Milton Friedman

Living Within Our Means

VTR Date: December 7, 1975

Guest: Friedman, Milton


for broadcast in New York City on WPIX, Channel 11
Sunday, December 7, 1975, 10:30 – 11:00 P.M.
Moderator/Host Richard D. Heffner
Guest: Milton Friedman, economist

HEFFNER: I’m Richard Heffner, your host on THE OPEN MIND. My guest today has been labeled this country’s foremost conservative 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. Professor Friedman, I wonder if I might begin the program by saying that you’re a kind gentleman, yet you’re identified by many with those who seem — to those who make that identification to want us not to do kind and gentle things — perhaps not provide for the poor, perhaps not provide for the aged — and I wonder how you’d reconcile these phenomena and whether you feel it’s fair to characterize you as a conservative economist.

FRIEDMAN: Well, let me start at the end of that first. I never characterize myself as a conservative economist. As I understand the English language, conservative means conserving, keeping things as they are. I don’t want to keep things as they are. The true conservatives today are the people who are in favor of ever bigger government. The people who call themselves liberals today — the New Dealers — they are the true conservatives, because they want to keep going on the same path we’re going on. I would like to dismantle that. I call myself a liberal in the true sense of liberal, in the sense in which it means (inaudible) and pertaining to freedom. Now, that brings me to your second point. One of the great mistakes is to judge policies and programs by their intentions rather than their results. We all know a famous road that is paved with good intentions. The people who go around talking about their soft heart — I share their — I admire them for the softness of their heart, but unfortunately, it very often extends to their head as well, because the fact is that the programs that are labeled as being for the poor, for the needy, almost always have effects exactly the opposite of those which their well-intentioned sponsors intend them to have.

HEFFNER: As an example, what are you referring to?

FRIEDMAN: Let me give you a very simple example. Take the minimum wage law. Its well-meaning sponsors — there are always in these cases two groups of sponsors. There are the well-meaning sponsors and there are the special interests who are using the well-meaning sponsors as front men. You almost always when you have bad programs have an unholy coalition of the do-gooders on the one hand and the special interests on the other. The minimum wage law is as clear a case as you could want. The special interests are, of course, the trade unions, the monopolistic craft trade unions in particular. The do-gooders believe that by passing a law saying that nobody shall get less than $2 an hour or $2.50 an hour, or whatever the minimum wage is, you are helping poor people who need the money. You are doing nothing of the kind. What you are doing is to assure that people whose skills are not sufficient to justify that kind of a wage will be unemployed. It is no accident that the teenage unemployment rate — the unemployment rate among teenagers in this country — is over twice as high as the overall unemployment rate. It’s no accident that that was not always the case until the 1950’s when the minimum wage rate was raised very drastically, very quickly. Teenage unemployment was higher than ordinary unemployment because, of course, teenagers are the ones who are just coming into the labor market — they’re searching and finding jobs, and it’s understandable that on the average they would be unemployed more. But it was nothing like the extraordinary level it has now reached — it’s close to 20%.


FRIEDMAN: Because the minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills. That’s what the law says. The law says here’s a man who would — has a skill which would justify a wage rate of $1.50, $2.00 an hour. You can’t, you may not employ him. It’s illegal. Because if you employ him you have to pay him $2.50. Well, what’s the result? To employ him at $2.50 is to engage in charity. Now there’s nothing wrong with charity. But most employers are not in a position where they can engage in that kind of charity. Thus the consequences of minimum wage rates have been almost wholly bad, to increase unemployment and to increase poverty. Moreover, the effects have been concentrated on the groups that the do-gooders would most like to help. The people who have been hurt most by minimum wage laws are the blacks. I’ve often said that the most anti-Negro law on the books of this land is the minimum wage rate. And so I think the real answer to your question is that you must not judge a bottle solely by its label. You have to look at what’s inside and see what the law or the measure produces.


HEFFNER: If one looked at the label, though, and perhaps one of those government regulations that you would look askance at, is that we look at labels. If one looked at the label and identified the objective of minimum wages, are there no positive, legitimate objectives achieved by minimum wage?

FRIEDMAN: None whatsoever. In my opinion, there’s absolutely no positive objective achieved by minimum wages. It’s real purpose is to reduce competition for the trade unions and make it easier for them to maintain wages of their privileged members higher than the others. And again, go back to my earlier point. Is there any group in this country that has been more discriminatory in its effects than the trade unions? It used to be at one time — to take this point of yours farther — you and I are both old enough to remember that it used to be lese majeste to criticize trade unions — trade unions were on the side of the angels — and it was an automatic (pause) conditioned reflex on the part. of any intelligent, well-meaning man, if you said trade union, ‘ah, good.” That’s changed. And desirably, it’s changed. Why has it changed? Because the harm which they’ve done — do — has become so absolutely obvious and patent. But even the most innocent and naive of well-meaning people — he might still have a warm feeling in his heart for labor, but he no longer makes a mistake of equating labor with labor unions.

HEFFNER: Do you feel this way about other aspects of social legislation that are designed to protect the aged, the sick, the needy?

FRIEDMAN: There is — I have often, in talking to audiences, especially liberal audiences, offered them a challenge. I have said, I challenge you to name a single social measure which has accomplished its intended objectives rather than the opposite, which has not done more harm than good — and that includes Social Security. Social Security — the objective is fine, again. And again, the objective of the Minimum Wage Law is fine, I approve it. What I’m objecting to is the means by which it is done. But the objective of Social Security is fine. But what has it in fact done? There is in this country today no tax which is more regressive and more objectionable than the tax which is levied on payrolls, supposedly in the name of financing Social Security. The most fantastic piece of Madison Avenue salesmanship that has been done in the twentieth century has been the brilliant stroke of linking together a regressive payroll tax with a bad system of welfare payments, calling the two Social Security, and selling them as if they were a bundle.

HEFFNER: You say Madison Avenue techniques. That means there are men with black hats on. Who?

FRIDEMAN: The do-good reformers who have sold these programs to the American people, telling them things that they knew were not true.

HEFFNER: That they knew were not -­

FRIEDMAN: That they knew were not true. One of the things that always shocks me is how people whom I would trust -­ maybe not with my wife, but certainly with my pocketbook — in their private capacity whom I would never question the integrity of, will in their public capacity, because they believe it’s in the best interest of other people — lie to the American people. Let me give you a simple example with Social Security, if I may. Social Security is a tax, as you know. That tax is supposedly divided into two parts, half supposedly paid by the employee and half paid by the employer — 5.65% by each. Now, the economics of the matter is that fundamentally there is no distinction between these two parts. The part for which the employer pays writes the check, is also paid by the employee. When Social Security system engages in propaganda — when it gives out information about the Social Security system, it always talks about the cost of the employee in terms solely of his part. I achieved what I thought was an enormous breakthrough about three years ago in a public debate with Wilbur Cohen, at that time Secretary of HEW. I got him to admit in public — for the first time that this has ever been done, to my knowledge, in Social Security literature — that the employer’s part was also borne by the employee. Now, Wilbur Cohen is an honorable man.

HEFFNER; in what way is it borne by the employee?


FRIEDMAN: His wage is lower than it otherwise would be. If you’re an employer, if you’re hiring a man, what’s the cost of that man to you? It’s what you pay him in wages, including his part of Social Security, plus what you pay in Social Security tax. You couldn’t care less whether he cost you $150 a week, of which $20 was tax and $130 wage, or whether he cost you $150 a week, all of which was tax. Couldn’t make any difference to you.

HEFFNER: Professor Friedman, let me, let me ask you what may turn out to be a long and rather convoluted question. You’ve said that the objectives of the people who have created Social Security programs and the people who want to provide for the aged, who want to provide for the poor, who want to achieve objectives that I would identify with Minimum Wage and Social Security, that the objectives were valid. And you share them.

FRIEDMAN: Absolutely.

HEFFNER: Now, if you share them, how would you have achieved those objectives?

FRIEDMAN: The only way you can achieve them.


FRIEDMAN: …in my opinion, which is by voluntary cooperative action. You see, I think there’s been one underlying basic fallacy in this whole set of Social Security and Welfare measures. And that is the fallacy — this is at the bottom of it — the fallacy that it is feasible and possible to do good with other people’s money. Now, you see that fallacy — that view — has two flaws. If I want to do good with other people’s money I’d first have to take it away from them. That means that the welfare state philosophy of doing good with other people’s money, at its very bottom, is a philosophy of violence and coercion. It’s against freedom, because I have to use force to get the money. In the second place, very few people spend other people’s money as carefully as they spend their own. Let me take this down to the situation of New York City right now. About six or seven or eight years ago — I’ve forgotten when it was — John Kenneth Galbraith, in an article he wrote in The New York Times Magazine Section, said, there are no problems in New York City that would not be solved if the New York City budget were twice what it is now. Now, the New York City budget has since then something like tripled. And all the problems are worse. Why? Because the fact is, it’s a confusion to identify the City with the people. The New York City’s budget is higher, but that means that the people of New York have less to spend. It’s only been transferred from people individually to the City. Now, who spends the money more carefully — the City civil servants or people who are spending their own money? Now, of course, you may say to me, but when the City spends the money, it’ll go for the good things, and so even half of it is wasted, it’s better off. But that’s nonsense. City civil servants and others are just like the rest of us. We’re all of us interested in pursuing our own objectives. The label again on the bottle may be welfare or health or education. But you have to look at all of the places where it drops off en route to going there. There are lots of other things that can be accomplished under those titles, and the fact is that no more — no larger a fraction of the money the City spends goes to good things. Let me illustrate in a very concrete way. A major problem in New York City is housing. Why? Because of bad governmental policy. Rent control, which was continued in New York after World War II, and the only city in the country where it was continued, everywhere else it was dropped. It has caused enormous abandonment of houses, eroding the tax base, public housing, governmental subsidy to housing, so that people who occupy it have no incentive to maintain it. If you had eliminated the government from the housing market and left that money in the hands of the people themselves, the housing situation in New York today would be far better than it is.

HEFFNER: Professor Friedman, I would like to ask you what you mean by “in the hands of the people” — you use that -­

FRIEDMAN: I mean you and me, I mean the people who pay the taxes, who finance the activities which government engages in. If I take Social Security, I mean instead of having a tax of something like 12% — not quite that — on every worker up to a maximum limit, it’s regressive. Instead of having that tax, if I let him have that money himself, he would be able to invest it in a program for his own old age, which would yield him greater benefits than on the average he can get from the amount that he is now paying.

HEFFNER: Suppose we grant that and say that that’s absolutely true — no question about that — aren’t we in a position though of looking back as responsible people to the point at which we had to recognize that many individuals were not doing this?


FRIEDMAN: That’s a misconception, I believe, of what the historical circumstance was. There is no doubt that in the Great Depression of the ’30’s many people were not able to take care of themselves. Lots of them. But that wasn’t because they hadn’t been prudent, hadn’t saved, because there was a real problem providing for old age. That was because of the catastrophe called the Great Depression which was itself produced by government mismanagement. The Great Depression didn’t arise out of any natural flaw in the system. It arose because some wise men sitting around in Washington and down here on Wall Street in New York decided to follow policies which reduced the quantity of money by a third over four years, which drove this country into an utterly unnecessary depression. Now, given the conditions you were in ’33, given that the mistake had been made, I have no doubt that major social action was called for. And I really have no criticism to make of the emergency action which was undertaken at that time in the form of WPA, PWA direct relief. I think you had to do it at that time, given the state you were in. But Social Security isn’t one of those things. And I do not believe it can be demonstrated that in the absence of Social Security, any large number of elderly people would be unable to provide for themselves. But let’s look at that a little farther. Suppose that 5% of the elderly would not be able to provide for themselves. Does it make sense to impose a program on 100% of the people in order to do something about 5%? Does that really make sense? You see, that’s the great defect in this line of thinking — is that the ideas that have been behind the direction we’ve been going in, is that the people are children who have to be looked after by their paternal — by the intelligent intellectuals and governmental officials who can take care of them. Big Brother is in Washington, and he has to look after people. Now, I think it’s Big Brother who has to be looked after, and not the people.

HEFFNER: Professor Friedman, would it be fair not to use the phrase Big Brother, but to say, yes, the assumption has been that there needs to be — call it what you will — leadership, there needs to be direction, there needs to be even the coercion that you find so distasteful? Is it so totally unfair to say that we didn’t live in a paradise even before the mismanagement that you claim brings about the depression?

FRIEDMAN: We didn’t live in a paradise, but there is no period in human history in which the ordinary man — the ordinary man — had as great an improvement in his lot in life as in the nineteenth century in the United States when the government was of trivial importance.

HEFFNER: Then what accounted for the movements, the very strong and positive movements to bring about governmental action?

FRIEDMAN: What accounted for those movements — those were fundamentally intellectual movements, they originated primarily in Britain and elsewhere — what accounted for them, I think, is a complicated story. I won’t profess to give a whole answer. But I think the important part of the answer is that it is a natural human tendency to take for granted the good things that happen and to regard as the workings of the devil the bad things. And that if a bad thing comes along, you say, my God, we ought to pass a law and do something. That’s a very natural human tendency. I think the remarkable thing, the thing that needs to be explained, is not why we’ve had a movement towards collectivism and towards more government control, because that’s been the natural state of mankind for thousands of years. The remarkable thing in my opinion, from an intellectual point of view, is how you ever managed to get a century or a century and a half in which the dominant philosophy was the opposite. That’s the exception.

HEFFNER: But it’s so fascinating to hear you say that this has been the natural way in which men have moved since the beginning of time — toward collectivism — then why do you describe that brief period, that century or century and a half, as the more normal, the more appropriate state?

FRIEDMAN: Oh, I don’t. Oh, you’ve used two terms.

HEFFNER: Fair enough.

FRIEDMAN: You said more normal, more appropriate. It’s a state I prefer. It’s a state that I think would be very much superior to what we’re heading into. It’s a state I think the ordinary citizen of this country would find superior, but it’s not the normal, natural state. Suppose you take a broad view of history for a moment, and of geography. You cannot find a date in history at which the greater part of the human race was not living in a condition of tyranny, misery, and decay. Take it right now. The bulk of the human race is not living in a free world. The bulk of the human race is living in totalitarian or dictatorial governments. Can you name any date in history in which that wasn’t true? Now, more extreme — take any place in geography. Put your finger on the globe and go back over time. I don’t believe there’s a place where you can put your finger on the globe where mankind has for most of human history lived except in tyranny and misery. You had a few brief occasions, Greece in the fifth century BC — and even there it’s mixed because you had a slave society. It was a free society for the upper classes, not for the community. You had a brief period during the Renaissance in Italy. You had a — and then you have the latter part of the eighteenth and the nineteenth century — mostly the nineteenth century, first part of the twentieth century — those are the exceptions, not the rule.


HEFFNER: Then you’re the one who seems to want to interfere with the natural order.

FRIEDMAN: Absolutely. I do.

HEFFNER: Then why do we call you a conservative?

FRIEDMAN: Because I’m not. Because I’m a liberal. I want people to take thought about their condition and to recognize that the maintenance of a free society is a very difficult and complicated thing. And it requires a self-denying ordinance of the most extreme kind. It requires a willingness to put up with temporary evils on the basis of the subtle and sophisticated understanding that if you step in to try to do them, you not only may make them — to do something about them — you not only may make them worse, but you will spread your tentacles and get bad results elsewhere. You know, another answer to your question as to why you seem to have the drift to collectivism is along these lines. The argument for collectivism for government doing something is simple. Anybody can understand it. If there’s something wrong, pass a law. If somebody is in trouble, get Mr. X to help him out. The argument for a free — for voluntary cooperation for a free market is not nearly so simple. It says, you know, if you allow people to cooperate voluntarily and don’t interfere with them, indirectly through the operation of the market, they will improve matters more than you can improve it directly by appointing somebody. That’s a subtle argument, and it’s hard for people to understand. And, moreover, people think that when you argue that way you’re arguing for selfishness, for greed. That’s utter nonsense. The people who are in positions of power in a political hierarchy are also selfish and greedy. Mankind is selfish and greedy. And one of the interesting features about the nineteenth century that we were talking about -­I wonder if you realize that there is no century in human history in which charitable and eleemosynary activity has been as widespread on as large a scale as it was in the nineteenth century.

HEFFNER: The charge used to be made that there were so many people trying to buy their way out of hell.


HEFFNER: Or into heaven.

FRIEDMAN: It’s not too bad to have a — can you think of more innocent ways in which people can be employed?

HEFFNER: Yes, but it interests me that you just said that mankind is selfish and greedy. And that has always been the battle cry of those who have said; therefore, we must impose controls upon them.

FRIEDMAN: Therefore, we have to put power into the hands of other selfish and greedy men. Now I want to apologize for what I said. The great bulk of mankind. There are always conspicuous exceptions, not everybody. And also for each person there is an exception. People are selfish and greedy in one aspect of their activity. They are unselfish and generous in another.

HEFFNER: No, I understand that, but -­

FRIEDMAN: I don’t mean to be making a -­

HEFFNER: I understand, but again that is the philosophic basis of the argument that government must step in.

FRIEDMAN: But it’s a false argument, because it assumes somehow that government is a way in which you put unselfish and ungreedy men in charge of selfish and greedy men. But government is an institution whereby the people who have the greatest drive to get power over their fellow men, get in a position of controlling them. Look at the record of government. Where are these philosopher kings that Plato supposedly was trying to develop?

HEFFNER: Limited to that Athens you were talking about.

FRIEDMAN: Right. Well, they never got power. They wouldn’t have been philosopher kings either. Acton, Lord Acton, of course, made his famous comment: “Power corrupts, and absolute power corrupts absolutely”. So that I do not believe that that argument will — that base will sustain the conclusion.

HEFFNER: Well, isn’t the major question, though, related to those who say that Lord Acton really was saying that power tends to corrupt, and I suppose that absolute power tends to corrupt absolutely, and that it’s too simple to say that power corrupts, and that there’s a trade-off here and a balancing which leads me to ask you, literally, in these last few minutes, where are we going in your estimation? Quite honestly, quite directly -­

FRIEDMAN: Sure, there is a balance. You’re quite right. I’m not in favor of eliminating government entirely. I think government has grown all out of proportion to its scope. Where are we going? I believe that that depends on us, that that’s not in the cards, it’s not — we are masters of our own destiny. But if you take the road that we have been on, we are heading towards a destruction of our free society and towards a totalitarian society. We are unfortunately headed down the route which Chile has already taken a century to its end, which Britain has taken much farther than we are. Now, I — we still have time to avoid it. But we will not avoid it unless the people of this country recognize the danger and take very difficult and important steps to set a limit on the extent to which they are going to permit government to interfere with their lives.


HEFFNER: If you thought that we were not going to avoid it, that we were going to continue down present paths, the path to serfdom, perhaps, would you then try to develop some different kind of philosophy, some different kind of approach that might enable us to make the jump from the freedom that you embrace and the near serfdom that seems likely in the future?

FRIEDMAN: I don’t believe so, because I think that if you go down that road I don’t believe there is any philosophy which will enable you to avoid it. I believe — I would -­my own reaction is very different. That is to say, we don’t have to go down that road. I may think the chance -­I really do think that the chance is a good deal less than 50% that we’ll be able to avoid it. We may well be fighting a losing battle, but if it’s the right battle, if it’s the only alternative to serfdom, then we ought to fight it and try to convert that 15, 25, 30% chance, whatever it is, into a certainty. There are some sources of support on our side fortunately.

HEFFNER: Tell me, give me the name of two, please.

FRIEDMAN: I will be glad to. Number one, is the extraordinary ability and ingenuity of the American people in finding ways to get around laws. That’s our major source of strength for freedom. And number two is the inefficiency of government. People go around complaining about waste in government. I am always reminded of a wonderful saying of an old teacher of mine. He was a teacher of statistics, and he made this statement about statistics in which he said pedagogical ability is a vice rather than a virtue if it is devoted to teaching error. Well, I say thank God for government waste. If government is doing bad things, it’s only the waste that prevents the harm from being greater. And the waste of government has two very important elements. Number one, if government were now spending the amount it spends -­which is 40% of our income — governments Federal, State, and local in the United States have total spending which equals 40% of total national income — if they were spending that efficiently, we’d be slaves now. And in the second place, the waste is so obvious that it arouses a counter­movement on the population at large, people are disillusioned with government and it increases the chance that they will recognize where this road is taking them and get off that train before it goes all the way.

HEFFNER: Well, I’m glad that we end our program on such a positive note. Professor Friedman, I’m delighted to have had you here with us today. I appreciate it very much that you give us the wisdom of your counsel once again. And thanks, too, to you in the audience. I hope that you’ll join us again on THE OPEN MIND. Meanwhile, as an old friend used to say, “Good night and good luck.”