The Future of Our Free Society: A Conversation with Milton Friedman with Milton Friedman and Paul McCracken Conversation Series, American Enterprise Institute, 21 February 1978 American Enterprise Institute PROFESSOR PAUL MCCRACKEN: First, one or two items of logistics. Professor Friedman is going to speak for 10 or 15 minutes and there will be a true seminar discussion, as it were, for the remainder of the time with a cutoff of the program at 5:30 this evening not tomorrow, this evening. We meet this afternoon in one of a continuing series sponsored by the American Enterprise Institute for Public Policy Research of Conversations with. Our guest of honor today is an extraordinary American, Professor Milton Friedman. I suppose along with David Copperfield he could begin his biography with the three words, I am born, except in this case the locale would have been Brooklyn, not across the ocean. After a Ph.D. at Columbia he taught, of course, at such universities you all know this as Minnesota, Wisconsin, Cambridge, and so forth; and Chicago, being appointed in 1962 as Paul Snowden Russell Distinguished Service Professor at that university. He is now also a Senior Research Fellow at the Hoover Institution of Stanford University. Professor Friedman s book list is noteworthy for the number of items but it s particularly noteworthy for something that s much more important, and that is that every major book Milton has published has left thinking different in the public policy arena. I think any central banker, as he agonizes over what monetary target he ought to set for this year, would attest to the fact that Professor Friedman has made a difference. You all know his major books ranging from economic theory, such as A Theory of the Consumption Function and A Monetary History of the United States, with Anna Schwartz, to Capitalism and Freedom, which would be particularly pertinent to this meeting today. He has had the highest honors that can be bestowed on anyone in our profession. He was President of the American Economic Association in 1967. He s the recipient of the Nobel Prize in economics, but the one that particularly impressed me was that the press in Chicago named him Chicagoan of the Year. My general impression is that it s not easy to bamboozle that organization, so I consider that our guest must be authentic. Milton Friedman. PROFESSOR FRIEDMAN: Thank you, Paul. It s a pleasure to be here at the American Enterprise Institute with which I have been associated for many years, serving under Paul McCracken who has been chairman of our Academic Advisory Committee to the AEI. So I m glad to be here in a different capacity today. The reason for all these lights is that this is also part of a different project. You all know that the most important thing in economics is to have maximum use of scarce resources, and so we have to use this for more than one purpose. The reason for all these lights is that this is part of a series of lectures and discussions that I have been giving which are going to be put on video-cassettes and distributed by Harcourt Brace Jovanovich to schools, colleges, universities, and the like, and also that the substantive content of these lectures and discussions is going to be used as the basis for a ten-hour TV series to be broadcast over public television in this country, over the PBS 1
stations. In the announcement that was distributed this morning at the National Association of Manufacturers, it was said that it would be on the air in the fall of 1979; I will settle for the spring of 1980. But we hope to get it on as soon as possible. At any rate, the main purpose of this, as Paul said, is a conversation and so I m not going to take up a great deal of your time. I will just make some brief comments, the purpose of which is to get the discussion started, rather than to be exhaustive. I thought what I could do would be to cover very briefly some of the comments which I made this noon in a talk before the National Association of Manufacturers and essentially treat this session as a continuation of that program. The topic for the NAM was The Future of Our Free Society, and I opened the talk by using a quotation from Abraham Lincoln, a quotation from the speech he gave when he was nominated for senator from Illinois in 1858. It s his famous House Divided speech. The quotation goes: A house divided against itself cannot stand. I believe this government cannot endure permanently half slave and half free. I do not expect the house to fall, but I do expect it will cease to be divided. It will become all one thing or all the other. Now I think that is just as pertinent today as it was 120 years ago I almost started the talk by saying Six score years ago Lincoln said, but I thought that would be too much of a plagiarism. I think it is just about as pertinent today as it was 120 years ago, but in a different sense. The slavery he spoke of then was the literal slavery of man by man; the slavery that is the problem today is the more subtle and sophisticated form of slavery. It is the slavery which arises from condemning ourselves to be slaves by assigning to other people power which becomes difficult to take back from those other people. In the particular instance it s by having a growing government which controls a larger and larger fraction of our resources and has more and more to say about our lives. There is only one respect in which I would have to admit that the quotation is not entirely appropriate: I do think that the house could fall in the direction of being all slavery. That is to say, I think that it is true if we continue along our present trends, if we were to continue increasing the role that we assign to government, the fraction of our income over which it has control, that we could end up and would end up as a collectivist society somewhat different maybe than other collectivist societies as America is different from other countries, but fundamentally a collectivist and wholly unfree society. On the other hand, it is not clear what you mean by all free. We can have a large measure of freedom, but I believe that we do have to have a limited government, that there is a real role for government in providing for defense against coercion by other individuals and providing for defense against other nations. But the thing that fascinates me is how far we have come down this road. The U.S. is still a free country in many ways, certainly among the major countries it is the freest. But if we look at various facets of our life we can see that our freedoms have been much restricted compared to an earlier time. As I told the people at the National Association of Manufacturers, a real sign of how far we have come is that their meeting was being held in Washington, D.C. It is the first time in their 82-year history that they have met in Washington, D.C. Why have they met here? Because 2
they have recognized where their true masters are. Their true masters are not their customers; their true masters are the government officials and bureaucrats, elected and non-elected, whose stronghold is Washington. As I said to them, I don t blame them for recognizing that fact. They would have to be blind not to recognize it. But I do blame them, and blame them very severely, for the very important part that they have played in bringing this situation about and contributing to their own enslavement. If you want to see how far we have come down the road you can look at various aspects of freedom. As we all know, free enterprise does not mean freedom for existing enterprises to do what they will, although that meaning is often given to it by enterprises. What you and I, I hope, mean by free enterprise is freedom for anybody to set up an enterprise. Well you cannot in the United States today set up a bank or, in any city except Washington, D.C., go into the taxicab business without getting a certificate of convenience and necessity from some government official. You cannot deliver the mail, or produce electricity or telephone service without getting permission. You cannot become a lawyer or a physician or a mortician or a beautician or a plumber in most states without getting a license to hang out your shingle from a state body. You cannot even raise money in the capital markets from people who are supposedly the most knowledgeable without filling out at least 400 pages of forms for the SEC, which will cost you more money than it s probably worth to get the capital. I know from personal experience of people who, after spending $100,00 in trying to complete those requirements, simply gave up in disgust and ended their attempt to raise funds on the public markets. And in the latest example I cited, you cannot even make a bet with somebody on an organized exchange about what the price of wheat will be a year from now without having one of those multi-initialed Washington organizations, the Commission for Futures Commodities I ve forgotten all the letters, CCFTC or something like that, whatever it is control it. If you go from the problem of free enterprise, of control over our economic resources, the governments at all levels in this country spend an amount equal to 40 percent of the national income. Over that 40 percent we have given up control. Again, nobody is taking it from us. I m not one of those who would attribute any of this to evil motives or evil intentions. It s good people who do harm; it s not bad people who do most of the harm. It s people who have intended nothing but the public interest who have cooperated with all sorts of other people to bring this state about. But as I say, 40 percent of our income is co-opted for governmental purposes and spent through the government. So that in that area, too, if you look at the ownership of enterprises, as I said to the NAM we pride ourselves on being a private enterprise economy, but the fact is that every corporation in the United States is 48 percent owned by the federal government. What does ownership of a corporation mean as a stockholder? If I own 1 percent of the stock, I am entitled to 1 percent of the income and 1 percent of the losses up to my limited liability. The government gets 48 percent of the income and shares in 48 percent of the losses of every corporation in this country. So we are 48 percent socialist. If you go beyond the narrow economic matters and go into what my fellow academics would consider more important questions, go into the question of freedom of speech, who has freedom of speech? There is no corporate executive in the land who will get up and say freely what he thinks without contemplating twice about whether the IRS might not be after him, whether the 3
Justice Department won t be after him. There is not a businessman in this country who can t stand up on two minutes notice and spout the cliches about the desirability of free enterprise, but he won t go very much beyond or, it s very rare man who ll go much beyond that to criticize details of governmental policies or activities. If you go to my fellow academics, how many professors of medicine would give talks against socialized medicine without thinking three times about what that might do to their grants from NIH? How many of my fellow economists are prepared to get up on the platform and criticize the existence of the National Science Foundation? So do we have free speech among the academics? You talk about a free press. Put to one side radio and televion which are clearly not a free press because of governmental licensure. Look at the newspapers, a great stronghold of free press. There was a recent story in England about a typographical union, the union of pressmen, which had closed down The London Times for two days because The London Times was proposing to run a story critical of that union. Is that freedom of the press? So we have lost a great deal of our freedom in every area. How did this come about? It came about, in my opinion, largely as a result of an unholy coalition between people who wanted to do good and people who were pursuing their own special interests, and these two groups are not mutually exclusive. In fact, each of us is at some time or another in one or the other of those groups. We are all of us, with respect to things that don t affect us very much, very strongly devoted to the public interest: we are all of us, with respect to those things that affect us very much, very ready to persuade ourselves that what s in our interest is in the public interest. At any rate I believe that the shift from a largely laissez-faire society not a complete one but a largely laissez-faire society was brought about by an unholy coalition between well-meaning reformers trying to do good and special interests trying to promote their end, reinforced and stimulated by a change in the philosophical climate of opinion away from a belief in individual responsibility and toward a belief in something called social responsibility toward a belief that the individual was not responsible for his destiny but that if something had happened it was society that was responsible and that we should turn to society. The actual change in opinion started in the nineteenth century, in the 1890s at the earliest, but it actually affected policy primarily after the Great Contraction in the middle 1930s when it really took off. Now who are these special interests that I am talking about with whom you have the unholy coalition? If I were making these comments several years ago or several decades ago, I would have concentrated entirely on business as the primary special interest and it still is an important one. But I would say that today the bureaucracy in Washington and in the states has become another special interest, and probably today is a more significant special interest in terms of preventing improvement, in terms of getting rid of governmental controls and restoring a greater measure, of individual freedom. Again, don t let me misstate the situation. No special interest group, as I have called it, promotes its special interest knowingly thinking it will harm the nation; nobody does that. We all do bad things for good reasons or for good motives. We all think and we all know that, by God, you ve 4
got to save the steel industry because otherwise national defense is going to suffer. You cannot reform welfare because otherwise those good programs I am administering are going to suffer. But if you look at what has happened in this situation, over and above the old style special interests of vested wealth and vested privilege in the business community which sought to promote its own interest, you now have a new class which are the governmental bureaucrats. I know of nothing which describes their influence more persuasively than Pat Moynihan s book on the attempt under the Nixon Administration to reform welfare, to introduce a form of the negative income tax in the form of the Family Assistance Plan. It wasn t a very good form; it was a bad form but it was a form. In any event, for my purpose it is irrelevant whether it was good or bad. What s relevant is Moynihan s story of who killed it, and he found as a primary villain the welfare establishment which did not want to see their nice jobs and their spheres of influence eroded by a reform which would have substituted a single simple thing to give people money instead of having a host of programs to tell them what to do. What is the chief obstacle to getting rid of the Interstate Commerce Commission? I think there is almost no one who could deny that the country would benefit by getting rid of the Interstate Commerce Commission. No doubt some of the people in the trucking industry and the railroads would oppose it. But the really effective opposition will come from the people who are employed at the Interstate Commerce Commission, from the governmental commissions, the legislative assistants in Congress, the people in Congress who sit on committees associated with the ICC. I am often fond of citing an example which I did not give to the NAM this afternoon but which I will add for your purposes, because I think it brings it out very clearly. Here s a tax reform from which at first sight everybody benefits and nobody loses: replace the highest rate in the personal income tax by 25 percent every rate higher than 25 percent replace by 25 percent. Don t change the law in any other respect. I guarantee you that in 15 minutes I can persuade each and everyone of you that the federal government would get more revenue by that change than it now gets. You would lose 7-1/2 percent on the arithmetic basis if everybody reported exactly what he now reports, but there isn t any doubt that everybody would report more or many people would. I think I could persuade you that the additional amount reported would more than make up that 7-1/2 percent loss. Now no taxpayer loses under that, because anybody could continue to file as he now does. The government doesn t lose; it gets more revenue. Yet that reform has no more chance than a snowball in the proverbial hot place of being adopted. Why? Because two groups would lose. One group are the congressmen and legislators who would no longer have special tax loopholes to sell. After all, if you are going to get elected to Congress you ve got to have some source of financial support; the best way to do it is by selling something, and you sell political influence. The second group who would lose would be the tax lawyers, accountants, and bureaucrats in the IRS and other governmental agencies associated with taxes. So you haven t got a chance of selling it, and that s an example of what I mean by the new class. The business community, of course, has not been innocent in this process. As I said to the NAM people this noontime, the worst measure of Mr. Nixon s Administration in my opinion was the imposition of price and wage controls in August 1971. The great majority of the business community at that time favored them to their regret, perhaps. Are we in an oil mess today? The president of Union Oil Company was one of the strong proponents of price and wage controls in 1971. The present price ceilings on oil derive from that. It s the only commodity that was never 5
decontrolled. So the business community has brought a great deal of this upon their own head. You could go on and give example after example of their guilt. Now insofar as they were serving their own interests, I can t complain. I believe in a society in which people pursue their own interests; that s the only kind of society you can have. I shouldn t say I believe in that society; there is no other. Every society, whatever its ostensible form, is one in which individuals pursue their interests as they see them, and I believe that the best kind of society is one in which that is open and above board and recognized in a free-enterprise capitalist society with the invisible hand of Adam Smith operating. However, what I do complain about the business community is that they are shortsighted and foolish in the way they pursue their own interests, as in the case of wage and price controls. That was not an effective measure in their own interest; it was a bad measure. As I said to them, businessmen I find are schizophrenic. In respect to their own business they are farsighted and look far ahead. When it comes to public measures, they look six months ahead and they don t understand the issues. They can t even count; because you know if you re going to be for price and wage controls and if you can count, that there are more workers than there are employers, so you know it s going to be price control and not wage control. So I think the business community has brought it on itself partly by rational self-seeking and partly by being shortsighted. But they could not have brought it on themselves without the cooperation of well-meaning people who cooperated with them. In everyone of these cases, if you look at any of these, whether you go from the U.S. tariff to the ICC to wage and price controls, the special interests could not have gotten their way if there had not been cooperation from people who were proclaiming that it was in the general interest. The question of the future of our free society is, where do we go from here? Are we going to be able to stop this trend? Can we roll it back? I am not wholly pessimistic by any manner or means. At the moment the signs don t look good, but there are some favorable things. The most favorable thing of all, the one thing that really gives me hope, is the combination of the inefficiency of government on the one hand and the efficiency of private people in finding ways to get around government controls and regulations on the other. You ve got more millions of people seeking to undermine government regulations than you have millions of people producing and enforcing them. Moreover, the first group has a stronger incentive than the second. That I think is the major hope because that in turn produces a public reaction. It produces a public recognition that the noble ideals have not been achieved; it produces a public resistance to paying ever higher taxes. So I think the most promising sign we have around is a possible tax revolt. The form which seems to me at the moment most effective is to try to impose limits on government spending in state and federal constitutions. 12/14/12 6