I recently sat down with Milton Friedman, a few days before his 94th birthday, to discuss the impact of two of his most important contributions to economics and liberty: A Monetary History of the United States, 1870-1960 [co-written] with Anna Schwartz, and Capitalism and Freedom. The ideas in both books had tremendous influence on the economic and intellectual landscape.

You can listen to our two-part podcast conversation on EconTalk:

The following transcript consists of excerpts from that conversation.

Russell Roberts
Features Editor

Russ Roberts: Welcome to EconTalk, part of the Library of Economics and Liberty. I’m your host, Russ Roberts, of George Mason University. My guest today is Milton Friedman. Milton is a senior research fellow at Stanford University’s Hoover Institution, the 1976 Nobel Laureate in Economics and a hero to millions in the United States and around the world for his insights and actions on behalf of economics and liberty.

Russ Roberts: Milton, I’d like our conversation to focus on the ideas contained in two of your books, A Monetary History of the United States, 1867–1960, a massive scholarly work, and Capitalism and Freedom, a slim monograph on the principles of a free society.

Let’s begin with the Monetary History of the United States. Written with Anna Schwartz. Published in 1963, it was an extraordinarily detailed and careful study of the role of money in the economy. And among many important insights, it made the case that inflation is everywhere and always a monetary phenomenon. When that book was published, what was the reaction of the profession to its scholarship?

Milton Friedman: The profession on the whole appreciated its scholarship. As I remember as best I can, there were three different reviews in three different professional journals, all of which were highly favorable even though—I think—two out of the three [reviews] were written by strong Keynesians.

Russ Roberts: And what was its impact in affecting the way the profession, at least in the short run, looked at the role of money?

Milton Friedman: I find that a very hard question to answer. Obviously, many things were going on in the world. Bretton Woods was on. The 1960s were a period of pretty good prosperity. On the whole, during the ’50s and the ’60s, it looked as if the Keynesian interpretation was right. After all, during that period, we had relatively prosperous countries, relatively stable prices, and relatively low interest rates.

It was a golden era, as it were, and everybody was said to be operating on Keynesian lines. What really changed the public perception and also the professional perception was the experience of the 1970s. During the 1970s, you had a combination that under Keynesian analysis could not exist. You had high inflation and high unemployment at the same time—named stagflation—and that combination was really ruled out by the simple kind of Keynesian analysis that was in vogue. But it was that experience which more than anything else led to a basic change in public and intellectual attitudes toward money.

Russ Roberts: So the scholars and the public had to try to puzzle out why this seeming impossibility was definitely occurring.

Milton Friedman: Yes and no. Because of our book, because of Bob Lucas’ work, we had predicted that this would happen and, therefore, it was like an experiment. You wait and see what happens and the predicted results happened.

Russ Roberts: There was a lens to look through to explain what was going on.

Milton Friedman: Sure, because this lens had predicted that you could have both high unemployment and high inflation at the same time.

Russ Roberts: I was an undergraduate and a graduate in the 1970s and my textbooks at the undergraduate level—not the graduate level, because I attended a small university in the Midwest I think you used to have an affiliation with, the University of Chicago—but as an undergraduate, my textbooks talked about all the different theories of inflation—cost push, cost pull, the role of unions, the role of industrial concentration and, of course, the possibility that Milton Friedman, this maverick thinker was right, that money had something to do with it.

It’s my impression that’s not true anymore; that the intellectual environment understands today that inflation is caused by a rapid growth in the money supply.

Milton Friedman: I think it does. I think that’s clear and the last 30 years, last 20 years I should say, has done a great deal to rub that in because every central bank has come to accept the view that it’s responsible for inflation.

Russ Roberts: Let’s talk about those central banks. What role do you think the Monetary History had—and the related work around it, of course—in influencing central bankers in focusing on the money supply in its role of affecting inflation?

Milton Friedman: I think it had a great deal of effect. I think what was most important was a chapter in the Monetary History that dealt with the Great Depression. The difficulty of having people understand monetary theory is very simple—the central banks are good at press relations. The central banks hire people and the central banks employ a large fraction of all economists so there is a bias to tell the case—the story—in a way that is favorable to the central banks.

But the Great Depression was such a major event and such a disaster that there was no way in which you could talk it away, although they tried to do so. If you read the annual reports of the Federal Reserve Board or its testimony before Congress, you will find that as late as 1933, at the very depths of the depression, it’s talking about how much worse things would have been if the Fed hadn’t behaved so well.

But the evidence was so clear. You had a decline in the quantity of money by a third from 1929 to 1933 and that coincided with the decline in the economy by half or so. When you have 25 percent of the working force unemployed, you can’t just talk it away.

Russ Roberts: But at the time, the main lesson that people drew from that was that capitalism is broken.

Milton Friedman: Absolutely. The lesson people drew was that it was a fault of business. It was a market failure. But I think the reason they drew that lesson was because of the way in which the self interest of the monetary authorities led them to promote it.

Russ Roberts: And you could toss in the self-interest of FDR in painting himself as a savior despite the severe recession of 1938.

Milton Friedman: But that would have been the same for them even if they had recognized the cause, only they would have concentrated more on doing—on abolishing the Fed or on reformulating the Fed. But the reason why the public and the intellectuals at large held to that perception was because that was what they were being told by the authorities.

Russ Roberts: And so it justified a great deal of government intervention in the economy at the time, obviously.

Milton Friedman: Oh, it certainly did.

Russ Roberts: And you’re suggesting that the Monetary History was the beginning of a revision toward a different perspective.

Milton Friedman: Well, I don’t know. On the ideological side, there were other things at work. Hayek’sRoad to Serfdom, which was published in 1945 made the ideological case. I don’t know what role the Monetary History played in the public at large but in terms of the monetary authorities, in terms of money, there’s no doubt that it played a considerable role.

Russ Roberts: And that chapter on the Great Depression must have alarmed them greatly about their potential for doing harm.

Milton Friedman: Exactly, exactly.

Russ Roberts: And at that time, in the 1960s, there was a lot of debate about what the role of the central bank should be and because inflation was relatively low, there was much less attention paid to that role.

Milton Friedman: Here and there, there were things like the Federal Reserve Bank of St. Louis, which was arguing against the Federal Reserve policy and which was arguing that they should pay more attention to the quantity of money, but they were mavericks. But so far as the bulk of the population, the bulk of the profession, the bulk of the people hired by the monetary authorities, they all were Keynesians.

Russ Roberts: Focusing on the central bank role, going back again to the ’70s when I was in school and shortly after your book came out, the focus was on the money supply—the quantity of money, counting it, controlling it through open market operations.

Something changed in the last 25 or 30 years. That’s not what Alan Greenspan or Ben Bernanke talk about. They talk about other things and they play with that short-term interest rate, not the so-called stock of money that you focused on so intensely in the book.

Milton Friedman: That’s what the talk about but that’s not what they do.

Russ Roberts: What do they do?

Milton Friedman: They use the short-term interest rate as a way of controlling the quantity of money. If you look at the statistics, the rate of change of the quantity of money from month to month, quarter to quarter, year to year, it has never been so low as it has been over the last 20 years.

I don’t believe there’s another 20-year period in the history of the country in which you can find so steady a rate of growth in the quantity of money and that can’t all be an accident. That’s because they use the short-term interest rate. Look at it in the simplest possible way.

The Fed says the short-term interest rate should be 4.5 percent. How do they keep it there? By buying and selling securities on the open market. Now you’re Mr. Bernanke; you’re Mr. Greenspan. You’re watching that. And with the current short-term interest rate, you find that the quantity of money is starting to creep up more rapidly than you really want. Well, then you will tend to be favorable to raising to a higher rate of interest.

At that higher rate of interest, the demand for money is less and so the supply of money under that phenomenon, instead of having to sell government bonds to keep it there, they have to buy government bonds to keep it there or vice versa. Maybe I’m getting it mixed up. But in any event, the short-term interest rate is a tool with which you can control the quantity of money.

Russ Roberts: But they don’t talk about it that way.

Milton Friedman: No, they don’t talk about it that way.

Russ Roberts: Why do you think that is? Do you have any idea?

Milton Friedman: I don’t know. I’ve always been puzzled by why they insist on using the interest rate rather than the quantity of money.

If you really carried out the logic concerning the quantity of money, you deprive the Federal Reserve of anything to do. Suppose the Federal Reserve said it was going to increase the quantity of money by 4 percent a year, year after year, week after week, month after month. That would be a purely mechanical project. You could program a computer to do that.

Russ Roberts: Like an indexed mutual fund takes away the fun of being a fund manager.

Milton Friedman: Right. That’s part of the reason. But the main reason, I think, is different. It’s that the central bank associates with banks. It regards itself as sort of a mentor of the banking system and, to the individual bank, it doesn’t believe it creates a quantity of money. That doesn’t make any sense to them.

What they deal with are interest rates and therefore, it’s natural and so many of the central bankers are themselves from the banking industry. They’re bankers. And so it’s natural for them to think in terms of interest rates and, moreover, when they think in terms of interest rates, they’ve got all kinds of interest rates—short-term interest rates, long-term interest rates—all kinds of excuses for exercising power or thinking they’re exercising power.

Russ Roberts: Taking credit for exercising power.

Milton Friedman: I’ve always been in favor of abolishing the Federal Reserve and substituting a machine program that would keep the quantity of money going up at a steady rate.

Russ Roberts: And over the last 20 years or so, they’ve approximated that.

Milton Friedman: Come closer to approximating it. Absolutely.

Russ Roberts: And I would argue, and I assume you would as well, that the relative stability of the U.S. economy over the last 20 years is a reflection of that steady growth in the money supply.

Milton Friedman: I think there’s no doubt at all.

Russ Roberts: The non-erratic path.

Milton Friedman: It’s a golden period. It’s a period in which you had declining inflation but a fairly steady rate, a steady level. You had only three recessions, all of them brief, all of them mild. I don’t believe you can find another 20-year period in American history. But it’s interesting to note that so far as the international acceptance of monetary control is concerned, it was started by the Bank of New Zealand, not by the Federal Reserve Bank.

It was some time in the 1980s when New Zealand essentially came close to privatizing its central bank. It set up a situation in which the governor of the Central Bank of New Zealand had a contract with the government in which he agreed to keep the price level—inflation—within a certain bound; 0 to 3 percent or 0 to 2 percent. And if he did not do so, he could be fired.

Russ Roberts: Not decapitated, merely fired.

Milton Friedman: Merely fired.

Russ Roberts: But it still concentrated his mind sufficiently.

Milton Friedman: Oh, yes. And Don Brash was appointed as the first governor of the Central Bank of New Zealand. He’s now the leader of the opposition in the New Zealand Parliament. But at the time, he came from business. He was a businessman and he is an extraordinarily able and effective fellow and he took this job on at the time when New Zealand had a very high inflation rate and he succeeded in living up to his contract.

And that really set the pattern. It was the New Zealand experience, I’m sure, that had more to do with other central banks around the world adopting inflation targeting than the United States experience.

Russ Roberts: Because it was so dramatically effective in New Zealand?

Milton Friedman: It was the first time that anybody had explicitly adopted an inflation target. So that was something that everybody observed. And, secondly, it was so dramatically effective.

Russ Roberts: So are you optimistic about the role the central bank will continue to play in that inflation and price level story? You said we’ve had a golden era of 20, 25 years of stable prices, steady growth with only minor—by historical standards—minor recessions. Are you optimistic about the next 25 years?

Milton Friedman: I have great difficulty not being optimistic about it. All the evidence would seem to be optimistic. On the other hand, I can’t hold back a doubt. Governments want to spend money and sooner or later, governments are going to want to spend money without taxing it and the only way to do that is to print money—to create inflation.

Inflation is a form of taxation. How long will governments be able to resist the temptation? And particularly as people become adjusted to being in a world of stable inflation. They will be bigger suckers as it were. It will be easier to get a lot out of it. If everybody anticipated inflation, you couldn’t get anywhere by inflating.

Russ Roberts: But once you get people lulled into the expectation of a lack of it, there’s the potential to exploit it. Let me ask the question in a different way. A lot of people credit Alan Greenspan with the expansion and success. They give Paul Volcker some credit as well at the early part of this period that we’re talking about.

But they make it sound like the key to success in monetary policy is you just got to get the right person in the job. When Ben Bernanke or whoever is following him comes in, there’s this absurd microscopic examination of the aura and vapors around such a person. And you’re suggesting it really has nothing to do with it.

Milton Friedman: Well, how is it that New Zealand can do it. How is it that Australia can do it. How is it that Great Britain can do it. These are all countries which followed New Zealand. New Zealand started it. But then Australia and Great Britain also adopted inflation targeting.

Russ Roberts: Well, they just happened to find the right guy in each of those places.

Milton Friedman: Oh, they were all lucky. Absolutely. (Laughter.) I’ve always felt that the big defect politically of the Federal Reserve is precisely that so much depends on unelected representatives. The central bank is treated as if it were the Supreme Court. That’s why during the Depression, there was no effective controls on the central bank. There were members of Congress who knew what to do and who trying to get the Fed to do it but they had no way to do so.

Russ Roberts: There was no incentive directly. There was an indirect incentive, of course, which was humiliation and the stigma which has endured. They had no idea at the time of how bad that would turn out—how those decisions would look in retrospect. But you’re suggesting that the disadvantage of the current system is a lack of accountability.

Milton Friedman: Right.

Russ Roberts: But the alternative, the elected system, has the problem that you mentioned earlier of the temptation to exploit the ability to create money to increase revenue.

Milton Friedman: But that’s why what you want—if possible—is a mechanical system. If there was any virtue to the gold standard, it was that virtue. Maybe you could create the same thing now. My favorite proposal really is a little bit more sophisticated—or less sophisticated if you want to look at it that way—than a straight increase in the quantity of money. I would—if I had my choice—freeze the amount of high-powered money. Not increase it.

Russ Roberts: High-powered money being bills and cash.

Milton Friedman: High-powered money is the currency plus bank reserves.

Russ Roberts: Okay.

Milton Friedman: I would freeze that and hold it constant and have it as sort of a natural constant like gravity or something. Now, you would think that that’s a bad idea because there would be no provision for expansion; however, high-powered money is a small fraction of total money and the ratio of total money to high-powered money has been going up over time. So the economy would create more money and on average, you would have a pretty stable money growth and a pretty stable monetary system.

Russ Roberts: What do you think the odds are of that happening?

Milton Friedman: Zero.

Russ Roberts: Zero? Well, that’s a small number, zero. I wish you were a little more optimistic.

Milton Friedman: No, I don’t think it’ll happen unless there is another catastrophe like the Great Depression. But other than that, it’s not going to happen. I think the real danger of this [the current monetary system] breaking down is there’s no danger of it breaking down into a Great Depression. The real danger is it’ll break up into an inflation.

When I see in the Federal Reserve reports that the inflation anticipation for 10, 20 years is on the order of 2 percent a year, I find it very hard to believe it. Sooner or later, the government’s going to get out of hand.

Russ Roberts: But this current run is a lovely illustration of your ideal— a non-discretionary, mechanistic rule. The average person finds it very unappealing. Discretion always seems to be better than rules.

Milton Friedman: That’s right.

Russ Roberts: What you’re saying is that with that discretion—which is not ideal in your world—yet with that discretion, they have followed the rule.

Milton Friedman: Yes.

Russ Roberts: So far. They’ve given the impression to the world that they are wise and careful engineers at the helm of the monetary system and yet they have acted as robots.

Milton Friedman: That’s right.

Russ Roberts: What a wonderful example of a lack of damage done by that discretion. So far. But I understand your pessimism.

Russ Roberts: Milton, let’s turn to Capitalism and Freedom. In the book, you lay out the principles of what you call liberalism. Sometimes you call it liberalism, sometimes 19th Century liberalism. Sometimes you’ve called it classical liberalism. And you advocate there a limited role for government in the legal and monetary system and maximal freedom and responsibility for the individual. And in that book, which was published in 1962, but based on lectures, I think, that you gave in the late 1950s—

Milton Friedman: 1956.

Russ Roberts: So the ideas in that book are 50 years old this year. And in 1956 and thereafter in the book in 1962, you argued for a volunteer army, flexible exchange rates, a monetary rule for stable prices, educational vouchers, privatizing Social Security and a negative income tax. At the time, those ideas were not conservative at all—

Milton Friedman: They were very radical.

Russ Roberts: Some people might call them conservative but you called them liberal because they were about freedom. They were considered either conservative or whacky. What was the reaction to the book when it came out?

Milton Friedman: I don’t know. I really don’t know how to answer that question because when it came out, it did not receive a great deal of attention to begin with. It was reviewed in no major newspaper. The New York Times didn’t review it. The only reviews were in professional magazines. It was reviewed in the American Economic Review, in the Economic Journal and other major professional journals but it got very little public attention.

Russ Roberts: And I’m surprised it was actually reviewed there. A book like that today would be much less likely to be reviewed in the American Economic Review or Economic Journal. It was a polemic of sorts. That’s a little strong.

Milton Friedman: It was a polemic.

Russ Roberts: It was a treatise. It was a manifesto.

Milton Friedman: But by that time, I had acquired a considerable reputation as an economist in professional economics. There was a good deal in this book, however, which was of professional economics importance. What you’ve mentioned—floating exchange rates—and the monetary stuff. It was polemic but it wasn’t primarily polemic.

Russ Roberts: And it’s not written in a polemical style.

Milton Friedman: No, it tried to be a rational argument and it tried to consider the evidence for the points that are made. But you’re stressing how much has since been achieved from it.

Russ Roberts: Correct.

Milton Friedman: But I’ve always stressed the opposite. If you look at the list in Chapter 1 or 2—I have a long list of things government ought not to be doing.

Russ Roberts: And it’s not exhaustive. You say at the end of it this is just the beginnings of a list.

Milton Friedman: The only one of those that has really been achieved is a volunteer army.

Russ Roberts: Right. We’ve made some inroads potentially on agricultural price supports which is, I think, the first thing you list on that page. There was actually somewhat serious talk about changing them. But you’re right. You could argue the glass is half empty. But as, again, someone who came of intellectual age in the 1970s and who was sympathetic to the ideas in the book, to put it mildly, advocating those ideas at the time, any of the ones we’ve talked about on the positive side that actually happened or are close to happening, was a recipe for being treated as a buffoon or a fool or a heartless person. I think it’s an extraordinary intellectual and policy experiment over the last 50 years that so many of those things have come to pass.

Milton Friedman: And what’s happened is that the public attitude has changed tremendously. In 1945, 1950, at the end of the war, intellectual opinion was almost wholly collectivist. Everybody was a socialist. They may not have used the term but that’s what they were. However, practice was not socialist. Practice was free enterprise.

The role of government at that time was such smaller than it has since become and from 1945 on to 1980, what you had was galloping socialism. Government took over more and more control. Government spending went from about 20 percent of national income—government federal, state and local—to about 40 percent of national income until Reagan came along.

But Reagan was able to do what he did because in that 20-year period, intellectual opinion had changed. What had before been a hypothesis was now fact. You now could see what the government did and people didn’t particularly like what the government did. So public attitudes about government had changed very much over that period and I think maybe Capitalism and Freedom added a little of that but I think experience was much more responsible.

Russ Roberts: At the time, the other side of the intellectual argument, the socialist or communist side, was doing quite poorly. But we were not aware of it. The Soviet Union was doing much, much worse than it appeared to be doing.

Milton Friedman: Sure.

Russ Roberts: And so if we had had the facts about the Soviet Union, the experiential case for capitalism and markets might have been even stronger. But it really is rather remarkable that given the intellectual apologists for the Soviet Union of the day, how much the tide changed in public opinion despite the lack of direct evidence that we had.

Milton Friedman: We had very little direct evidence outside the United States and I think it was the evidence of the government in the United States that was playing a role.
But I really have never done any serious work on trying to trace the course of general public opinion except as it worked for the politics of it. Reagan could never have gotten elected if there had not been a big change in public opinion. He could not have been elected in 1950.

Russ Roberts: And Goldwater was not electable in 1964 who in many ways was the most free market candidate of the 20th Century. Yet George W. Bush, who is not much of a classical liberal, did at least talk about what he described as privatizing Social Security, a topic that Reagan might think was a good idea but I don’t think ever talked about it publicly, advocated it, never made it a campaign issue. I think probably afraid of it, perhaps correctly so.

I remember in my youth, again going back to the ’70s, talking about eliminating Social Security was an invitation to be described as a person who wanted to see old people die in the streets “as they did before the 1930s” as if somehow Social Security had prevented this from happening, which is bizarre given the level of Social Security in the 30s.

Milton Friedman: Of course.

Russ Roberts: —and all the private mechanisms we have for taking care of ourselves. And so, obviously, Capitalism and Freedom played a role. You mentioned earlier The Road to Serfdom by Hayek in affecting public opinion. There was definitely an intellectual foundation laid for these public opinion changes that gave people something to hold onto.

Milton Friedman: Well, we know that, for example—we happen to know—that Reagan read Capitalism and Freedom before I ever met him and, clearly, that’s a way in which a book has influence.

Russ Roberts: But it also has influence through affecting the electorate who—

Milton Friedman: Oh, sure.

Russ Roberts: And Free to Choose, a book we haven’t mentioned yet, which was a documentary on public television at first and then I think the book followed the documentary or was it the other way around?

Milton Friedman: The book was based on the documentary but appeared in print before the documentary. What happened was we finished all the work on the documentary in the spring of ’79 and we spent the summer of ’79 using the transcripts of the program as a basis for Free to Choose book and Harcourt Brace did a remarkable job of publishing the book. We went to the printers in September and it was in the bookstores in December. Jovanovich—at the time, it was Harcourt Brace Jovanovich—Bill Jovanovich was very much of a fellow thinker and he contributed to our program.

Russ Roberts: In what way?

Milton Friedman: Oh, to begin with, the first step in creating the program was that I gave a series of lectures all over the country on the subjects that were going to be in the program to provide material for the producer and directors to weave into film. And he gave us a contract for publishing the transcripts of those lectures.

Russ Roberts: So that helped finance the trip. The book and the TV series, which reached millions, obviously, helped as well with the ideas of Capitalism and Freedom which probably didn’t sell quite as well —marketed by the University of Chicago Press—but with similar ideas.

Milton Friedman: No, no. The University of Chicago Press did a good job in marketing considering the absence of book reviews. After all, Capitalism and Freedom has sold something like 600,000 copies. Free to Choose has sold over a million copies. And we found it very fascinating to observe the way sales of Capitalism and Freedom went. To begin with, they were relatively few. And then they gradually started to increase and it was entirely person to person—word of mouth.

Russ Roberts: And it is a book that’s still quite topical.

Milton Friedman: The basic principles that we believe in are going to stay the same for the next thousand years. That aspect of it will never go out of date. What goes out of date are the particular applications. We still find Adam Smith’s book, Wealth of Nations well worth reading even though it’s published in 1776.

Russ Roberts: Yes, it is surprisingly informative.

Milton Friedman: It certainly is and it’s so well written.

Russ Roberts: I think a huge part of your success—obviously not the logic but the success of the ideas—is your ability to communicate clearly and effectively to a non-technical audience.

Milton Friedman: Well, I’m not a stylist the way Smith was. The modern economist who really I think matches that is George Stigler.

Russ Roberts: Absolutely. He had a graceful pen. And it was a pen probably, not a keyboard, if I had to guess.

Milton Friedman: Oh, there’s no doubt that it was a pen.

Russ Roberts: I know you can give us the empirical evidence. Let me ask you about another idea in Capitalism and Freedom that you later elaborated on in a Sunday New York Times magazine story in the early 1970’s. You wrote there: “There is one and only one social responsibility of business, to use its resources and engage in activities designed to increase its profits, so long as it stays within the rules of the game which is to say engages in open and free competition without deception or fraud.”

I feel that that view of business, the one that says it should maximize its profits, is increasingly under attack and there’s a strong activism afoot in the land to turn corporations and businesses into social organizations, welfare agencies, charitable organizations. One, do you agree with me? Do you think that’s true? And two, what can we do about it? Any ideas?

Milton Friedman: I think it’s absolutely true. There’s no doubt that that’s—the view that there are many stakeholders and not only the shareholders has spread. And business itself propagates the idea because it’s good public relations. They spend money entirely with a view to the bottom line but label it social responsibility spending.

And that sentence, I think, is still just as true as it ever was and I’ve never seen an occasion to change my view about that. Suppose a business wants to do charity. What is it that gives it any special ability to do charity properly? The XYZ Company, in addition to producing XYZ trucks, also wants to be socially responsible and so it does what it thinks is charity. What is its special capacity for that?

It may know how to make trucks but does it know the right way to spend charitable money? And whose money is it spending? It’s spending somebody else’s money. It’s a very bad practice. Business has had such a big incentive to label itself socially responsible—it’s primarily responsible for that conception.

Russ Roberts: Yeah, I worry about that slippery slope as they brag about how well they’ve done in those different dimensions. I’d like them to brag about how profitable they are. That means they’ve produced something that people enjoy, are willing to pay for and have found a way to produce it at a lower cost.

Milton Friedman: The truth of the matter is that the only way anybody can make money is by producing something that people want to buy, but it can give away money without meeting that restriction.

Russ Roberts: That reminds me of one explanation for why people, I think, lean on businesses to indulge other activities besides producing products well. It’s the Willie Sutton theory of why you rob banks—that’s where the money is.

The Chicago City Council recently passed an ordinance requiring large retailers—mainly Wal-Mart and Target—to pay at least $10.00 an hour in wages and $3.00 an hour in benefits.

If you ask the proponents why should Wal-Mart finance a higher standard of living for their workers, why should the investors of Wal-Mart, the stockholders, and Target, be the ones that finance that, I think the answer would be “Well, they have the money.”

That ignores, of course, the incentive effects that then result. They’re the last people that you’d want to have finance this because it discourages them from creating jobs for low skill people. But I think that first order effect of “Well, they’ve got the money, they write the checks so therefore they’ve got the responsibility” has a huge appeal to the average person.

Milton Friedman: But it’s always been true that business is not a friend of a free market. I have given a lecture from time to time under the title Suicidal Impulses of the Business Community, something like that, and it’s true. It’s in the self-interest of the business community to get government on its side. It’s in the self-interest of a particular business. Look at this crazy business about ethanol. Who’s benefiting from that?

Russ Roberts: Farmers. Corn farmers.

Milton Friedman: No, the farmers aren’t benefiting.

Russ Roberts: The landowners.

Milton Friedman: What’s the company that produces it?

Russ Roberts: Archer Daniels Midland. So of course, they lobby and talk about the enormous environmental benefits of ethanol.

Milton Friedman: But the real puzzle—puzzle isn’t quite the right word—the real problem here is where do you find the support for free markets? If free markets weren’t so damn efficient, they could never have survived because they have so many enemies and so few friends. People think of capitalism or free markets as something that obviously is supported by business. People think that if a business party is a party in politics, it will promote free market. But that’s wrong. It will be in the self-interest of individual businesses to promote a tariff here and a tariff there, to promote the use of ethanol—

Russ Roberts: Special regulations for its competitor that apply just by chance to its competitors but not to itself—

Milton Friedman: That’s right.

Russ Roberts: —or that they already comply with but their competitors don’t happen to comply with.

Milton Friedman: And it’s so hard in general, so much harder, to repeal anything government is doing than it is to get it to do it. There are so many stupid things that government is doing that, clearly, it would be in the self-interest of the public at large to have repealed. Who would—who can really on logical grounds defend sugar quotas? There’s no way of defending sugar quotas.

Russ Roberts: You don’t think it’s a big national security issue? [laughter]

Milton Friedman: That was why they were imposed. Because of Cuba. They were initially imposed against Castro. But once you got them, you couldn’t get rid of them.

Russ Roberts: It’s a good example because the beneficiaries are very few.

Milton Friedman: They’re very few.

Russ Roberts: We understand that politically that gives them a certain reason to be loud in talking to the representatives but you’d think the fewness of them would eventually be decisive in overturning it but it has not.

Milton Friedman: No, it’s not, because it’s an advantage. If 50 percent of the people were sugar farmers, you couldn’t possibly have sugar quotas, because it costs too much to the others. But if 1% of the people are sugar producers, for each dollar that they get, that’s divided among 99 people so it’s only one cent to the individual.

Russ Roberts: So their incentive to yell is small— which brings us back to a question that you write about in Capitalism and Freedom. Issue by issue, it’s easy to make the case for discretion.

When you see the cumulative effect of going issue by issue, you really can make the case for principles. You give the example in the book of freedom of speech. Obviously, a lot of Americans are against freedom of speech.

Milton Friedman: Oh, sure.

Russ Roberts: And if you went issue by issue, you’d find a lot of speech that would be voted down as not appropriate and yet we sustain it through enough people believing that it’s a good thing.

Milton Friedman: But even here, with the campaign finance laws, we’re reducing freedom of speech drastically.

Russ Roberts: That gets back to your point about businesses wanting government to protect them. In this case, the business is the industry of government. Politicians like the protection that campaign finance laws gives them.

Milton Friedman: Yeah.

Russ Roberts: That’s a very tough one when they regulate themselves. They do tend to be a little self-interested there. It’s very sad.

Milton Friedman: But how do we get that repealed? What politician is going to come up and make a big fight on repealing the McCain-Feingold legislation.

Russ Roberts: Although the Supreme Court occasionally does speak up and suggest that this is not really consistent with the Constitution.

Milton Friedman: Well, the Supreme Court is not a very strong support in some cases. Look at what it did with property—with eminent domain. The Kelo case is not really a good advertisement for a free market Supreme Court.

Russ Roberts: But ironically, it did produce a backlash at the state and local level against using it.

Milton Friedman: The Institute of Justice—which is a remarkably good organization—has been promoting that backlash against it and they’ve been doing a very good job. It may well be that you’ll end up with a stronger support for property than you originally had. But that wasn’t the intention of the Supreme Court.

Russ Roberts: Let’s go back to the difficulty of repealing bad laws. You mentioned sugar quotas, sugar price supports, as an example. What role do you think economic illiteracy, a lack of understanding on the part of the public of the full effects of legislation, plays in sustaining laws that are described as in the national interest but are really serving special interests?

Milton Friedman: Very little. Because it’s not in the self-interest of the recipients to figure it out. What housewife is going to spend the time to save the extra money—maybe it’s $5.00 or $10.00 a year she pays extra on sugar? It doesn’t pay to try to figure out. What you’re dealing with is rational ignorance. The rational part is what I want to emphasize. It’s not ignorance that is avoidable because it’s rational to be ignorant.

Yet somehow, people do get it. Minimum wages have become less popular than they used to be. They’ve been trying to pass a rise in the minimum wage for years and they haven’t passed one. And that’s because, I think, there is more understanding of the economic merits or demerits of it than there used to be—more people recognize the effect of a higher minimum wage on the employment of the poor.

Russ Roberts: On the flip side, the living wage, which are these local ordinances or like the one in Chicago we spoke about earlier, gets attention and often passes.

And if anything, you’d think there the effects are going to be more stark in a local area—employers have more choices to leave the area which they wouldn’t have at the federal level. On the case of gasoline price controls, true, no one clamors for price controls but we have all these implicit price controls—threats by attorney generals to prosecute gougers in the wake of Katrina or worse, vaccine manufacturers who might have the gall to charge a market-clearing price.

Instead we have the president of the United States two winters ago begging people to not use the vaccine if they’re not really at risk, instead of using the price mechanism which is so much more effective. It seems to be a paradoxical pattern? Do you have any thoughts on that?

Milton Friedman: I don’t think there’s anything very paradoxical about it. First place, we are now only 20 or 30 years from when we had price controls [on gasoline]. And so a large fraction of the population had personal experience with it. Twenty or 30 years from now, after there’s nobody living who had experience with price controls, I wouldn’t be surprised to see it come back again.

We have to keep ourselves open to the facts. The facts are that the world has become better and better over time. The 19th Century was better than the 18th Century. The 20th Century was better than the 19th Century. The 21st Century is going to be better than the 20th Century. There was once an article back in, oh, 1780 or something, which said how many people lived in free countries and how many lived in the rest—non-free.

And the ratio of people who live in free countries to the total population of the world has surely been going up throughout this whole—these past two centuries. It went up most dramatically recently when the Berlin Wall fell, when the Soviet Union went out of existence. So there’s reason to be optimistic.

Somehow or other, these stupid individuals who vote these bad laws seem to have enough sense to keep from voting laws bad enough to create a negative GNP. So I think in the end, you’ve got to remain an optimist.

Russ Roberts: I share your optimism and I like the long-term perspective. On any one day, you can always get depressed about what’s going on in Washington or in city hall but the long-term trend is toward more freedom and a higher standard of living and although it seems very difficult for people to recognize that, they’re always moaning; the educated class is always moaning about how things have never been worse. We stand on the brink of a precipice either because we have a trade deficit or China or manufacturing jobs are in decline or the inequality due to this, that or the other, or immigration. There’s always some threat to our prosperity that’s imminent and yet we manage to keep going.

Milton Friedman: And yet—another thing on the glass being half empty. While everybody complains about Bush’s tax cuts, nobody really is in favor of higher taxes. There’s no broad sentiment, no broad move [to raise taxes].

Russ Roberts: I want to ask you about George Stigler who you mentioned earlier. Stigler was an observer of the political scene. He was a political economist who described why things were the way they were but he felt it was a waste of time to be an advocate, a preacher, a proselytizer for a particular philosophy or ideology because politicians face these incentives and you’re not going to change what they do. Being an advocate for this policy or that policy or trying to increasing liberty—as you have—is a Quixotic endeavor. Is that a fair assessment of his view?

Milton Friedman: There’s a lot of truth to it. George always used to say, “Milton wants to change the world. I just want to observe it.” But it wasn’t true. That was what he would say. But after all, you never heard George say a good thing about bigger government. You never heard him in any way express views that differed from yours and my views about what we ought to be doing. So I think that was a little bit of a show that he put on.

Russ Roberts: But he didn’t spend as much time as you have professionally.

Milton Friedman: No, no. He did spend much more time on observing.

Russ Roberts: And you have spent a great deal of time obviously on observing but a sizeable amount of time on urging or prodding or pushing politicians and others—the rest of us—to advocate for smaller government and more individual freedom.

Milton Friedman: I have.

Russ Roberts: As a person who spent a lot of time in the—not just in the academic vineyard but in the policy vineyard, do you look back on that as fruitful work?

Milton Friedman: I really had two lives. One was as a scientist—as an economist—and one was as a public intellectual. And everybody more or less does his major scientific work at a relatively early age And it’s kind of natural, I think, that people switch from the one area to the other. Really until the 1970s, I did not have much contact in politics whatsoever.

I had some but not much. But then, I think increasingly as the scientific side of my life matured and I happened to know more people in politics, my interests and my activities switched to some extent. I think what really motivated it more than anything else was when I was writing columns for Newsweek.

Russ Roberts: Which was fun, I assume.

Milton Friedman: It was fun. It was fine. I found it a very challenging thing to do and it made me—forced me—to keep up with the current affairs that were going on and also it brought me into contact with people who were active in politics.

Russ Roberts: Did colleagues other than George voice an opinion about you spending your time that way? I know at that point in your life, you were already incredibly respected and successful but—

Milton Friedman: No. No.

Russ Roberts: For a young scholar, it’s not the best use of time often.

Milton Friedman: I always told my students that if they went to Washington, they shouldn’t stay there more than two years or they’ll get ruined. And in general, I’ve argued to youngsters who came up to me and wanted to be ideologists, wanted to promote an ideological view, that they first better get themselves established as an economist or as a scholar and get a good job and then they could afford to do it.

Russ Roberts: What advice would you give to those who love liberty and would like to see its cause thrive? You talked about some optimism, that the broad historical trends are good. Anything in the short run that you think would be useful or good for people to be aware of or take advantage of?

Milton Friedman: I think people have to do what they want to do. I think that the best thing that people can do who want to promote the free market is to talk about the free market, to think about the free market, to write about the free market and to get into arguments.

Russ Roberts: Something you’ve spent a lot of time at.

Milton Friedman: I’ve had a lot of experience in it, a great deal.

Russ Roberts: That’s good advice. Thank you, Milton.


*See Milton Friedman’s biography in the Concise Encyclopedia of Economics.

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