♪ Music ♪ Reality – captured in user friendly symbols and processed for understanding. ♪ Music ♪ The Idea Channel Dr. Milton Friedman’s international standing and impressive credentials are well known to you. He’s a senior research fellow at Hoover Institution on War, Revolution and Peace based at Stanford. He’s a columnist and contributing editor of Newsweek, a member of the research staff of the National Bureau of Economic Research and Paul Snowden Russell Distinguished Professor of Economics, University of Chicago. Dr. Friedman earned his PhD. from Columbia University, but at least eleven others have chosen to recognize his outstanding contributions by conferring honorary degrees. His teaching and research posts, his extensive writings, his role as advisor to presidents and other heads of states have earned him a unique place as perhaps the leading economist of our times. The Nobel Prize in economics awarded to Dr. Friedman in 1976 is one of the latest in a long of his prestigious awards. When Dr. Friedman speaks, the nations’ leaders take notes. Dr. Friedman, we’re honored to have you with us. We will listen closely now to a subject very vital to all of us, “The Future of Our Free Society.” Dr. Friedman. (applause) Thank you very much, Mr. (inaudible). Maybe they listen, but I don’t think they take notes, except to do the opposite most of the time. I’m very glad to be here with you. People assembled in this room, representatives of the National Association of Manufacturers, of your congress, are among the greatest resources in this country today to promote a continuation of the great record of progress that this country has had over 200 years. You are also, unfortunately, one of the great obstacles to that progress in ways which I shall come to in the course of the talk- not because you intend to be, of course; but the great lesson which history teaches is that bad results seldom are produced by men of bad intentions. There is a famous biblical quotation about a road that is paved with good intentions. I shall come further to that point in a few minutes, but let me start and give my theme by quoting to you from the speech which Abraham Lincoln gave in 1858 when he was nominated for the Senate. It’s his famous “House Divided” speech and he said, and I quote, “A house divided against itself cannot stand. I believe this government cannot endure permanently half slave and half free. I do not expect the house to fall, but I do expect it will cease to be divided. It will become all one thing or all the other.” Lincoln was prophetic for his time, but his words are as applicable to our time as they were to his. Only the form of slavery has changed. We in this country in the past half century have been moving away from a free society and toward an increasing degree of slavery. Not the kind of slavery that Lincoln talked about, but a kind that is no less destructive of the basic greatness and freedom of this country, a slavery in the form of an increasing role of government in our economy, of an increasing extent to which we are the subjects and the government the master instead of the other way around. The question I want to discuss today is whether we shall continue this trend or will halt and reverse it. If we continue the trend to a collectivist economy, continue the trend to a society controlled by government, we shall lose not only our economic advantages but also our political freedom… our political liberty. We cannot continue half slave and half free, and if we continue in the direction of slavery we shall end up as a collectivist totalitarian society. It will have a different form than others; America is different from others. However, we need not continue in that direction. We are masters of our own destiny. We can take thought and halt it, and the question is, shall we halt it? Shall we move toward a greater degree of freedom and reduce the extent to which we are being controlled? If you want to see a clear sign of the direction in which we have been moving, it is the fact that this meeting today is being held in Washington, D.C. There have been eighty-one… I am told previous congresses of the National Association of Manufacturers. Not a single one was held here; most of them were held in New York. You have now moved your offices and, a few years later, this congress to Washington. Why? Because you have recognized increasingly that your masters are no longer primarily your customers, but increasingly government bureaucrats, elected and non-elected. I don’t blame you for recognizing the change. You would be myopic in the extreme if you did not recognize that that is what happened. It is understandable that you choose to hold your meeting where the real power is, but it is a very clear sign of what has been happening in this country. As I’ll come to later, I do blame you- again, not as individuals and not as intentionally-for helping to bring about the shift in power from the market to the government. Make no mistake about it: human freedom cannot exist- human freedom has never existed-without a viable, healthy, free market economy. And that is what is being destroyed. That is what is being destroyed as much by its alleged friends, including many in this organization, as by its announced enemies. This country remains predominantly a free country; it remains the freest major country in the world. There are some minor countries that have a greater degree of freedom, but among the major countries we remain the real stronghold of freedom. And yet, it is worth taking a few moments to look at how far we have come from a truly free economy, a truly free society. If we look at the problem of enterprise- of the business world, of free enterprise, we are all of us prone to get on the lecture platform and talk about the virtues of free enterprise. What does free enterprise mean? It does not mean what it is often taken to mean: it does not mean that private enterprises shall be free to do what they want, including restricting markets and keeping out competitors. That is not the fundamental meaning of the term or the meaning it has always had. Free enterprise means that anybody shall be free to set up an enterprise, to start small and grow big. And yet, in that sense, you are not free in this country to set up a bank, unless you can get a certificate of convenience and necessity from a governmental official. You are not free in almost every city with possibly the exception of Washington, D.C., to enter the taxicab business, unless you either get a permit from city hall or currently buy such a medallion, a permit to operate from somebody who was lucky enough to get it some years back. You are not free to become a lawyer or a physician or a plumber or a mortician, or a host of other occupations, unless you can get a license from a state body certifying that you may offer your services for sale. You are not free to go into the business of delivering mail, or of offering electricity or telephone service without getting a permit and permission- and in those cases in the case of the mail, obviously a nationalized monopoly; in the case of the telephone, electricity, local monopolies but franchised by the state. You are not free to go and raise money on the capital markets, unless you fill out the 400 or more pages of forms that SEC will demand of you at a cost which has had as one of its major affects a strong handicap to the emergence of new small enterprises in this country. In one of the most recent extensions of government power, you are not even free to make a bet with somebody on an organized exchange about what the price of wheat will be a year from now, since we have now set up a commission to control the commodity futures exchanges. I could go on and on. You people in this room can name far better than I can- the enormous limitations which there are on your opportunity to engage in free enterprise in the true sense. If we go from the area of enterprise to control over your income and your property, every individual in this country works from the beginning of January to the end of May, roughly, in order to support governmental expenditures. Over 40 percent of the income of the American people is now spent on their behalf by civil servants, bureaucrats… others whom they have chosen to spend their money for them. This may be good. It may be bad. But with respect to freedom, it clearly means that we have given up control over 40 percent of our resources. We talk about how we must avoid socialism, yet every corporation represented in this room is owned to the tune of 48 percent by the U.S. government. We are 48 percent socialist. What does it mean if I own 1 percent of a corporation? It means that I am entitled to 1 percent of its profits and must share 1 percent of its losses up to the extent of my limited liability. But the corporate income tax says that out of every dollar of profits the government gets 48 cents; out of every dollar of losses, the government loses 48 cents up to the amount of profit that has been carried over- limited liability again. So in a meaningful sense, not in terms of words, we are 48 percent socialist. Let us go away from the area of economic freedom, of the freedom to set up an enterprise, the freedom to control your own resources and your own income. Let’s look at the political area. What has happened to the area of political freedom? Is there a corporate executive in this room who has free speech? I don’t believe it. There is hardly a one of you- maybe there is an exception in this room- but there’s hardly a one of you who would get up and make a speech without giving considerable thought to what effect that would have on the IRS, on the Justice Department- you name the other departments. Let me quote from a letter that I received a while back from an executive vice president of an oil and gas association. In the modern spirit, it was a she and so she wrote: “With increasing regulation as the Big Brother looks closer over our shoulder, we grow timid against speaking out for truth in our beliefs against falsehoods and wrongdoing. Fear of IRS audits, bureaucratic strangulation, or government harassment is a powerful weapon against freedom of speech.” In the October 31, 1977 edition of U.S. News & World Report,” she went on to say, “the Washington Whispers section noted that ‘oil industry officials claimed that they have received this ultimatum from Energy Secretary James Schlesinger,'” to whom as I gather you listened this morning, and his message was, ‘”Support the Administration’s proposed tax on crude oil or else face tougher regulation and a possible drive to break up oil companies.”‘ Is that freedom of speech? Taking another more immediate example… I am living at the moment in California. There is in California a proposed amendment to the state constitution, the Jarvis-Gann Amendment. It’s an amendment which is not the amendment I would write; it’s not a perfect amendment. It has defects, but it is an amendment that offers the most promising chance in many a year to set a limit on state governmental expenditures and state taxes. I am told that businessmen around the state have been subjected to increasing pressure from Sacramento to come out in opposition to the Jarvis-Gann Amendment. Now, many of them will resist the pressure, but do they really have effective freedom of speech? If I were giving this speech… this talk before some of my academic colleagues, they would say to me at this stage, “Well, what are you worrying about? Those are only businessmen. What difference does it make if they have freedom of speech? What really matters is the intellectuals.” But do my fellow academics have freedom of speech? If you were a professor in a medical school in any university in this country, do you suppose that you wouldn’t think three times before you gave a speech against socialized medicine, when half of your budget is coming from the National Institute of Health? If you were one of my colleagues, even in the field of economics, who was receiving grants from the National Science Foundation to support his research, don’t you suppose that would affect your willingness to give a speech about how undesirable it is that government should be subsidizing that kind of research? If you look at what is happening on the universities today in the area of affirmative action, if it weren’t so important it would be humorous and enjoyable, because there is no group in this country that have it more coming to them. But it is too serious to take satisfaction in that. The extension to universities of the control by HEW of employment and other practices is no more justified, and no less justified, than is the extension to industry. It’s unjustified in both cases. A free-enterprise economy means that you have freedom to hire and fire, to make such contracts with other people. The mission of a university cannot be maintained and cannot be expressed if it has to have a quarter of a professor who is of Japanese origin, two-thirds of a professor who comes from the Baltic States, and so on down the line. And yet, what is happening on the campuses? Leave aside for a moment the academics and go to the area that we have always put most emphasis on, the area of free press. There are representatives of the press here. Do you have freedom to speak? There was a story a while back in England that is a portent of the future. A union of pressmen on The London Times closed down the publication of The London Times for a day or two- I’ve forgotten for how long- because The London Times was proposing to print a news article which had some unfavorable comments about that union. Is that freedom of press? As I say again, we can go farther and farther but the record is clear. We are predominantly a free society, but we have an enormous range of restrictions on our freedom, and those restrictions will grow and grow, unless we can somehow bring a halt to this expansion of government power. The closest approximation we ever had to a free society in this country was unquestionably in the nineteenth and early twentieth century, a period about which myth has become more dominant than reality. It was a period of the greatest progress in the well-being of the ordinary man that the world has ever seen, and yet it has become enshrined in myth as a period when robber barons were going around the country grinding the poor people under their heels out of sheer malice. The interesting question is: what produced the shift from that nineteenth century relatively free society to our present 48 percent socialist society? What produced the shift? It was not produced by evil people for evil purposes. There was no conspiracy. Very seldom, as I said at the outset, do bad things come from bad intentions. What produced the shift, in my opinion, was an unholy coalition of well-meaning people seeking to do good- and of special interests trying to use the power of government to promote their own particular immediate interests, reinforced by a change in political philosophy, a change in political philosophy from an emphasis on individual responsibility to an emphasis on social responsibility. That shift started in the nineteenth century, but it did not really take off until the New Deal in the 1930s, and in the past fifty years it has gone very far. In 1928, total government spending at all levels was 10 percent of the national income- two-thirds state and local; the federal government spent 3 percent. The National Association of Manufacturers would never have contemplated meeting in Washington. Today, government spending at all levels is 40 percent of our national income and two-thirds of that is federal spending. That’s only one index, not necessarily even the most important. The question is: where do we go from here? Can we reverse that process? Many people will say, “Well you can’t reverse the process. Technological change, the development of more complex and sophisticated economy requires big government.” That is another of those myths that needs to be punctured. If you look at where government has grown, it has not grown in those areas which can in any way be attributed to technological change. It has grown in the area of welfare transfer expenditures, of taking money from some people to give to others. And the only respect in which technological change has played a role in that is through the invention of the computer and similar devices which make it more nearly practicable for the federal government to take from everybody and send checks to everybody. In the areas which you might have supposed technology would affect, technological change has done as much to reduce the need for government as to increase it. In an earlier day when transportation was more difficult and more costly, you could have a wide range of local monopolies. That’s almost impossible today. You can have competition not only from all over the country but from all over the world. Communication is faster. There is no one-way street from technology. Nonetheless, there are many unfavorable signs about which way we are moving. It is far easier to enact laws than it is to repeal them. The very people who opposed the enactment of a law will ultimately end up opposing its repeal, because, once you enact the law, people get special vested interests in what’s going on- not least of all the bureaucrats who enforce the laws. Again, you have the problem of the political power of special interests. Now it used to be that anybody who talked along these lines fifty years ago would have talked of the special interests as being primarily business. But that’s no longer the case. Today, increasingly governmental officials who are desperate to keep their jobs and their influence are a major special interest preventing an elimination of bad programs and the reduction in the role of government. To take the most dramatic example, in 1970-71 then President Nixon proposed a major reform of the welfare system. He proposed something called a Family Assistance Plan. I recommend to you the book by then Pat Moynihan at the White House, now Senator Moynihan, on the politics of the program in which he points out that that program- that reform was defeated primarily by the welfare establishment, by the people who were involved in running the many, many programs that would have been consolidated and eliminated under that reform. Again, in California and in Michigan, and many other states- but California and Michigan are the two cases I know about personally- we had attempts to get constitutional amendments adopted limiting the government spending- the spending of the state governments in those cases. Who defeated them? The most important single force defeating them was, in Michigan, the Michigan Education Association and in California, its counterpart, the bureaucrats in the educational establishment. Now again, they were not doing it out of evil motives. Every individual has the capacity to rationalize his own interest as being the national interest. That goes for you and me- and let’s never forget it. So that they weren’t doing it out of- I’m not attributing it to malice or anything else, but they now are in a position where they are a very strong special interest. But let me turn to this audience, to business. I cannot complain, as a believer in a free enterprise society in which human progress comes through the attempt by individuals to better their own lives, through Adam Smith’s famous “invisible hand.” I cannot complain if business pursues its self-interest rationally and in an informed way. That is the main motive of every system. But I think I can complain and I am impressed with the extent to which business, when it turns to matters of public policy, is shortsighted and operates against its own interest. I have been struck time and again by the contrast. A businessman dealing with his own firm will look thirty or forty years ahead. He will make long range plans; he will not conduct his business in terms of what’s going to happen in the next six months. But when he comes to the area of public policy, well… six months is a long time ahead to look. Let me give you some examples. In 1971, President Nixon imposed price and wage controls. In my opinion, by far the action which he took- which did the greatest harm to this country. One of the main reasons he imposed it, and was able to impose it- was because a large fraction of the business community supported it. I do not know how many people there are in this room who supported it, but I do know that at meetings of major businessmen before this was imposed, two-thirds or more were in favor of price and wage controls. They thought it would be wage control but, apparently, conducting even a major business does not mean you know how to count. You count the votes and you know it’s not going to be wage control; it’s going to be price control. Businessmen have learned that lesson… have they? I’m not sure. They are capable of doing the same thing again. I have the steel industry right now. Can the steel industry say it’s against price and wage controls? It cannot, not when it welcomes government setting a minimum price on imported steel. If it approves a minimum price on imported steel, with what straight face can it oppose a maximum price on domestic steel? What’s sauce for the goose is sauce for the gander. Does the banking industry oppose price and wage control? If I asked people in the banking industry, they’d say yes. But then, are they really uniformly opposed to the maximum price of zero on the price they may pay for their main raw material- which is demand deposits- legal prohibition on the payment of interest rates? It was the New York banking community that some years ago, with a few conspicuous exceptions, that stood out to the last minute for trying to peg the price of the dollar in foreign exchange markets, which produced the Eurodollar market and the exodus of international financial business from New York. In both of these cases I think this is shortsightedness. The steel industry may think it is getting some benefits currently. It will pay a very, very large price in the future for supporting a policy which is adverse to the national interest. Don’t kid yourself. It is not in the national interest to make steel more expensive to consumers. It is not in the national interest to reduce the jobs available in the export industries. It is not in the national interest to allow government to step into still another industry, and run it in great detail. The oil industry, which objects to energy policy… some segments of it; some parts of it are supporting it. No industry in the country has spoken in more glowing words about the virtues of free enterprise, and done more to undermine free enterprise. From percentage depletion to pro-rationing of oil in the various states, to oil import quotas in the 1950s, the oil industry has sought governmental intervention. How can it then complain if government intervenes now on the other side? Businessmen in general have been very much concerned, and rightly, about the fact that under an inflationary period the tax treatment for depletion… and for depreciation causes an overstatement of their taxable profits. They are right… how do they fight it? By asking for special measures for business. Why don’t they have the foresight and the farsightedness to ask for indexation of the tax system in general, for both business and private individuals, and join themselves to a national cause- instead of trying to get special benefits? I hear today all of this talk from the business community about “taxes on business. We must lower the taxes on business.” There are no taxes on business. Business can’t pay taxes. Business executives may sign the checks, but the taxes are paid either by customers or by workers or by stockholders. Only people can pay taxes. This building can’t pay a tax. There are no taxes on business. Instead of the business community promoting that kind of talk, they ought to be promoting the opposite- they ought to be talking about taxes. But there are also some favorable signs which lead me not to despair of the preservation of a largely free society. The most favorable of all, of course, is the inefficiency of government. If government were really spending that 40 percent of our income, which it now takes efficiently, we’d be through. But fortunately, it’s spending 40 percent of our income and getting 20 percent, roughly a two to one ratio. And this in turn promotes a recognition on the part of the public of the inefficiency of government, and it promotes a reaction against government. That reaction against government is very manifest. Its most promising sign today is the revolt of taxpayers in various states. The most promising movement I see ahead of us, as a possible way to halt this trend is the movement toward constitutional amendments limiting government spending, and I urge all of you to look into those a little bit more. The United Kingdom gives an example that ought to give us a little bit of hope. The United Kingdom went down this road before we did and went much farther. It is now backing up. A Labour government in Britain has for two years reduced government spending as a fraction of income. It hasn’t done it because it has changed its philosophy but, because like every government, it does what is politically profitable. Let me close by asking what is the role of business and what can business do about it? Business qua business can do little except, in my opinion, to become more sophisticated with respect to pursuing its own long-term interests, to look farther ahead, not to be shortsighted, to take up the issues and see where you’re going to lead; to apply the same kind of planning, the same kind of analysis to public policies that you apply within your own companies. But businessmen can do a great deal. Businessmen are citizens; they are individuals. This country is a democracy; it is a representative government. We are doing these things that many of us regret in Washington because it has been politically popular to do so. And you and I can do our share as individuals to persuade ourselves and our fellow citizens that this is a road to a collectivist state, that this is a road which if long continued will destroy both our prosperity and our liberty. And if we do that, we can do a great deal to help turn the tide back. Thank you. (applause) If I haven’t said anything that causes somebody to want to ask a question, I’ve really been a failure. Dr. Friedman, how do we persuade those who are recipients of these vast numbers of computerized checks from the federal government that their interests also are in danger? Let’s ask ourselves, first, who are the recipients? Because the recipients are you and me and not merely the people you may think of. The great fear of people who feared public democracy was that the have-nots would get together against the haves. In my opinion that fear has been a false one. The problem is not that the bottom 51 percent get together against the top 49. The reason for that is that those people who tend to be not successful in the economic sphere are also not very good in the political sphere. What we have is that the coalition that forms is the middle: you eliminate the 10 percent at the top because their votes are less important than the money you can get from them by taxation; if I say 10 percent at the top, then I eliminate 39 percent at the bottom, and it’s that middle group of 51 percent that forms the effective political coalition. So almost every governmental measure undertaken in the name of helping the poor turns out to confer benefits on middle income people. So let’s for a moment be careful about who are the recipients. How do we persuade them? I don’t think we have too much trouble persuading most of them. I think most of us believe we’re not getting our money’s worth. When you start out and you tax 90 percent of the people to help 10 percent of the people, it’s easy. But when 100 percent of the people are taking it out of one pocket in order to put it in the other pocket, it ought to be fairly easy to persuade people that that’s an arrangement under which you lose rather than gain. Frankly, I really don’t believe your problem is the basic problem. I think the basic problem is a much more basic philosophical problem. Dr. Friedman, do you believe in a total laissez-faire libertarian economy? Yes. I also believe there is room for government and those are not a contradiction. I believe that government has some very important functions to perform. It has the function of protecting individuals from physical coercion by their fellows, it has the function of protecting the nation from foreign enemies, it has the function of enabling us to have a forum, a means through which we can decide on the rules of property and so on by which we want to conduct our affairs, and it has the function of adjudicating disputes among us. Those functions, in my opinion, are the fundamental and basic functions of government. There may be some other peripheral things that government can do without doing much harm, but beyond that I believe in as unfettered a free enterprise economy as is feasible within those very narrow limits for a limited government. Professor Friedman, there is a great deal of uncertainty in the business community over the economic policies of the Carter Administration. Inflation is also considered the number one problem, the number one concern, of the American people according to public opinion surveys. It seems obvious by looking at the economic numbers that both inflation and interest rates are on the rise. What then do you see for the future economy and the extent of our current recovery? Do you see a possible recession in the year ahead? We have been having recessions for some 200 years. I think it would be a very bold man who would say he doesn’t see a future recession. Of course there is going to be a future recession; the only question is when. That’s the sixty-four dollar question. So far as the economic policy of the Carter Administration is concerned, it is not entirely clear what the economic policy is. What is clear is what the social policy is, what the political policy is. The policy of the Carter Administration is a policy of continuing and extending governmental controls. Of course, government policy is to make it more efficient and cheaper; we all want to do things as cheaply as we can. But I am not judging from statements. As you and I know, statements are not good predictors of behavior. You have to look at behavior. The major initiative of the Carter period has been the energy program. The energy program, in my opinion, can be explained in one way and one way only: it is a program which has as its bottom line governmental control of the distribution and consumption of energy. From that point of view, I believe those who think that the energy program is in trouble, because Congress has been wrangling over it, are wrong. The major objective of the Carter energy program has been achieved. It was achieved by the establishment of a Department of Energy with an annual budget of $10 billion, roughly equal to the total profits of all the oil companies in this country. It was achieved by the establishment of a Department of Energy which has 19,000 employees. You now have established a very strong pressure group to promote further government intervention in the control of the energy industry. It is now set on the route which has been followed over a longer period–but after all we learn how to go faster–by the railroad industry. It’s on the route to complete nationalization and control. I take that to be the clearest indication of what is the fundamental policy of this administration. They are not different in this from earlier administrations. This is not a partisan statement. I mentioned earlier that one of the major moves toward collectivism was made by President Nixon when he introduced price and wage controls. Few people realize that our present energy problems derive very largely from that measure. The only price that was not relieved from the ceilings was the oil price. Its origin was August 15, 1971, and without that price and wage control you very probably would not be having an energy crisis in this country or a Department of Energy. Now if you go beyond that and look at it in the more sort of day-to-day affairs, what I note is that the Carter budget proposes to continue increasing government spending as a fraction of income. President Carter talks about reducing taxes. Neither he nor anyone else has proposed to reduce taxes in any meaningful economic sense. Neither the Republicans nor the Democrats at the moment are proposing to reduce taxes. The true tax that the American people pay is what government spends. If the federal government spends $61 billion more than it takes in, who do you suppose pays the difference? I don’t think that the Arab sheiks are willing to pay it. Who does pay it? You pay it; I pay it; we pay it as taxpayers. The only thing is, instead of calling that a tax, we pay it in the form of a hidden tax called inflation, or in an even more deeply hidden tax called government borrowing. But both of those are forms of taxation, so nobody has proposed to reduce taxes. What they have proposed is to shift the form of taxation, to rely somewhat less on such direct taxes as income taxes and somewhat more on such indirect taxes as inflation and borrowing. Do not look primarily at the deficit. Look at government spending. That’s the measure of the size of government and of the true size of government taxes.