mean the outcome is. And finally, the slate becomes so full – if I may continue to use that image – that there’s no more room to write on, and you need somehow something which will provide for another removal of restraints.

HEFFNER: What do you think would provide now for a tabula rasa again, a wiping clear of the slate?

FRIEDMAN: Well, I think the first thing that’s necessary to wipe clear the slate is to set a limit to government spending. The thing that has been encroaching more and more upon that slate is that whereas until 1928 or 9, total government spending in the United States, federal, state and local, never exceeded ten percent of our income, except in the Civil War and the First World War. It has now risen to over 40 percent of our income. If that continues…well, 40 percent is an awful lot. In Britain now it’s reached somewhere between 50 and 60 percent. The first necessity, I think, as a tactical matter, is to set an end to that. As a strategic matter, the main necessity is to have a change in the intellectual climate of opinion which will substitute a belief in the individual responsibility for the false belief in social responsibility. Let me emphasize, the problems that have arisen for us have not come from evil people who were trying in conspiracy or anything like that to enslave us. That hasn’t been our problem. Our problems have arisen from good people who were trying to do good, but trying to do good is a fundamentally flawed way. The welfare state is in many ways a noble construct, a noble concept. It’s the concept that we ought to help our fellow men. What flaws it is that it’s one thing for you to help me out of your pocket; it’s another thing for your to help me out of his pocket. And the fundamental flaw of the welfare state, in my opinion, is the idea that you should do good with somebody else’s money.

Now what’s wrong with that? Two things are wrong. First place, nobody spends somebody else’s money as carefully as he spends his own. We talked about New York City. About seven or eight years ago (I’ve forgotten exactly when it was – Kenneth Galbraith in a n article in New York magazine said there were no problems in New York that could not be solved by the city spending enough money. If my memory serves me right, he said by doubling New York’s budget. Well, in the meantime, New York’s budget has quadrupled, and the problems have gotten worse, not better. And that’s cause and effect. Because when you say spend more money, whose money? The City of New York spent more money, but where did it get it? From its citizens. There is no more money in total to be spent. But nobody spends somebody else’s money as carefully as he spends his own. So you had more money being spent carelessly, and less money being spent carefully.

In the second place, equally important, you cannot spend somebody else’s money unless you first get it. How do you get it? Ultimately and fundamentally be sending a policeman to take it away from him. So the concept of doing good with somebody else’s money has force or coercion built into it as an essential feature. And those flows, the waste which arises out of spending somebody else’s money and the coercion which is unavoidable, destroy the good and the idea of doing good and convert it into doing bad.

HEFFNER: I’m interested in your second point because I’ve wondered, as you were addressing yourself to the subject, I’ve wondered whether it would be the philosophical climate that’s created, that of the policeman who comes and takes those tax monies, those funds, or is your opposition that of the economist? Is it that of the economist of that of the philosopher? Can we distinguish between them?

FRIEDMAN: We can distinguish between them very much. The economist, as economist, I can say what will be the consequences of doing something or other. As an economist, if you say to me – let me take a New York City problem – if I analyze to you the disastrous consequences of rent control in New York City, the effect which that has had on the deterioration of buildings, on the abandonment of buildings, on the reduction in the tax base, on slums, all of that is a predictable consequence of rent control. It’s a straight matter of technical economics that can be shown with a curve. Wherever rent control was introduced, whenever it was introduced, whether in Britain or in France or anywhere, it doesn’t matter; that’s purely a technical consequence of rent control. On the other hand, if I say, regardless of the consequences it is morally wrong for a government official to force me to rent a piece of property to you for less than the price at which I would voluntarily rent it, at that point I am now speaking as a man with values and philosophy. That is to say, you have both principle and expediency involved. The economist talks to the expediency; and the philosopher, the ethicist, the human being, talks to the principle.

HEFFNER: Now, the philosophers may disagree. Do the economists on this question of rent control and its relationship to New York’s…

FRIEDMAN: Oh, no, no. On rent control there’s no disagreement whatsoever. Oh, the interesting thing is that the public at large believes that economists disagree. The fact is that on most technical subjects in economics you’ll find almost no disagreement.

HEFFNER: All right.

FRIEDMAN: Rent control is certainly one example in which I will challenge you to find from the professional economists from the left to the right, I will challenge you to find anybody who will defend rent control from a technical economic point of view.

HEFFNER: All right. Now, when the program began, I was going to refer to you as this country’s foremost conservative economist. And you demerit that, you object to that characterization. And I can appreciate that. Is it not appropriate or proper though to say that there are economists in this country who fall into a camp that one might generally say is on the right, and others who fall into a camp that others might generally say is on the left?


HEFFNER: Or can we not say that economists disagree on major issues?

FRIEDMAN: Well, they disagree on major political issues. The question is whether they disagree on economic grounds or on noneconomic grounds. First, my objection to conservatives is not the same as the objections to what’s right or left. Right or left are very ambiguous terms. But conservative is a very definite, clear term. A conservative is somebody who wants to conserve, who keeps things as they are.

HEFFNER: And you don’t like the way things are.

FRIEDMAN: I don’t like things. I want to change them. I’m a radical. Who are conservatives today? The New Dealers, the people who are called in this country erroneously, liberals, the people who are in favor of big government. Mayor Beame’s a conservative. Hubert Humphrey’s a conservative. They want to continue along the path we’ve been going. You have two different dimensions along which, it seems to me, you can consider people. One of them they want to keep things the way they are, or change them. Conservative or radical. From that point of view I’m a radical. Second, insofar as things are changed, in what direction do they want to change them? You may have radicals who are people who are not conservative, who want to move farther in the direction we’ve been going, who want to have a completely socialized state, a completely collectivist state. And there is seems to me to the right terms are the ancient and honorable term “liberal” in its original sense and meaning of and pertaining to freedom; people like myself who want to maintain a free society. A word that has been much abused. And collectivists or stateists. People who want to have things organized through the state.

Now, the interesting thing about your question about economists is that there is a misleading impression of disagreement among economists. I’ve had this experience many times. Get a dozen people in a room together, some of them economists and some noneconomists, political scientists, sociologists, journalists, whatever they may be. Start any subject going. Within 15 minutes all the economists will be on the same side. Whatever their political persuasion is. Now, that doesn’t mean that they don’t have different political views and different political attitudes. But those derive very little from their technical economic discipline, and a great deal from their values, their political orientations. Let me show you, again illustrate. When President Ford two years ago and more had a summit conference in Washington at which there were a collection of economists, to discuss the problems of that time, there was a manifesto issued by all the economists present with the exception I think of two, in favor of a long list of 28 (I think it was) measures at reducing governmental intervention into the economy. Economists from the left to the right were in favor of eliminating interstate commerce commissions in control of rail, of CAB control of airfares. And I now have forgotten of the… But there were, I think 28 such items on which they agreed. So I think the appearance of disagreement is very much greater than the reality.

What happens – let me take the energy problem we started about – suppose you were to ask economists – I don’t care whether they’re on the left or the right – “What would be the appropriate way to handle the energy problem if you could neglect all considerations of political feasibility? As technical economists, how should the energy problem be handled?” I will lay you a large wager that the bulk of the economists, 80, 90 percent will say, “Oh, well, that’s easy. You should let the market go. Let market price oil and market price natural gas.” Among the things that all the economists were agreed on at that summit was that you ought to get rid of the price ceilings on natural gas.

HEFFNER: Now, their differences will arise from what?

FRIEDMAN: At this level their differences will arise because they will say, “Oh, of course that’s the right solution.” But you know it’s not perfectly feasible. And so they go down the trap you were trying to drive me down before. Having accepted that it’s not politically feasible, then instead of being in favor of what I think is the right thing, I’m going to try to ask which is the least bad thing. So the economist comes out and says “Well, as the second best thing…” — he doesn’t even say this, but he thinks it – he says, “Well, I really have to be practical. It’s not feasible. You’re going to continue with price control on natural gas. You’re going to continue with price control of fuel crude oil. So maybe it would be a little better if we allowed those fixed prices to be higher, so we’ll come out in favor of higher prices and not attack the controls.”

HEFFNER: But now, Professor Friedman, you use the word “political.” You say this is a political decision. Is it political, or is it philosophical? Does it relate to the desire to have one’s party reelected? Elect, elect, elect; or spend, spend, spend and the elect, elect, elect? Or is it related to the sense of what we can impose upon the human beings who make up the electorate?

FRIEDMAN: Well, you know, you’re trying to put things into watertight categories that cannot be put there.

HEFFNER: Then take them out.

FRIEDMAN: Human beings are, every human being has a capacity of knowing what he believes is the right thing is also the right thing for the country. “What’s good for General Motors is good for the United Sates and vice versa,” in that famous phrase of Mr. Wilson’s. So I don’t think you can distinguish between these two. I think that politicians and people, everybody, businessmen, politicians, scholars, we’re all seeking to pursue our own interests. We don’t have to interpret it as narrowly. My interests are in ideas as much as they are in dollars and cents or something else. But we’re all seeking to pursue our own interests. Politicians, their interests are closely connected with getting reelected. And therefore they will put primary emphasis on what will get me votes next time.

HEFFNER: Well, I was thinking of an analogy. I was thinking of drawing this comparison with the medical scientists; economic scientist and medical scientists. Medical scientists presumably will disagree minimally about what all other factors…

FRIEDMAN: Not at all. Not at all.

HEFFNER: On certain things they may disagree minimally in terms of the technical means that they should employ to deal with, to treat a patient. But in terms of considering the patients, in terms of considering their needs that are more than technical, they may disagree. And quite honestly, as to the approach to take, wouldn’t it be fair to say that this is as much a consideration as what you consider political, a political consideration among economists, which I would relate to how is my party going to be elected more readily the next time around?

FRIEDMAN: Well, I don’t either want to rule out completely that narrow interpretation, nor rule it in completely. I think economists are human beings like everybody else. Many of them do establish party loyalties. What’s more important, many have very strong private interests that are associated with which party is in power.

HEFFNER: Like what?

FRIEDMAN: Like what jogs they have. Like what prestige they have. Like what outside income they will be able to earn. You know, it was not a joke only, for years that the Brookings Institution in Washington was a home away from home for out-of-power Democratic economists. It’s not a joke now that the American Enterprise Institute is serving a similar function for out-of-power Republican economists. Surely these are not trivial and negligible. But they are not the only thing, I agree with you.

HEFFNER: You don’t really think that determinations of public policy or contributions by major economists in terms of the determination of public policy, that in those determinations one’s job in the next administration has played a major role; or do you?

FRIEDMAN: You know, you want to make it black and white. Human beings are distinguished from animals much more by the ability to rationalize than by the ability to reason. Sincerity is a much overrated virtue. It’s possible for anybody to be sincere about anything. I’m not questioning the sincerity or the motives of anybody. I’m only saying a human being is affected by those things that affect his image.

HEFFNER: Are your economic policies affected in that way?

FRIEDMAN: Of course they must have been. I can’t deny that they could have been.

HEFFNER: No, no, I’m not talking about could have been.

FRIEDMAN: Or that they have been. Or that they have been. I mean, we never know ourselves. And the man who says, “I am objective,” you k now that can’t be the case. We’re all of us imperfect human beings. We’re all of us going to be affected by these things. I’m not saying anybody else is any more or less affected than I am. Some people are less affected; some people are more. I would say on the whole you’ve got to look at it in a more complex and sophisticated way. Most people develop beliefs and ideas. Those beliefs and ideas in turn determine what policies they approve, what directions they move. That in turn reacts on them and affects their beliefs and ideas. And the whole thing is a kind of biological process of creating a complex structure that can/t be dissected into the simple black-and-white category. He is in favor of this policy because if he is in favor of that policy he will get this and this job. You can’t say that. That’s not true. I’m not saying that of anybody.

HEFFNER: Okay. I wondered about that because the question of self-interest did come up, and I was shocked by it.

FRIEDMAN: Well, you see, the economists… Take the economics profession as a whole. Because I think it’s very interesting from this point of view. The economists have a very schizophrenic situation. Our discipline of economics, as a science, predisposes all economists to be in favor of a market system, of a free market. Because that’s our business. We come to understand how a market operates. It’s a much more sensitive and sophisticated instrument than may appear on the surface or that the ordinary man in the street believes it. So every economist has a predisposition to be in favor of a market system. On the other hand, the major growth area for jobs for economists has arisen out of government regulation. So the special interests of economists is to be in favor of government regulation. How do you reconcile this? Again, don’t misunderstand me. I’m not saying anyone is doing this in a Machiavellian way. I’m just describing the unobserved forces that are at work on it. Well, the way in which many economists have implicitly reconciled it is by being in favor of the free market in general, and opposed to the free market in particular. “And this area is a special case that needs regulation, this area is a special case.” You know, the same thing happens to businessmen. Every businessman is in favor of private enterprise.

HEFFNER: Except in his…

FRIEDMAN: Except for himself. And he isn’t – let me emphasize – in both cases, he isn’t being Machiavellian. He isn’t being insincere. He isn’t being devious. He sincerely believes. He knows his own case. And he sincerely is persuaded that his own case is special and that it’s in the national interest to treat it differently than other cases.

HEFFNER: But this concept of the marketplace, has it always been with us?

FRIEDMAN: Yes. Oh, every society is primarily run by the marketplace. But there are many kinds of marketplaces. The political marketplace…

HEFFNER: And aren’t you talking about a particular kind?

FRIEDMAN: I’m talking… But even the particular kind, yes, there are two main kinds of marketplaces. The economic marketplace in which you buy and sell, which has much broader relevance than you might a first suppose. And the political marketplace in which decisions are made by votes or by authority through political position by command.

HEFFNER: I understand. But I just wondered whether this basic agreement that you referred to among economists, all of whom relate to the economic marketplace, I was about to ask where is it written…

FRIEDMAN: (Laughter)

HEFFNER: …where is it written that the concept of the marketplace shall prevail? Isn’t this a rather modern concept? And if it is, why must we tie ourselves to it as tightly as you would have us do, as tightly as you suggest all economists would have us?

FRIEDMAN: Well, let’s answer that in two different ways. You say, “Why must we tie to it?” Because the fact of the matter is that there is no alternative mechanism that has so far been devised which will enable large and complex societies to exist. Consider what seems like the most extreme exception: the Soviet Union. It’s not, in the first instance you would say that’s not a market economy. And yet, the main organization of resources in the Soviet Union is through the marketplace and not through government command. And this is true in all sorts of ways. Anybody who read Hedric Smith’s fascinating book on the Russians will discover that if something goes wrong with you electricity in your house, you don’t call a state office and have them send somebody. You get a government employee on his spare time to come in and fix it for you.

HEFFNER: The same thing is true here, if you can.

FRIEDMAN: Of course, of course. Well, no, if you can here, you hire somebody. But in Russia supposedly you ought to get a state official, governmental official. It’s all done by government agencies. It’s not here, yet.

Go on. Take food. Something like 25, 30, 35 percent of the people in the Soviet Union are required to produce a food. They permit small private plots. Those plots account for two to three percent of the arable land of the Soviet Union. They produce a third of the food in private markets and distributed through markets. If you have, if you look at the way in which labor is organized, the buyers are governmental agencies. But people are attracted to one job or another by the job or by the pay that is offered to them. Fundamentally, the Soviet Union is a market economy, but it’s distorted market economy because the extraordinarily great role of government forces the market into channels which are not efficient and not effective. And so much of its power is wasted in simply overcoming the bureaucratic mess of the government. That’s why the Soviet Union has such a low standard of life. So it’s interesting, on a matter of theory. Well, I don’t like that word. ON a matter of sort of abstract ideal, you can conceptualize a command economy in which the market plays no role. It’s an army. A general gives an order to a colonel, a colonel to a major, a major to a captain, and so on down the line. Or you can visualize a voluntary exchange economy, a pure market economy in which everything is conducted by voluntary agreement among individuals’ purchase and sale. But as a matter of practical experience, no complicated society can be run solely on the command principle. It’s just impossible. And therefore, in one sense, the market is essential; there’s no way of avoiding it. Now, you don’t mean it in that sense. You mean another sense. In what sense is it written that the free market is desirable?

HEFFNER: Well, desirable, I didn’t really mean that. NO, I meant in the first instance where is it written that this concept, which I thought was comparatively modern, of the free marketplace…

FRIEDMAN: Well, in the modern version of it it really dates back to Adam Smith in 1776, which is just 200 years. There are precursors to that of course. But as…

HEFFNER: How did we survive? How did we get there?

FRIEDMAN: Well, but you know, ideas, you know about the Frenchman who discovered at the age of 70 that he had been talking prose all his life. Because we can give words to things doesn’t mean that those things didn’t exist before we gave words to them. The free market has been around for thousands and thousands of years. The theory of a free market in a systematic organized way dates back to Adam Smith in 1776. But the free market doesn’t.

HEFFNER: so the answer to the question of where it is written is really in Adam Smith, The Wealth of Nations?

FRIEDMAN: Yes, that’s the first major source. There have been lots since. But that’s still a book worth reading.

HEFFNER: Indeed. You know, I was thinking about, before we began to do this program, I was thinking about where is it written. And I was considering going back to a very ancient civilization, mostly in terms of the reports that we have that you may in your visits to Israel advise the new Israeli government in terms of its economic problems. And I wanted to ask you a question. I wanted to ask you a question about a remark that I had heard you make in connection with this story about the role you might play in relation to the new Israeli government. You said something like this – and to the degree that I’m distorting your words or your thoughts, please correct me – “It is somewhat strange that socialism is supposed to find so many friends, and capitalism so many enemies among Jews when perhaps some people might think that the essence of the Jewish tradition is so alien to socialism and so akin to capitalism.” And I wondered, to the extent that you meant much of that, what you meant by it?

FRIEDMAN: Well, I think I mean, I would endorse certainly that statement as you put it, while going onto say it needs some elaboration in some respects. Let me see if I can put it to you in a sort of a different way. My first visit to Israel was made about 15 years ago. I was there for about three months as a visitor at the Hebrew University in Jerusalem. And after I left Israel, I summarized my impressions by saying that I thought that the best way to understand Israel was to recognize that two Jewish traditions were at war with one another in Israel. One of them was a very recent tradition, a tradition of 100, 150 years old. That’s the tradition of socialism. That’s the tradition you referred to in your initial comments, that it is true that on the whole the Jewish intellectuals have been strongly pro-socialist. And that’s contributed disproportionately to the socialist literature. That was the one tradition. The other tradition, I said, was a tradition that was at least 2,000 years old. It was a tradition that had arisen during the Diaspora and as a result of the Diaspora. It was a tradition of how you get around government regulations, how you find chinks in controls, how you find those areas in which the free market operates and make the most of them. It was that tradition which had enabled the Jews to survive during centuries of persecution by the constituted authorities. Once in a while there would be a monarch who would intervene in favor of the Jews. But almost always that was because there had been a Jew who had accumulated enough money through the free market, through capitalism, to have loaned money to the monarch and have him in his debt. The story in the Bible of Esther is not a very usual story. That isn’t usually the way it occurs. Most of the time the Jews have survived despite the opposition of the powers that be, not because of them. And this ancient tradition of 2,000 years is still very much alive in Israel. And what I said at that time was that fortunately for Israel the ancient tradition is strongly renewable.

Now, let me go back to that in a modern context. I believe that there are few people in the world who have benefitted as much from capitalism and free enterprise as the Jews. Suppose you ask yourself in what countries it is that the Jews have been able to survive and thrive. They’ve been able to survive and thrive primarily in those countries that have had capitalism and free enterprise. They haven’t been able to survive and thrive in the socialist utopias of Russia or of Poland. They haven’t been able to, they weren’t able to survive and thrive in the national socialist state of Nazi Germany. They have been able to survive and thrive in places like Great Britain, in Germany when it was capitalist before Hitler, in France which is largely capitalist, and the United States. And more important, in what parts of those economies have they done best? In those parts where government has had the least role to play. You do not find in the United states that the Jews have done very well in large-scale manufacturing or in commercial banking, because those are areas which are very closely intertwined with government. In banking you need a governmental franchise. And there is probably no industry in the United States in which there are fewer Jews, surprising as it may seem, in major positions of responsibility than in the commercial banking industry. Where have they thrived? In the industries which have been most competitive, where there’s been the least monopoly, private or public: retaining, which was open to all; in new industries, in Hollywood. Why? Because it was a new, brand new industry. There were no settled positions of privilege or of power, no government involvement.

So, Jews have done best – and other minorities. I’m not only speaking of Jews. If you look at the Japanese in the United States, if you look at the blacks in the United States, in every case they have done best in those areas where you have had the greatest degree of competition; and they have done worst in those areas where you have had the most monopoly and the most governmental link to government. So on the one hand, there are no people in the world who have benefitted so much from capitalism as the Jews. Look at Israel. Suppose socialism had triumphed in the world. How would Israel have gotten support? Did Israel get support in its early and difficult days from the governments of the world? Or from people? And from what people? From the Jews who had managed to make a little bit of a competence for themselves and accumulated a little funds in the capitalist bastions of the world.

So, the Jews have benefitted enormously from capitalism. And yet on the other side – and that’s the issue you raise – here you have the paradox that the Jews have been among those who have contributed much to undermine the intellectual foundations of capitalism.

HEFFNER: Is this a dichotomy that exists in contemporary Israel too?

FRIEDMAN: Of course. Of course. It has existed.

HEFFNER: Then how will you make a contribution?

FRIEDMAN: Oh, well, you know how it is. I will make a contribution. I would be delighted to if I could. But you know, people ask for advice from people who they know will give them the advice they want to hear. Well, there’s no shortage of good economists in Israel. They are very good economists. They know what to do. And in fact, the economists in Israel have not been in favor of governmental policies in Israel. It’s like it has been in the United States, where the economists have been opposed uniformly to many governmental policies, such as the price-fixing policies I was talking about, such as rent control. Similarly, the economists in Israel have been almost unanimously opposed to some, many governmental controls and regulations. What’s happened in Israel is that you now have a new party that came into power. … It’s a party that proclaims it’s belief in private enterprise. It proclaims its desire to reduce the size of government and to give greater opportunities to individuals. Their objectives are excellent. I hope they achieve them. I’m not wholly confident that they will, in fact. I have many doubts about whether they will succeed. And a reason why they have asked me if I would advise them is because they know that I believe in a free economy and that their policy is my policy. And insofar as I can give any assistance, I am delighted to, both because of my general desire to see freedom prosper, and also because I have a very strong personal sympathy and interest in Israel. I am Jewish by origin and culture. I share their values and their belief. I share the admiration which many have had for the miracles that have occurred in Israel. So if I can make any contribution to a more effective policy for preserving Israel, Israel’s freedom and strength, I would certainly be delighted to do so.

HEFFNER: Let’s turn now, in the moments we have remaining, from Israel to our own home. You had a plus and a minus evaluation of these past two years before. In terms of the president’s attitudes as well as actions, how do you, given your approach to the needs of this country, evaluate President Carter?

FRIEDMAN: Well, I have always argued that you will not solve problems by electing the right man to the White House.

HEFFNER: Certainly not by electing the wrong man.

FRIEDMAN: Yes. The only way you will ever solve problems, in my opinion, in moving the direction we want to move, is by making it a political interest of the wrong people to do the right thing.

HEFFNER: Go ahead. Spin that one out, Professor Friedman.

FRIEDMAN: I’m not knocking it. I do not want a dictator. You do not want a dictator. We want a man as president who is responsive to the will of the people. Now, we also want a man who will exercise leadership. We also want a man who will distinguish between a momentary whim of the people and some longer-run will. And we want a man who will stand up for what he believes, but not too far. Not beyond the point where he destroys his country in the process.

Now, as I look at President Carter, I think his political interests have, to a large extent, coincided with many of his personal values. He is a small, has been a small businessman. He comes from the South, he is fiscally prudent. His desire, I’m sure, to move toward a balanced budget is serious, is sincere and honest. And it has been politically prudent to do so, because we have been in the course of a very good expansion. The economy is growing. The real threat is a rise in inflation, not a recession at the moment. It’s in his political interest to try to keep this expansion going as long as he can. So fiscal conservatism in that sense has been both consistent with his principles and politically profitable. However, he wants fiscal conservatism for a different reason than I do. I want fiscal conservatism to reduce the scope of government. He wants it to enable government to exercise greater power in achieving what he considers desirable objectives. He is not a “conservative” in any way whatsoever, so far as I can see, in the sense of being in favor of a small government. He has come out openly in favor of vast expansions in government power. He has come out in favor of a national health insurance program which would, in my opinion, be a medical as well as a social and financial disaster in the United States. His energy program, as I mentioned earlier, is not a program which is designed to give the market greater play; it’s a program for running things through government. He is fundamentally, as so many people have pointed out, an engineer. That’s his background, that’s his training, that’s his disposition.

HEFFNER: You’re saying he’s also a social engineer though.

FRIEDMAN: Of course. He’s an engineer. And he’s in a position…where can he engineer? On the social level. He is a social engineer. And he believes in it. I’m not questioning that. From that point of view, I believe his principles are very undesirable for what we need for the future. Now, how it will work out…
HEFFNER: Now, in terms of what you said, that may work out well.


HEFFNER: In terms of what you said a moment ago, that may work out well.

FREIDMAN: It may. That depends, exactly. That’s why I say that what matters to me is much less what his own beliefs are than what you and the others out there and what the people of this country decide they want their government to do. Let’s not kid ourselves. The government is responsive to the public. This is a democracy. If we have been moving in the direction of collectivism, if we have been destroying the springs of private initiative and private freedom, if we have been restricting ourselves in many areas as we have, it is because the public at large has sent instructions to Washington to do that. Take a simple case. We all bemoan inflation. Inflation is terrible, it’s awful. Nobody likes inflation. Why do we have inflation? Because we the citizens have demanded it. We have sent a message to Washington. We said, “We want you to spend more on roads, we want you to spend more on health, we want you to spend more on education. But don’t tax us for it. We don’t like those damn taxes.” What happens? Congress listens. It votes more expenditures. It doesn’t vote taxes enough to cover them. But after all, the difference has to be paid for somehow. And so the difference is paid for by the hidden tax of inflation, which is the only tax that can be imposed on the American people without anybody having to vote for it. And so that inflation, we’re responsible for the inflation. Other people have been the intermediaries, but we’re ultimately responsible. Well, in the way, whether Mr. Carter’s propensities are a force for good or ill will depend in a very large measure, almost entirely, on what the sentiment of the public is, what is politically feasible, what is politically profitable for him to do. And that’s where the changing attitudes and ideas of the public play such a large role.

HEFFNER: In coming full circle as we end the program, I gather you do feel that you see signs of a changing attitude on the part of the public.

FRIEDMAN: Oh, there’s no doubt about that. Changing attitude on the part of the public, there’s no doubt about their reaction to the New York case. There’s no doubt about their loss of confidence in the ability of government programs to achieve their objective. You know, if you want to get a laugh out of anybody you talk about the post office. And it’s a universally understood thing. When I say when I try to talk against the energy program is to say, “Are you really seriously suggesting that we should turn over the production and distribution of energy to the people who run the post office? That’s what Mr. Carter is proposing.” And that gets a laugh out of people. Why? Because attitudes and views are changing.

HEFFNER: I think we’ll look again maybe two years down the road as to whether they’ve changed in the direction that you want or not. Thank you so much for joining me today, Professor Milton Friedman. It was a very, very great pleasure to talk with you once again.

FRIEDMAN: I’m very glad.

HEFFNER: And thanks, too, to you in the audience. I hope that you will join me again on The Open Mind. Meanwhile, as an old friend used to say, “Good night, and good luck.”

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