PRC Forum: Milton Friedman (U1060) – Full Video

PRC Forum: Milton Friedman (U1060) – Full Video


Music Reality. Captured in user friendly symbols and processed for understanding. Music The Idea Channel. I am Milton Friedman. The current media discussion of our economic problem almost always reminds me of an old saying by a 19th century American humorist, Josh Billings, when he said, “The trouble with people ain’t ignorance, it’s what they know that ain’t so.” Well, in the same way, it often seems to me that what the pundits through the news media and through the, over your little screen are putting forth, it’s not what’s true, not what’s right, but what they think is so. In particular, let me be more specific. The three problems that you hear most about over the news media are first, our current federal budget deficit, the fact that the federal government is spending more than it’s taking in; second, the size of our government debt. And third, the balance of payments deficit. To listen to people talk, you would think that the deficits are going to drive us into bankruptcy or inflation. That the debt is going to bankrupt our children and that the balance of payments deficit means that we’re heading toward becoming a banana republic. In my opinion, all three of these things are false problems. That doesn’t mean they aren’t real problems–they are–and those are the ones that I want to talk about. But these are false problems. Why? First take the budget deficit. If the federal government spends a trillion dollars and takes in what it calls taxes, 800 billion, who do you suppose pays the other 200 billion dollars? You and I do. What are called deficits are simply a form of taxation…they’re a bad form of taxation, but they’re taxation. They’re hidden taxation, either inflation or a tax on our wealth. The real problem, not the false problem but the real problem, is what the government spends, how much government spends and the regulations and impositions that it imposes on all of us. How much of our lives does government run for us? The second problem, the second false problem, is the debt. Now as it happens, the federal government debt, relative to our national income, is very much smaller now then it was for most of the post war period. At the end of World War II, the debt, the government public debt, the federal government public debt, was over a year’s national income. Today, it is around 40% national income. Again, it’s too high. I’d like to see it smaller, but it doesn’t raise a major problem for us. The third problem, the so-called problem, the problem of the balance payments deficit, you hear a lot about how foreigners are taking advantage of us that we somehow have an open market, they have a closed market and all we’re asking for is a level playing field. That is a bunch of arrant nonsense. We have imposed a great many restrictions on foreign trade as other countries have. We’re not angels and neither are they. The truth is that the real problem, which all this talk conceals, is the problem that is raised for us, for you and me, by the limitations that are placed on foreign trade by the tariffs, by the quotas, by the other restrictions that keep us from buying goods where we can get the most cheaply and selling our products where we can sell them most dearly. That’s the real problem. And that, if we don’t get it under control, is capable of doing us a great deal of harm. Well, Milton, how do you account for these differing public perceptions? Both parties, apparently, feel they understand the issue correctly. Well, it’s very easy to account for the different perceptions on the part of congress. If you’re a congressman, what is that you’re aiming for? You’re aiming to behave in a way which will get you re-elected. Now it turns out that it’s easier to get re-elected, on the average, by spending other people’s money than it is by saving it. Let me put that more specifically. Here’s what looks like a very attractive spending program. Some people are going to benefit a great deal. You and I are going to pay ten cents extra in taxes a year to pay for it. Are you going to go down and lobby your congressman not to pass that spending program? Not at all. But the people are going to benefit greatly from it. They’re going to be down there lobbying for it. Let me give you a very, very simple example. Every housewife in this country pays four to five times the world price for a pound of sugar. If she were able to buy that sugar on the world market, it would cost a fifth of what it now costs. Why can’t she? Well, there are a few hundred thousand farmers who grow sugar beets, some who grow cane for the sugar; between them they have been able to persuade the congress to put a quota on the imports of sugar from abroad. Now those sugar quotas do the consumers a great deal of harm. They help the one hundred, two hundred thousand maybe, I don’t know what the exact number is, maybe it’s more, maybe it’s less, but a very small number who bring great pressure to bear on the congress to keep the quotas. Once those quotas are in effect, once sugar has become expensive, it turns out that there are more special pleaders because then it turns out with sugar that expensive, natural sugar, various kinds of artificial sugar like sucrose made from corn can be produced more cheaply than the artificial price of the sugar, though more expensively than the world price. The result of that is, is that the producers of that kind of sucrose join the lobbyists who are lobbying for an import quota. And the end result is that the consumers are quiet, the producers and those who are affected are loud and it gets passed. Now what’s congress going to do about it? It doesn’t like the deficit, but in fact, the easiest way to get out of that deficit is to raise taxes rather than to lower spending. But if you listened to what I said before that doesn’t do any good from the point of view of the consumer. You pay for it one way or another. The real question is: how much are you required to spend one way or another, directly or indirectly by taxes, by lending, by inflation? What fraction of your income are you required to devote to having other people spend it, supposedly, on your behalf? Well, I understand the sense in which politicians have a benefit from the way they act, but how do you explain other scholars, other intellectuals, who draw conclusions that are different from yours? Well, they don’t. I don’t believe that’s the case. I think if you ask any scholar whether the burden imposed on government is better measured by what government spends, that isn’t the best way to measuring it either. Take the case of the sugar quotas…Government doesn’t spend a great deal of money on imposing those quotas, but you and I spend a great deal of money in paying the higher price for sugar. But go back. Suppose you ask the scholars: which is more nearly a correct measure of the impact of government or what government spends; or what it takes in tax receipts? There is no doubt that almost all scholars would agree that it’s what government spends. The place where there is a difference of opinion is how serious a deficit will be and the crucial difference there is, there is not a difference of logic or analysis, but a difference of political judgement. Let me explain. Most of the people who argue for higher taxes to eliminate the deficit implicitly assume that imposing higher taxes would eliminate the deficit. I don’t assume that at all. If higher taxes would eliminate the deficit, why haven’t we gotten rid of the deficit long ago? Taxes have been going up for fifty, sixty years. The fraction of income taken in taxes by the federal government has gone from something like 3% to nearly ten times that, well not quite, to about 20% now, over the course of the period from the 1930s to now. So if higher tax receipts could eliminate the deficit, we wouldn’t have a deficit. My belief is that if taxes somehow by magic, suppose last year, tax receipts had by magic suddenly had been a 100 billion dollars higher than they were. My own belief is that the main effect would’ve been that government would’ve spent more, maybe not a 100 billion more, maybe 80 or 90 billion more, but almost the whole of it. That was certainly demonstrated in 1982 when President Reagan agreed to a deal with congress under which he was promised that there would be three dollars of spending cuts for every dollar of tax increase. As the thing worked out there was, in fact, three dollars of tax increase for every dollar of spending cuts. So I think the difference in views reflects mainly, shall I say a difference of cynicism, or a difference of how much we believe what politicians say. Well…it’s obvious that the quality and the quantity of the information that one has would have an impact on one’s perceptions as to solutions. What about Tom Sowell’s idea that there is this basic conflict of visions that there are people that have a view of the world that affects their judgement on these matters? There undoubtedly are such views. There are people who believe that it is desirable for government to be larger, no doubt, and with them there’s a straightforward argument between people who believe that way and people who believe the way I do. Let me go back over that a little. The fact, the plain fact, is that every citizen of the United States, every resident of the United States, on the average works from January 1 to sometime in June to pay the expenses of government before he can start working to pay directly what he wants to spend himself. Now is that total government? Federal? State? That’s federal, state and local. That’s all three of them. I’m glad you added that. Two-thirds of it is federal, one-third about local. Now there would be nothing wrong with that, if people felt that they were getting their money’s worth for what they are spending. But I believe it’s very hard to find any large number of people who would say they’re getting their money’s worth. That, of course, leads you to the question of how do you explain all these polls in which people say they don’t want government to cut down spending. The answer to that is very easy. Everybody believes that the government spends too much in total, but very few believe that the government spends too much on the particular projects that interest them. So each one separately is going to defend his own turf. And the real problem is: how do you get a package deal under which they’ll all agree to cut down what they separately believe they’re benefitting from? I keep saying “believe they’re benefitting from” because most cases they really aren’t benefitting. They are to begin with, but then it goes away. Take these sugar producers, if there had never been any quotas, they wouldn’t be any worse off than they are now. They would simply be doing something different. They’d be growing a crop that could stand on its own feet in the market and wouldn’t have to have government support. They would be getting about the same income for their labor and for their capital and so on. But once they’re in sugar, once they’ve got capital sunk in sugar, there’s no doubt that the elimination of those quotas would hurt them. Pursuing just a bit further this question of differences of view point, using yourself as an example, do you recall having a different outlook of these policy issues than your high school friends? No, I don’t. Now, remember that goes a long way back. I was in high school from 1924 to 1928, but then I was in college from 1928-1932 and, of course, that was a period of the Great Depression. I graduated from college at just the very depth of the Great Depression. And at that time there was an enormous amount of concern about the economy, about whether there was something fatally flawed with the economy. And I have no doubt, though it’s very hard for me to reconstruct at this distance, what my thoughts were then. I had no doubt that I joined with my fellow students in sort of believing that somehow government had to do something about it. And I think government did. I think in an emergency like that- even though I later found out and later discovered- that the Great Depression was produced by government error, by mistakes made by government. Even so, given the situation you were in, in 1932 and 33, I have no doubt that it was desirable for government to step in and take some emergency measures. Were your mother and father, at all, interested in these public policy issues? Not at all. My mother and father were immigrants from Europe. My mother came over when she was 14 years old. My father came over when he was, I think, 16 or 17 years old. They met over here, got married. My mother started working in a sweat shop, running a sewing machine in a sweat shop. And when I was growing up, they had a very small retail business in a small town. I doubt that our family, as a whole, ever had an income that would’ve risen above what’s now called the poverty level or even a very small fraction of that. And they had enough to do, trying to keep body and soul together. They may have been interested in some issues, but I never recall discussions at home about problems of public policy. But, again, let me recall that I really, to all intents and purposes, left home in 1928 when I went off to college and by that time my father had died, as a matter of fact, my mother was the sole support and then she ran the store which had been the family store. And I went off to college and then I lived at the college and I made my own way. I worked my way through college as so many youngsters did then and do now. And from then on, I suppose my discussion about these matters, my intellectual discussion, was among my own colleagues, very little at home. Well, when you started, that was at Rutgers, is that correct? That’s right. I started at Rutgers. When you started college, what were your goals? Oh, my goals were very simple. It was to make a living. As it happened in high school, I was very much interested in mathematics and I was pretty good at mathematics. And I started inquiring around whether there was any kind of a discipline in which you could use mathematics and still make a living. It never entered into my wildest dreams going into college teaching or anything like that. High school teaching might have entered my mind. But I discovered that there was something called an actuary. An actuary was a fellow who worked for an insurance company and he made good money and he used a lot of fancy mathematics. So I set out, determined to become an actuary and indeed, then until I was in my junior or senior year that was still my goal, as it happens there is an organization of actuaries, a society of actuaries which gives examinations to qualified people for being classified as a certified actuary, and I even went so far as to take some of the exams. I think they have a whole series of three or four year’s worth of exams. And while I was in college, I started to take some of their exams. I must say those were the only exams, I did pass some of them, but I failed some of them. And I believe they were the only exams I ever failed in my life. Well, most of us who know Milton Friedman know that the University of Chicago comes into your life, who or what led you to the university? Well, that’s very simply, very straightforward. I had a teacher at Rutgers by the name of Homer Johns, who was a graduate student at the University of Chicago trying to make some money for a couple of years while his wife was working in New York. And he had an enormous influence on me, in particular. He recommended me to the University of Chicago, particularly to Frank Knight at the University of Chicago, and lo and behold, I got an offer of a scholarship from the University of Chicago. In those days what a scholarship meant was that you didn’t have to pay tuition. There weren’t anything for first year graduate students. It was very, very rare. And any first year or second year graduate student, for that matter, got more than tuition in return for scholarship assistance. You are often cited as founder of The Chicago School of Economics. Are you? And what is The Chicago School of Economics? I am certainly not the founder of The Chicago School of Economics because something known as The Chicago School of Economics existed, I suppose, certainly when I was boy and maybe before I was born. The interesting thing is, is that the University of Chicago has always had a very distinctive character in the field of economics. The interesting thing about that character is that it’s not what people think. People think of the University of Chicago as monolithic. It was anything but that. The first chairman of the University of Chicago of the Department of Economics at the University of Chicago in 1890 was James Lawrence Laughlin, who was a great fighter for gold, for the gold standard and a great battler against William Jennings Bryan and the free silver movement of the 1890s. Laughlin was regarded as a hard right conservative, but he brought on to the faculty with him, Thorstein Veblen who developed a great reputation as a left wing socialist. Well throughout its history, Chicago has had the capacity to have a faculty that covered all views. However, throughout there has always been a strong component of people who believe strongly in free markets and in the free enterprise system and who believe that the price system is a splendid way to combine efficient production with human freedom. And that is a central characteristic that came to be known as The Chicago School. It also had another meaning. Economists had to be divided into two groups: those who regard economics as a kind of a branch of mathematics as something to be admired and studied and made more sophisticated, there are those who regard economics as a way to analyze, as Alfred Marshall once called it, an engine for analysis of real problems. Chicago has always had the reputation of being in the second group, a group of economists who believed that economics was a real scientific discipline that provided tools with which you could analyze concrete problems. Those two elements, mythological on the one end and substantive on the other, are of the major content of The Chicago School of Economics. My own role in it and the reason why I have become known in the way I have, is that I probably was most responsible for reviving emphasis on the study of money, on the quantity theory of money, on the relationship between the quantity of money on the one hand and the economic activity on the other…of reviving emphasis on that relationship in an era when it had almost disappeared under the barrage of Keynesian economics. And it is for that reason that I have tended to be known as the father of The Chicago School of Monetary Economics. I am delighted to accept that attribution of paternity because I believe my children- if I am the father- my children have been very original, independent, creative and very productive. Remembering in the context of this next question that we’re not economists, there is a lot of speculation that your work at Chicago and your monetary theory has in the last four or five years not proven out. That it has failed us. Would you like to take this opportunity to comment on that? I certainly would because I think that’s a gross misconception. It arises from the fact that when something is successful- everybody tries to steals its clothes and its aura. The doctrine that became known as monetarism–I don’t like the title–I’ve tried to avoid it but you can’t help it–you can’t beat city hall as the saying goes–I’d rather refer to it as the quantity theory of money. But the doctrine that is known as monetarism turned out to be very much more successful in understanding the course of events than the doctrine that had become popular under Keynesianism. The Keynesian doctrine produced drastic failures in understanding the course of events in the United States, and in other countries around the world, particularly through the 1970s. It was a flat contradiction to some of the central tenants upheld by those who called themselves Keynesian. When you had inflation accompanied higher unemployment, when rising inflation is accompanied by rising unemployment, the Keynesians had set out as a basic principle, enshrined in the so-called Phillips Curve, that if you increased inflation you could reduce unemployment and that by holding inflation at a fairly moderate level, you could hold unemployment down at a lower level than otherwise. I and others like me, who are monetarists, who are quantity theorists, said that’s wrong. If you have inflation, you can fool people only for a certain length of time. As Abraham Lincoln said, “You can fool some of the people some of the time, all of the time and all of people some of the time, but you can’t fool them all, all the time.” And we said when people begin to understand what’s going on, they’ll start demanding to catch up in wages, prices, and so on and you’ll discover that you’ll have inflation with rising unemployment rather than lower unemployment or at least with no effect on unemployment. Well the 1970s proved a, more or less, crystal-clear test. We had throughout the world, in country after country, rising inflation and also rising unemployment. And it was clear that the so-called monetarist interpretation gave a very much better understanding of what was going on than the Keynesian theory. Well, the people who were in charge of policy, in particular the United States and the Federal Reserve Board, they were riding a tiger. They had a tiger by the tail. They had been increasing the quantity of money and had themselves, in my opinion, produced the inflation. They wanted to stop it. The only way they could see to stop it and now I’m going to 1979, was by letting the interest rates rise to a very high level. I should add the Federal Reserve cannot control the real rate of interest, the interest rate adjusted for inflation, except over very short time intervals. It had no control over it. It can control the nominal rate, the rate you see to a certain extent, but only by creating inflation or the opposite, deflation. In any event, in 1979, they were at their wits’ end and they had to do something. Then, so, they declared that they were going to follow a monetarist policy. Now I have said, with respect to that episode, over and over again, if you had asked every member of that board, “Are you now or have you ever been monetarist?” not a single one would’ve said yes. This was a cloak…because the former way of operating had been by manipulating the interest rate, but they didn’t want to take the blame for pushing an interest rate up to 15-18% which is what happened. And so they made a dramatic announcement that they were going to, hereafter they were going to operate by controlling the quantity of money rather than by trying to influence interest rates. I wrote a Newsweek column at the time, in which I said that’s an announcement we’ve been asking for a long time, but we’ve heard this kind of song before. I think we ought to wait ’til we see what comes out of it. So, I have to confess that even at the very beginning, I wasn’t terribly impressed by this statement. At any rate, what happened is that they did for a time follow a monetarist prescription in the sense of slowing down drastically the rate of growth of the quantity of money. However, the monetarist prescription has two parts. One is you have to cut the growth of the quantity of money if you’re going to control inflation and you have to hold it down at a low level if you’re going to prevent inflation from rising. But the second is you want to do it gradually and steadily. You don’t want to jerk from one side to the other. The Fed did cut down the quantity, the average rate of growth of the quantity of money, drastically, and that did bring down the inflation. There’s no question. But it also did so in a highly erratic way. And the result of that was that the period from 1979-1982 was much more unstable, much more erratic, with interest rates fluctuating much more widely than would’ve been necessary. If they had followed the same policy, but had done it gradually, instead of stepping first, too far on the brake then on the accelerator, then on the brake and so on… Now since then, they have been increasing the quantity of money and inflation has been continuing to go down and people think that’s a contradiction. It isn’t. It’s what we’ve observed in every episode of major inflation which has then come to a halt or has been stopped– whether it’s a hyper inflation after World War I or the more moderate inflations. The situation is very simple. The cost of holding money or holding cash or holding currency in your pocket or demand deposits, checking deposits at a bank, depends on interest rates. The interest rates are very high in nominal terms. That is, if you are paying 15% interest, it’s costing you 15 cents a year to hold a dollar in your pocket for a year. On the other hand, if interest rates are 5%, it’s only costing you five cents a year. So it stands to reason that the lower the cost of holding money, the larger the quantity of money you are likely to hold. The effect of the sharp decline in inflation was to reduce sharply the cost of holding money. As a result of that, people decided that they would hold more money, not necessarily in dollars, but as a fraction of their total income. That meant that money, the quantity of money, was able to go up for a time at rates of 8 to 10% at the same time that prices were only going up at 3 or 4% because people were rebuilding their cash balances. However, experience in every other inflation shows that once people have gotten their cash balances where they want to, if you then keep on increasing the quantity of money by 8 or 10%, you sure as a devil are going to have a resumption of inflation then you’re off to the races again. I am afraid that there is a danger that- that happened to some extent in 1986, I guess, ’84 or ’85 was mostly rebuilding- by ’86, I think they were going too fast. They were building up inflationary pressure and as a result, I think we have passed the bottom of the inflation in 1986 and we are now, as I speak here in the middle of 1987, we are now seeing in an upsurge in inflation. However, I do not believe we will go back to the bad old days of 1975-6-7-8-9, when inflation rates got into double digits. And the reason for that is, and I think, everybody has learned a lesson from the 1970s that it is recognized that you don’t have to let inflation get up that way and that you can stop it. And I think the public is going to demand, and is demanding, that it be stopped. And already there are some signs that the Federal Reserve System has heard the message. What I am afraid of is that they will continue on their former policy, of swinging too far from one extreme to too far to the other, and that as a result, they may put us through another severe recession in order, unnecessarily I should say, but as a result of their attempt to correct the earlier access. I hope that doesn’t happen, but I’m afraid it may. Another area that is clearly recognized as a Friedman position is free trade. And I know that you have very strong feelings on that. In the past years, few years, we’ve seen a lot of fair trade comments being made. Surely you’d admit that Japan and Europe have been inclined toward protectionism… and how do free traders deal with partners who don’t abide by those principles? Well, first of all, it’s certainly true that Japan and Europe has been inclined to protectionism. But it’s certainly true that the United States has been inclined to protectionism. It is very doubtful that we have less protectionism in any meaningful sense than Japan does. I know that will come as a surprise to everybody because they read American newspapers. They don’t read the Japanese newspapers. But the fact is that while Japan has a great many restrictions on trade, unquestionably, so do we. I already mentioned the sugar quotas; that’s only a very small part. We have a whole wide range of quotas on various imports. In addition, we have quotas on exports. We prohibit the export of oil from Alaska to Japan. Why? Because there are boats that carry that oil down the West Coast and under our laws they have to be in considerable measure, American flag boats. And the maritime union is a very strong lobbying force which is primarily responsible for the lobbying that has put into effect that provision. In addition, there’s a law prohibiting the export of timber cut on national forests to Japan. That also is a result of a special interest group, namely the lumbering companies. But at any rate, it turns out surprising to say, that if you eliminated those two prohibitions alone, you would tend to cut in half the bilateral deficit between Japan and the so-called deficit between Japan and the United States, half of it. Now, it would reappear somewhere else because it’s much more sensible for the world as a whole that Alaskan oil go to Japan and Middle East oil come here than it is for Middle East oil to go to Japan and the Alaskan oil to go to the East Coast. Now it’s insane from an efficiency point of view, but let me go back to your main point. President Reagan put this very well once in a speech he gave in San Francisco in which he said, “You know, let’s suppose three of us are out in a boat in the ocean and one of the fellows in there takes out a gun and shoots holes in the bottom of the boat. Is it the sensible thing for the others of us to do to take out our guns and shoot more holes in the bottom of the boat?” That’s kind of a silly notion isn’t it, but yet that is exactly the notion of protection and retaliation. Suppose Japan and Europe do and they do, no question, impose protectionist tariffs. That hurts them. It hurts us. If we turn around and impose protectionist tariffs on them in retaliation, all we do is to hurt ourselves some more and to hurt them some more, we’re just shooting additional holes in the bottom of the boat. It doesn’t make any sense. The best thing in the world would be for all countries to engage in free trade, but even if other countries don’t, then the sensible, rational thing for us (is) to do all by ourselves. After all, we’re the great leader of the free world; we’re not simply a camp follower. The idea of our going around and imposing quotas on imports from Hong Kong and from Singapore and from all those other terribly threatening countries, it seems to me it’s just demeaning and degrading for a great power to engage in acts like that. So in my opinion, the right course of action for the United States, would be unilaterally to get rid of its restrictions and say to the world “come and sell your goods here, we’re delighted to sell to you, we’re delighted to buy from you, we’re delighted to sell to you.” Now, of course, if you buy, if you sell to us, you’re going to get dollars and what are you going to do with those dollars? Are you going to eat them? If you would like to stack them up in a nice pile and set fire to them, we’d be delighted. We could print all the pieces of paper you want, but nobody is going to do that. If they sell things to us for dollars, they are going to spend the dollars back here. There’s no doubt about that. And what will produce that result is that the price of the dollar, in terms of their currencies, the number of yen it takes to buy a dollar, the number of marks it takes to buy a dollar and so on will adjust up and down, so that the total flows of dollars in both directions will be the same. There are two arguments I’ve heard recently to that point that I’d like you to comment on. One is that in this process of waiting, while we’re waiting for those dollars to come back from Japan, the argument that has been put to me is that we then endure two things, both we suffer the inefficiencies that are caused by the fact of this dumping that goes on and the inability of local companies to compete against that and therefore, they have to spend more capital than the other one, etcetera, etcetera, but those inefficiencies and the end result being that industries are destroyed and we have to rebuild them. This is a bunch of utter nonsense from beginning to end. Let’s take up the make of the chart at what sounds like a bad word, ‘dumping.’ I want to ask you: which would you rather be, the dumper or a dumpee? A dumper is somebody who sells something below cost according to the official definition. A dumpee is somebody who buys things below cost. Would you rather be the one who has to sell something below cost or the one who has to buy something below cost? Well, I don’t think there are two answers to that, and nobody could’ve thought different if it hadn’t been, in the words of Adam Smith- who was a real source of free trade- the real Adam Smith 1776, not the fellow who goes under that name now, nice fellow but not the real Adam Smith. At any rate, go back, Adam Smith said “People could never have believed such a silly thing that they would rather be dumpers than dumpees; if it hadn’t been for the interested sophistry, (those are his words,) of merchants and manufacturers in these days.” I may say the interested sophistry of merchants and manufacturers is reinforced by the interested sophistry of some people who professed to be presidential candidates and people on both sides of the party aisle. But let me go back to the straight story. A dumper sells something below cost. A dumpee buys below cost. Now the particular argument that is made, they say- because here’s a Japanese firm- it sells something below what it costs it to make. It is true. It loses on each item. They are, people aren’t so silly to use the old saw; that they lose on each item, but make it up in volume. So nobody believes that. They lose on each item, but they say they’ll drive the American producers out of business and they’ll be able to come in and take over the whole field, and then they can raise the price very high and boy, then they’re in the money. Well, let’s consider that for a moment. Suppose you were one of those American producers and the Japanese were selling goods below cost. Let me tell you how to make yourself rich. You simply buy what he wants to sell. Don’t produce any yourself. Just buy it and stockpile it. The more you buy, the more he loses. For everything he sells you, you tell me he’s producing it below cost. He’s selling it below cost. You can bankrupt him. And then when he is bankrupted you can just offer these for sale on the market and you can reap a nice, fat profit back again. This is a fairy tale that this goes on. It was first made very prominent way back- to show you that it’s an old fairy tale- and it probably goes back before that, but the first prominent case was early in this century about John D. Rockefeller and Standard Oil of Ohio. It was said to have obtained a monopoly by driving out his competitors by selling below cost. When a student of Aaron Director’s, the founder of the Discipline of Law in Economics, John McGee, went and studied that case, went through all of the records and extensive anti-trust suits and then the hearings before the congress and so on. He discovered that there wasn’t a shred of evidence to support the notion that that was a way Rockefeller produced his monopoly or his large companies…not clear it was a monopoly. He did it by being more efficient. But of course, if you’re the fellow who has been driven out of business by somebody else’s more efficient, isn’t it more satisfactory to you to say “Oh he didn’t drive me out because he’s more efficient, he drove me out because he had a big pile of money and he could sell below cost?” As I say, that’s almost always rationalization of people who are inefficient and unproductive. It doesn’t pay anybody. It doesn’t pay foreign producers to dump. That’s nonsense. I may say most of the cases when you charge them with dumping, they’re not dumping. There are either of two things happening. Either they really do have lower costs than their American competitors, or they have a temporary over supply and they got to get rid of it. Just bring it down home. Don’t go over overseas. But here you are. You have a store, let’s say, and you’ve over bought an item, you can’t sell it. You suddenly discover you’re overstocked. What do you do? You don’t like it, but you’d rather sell it below cost than not sell it at all. And now, if you’re the customer- don’t you feel fine about getting that bargain? If Japan- the only way in which Japanese manufacturers could continue to dump in this country over any long period would be if the government subsidized it. Well, now, let’s look at that possibility. Suppose the government subsidized it…well let’s come close to home…The biggest dumpers in this world are the United States government without question. We have been for years selling wheat to India under so-called PL480 at a price of zero. That’s surely below cost. You can calculate cost anywhere you want, but zero is less than cost. We call it foreign aid. I don’t know whether the Indians were wise to take it or not, maybe they weren’t. But tell me, do you blame the Indians for taking our foreign aid? Do you think they made a mistake to take that free gift? If the Japanese government wants to subsidize Japanese producers of television sets to sell their sets in this country below cost- they are providing us with foreign aid. Should we refuse that foreign aid? Now I tell you this is a silly fairy tale from beginning to end- because it isn’t happening. The Japanese government isn’t in the business of subsidizing American consumers. Japanese manufacturers aren’t in the business of selling goods for a long time below cost, maybe they occasionally have to, so do American manufacturers. What you have is a rationalization by American manufacturers who have not been able to compete successfully on their own ground, on their own terms, with some Japanese producers. Now if that’s the case, the right solution is to keep the market open. The way to get efficiency is to make people face up to competition, to make them shape up or get out. That’s the American system of competition. It’s a system that produced our great progress. If we shut out the rest of the world, we’re going to stagnate and not grow. What about the classic argument that if, in that process, we allow it to proceed, we end up without a steel industry, without an electronics industry, and then our national security is threatened? We just have to ask ourselves one question. Can you name any case in which the government through protection has prevented a major industry from declining? What’s the record? Where are the successes? After all we’ve been doing this since the birth of the Republic. Alexander Hamilton and his famous report on manufacturers, Alexander Hamilton was a great man, but that was a terrible report and it set itself on the wrong road. And his report on manufacturers, what was it… 1790 something? I don’t know it was about that time, a long time ago anyway, he urged protective tariffs for infant industry arguments. He proceeded to praise Adam Smith to the sky at the same time that he argued that Adam Smith was all wrong so far as the United States was concerned. For my money, Adam Smith was right and Alexander Hamilton in that particular instance was wrong. At any rate that was a steel industry. Throughout its history, the steel industry has had tariffs and protection. You know it’s a funny thing about these infant industries, they never grow up. More recently, to come down to modern times, sometime about 1972 I think it was, I forget the exact date, the steel industry made a great hullabaloo about the fact that foreign imports were taking a larger fraction of the business away from them. And they were. Foreign imports were going up to something like 15 or 20 percent. For some years, and the reason was a very simple one, it was that steel workers were earning wages that were something over twice as high as the average wages of all people in the United States in manufacturing. People make a mistake when they compare wages in the United States with wages in Japan. How do you compare wages and dollars with wages and yen? The right comparison is the wages of steel workers in the United States and the wages of other workers in the United States, like farm workers. There are two ways we can produce steel in the United States. One way is to have steel blast furnaces. Another way is to produce, let us say oranges, sell the oranges to the Japanese for yen and buy steel from the Japanese for yen. That’s another way to produce steel. And if that’s cheaper then that’s the better way. At any rate, that was the case. It was cheaper. Why? Because the steel workers were grossly overpaid relative, not to what they wanted or what they deserved as human beings, but relative to what people in similar manufacturing enterprises were getting. For a while, while competition wasn’t allowed to prevail, the wages of steel workers started going down relative to the average. Then the steel industry started to hold its own and then the United States came in and this was long before the present administration or before the Carter administration and put in some kind of a protective device. I forget the details. It was something called a trigger price which had the effect of setting them in minimum floor. What was the result? Over the next ten years there was no more gain in the relative wages, that is, no more decline, in the relative wages of steel workers compared to other workers. And there was a further increase in imports of foreign steel. And over the period since then, total employment in steel has gone down sharply. The U.S. has protected it very strongly over the so called protection as you can see; it isn’t protection… that’s a misnomer. What it is is a sentence of death. I have said if you look at the record, government protection for an industry is a sentence of death for that industry. And that I think is what the record shows in almost every case and it’s understandable why that should be the case. If you take away the spur of competition, you take away the most important force for maintaining efficiency and productivity. I do not believe there’s a chance in the world the steel industry would disappear if we had absolutely free and open competition and no restraints on trade and steel. Why? Because there are great geographical advantages in producing steel where the ore comes out and where the steel is going to be used. And I cannot conceive of that being completely frittered away by inefficiency and lack of productivity. And the same thing goes with almost every other industry people talk about. When people talk about a key industry like oil and they say, well my god, we can’t let the oil industry go. We need that for war. Well, what we do need for war is oil, not an oil industry. It’s far cheaper to stock pile oil than it is to maintain in existence oil wells that cost a great deal more to exploit then you can buy the oil from abroad. In any event, it’s always seems to be kind of a mystery about how you preserve the oil reserves in the United States by pumping it out as fast as possible. That seems to me a contradiction in terms. So I suggest to you that Adam Smith’s phrase of interested sophistry is the better designation for these various arguments than that they are reasonable or rational. They are rationalizations. Rationalizations have an understandable attempt, don’t misunderstand me. I understand the attempt, if you’re in a position where you are seeing somebody beat you out, where you are losing your business, where your income is going down, whether that’s because of a domestic competitor or a foreign competitor, I don’t blame you for trying to do what you can. I just blame the rest of us for being so weak and silly and foolish as to let you get away with it. Please define conservative and liberal and tell us where you place yourself. Well, the word conservative really doesn’t have any real meaning in a sense that if you take it literally in a dictionary meaning it means to keep things the way they are. And the people who call themselves conservatives, in general, don’t want to keep things the way they are. So it’s a misnomer. But in practice, if you go down to the way people classify themselves; there are several classes of conservatives. There are the so-called traditional conservatives who believe that practices that have developed over generations and over centuries must have a great deal of merit to them out of the simple evolutionary process by which they’ve developed and I believe that is correct. But I am not one of those, however. I think they have a great deal of merit and something to be said, but there are other classes of conservatives, more classes then you can shake a stick at and they’re not all exactly the same. It’s very hard to classify them. Liberal is a different story. The word liberal once had a simple straightforward meaning and it still has if you look in the dictionary. It means of and pertaining to liberty. But unfortunately, the people who, now in the United States, call themselves liberals are not devoted to maintaining liberty. In the main, they are people who should properly be called socialists. Their aim is to have government or the collectivity as a whole assume a greater share of responsibility and a greater role in determining the lives of individuals. So I think these terms are both misleading. I would like to classify myself as a real liberal, as a liberal in the original sense of the term, but the term is so much misused now that it’s hard to do so. And consequently I am often driven to call myself a libertarian by which I mean exactly the same thing. Somebody who believes in a free society and who believes that you can only maintain a free society if government is kept relatively low. But in the words of our framers and our founders, the real threat to human liberty comes from government, not from individuals, and that you have to control it. That’s why we have a constitution with checks and balances which sought to limit the scope of government. If I may put this back into the terms you introduced earlier of Tom Sowell’s Two Visions, I would describe the two visions somewhat differently than he did, although I think they ultimately come to the same thing. I would say one vision–and it’s my vision and I think that of most people in the United States–is a vision of the human being of the human individual or really better, the family as the ultimate objective, as the ultimate end, as the thing that’s important, as society, as a collection of human individuals who share certain values and who agree to work together for certain objectives. And government, preferably and desirably, as a means whereby people can work together without, so far as possible, limiting their individual separate freedom to pursue their own objectives in their own life just so long as they don’t interfere with anybody else’s right to do the same thing. I believe you do need a government to prevent people from coercing one another to enforce contracts and for various other purposes, but I believe you only need a very, and to defend against foreign enemies, but you only need a relatively small government. That’s one vision. At any rate, the crucial thing about that vision is that the individual, the human being is the center of it. The other vision is a vision that properly should be called collectivism. It’s a vision of there existing some organic unity which has a meaning and a significance outside of the individual. It’s the community, the society in the Marxian language it’s the class. But collectivists are by no means all Marxians. I don’t mean to suggest that at all. There are many varieties of collectivism as there are many varieties of individualism. But the crucial dividing line, I think, is between those who take the individual as the center of the human universe as it were and those who take the collectivity, the organism, the collection of individuals as a central concept in their thinking. So far as a lateral concern it is appropriate to override the wishes and desires of the individuals in the name of a higher end that will benefit the community as a whole. And I think those are the two fundamental visions, not these misleading terms currently of liberal and conservative. We keep hearing about freedom and prosperity and that they are the results of free market capitalism, and I think that’s generally acknowledged, but what about the moral and cultural considerations of a society, aren’t they being short shifted here? I believe that free markets, applied to a much greater and a broader range of considerations , than simply buying and selling and exchanging, borrowing and lending, that’s one kind of market. But tell me how did we develop a language? Was there a governmental bureau that decided there should be 144,336 words or whatever the number of words, in the dictionary? Not at all. We’ve developed language through a market, through cooperation among people and speaking with one another, finding new terms to express our ideas, finding ways to communicate with one another. And that- though produced by human beings in the terms that Friedrich von Hayek uses- that language was not an explicit, deliberate human construct. It was the unintended consequence of voluntary cooperation among individuals. That’s language. Take another concept, take science, modern science. Science was never centrally planned. It never arose out of a government bureau. It arose out of individuals cooperating with one another voluntarily to promote a common objective. That objective wasn’t making money, it might have been a part of it, but it wasn’t the primary objective. The primary objective was to find out the way things worked: curiosity, trying to understand, the curiosity of an Einstein. He wasn’t supported by government except that he had a job as a clerk in a patent office, I believe, in Switzerland. And we go down, none of the great geniuses, very few of them were…they all were individuals who produced their own thing. But, the point I’m trying to make is a different one. They were operating in a kind of market in which they were exchanging information with one another. Now we come to your question of basic morals. How did our moral system develop? Well, for some people it was laid down on the mount through a sermon. For other people it was in the ten tablets brought by Moses from the Mt. Sinai, for still other people it’s in the writings of Mohammed. Many places where people get morals, but in the end the common values that people share derive out of a market. Transaction may seem a strange way to talk about it, but I think it’s what it really is. The common, moral beliefs we have and we share, whether Christians or Jews or Muslims, to a large extent, have devised finding out how we can best voluntary cooperate with one another. So, I would argue that voluntarily cooperation, free exchange of ideas, free speech and thought, is the most effective way to promote and maintain a moral philosophy, moral attitudes, to develop moral attitudes and to maintain them. I do not believe we have seen a growth in morality as government has become larger. I think fractionally speaking that is very hard to support. As I turn off this tape and walk away, what single thing should I work for in terms of change in the government structure in the United States to preserve these freedoms? There is no doubt these freedoms can be preserved only if we can limit the size and scope of the government. We cannot do that, in my opinion, solely by electing the right people to congress. That may help, but that won’t do it as we’ve seen. And therefore, I believe the most important thing to work for is for an expansion and extension of constitutional restraints upon the scope of government.

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