Milton Friedman on Economic Issues

In the July 2006 edition of Hillsdale College's Imprimis, Larry Arnn interviews Nobel Laureate Milton Friedman on a number of topics. Here are his thoughts on economic issues:

LARRY ARNN: In Free to Choose, in the chapter on "The Tyranny of Controls," you argue that protectionism and government intervention in general breed conflict and that free markets breed cooperation. How do you reconcile this statement with the fact that we think of free markets as being competitive?

MILTON FRIEDMAN: They are competitive, but they are competitive over a broad range. The question is, how do you make money in a free market? You only make money if you can provide someone with something he or she is willing to pay for. You can't make money any other way. Therefore, in order to make money, you have to promote cooperation. You have to do something that your customer wants you to do. You don't do it because he orders you to. You don't do it because he threatens to hit you over the head if you don't. You do it because you offer him a better deal than he can get anywhere else. Now that's promoting cooperation. But there are other people who are trying to sell to him, too. They're your competitors. So there is competition among sellers, but cooperation between sellers and buyers...

The final outcome in China will not be decided until there is a showdown between the political tyranny on the one hand and economic freedom on the other—they cannot coexist...

Almost every country in the Middle East that is rich in oil is a despotism.

LA: Why do you think that is so?

MF: One reason, and one reason only—the oil is owned by the governments in question. If that oil were privately owned and thus someone's private property, the political outcome would be freedom rather than tyranny. This is why I believe the first step following the 2003 invasion of Iraq should have been the privatization of the oil fields. If the government had given every individual over 21 years of age equal shares in a corporation that had the right and responsibility to make appropriate arrangements with foreign oil companies for the purpose of discovering and developing Iraq's oil reserves, the oil income would have flowed in the form of dividends to the people—the shareholders—rather than into government coffers. This would have provided an income to the whole people of Iraq and thereby prevented the current disputes over oil between the Sunnis, Shiites and Kurds, because oil income would have been distributed on an individual rather than a group basis.

LA: Many Middle Eastern societies have a kind of tribal or theocratic basis and long-held habits of despotic rule that make it difficult to establish a system of contract between strangers. Is it your view that the introduction of free markets in such places could overcome those obstacles?

MF: Eventually, yes. I think that nothing is so important for freedom as recognizing in the law each individual's natural right to property, and giving individuals a sense that they own something that they're responsible for, that they have control over, and that they can dispose of...

...Following the election of Ronald Reagan, there was an abrupt and immediate halt to this expansion of government. But even under Reagan, government spending as a percentage of national income didn't come down: It has held constant from that time to now. Although the early years of the current Bush presidency did see spending increases, national income has risen, too. We have achieved some success at our first task: stopping the growth of government. The second task is to shrink government spending and make government smaller. We haven't done that yet...I should also mention as a cautionary tale that, prior to Reagan, the number of pages in the Federal Register was on the rise, but Reagan succeeded in reducing this number substantially. However, once Reagan was out of office, the number of pages in the Register began to rise even more quickly. We have not really succeeded in that area.

...since Free to Choose was published [in 1981]...in general, there has been a complete change in public opinion. This change is probably due as much to the collapse of the Soviet Union as it is to what Friedrich Hayek or Milton Friedman or somebody else wrote. Socialism used to mean the ownership and operation of the means of production, but nobody gives it that meaning today. There is no country in the world attempting to be socialist in that sense except North Korea. And perhaps Russia is moving in that direction. Conversely, opinion has not shifted far enough in terms of the dangers of big government and the deleterious effects it can have, and that's where we're facing future problems...We must make clear that the only reason we have our freedom is because government is so inefficient. If the government were efficient in spending the approximately 40 percent of our income that it currently manages, we would enjoy less freedom than we do today...

LA: ...Like Lincoln, you argue that a house divided against itself cannot stand: America is going to be a government intervention country or it's going to be a free market country, but it cannot continue indefinitely as a mixture of both. Do you still believe that?

MF: Yes, I very much believe that, and I believe that we've been making some headway since Free to Choose appeared. However, even though it is real headway compared to what was happening before, we are mostly holding ground.

LA: What do you think are the major factors behind the economic growth we have experienced since the publication of Free to Choose?

MF: Economic growth since that time has been phenomenal, which has very little to do with most of what we've been talking about in terms of the conflict between government and private enterprise. It has much more to do with the technical problem of establishing sound monetary policy. The economic situation during the past 20 years has been unprecedented in the history of the world. You will find no other 20-year period in which prices have been as stable—relatively speaking—in which there has been as little variability in price levels, in which inflation has been so well-controlled, and in which output has gone up as regularly. You hear all this talk about economic difficulties, when the fact is we are at the absolute peak of prosperity in the history of the world. Never before have so many people had as much as they do today. I believe a large part of that is to be attributed to better monetary policy. The improved policy is a result of the acceptance of the view that inflation is a monetary phenomenon, not a real phenomenon. We have accepted the view that central banks are primarily responsible for maintaining stable prices and nothing else.

LA: Do you think the Great Depression was triggered by bad monetary policy at a crucial moment?

MF: Absolutely. Unfortunately, it is still the case that if you ask people what caused the Great Depression, nine out of ten will probably tell you it was a failure of business. But it's absolutely clear that the Depression was a failure of government and not a failure of business.

LA: You don't think the Smoot-Hawley tariff caused the Depression?

MF: No. I think the Smoot-Hawley tariff was a bad law. I think it did harm. But the Smoot-Hawley tariff by itself would not have made one quarter of the labor force unemployed. However, reducing the quantity of money by one third did make a quarter of the labor force unemployed. When I graduated from undergraduate college in 1932, I was baffled by the fact that there were idle machines and idle men and you couldn't get them together. Those men wanted to cooperate; they wanted to work; they wanted to produce what they wore; and they wanted to produce the food they ate. Yet something had gone wrong: The government was mismanaging the money supply.

LA: Do you think our government has learned its lesson about how to manage the money supply?

MF: I think that the lesson has been learned, but I don't think it will last forever. Sooner or later, government will want to raise funds without imposing taxes. It will want to spend money it does not have...The temptation for government to lay its hands on that money is going to be very hard to resist...

LA: ...You describe a society in which people look after themselves because they know the most about themselves, and they will flourish if you let them. You, however, are a crusader for the rights of others. For example, you say in Free to Choose—and it's a very powerful statement—a tiny minority is what matters. So is it one of the weaknesses of the free market that it requires certain extremely talented and disinterested people who can defend it?

MF: No, that's not right. The self-interest of the kind of people you just described is promoting public policy. That's what they're interested in doing. For example, what was my self-interest in economics? My self-interest to begin with was to understand the real mystery and puzzle that was the Great Depression. My self-interest was to try to understand why that happened, and that's what I enjoyed doing—that was my self-interest. Out of that I grew to learn some things—to have some knowledge. Following that, my self-interest was to see that other people understood the same things and took appropriate action.

LA: Do you define self-interest as what the individual wants?

MF: Yes, self-interest is what the individual wants. Mother Teresa, to take one example, operated on a completely self-interested basis. Self-interest does not mean narrow self-interest. Self-interest does not mean monetary self-interest. Self-interest means pursuing those things that are valuable to you but which you can also persuade others to value. Such things very often go beyond immediate material interest.

LA: Does that mean self-interest is a synonym for self-sacrifice?

MF: If you want to see how pervasive this sort of self-interest is that I'm describing, look at the enormous amount of money contributed after Hurricane Katrina. That was a tremendous display of self-interest: The self-interest of people in that case was to help others. Self-interest, rightly understood, works for the benefit of society as a whole.