From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

Interview. Interviewed by Edwin Newman. Speaking Freely (WNBC), 4 May 1969.

MR. NEWMAN: Speaking Freely today is Milton Friedman. Milton Friedman is a professor of economics at the University of Chicago, he is one of the best known and influential economists in the world. He’s an advocate of what might be called the free market approach to the country’s problems. Professor Friedman is celebrated as a critic and opponent of government intervention. He was a principal advisor to Barry Goldwater during the Presidential campaign in 1964.

Mr. Friedman, for a number of reasons, one of them of course your association with

Senator Goldwater but more specifically the 13 or so books you’ve written and your whole

career as an economist, you are generally described as a conservative. But you like to call

yourself a liberal. Now, most people who call themselves liberal probably would push you out

of the door, so why do you choose that label?

MR. FRIEDMAN: The liberal, if you look it up in the dictionary, has to do with

freedom—liberalism is the doctrines of and pertaining to freedom. And the basic component

of my belief is the belief that we should adopt arrangements which will give each individual

separately as much freedom as possible so long as he doesn’t interfere with the freedom of

others.

Traditionally and historically, this is the meaning the term liberalism had. In the 19th

century and still today in Europe, the liberal parties were those parties which were in favor of

freer market, of cutting down tariffs, of expanding the role of the individual in the economy.

In the 20th century, particularly in the United States, liberalism has come to have a different

meaning. Part of the meaning is the same. The modern liberal like the older liberal believes in

individual freedom but he tends to restrict that to political freedom and to think that economic

1 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

freedom is not very important. And the modern American 20th century liberal thinks that the way to solve the economic problems is to have government play a larger role.

Well, I think it’s a shame to let the enemies of freedom—those who would use the state, in effect, to control people, take the perfectly good and respectable name of liberalism and pervert its meaning.

The trouble with the term conservative is that that has no real content in terms of policy or program. Conserving means keeping things as they are. The true conservatives today in

America, although they would not regard themselves as such, are the people who want to conserve the New Deal, who want to conserve the present programs that we have of governmental participation.

MR. NEWMAN: Well, to what extent would you have the government do anything? Now, I think I know the answer to this question and I don’t pretend that I don’t, but I think I should put it anyway. Your view of the role of government is that it is a minimal role.

MR. FRIEDMAN: Well, I don’t like to express the issue in terms of what would I have the government do. I rather like to think of ourselves as a community of individuals, of several hundred millions of individuals, and we jointly use various ways to satisfy our needs, and our desires. We do a great deal through voluntary association. And we may decide jointly to do some things through government. And the question is, what are the things that we would be best advised to do through government.

See, the problem is that there is so much of a tendency to think of a dichotomy of government versus the people, or them and us. Whereas the real question is, what do we want to do one way and what do we want to do another. And from this point of view, the roles, it seems to me, that it’s essential for us to do through government are first of all and most fundamental: the maintenance of law and order in the traditional, strict sense of preventing one man from executing violence on another, preventing you from hitting me over the head, preventing somebody from stealing my property. This is the basic, fundamental function of

2 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

law. Because the problem of increasing freedom is a problem of minimizing coercion—

coercion of one man over his neighbor. And the most elementary and basic form of coercion

is pure physical force. And it seems to be necessary for us through government to provide a

means of minimizing that force. That’s the first, most important function.

A second function is that we have to have some way in which we decide on the rules of the game that we’re playing. We’re jointly part of a general society. We talk about private property but that isn’t something that comes down to us from heaven—we have to decide what the rules are, what kind of things are private property. If an airplane flies over your house at a level of 1000 feet, is he violating your private property? If he flies over at 25000 feet, and so on. Well, so the second major function that we need to do through government is jointly to decide on the rules of our game—to define property rights, to define what things will be considered coercion, what things will be considered disrupting somebody else’s freedom. That’s the role of government as a legislator, as a law-maker.

We need also to administer these rules. That’s the role of government through the judiciary.

Now, on a very different kind of level, it seems also to be desirable to have government do something about providing a stable monetary framework. In each of these cases what I’m trying to stress is the role of government—of us through government—providing ourselves with an institutional arrangement and framework where we can have a maximum degree of freedom beyond that. And the case of money is a specially difficult and complicated one because it has turned out over and over in history that when money has been left free, it has become a great source of problem.

Now, the trouble in each of these areas is, it’s one thing to say we want to do these things through government, it’s another thing to do them properly. The case of law and order is most obvious. Here is the most elementary function of government, which nobody—hardly anybody, there are a few philosophical anarchists who might believe that you could privately

3 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

prevent individual coercion—and yet this is an area in which today we are largely falling down on the job, in which our performance is getting worse and worse.

I may say, I think part of the reason for that is just because we have attempted to do so many other things through government that government has no business doing—that we’ve diverted its energies away from its proper functions and toward other functions.

Similarly in the area of money, while I think it is a basic responsibility of government to provide a stable framework, the government has done an awful job in that respect.

MR. NEWMAN: May I take you back a bit. One of the things that struck me when I was reading some of your writings was the objection you made to a statement by—a phrase of

President Kennedy’s that obviously will go down in history and become part of the language and part of the folklore and legend of America: “Ask not what your country can do for you, ask rather what you can do for your country.” Now, you said that that was not worthy of the ideals of free men and a free society.

MR. FRIEDMAN: Yes.

MR. NEWMAN: And there, I suppose, set out very briefly is your fundamental attitude.

Now, why did you think that that phrase of President Kennedy, “Ask not what your country can do for you but what you can do for your country,” was not worthy of free men?

MR. FRIEDMAN: Because it suggests that there is such a thing as a country which is separate from the people who compose it. Ask what we want to do—who are we? that’s you and me and the other fellows: “the country” is a collection of us. We have common ideals, we have common interests. But the notion of the country as something different from the people—and really one tends, at the next stage, to identify the country with the government.

Now, obviously President Kennedy didn’t mean this interpretation. But if you read it literally, that statement is consistent with a strictly organismic theory of a state. Mussolini or Hitler could have made that kind of statement. In their mind—the most extreme form of this perversion, and obviously very very far indeed from what President Kennedy had in mind,

4 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

was the Nazi state, where Hitler had the German Reich which was going to last 1000 years

and it was the important thing, and the people were instruments to serve the state. ‘Ask not,’

said Hitler, ‘what your country can do for you; ask what you can do for your country.’ But

even the first half, what your country can do for you, suggests a relation of father and son, it

suggests a paternalistic relation. It does not suggest an association of free men voluntarily

joining together in some common enterprises, And that seems to me the concept of the

community and of the country which is worthy of free men.

MR. NEWMAN: Of course you have more than a theoretical objection to the country or the government seen in those terms. You think it doesn’t function very well. You think that the history of American government especially in the last few decades is one of very nearly disastrous failure in one field after another, do you not?

MR. FRIEDMAN: Well, “disastrous failure” may carry it too far. There are some things the government has done that are very good. But in the main, I think it is failure. The reason it hasn’t been disastrous is because, fortunately, we developed and became a great country before government played a very large role. If you take the great period of American development in the 19th and early 20th century, when we absorbed millions of immigrants from all over the world at a rate that today seems incredible—a million a year in the early

1900’s, 1906–7–8, when the population of the United States was half what it is now—that was a period when government was playing a very minimal role; it was mostly doing the kinds of things I was talking about. It was providing for law and order, it was legislating what should be property, it was enforcing those rights, and adjudicating disputes through the courts. But it did not have a very active policy. You remember Grover Cleveland at one point, in one of his statements, when he was asked to give relief to the distressed, said, “It is the duty of the public to support the government, not of the government to support the public.”

Now, that’s a sentiment which no man today could express, it’s so completely out of tune. But it was during that period when the U.S. developed and became wealthy. And we have now become so wealthy as a result of that that we can afford a lot of waste that we couldn’t have

5 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

afforded then, I venture to suggest that if a hundred years ago government had been playing the kind of role in the United States that it is now playing, the United States would never have developed as it did, it would still be a relatively backward country.

MR. NEWMAN: Let’s take the statement that Grover Cleveland made, Dr. Friedman,

Could any government, and should any government now decline to support the distressed, or to help the distressed—or to put the question differently, is there an alternative to the government doing it?

MR. FRIEDMAN: Oh yes, indeed, there’s a very great alternative to government doing it.

In fact, in my book, many of the reasons why you have distressed—the distressed have been produced by the government, many of the most serious causes of distress, the most basic causes. However, you cannot at any time break into a historical process and start completely anew. You have to take the process as it is. Now, as our process is, we have undertaken to provide assistance to millions of people—people who might not have been distressed but for government policy, but are today distressed, the millions of people who are on welfare and relief. And stepping in at that point. I do not believe that you can immediately say nothing more is going to be done, we’re going to abolish that all. I believe at that point you do have a commitment, to keep to your faith.

MR. NEWMAN: Excuse me, Dr. Friedman, why do you say that these people were placed in their distressed state by government action? Is it not the case, for example, that millions of the distressed people are from the South or from the mountain areas who’ve simply been displaced by technological development or in some cases by unfriendly political environment? To put it euphemistically, from where they used to live they’ve been forced off the land?

MR. FRIEDMAN: Oh yes, indeed. You have many forces that are causing people to change their circumstances, enabling some people to be better and some worse. But government’s main role has been in making it difficult for them to adjust and to get out of their situation of distress. Let me illustrate in a number of ways. If you look, for example, at

6 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

the problem of the relatively poor, there’s a very high rate of unemployment among unskilled, especially among teenagers, relative to the unemployment in the population as a whole. Our unemployment overall is about 3½%; unemployment in the extreme among Negro teenage males is about 25%; among white teenage males it’s still high but a good deal lower than that, about 14%, 13%. Why? Well, the major factor there is unquestionably the fact that the government has legislated that those people shall be unemployed. It legislated that by legislating a high minimum wage rate. If I have two people one of whom is relatively unskilled and another of whom has some skill, how can the first-compete against the second in getting a job? There’s only one way he can compete, that’s by offering to work for less.

And if you say, “Oh no, you must pay them the same,” then you are in effect denying the unskilled person a job.

Well, if you look at the statistics you will find that every time there has been an increase in the minimum wage rate, there has also been an increase in unemployed among this group. I don’t mean that’s the only factor; that’s one factor.

Let me take a second factor. Consider the pressing problems now of the Negro and of the racial tension. Suppose you look at the record over the last 80 years, there’s no doubt that the average condition of the black people in this country has improved enormously—there’s a great deal of nonsense written about this because people tend to talk about relative position rather than absolute position—their actual absolute position has increased enormously. But there’s one area in which they are almost certainly worse off now in respect of opportunities than they were in let’s say 1880 or ‘90, and that’s in the skilled construction trades. If you look at the fraction of people in carpenters, plumbers and so on, who are black in the skilled construction trades, my impression is that it’s distinctly lower now—very low now— distinctly lower now than it was 80 years ago. Why? Because of trade unions. Because of trade union restrictions in the skilled trades. Why have those trade union restrictions been effective? Because government has supported them and abetted the trade unions in a variety

7 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

of ways so that the trade unions have immunities that are not available to other groups in the

community.

Let’s take a third problem, why has there been an enormous migration of poor people

from the South into the cities? Well surely one factor, not the only factor but one factor, has

been the fact that there have been high levels of welfare payments in the cities, relative to

those that are available in the South and in the rural areas. I don’t blame people for moving

for that reason, but I’m saying that that migration has been produced by governmental policy.

Moreover, the method of giving welfare has been one that has had the unfortunate side effect

that when people get on welfare it’s very hard for them to get off.

Or again, what is another major source of distress in the cities? Housing. Why is the

housing in the blighted areas, in the slums and the middle of the cities relatively bad, very

bad? Well, one reason is that the government first had a very large program to encourage

everybody to move to the suburbs. If you go back to the immediate post-war period or the

whole of the post-war period, the FHA mortgage programs, the favorable treatment of income

from owned homes of owners versus tenants on the income tax, has encouraged through

governmental policy a migration out to the suburbs. Then you get the migration out to the

suburbs and we now have a claim for large governmental expenditures to bring people back.

If you go beyond this, the blighted areas are partly blighted because of the urban renewal

programs. I’ve often said that the two most anti-Negro laws on the books are the minimum

wage rate—which condemns a large fraction of the Negro youth to unemployment, and the

urban renewal program—which worsens substantially the housing conditions of the poor.

Under the urban renewal program you’ve torn down low income housing and built high income housing or public housing.

Now, I’ve covered in a little way jobs, I’ve covered housing—let me go to what I think is fundamentally more important than any of these, schooling. If I ask myself a question, “How is it that a poor family in the slums of Chicago is most disadvantaged?”—it’s not with respect to the goods and services that are provided by the free market. If a family in our deepest

8 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

slums wants to save, can save enough money, he can buy the same automobile you or I can

buy. He can buy the same clothes, the same goods on the market that we can. But if he wants

to send his children to school, his choice is much more narrowly limited. He has to send his

children to the schools in his neighborhood, and those schools are very distinctly inferior to

the schools that are available to those of us who are fortunate enough to live in higher income

neighborhoods or in the suburbs. Why? Why is he so badly off? Because government

provides the schooling. That sounds like an extreme statement. And yet, is it an accident that each of these occasions when we look at it—look down to it, we find it’s the governmental component that’s the one that seems to be lagging behind.

MR. NEWMAN: Well, before we get to education or schooling—and I know you make a distinction between them—may we go back a little? You said that one of the things that drew poor people from the farms, especially in the South, brought them North, was the fact that welfare payments in the big cities were higher than they were in the Southern states from which the migrants came. You say that that is government policy and that the migration was in part a consequence of that. But you’re surely not saying that the welfare payments should not have been that high.

MR. FRIEDMAN: The welfare payments—yes, I am. The welfare payments—a) should

not have been that high, and b) should not have been in that form. They should not have been

in a form which encouraged people to move. If you’re going to provide it—well it’s more

than that. Our welfare payments as they are now given are a highly paternalistic kind of a

system in which individuals who get on welfare are guided and controlled in almost every

part of their life. And my belief is that if you’re going to have welfare payments, you ought to

do it in some way which lets the people who get the money be free to spend it as they will.

MR. NEWMAN: Why do you think that would—such a provision would not attract people

to the North?

MR. FRIEDMAN: Well it would still be true—I agree with you—it would still be true

that if the payments were higher in the North, they would. And that’s why I am in favor of a

9 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

national negative income tax which would provide essentially a floor under welfare payments throughout the United States. It would still be—a national one would be relatively low, and it could still be supplemented by states and cities, but it would not produce the kind of difference you have. Now of course—

MR. NEWMAN: Well, I’d like to ask about the negative income tax in some detail later; I don’t mean to interrupt. Sorry, you were going on.

MR. FRIEDMAN: No no, I was only going to say—now again, I’m in favor as of the moment of the negative income tax for this reason. That’s because we’re breaking into a particular historical pattern. If at an earlier date you had not had the obstacles to employment of the disadvantaged in the form of minimum wage rates, in the form of special trade union arrangements—there are other more technical forms: Walsh, Healey, Davis, Bacon, governmental acts which restrict opportunity—then any need or desire for welfare would have been far less.

In the second place, if you didn’t have such extraordinarily high levels of government spending and government taxation, private funds available for the relief of the distressed would have been more plentiful. There is not really much evidence, if you go back over the past, that in the absence of governmental programs which encouraged a large number to become dependent—there is not much evidence that private charitable arrangements would not have been able to handle much more effectively the major cases of real distress.

See, the problem in the modern world is a tendency to think that there are only two alternatives: to have the government do it or not to do anything. But there are not those two alternatives. There are an enormous variety of voluntary arrangements which can provide for many of the things that people now think they would like to get through government.

MR. NEWMAN: Dr. Friedman, you also mentioned unions; you said unions have been helped by the government—and I take it you were referring to the Wagner Act during the— principally the Wagner Act during the—

10 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

MR. FRIEDMAN: No. Wagner Act: was one, but—

MR. NEWMAN: During the New Deal.

MR. FRIEDMAN: The thing about the unions, it’s a whole collection of special immunities. For example, the unions are not subject to the anti-trust act, whereas enterprises are. In my opinion they ought to be treated exactly alike. More important than any specific laws probably our attitude toward them. If you or I go out and wantonly turn over somebody’s car in the street we’re likely to-get caught and sent to jail. If that car is turned over in the course of a labor dispute it is very unlikely that anybody who does it will be jailed. And similarly, the tolerance for violence and for coercion in labor disputes has been very high. It seems to me that the major factor has been this general attitude of saying the things that are done by trade unions in the name of labor are perfectly satisfactory, perfectly acceptable, even while the same thing done in some other name by somebody else would not be. And that’s the main thing I had in mind.

MR. NEWMAN: But the strengthening of the unions during the New Deal was thought at the time to be an essential economic step to—well, to help bring an end to the Depression, that was the theory under which it was done.

MR. FRIEDMAN: Oh, of course. Almost all bad things are done for good reasons. And it

was a mistake, it was not desirable—

MR. NEWMAN: Was there an alternative at that time?

MR. FRIEDMAN: Yes indeed. We did come out of the Depression, and we came out of

the Depression not because of the union legislation—that hindered it.

MR. NEWMAN: We apparently came out of it because of the war.

MR. FRIEDMAN: No, we didn’t. Well, we came out in the later stages. But if you take

the period from 1933 to 1937 which is well before the war, people do not realize that those

four years showed the most rapid rate of growth in total income than any four years in

American history. The thing was —the real problem was that you had gone down so low in

11 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

1933. What really brought us out there was primarily an expansionary monetary policy. We

had a very rapid increase in the quantity of money from 1933 to 1937, just as what produced

the great Depression, what made it what it was, in my opinion, was a rapid decline in the

quantity of money. From 1929 to 1933, the quantity of money fell by one-third—one dollar out of every three of money, that is of currency and of deposits, went out of existence. In my opinion that Depression is the tragic testament to the power of governmental monetary policy; it need never have happened.

MR. NEWMAN: Well, I seem to have found myself almost from the beginning of this

discussion saying, “Well that’s something I want to ask you about later.” And indeed, money

supply is something I want to ask you about. But while we’re still on the subject of what

government ought to do and what it ought not to do—you are of course well known as Senator

Goldwater’s economic advisor in ‘64, and it is usually thought that one of the things that led to Senator Goldwater’s defeat, or in any case contributed to it, was his statement about social security and how he thought it might be better if it were voluntary, or if it were replaced by voluntary arrangements. And various detectives have discovered that he perhaps got this idea from you. Do you think that it did damage him? And should it have?

MR. FRIEDMAN: Well, those are two very different questions. I’m not much of a

political analyst. In my opinion, what really damaged Goldwater in ‘64 was the

extraordinarily effective campaign on the part not particularly of the Democrats but on the

part of a much broader range of intellectuals including, if you’ll pardon me, the news media

and TV, the extraordinarily effective campaign presenting Senator Goldwater as an

irresponsible person who would press the button and cause a nuclear holocaust. I think that

was a major factor that damaged him. I think that the social security issue was a minor factor

that unquestionably also did damage him, and very unjust. Senator Goldwater himself is far

less extreme in this position than I am. He only said that it might be worth investigating the

possibility of a voluntary arrangement; I am firmly convinced that it would be desirable to

substitute a voluntary arrangement. Now, let me say at the outset that, as in the case of the

12 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

relief, once we through government have entered into certain commitments, we have to carry them out. Insofar as we have entered into commitments with people who are on the social security system, to whom we have committed ourselves to pay certain pensions, we definitely ought to do that. But that doesn’t mean that you can’t change with respect to new people who are coming in, or with respect to anybody who wants to, that you cannot provide a voluntary alternative to social security and let people take care of provision for their own old age.

If you look at social security, it is actually a mess which I find it—interestingly enough, it is very difficult for anybody to defend. It’s a mixture of something supposed to be insurance—and nobody will defend it as insurance, because as insurance it turns out that some people get extremely good buys and some people get extremely bad buys; the young people get very bad buys relative to the older people; men get good buys relative to women, who get bad buys; married women get the worst buy of all. The most extraordinary thing from the point of view of insurance is, that if you continue working after 65, you get no benefits if you earn more than a certain amount. But you have to continue paying the taxes. So nobody can defend it as insurance. It’s partly a welfare program. But nobody will defend it as a welfare program because as a welfare program it indiscriminately gives benefits to rich and poor, it indiscriminately imposes taxes on rich and poor. So the curious thing about social security is that it cannot be defended as insurance, it cannot be defended as a welfare program; and yet, when you do this miracle of merchandising and of packaging that was done and call it social security, somehow or other everybody’s in favor of it. But I think that it would be a very good thing to think seriously about introducing a large voluntary element into social security.

MR. NEWMAN: Well, isn’t the theory that social security could not survive if it were made voluntary? That it depends on precisely what you talked about, which is that some people who are better off will make much larger contributions than the people who are less well off?

13 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

MR. FRIEDMAN: But if it won’t survive if it’s made voluntary, it doesn’t deserve to

survive. Let’s separate these things. Insofar as we want to give relief to poor, let’s separate

out the poor and give assistance—the negative income tax would do that, or something like that. Insofar as we want to have an insurance system, why should we have a government monopoly? Why not let private competition into the picture? Why not let people choose, on their own, between a governmental program and a private program. If the governmental program is then better than the private program, why then it will last. If it isn’t, it deserves to go down under. We all recognize this in the private world. If a person starts a business and he produces something that people don’t want to buy, would any of us say, “Well then we have to compel them to buy it in order to prevent this business from going broke”? The virtue of a private enterprise system is that it’s a profit-and-loss system, and the losses drive out the unsuccessful ventures. The difficulty with a government system is that once you start a government venture, some may be successful and some may be failures, but one thing you can be sure of, they’ll all last.

MR. NEWMAN: Well, the key to it all with you then, Dr. Friedman, is that where people

need help they ought to be given help and it should be confined to that.

MR. FRIEDMAN: That’s right.

MR. NEWMAN: Well, perhaps this would be a good point at which to talk about the

negative income tax—about which I think there’s a fair amount of misunderstanding; you might want to say parenthetically, thanks to the news media, I don’t know.

MR. FRIEDMAN: Oh no, I don’t believe you’re to blame on this one.

MR. NEWMAN: But anyway, what precisely—obviously briefly—would a negative

income tax be?

MR. FRIEDMAN: It’s a method of giving assistance to the disadvantaged, the people

below some level—which tries to limit the assistance to the people who need it on the one

hand, but on the other, tries to give them an incentive to work their way out of it. And briefly,

14 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

it would be tied in very closely with our positive income tax. Under our present income tax, if a—take the particular case of a husband and wife and two children, a family of four—if they have an income of $3000, they pay no tax; that’s the sum of their exemptions and deductions.

I might say that in my opinion those are too low, they ought to be raised, they’ve been there for a long time, and they’re lower in real terms than they’ve ever been in history, our exemptions under the income tax. But let’s take that as a starting point. If they have an income of $3000 they pay no tax, they receive no benefit. If they have an income of $4000 they have $1000 of taxable income and they pay a tax on that, currently 14% plus a surtax.

Suppose such a family had an income of $2000. If they went through the calculation of the income tax form they would write down $2000 income, $3000 exemptions and deductions, the difference, –$1000 taxable income; that’s negative taxable income. That’s where the name negative income tax comes from. At present they get no benefit from that.

They have not used $1000 of their exemptions and deductions; they get no benefit from it.

Under a negative income tax, they would be entitled to receive a fraction of that. If the rate were 50%, which is the highest rate that seems at all feasible, they would be entitled to get back $500 from that $1000. That means—and if I had a family with an income of $2000, it would receive $500, it would end up with an income of $2500, it would be brought half the way between its income and the break-even point of $3000.

If I had a family that had a zero income, it would be entitled to receive $1500, or half of that distance.

Now, how does that stack up with our present welfare system? Well, in the first place, it means that eligibility is defined much more simply, by the level of your income as calculated for federal income tax purposes. Whereas now under the welfare system it’s defined by a very complicated mass of questions including what wealthy relatives you have, what other assets you have and so on. So eligibility is simple and is there all the time.

Second, the worker—the individual always has an incentive to earn some more. Under our present welfare system, if a man earns an extra dollar, he’s supposed to have his welfare

15 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

payment reduced by a dollar, if he’s honest; and therefore he has no incentive to earn more.

Under this, he would still—if he earned a dollar, his payment from the government would go down by 50¢ but he’d still get to keep 50¢ out of the total.

In the third place, this would be a very simple thing to enforce. It would be combined with the administration of the positive income tax. You could eliminate almost the whole of your present enormous welfare bureaucracy. And it would give the people who are being helped not only an incentive to help themselves but responsibility for spending their money in their own way. Those are the major components of the negative income tax.

MR. NEWMAN: Well, Dr. Friedman, one of the theories about people who are in the condition of the people you’re talking about is that they’re really not capable of spending the money in their own way and that—for example, that children aren’t sufficiently well taken care of, and that that is one reason that it is necessary for the welfare bureaucracy to keep track of people to the extent that is done, and even to teach them how to spend money—teach them the rudiments about home economics, shopping, that kind of thing. Do you accept any of that?

MR. FRIEDMAN: There’s a good deal of descriptive truth to it. The question is, what are its implications for policy. If people don’t know how to spend their money very well, it’s foolish to think that by the present kind of welfare regulations you’re going to prevent them from doing that. People are very clever and ingenious, and they will find all sorts of ways of getting around it. It’s not very sensible to require a person in the first instance to buy milk if he’s going Lo turn around and sell it to somebody else in order to get back the money to do whatever he wanted. So I think that our present attempts to control what they spend are not very successful.

In the second place, I think there’s a great tendency for people to underrate the capacity of the individuals who are involved in this. They are perfectly decent human beings; many of them are where they are because they’re distressed. If we go back over the past history, after all, we have had wave after wave of people who had no better training and schooling and

16 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

background who have learned how to handle themselves. I think that the best and most

effective way to promote greater ability in spending money is to let people make their own

mistakes.

Now, when you come to the children you have of course a very special problem. And

there is a real argument for some element of paternalism in respect to the children. Again the

question is, what would be the most effective way. And I think the most effective way to handle those problems—well let me go back. If you took off the main load of income maintenance through a negative income tax, you would have hardship cases left, you would have the kind of people you’re talking about. But they would be many fewer than you now have to deal with. And I believe that the most effective way to handle that smaller number would be really through voluntary, private arrangements, and not through governmental civil servants. Our present government bureaucracy does not handle this very well, because most of their time has to be spent on checking whether people are cheating. They become policemen and spies, not people who can really help the people who need help.

MR. NEWMAN: Well I suppose the kind of people you have in mind are those who are

victimized by, oh, contracts that they don’t really understand and go in for a great deal of

installment buying, and are very seriously taken advantage of—

MR. FRIEDMAN: Well I’m not sure whether—that, again, is a complicated issue. The reason why the costs are high on those contracts is because the default record is also very high; it’s not clear that people are taken advantage of.

MR. NEWMAN: Well I’ve been led to understand that a good deal of junk was passed off on these people. But perhaps—

MR. FRIEDMAN: Oh, of course, it is. I don’t—but again, there’s going to be—perfection is not for this world. You have to ask what is the least imperfect of the alternatives open to you. And I’m saying, it seems to me it would be less imperfect to try to give such people a

17 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

maximum opportunity to develop their own sense of responsibility, than it is to try to control

them closely as we now do.

MR. NEWMAN: Dr. Friedman, you have so many ideas that are—you’ll allow the word—

unorthodox and provocative, and so many fields that—we can’t go into many of them, but you did mention schooling, and you thought we might very well do with an entirely different approach.

MR. FRIEDMAN: I think that there’s been an enormous confusion in considering a wide variety of programs between the problem of making something compulsory, requiring people to have it, the problem of financing things, and the problem of administering things. And schooling is a wonderful example. You could have compulsory schooling up to a certain age without the government being further involved. For example, you are now compelled, if you own a home, to keep it from being a menace to your neighbor. But the government doesn’t provide contractors and builders and so on to maintain your house; that’s imposed on you. So you could compel people to school their children up to a certain age and stop there.

Now, the second place, you could have financing without administration. We finance many things that the government doesn’t administer. The government pays people let’s say social security checks; it doesn’t provide grocery stores and stores in which the people spend the checks. So as a second level, the government could finance the schooling but not administer it; it could finance it and let private agencies, private organizations, provide the schooling.

What we have in fact done in schooling, in the main, is to combine these three—to have compulsory schooling, paid for by the government, but also run by the government. And it seems to me that we would be far better off if we could start a reform at this third level. We might want to work backwards, but at least start at this level.

The problem with schooling—and especially consider the people in the ghetto or in the areas where schooling is bad—the real problem is, they have no alternative, they have no

18 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

choice. You may say, “Well they can influence their schooling by political mechanisms.” But political mechanisms are very inefficient. If you or I are dissatisfied with a store we shop at, if we think Macy’s isn’t very good, well we can individually punish Macy’s, as it were, or discipline them, by taking our business away from Macy’s and going to Gimbel’s or some other store. That’s far more effective than it is if all the customers of Macy’s had to get together and have a vote on whether Macy’s was being run right.

Well now, go to the schooling system. If a parent in such an area doesn’t like the schooling his child is getting, he can take his child out and go elsewhere. But if he does, he has to pay the whole of the additional cost. He gets no credit for the fact that he has reduced the load on the city. And as a result, this is not really an effective alternative to him.

Now, one way to continue the state financing of schooling, while having more choice for parents, would be to say to each parent, “Here, if you take Johnny out of the public school, you are saving the city so many dollars a year”—I don’t know what the numbers are; for

Chicago, which I know something, it’s about $800 a year, that’s the amount the city is spending per child per year—“You’re saving the city of Chicago $800 because we don’t have to spend that on schooling your child; therefore, we will give you a voucher, a piece of paper, entitling you to purchase up to $800 of schooling somewhere else. You can’t use that voucher for anything else; you can’t turn it in and use it to buy beer or clothing or anything. The only thing it’s good for is for schooling. But you can spend it at any approved school.” You would have to have a list of schools which meet some minimum standards. Now, if you did that, that would immediately provide the parent with an effective way to get better schooling for his child. You will say that there aren’t very many private schools now, for such people. That’s right, the only kind of private schools there are now are those that are directed at people who can afford to pay twice for schooling: once through taxes and once by paying the full cost elsewhere; that’s why they tend to appeal to a very high-income group. Or else, the only other alternative are parochial schools. Because the Church is willing to subsidize the schools the same way in which the Federal government does.

19 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

But a parent who doesn’t want to go to a parochial school and can’t afford to go to a real

private school has no alternative now. If you had this voucher scheme, there would be a

market and demand for such schools, and such schools would grow up. Groups of parents,

churches, universities, other people could organize non-profit schools. Private people could

organize schools run for profit. And they would have a market now and an incentive to do so,

by providing schools. In this way—now if—again, it’s the same thing as what we were saying

earlier about social security—if the government-run schools were superior, people would

keep having their children in them, there would be no effect. If the government-run schools

are inferior to what’s available elsewhere, then parents could pull out their children and send

them to the other schools, and parents would have a very real control. This would truly

decentralize schooling. In my opinion, it would enormously increase the variety, diversity and

kinds of schools.

Now, I might call to your attention the fact that this is not completely unprecedented.

What I’m describing for elementary and secondary schools is precisely the GI Bill for

enabling veterans of wars to go to school. After World War II, of course, it was a very large

thing, and it’s still going on. And under that scheme, the government doesn’t undertake to

provide a college to which it sends these people; it gives the money which they can then

spend and buy tuition at any school of their choice. Now it seems to me that this would be the

most important single thing you could do, from the long-run point of view, to break the

vicious cycle we now have, to introduce an improvement in the schooling conditions available

to the poorer people in this community.

MR. NEWMAN: Dr. Friedman, I do want to ask you about your theory of supply of money and its relationship to the economy. There are so many things to talk about that one has to be arbitrary.

MR. FRIEDMAN: Before you do that, though, let me—there are many things to talk about, but it’s interesting to stress the links among them. And let me call to your attention that here we’ve got about three or four things, and I’m going to add one or two more, in which the

20 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

common link is that what we want to do is to provide alternatives. What we want is

competition, we want pluralism, we want a variety of sources of services. And the thing we

ought to be opposed to at all times are monopolies—whether by government or private

people.

Now, we had that in the case of social security. What I was arguing was, let’s have an alternative, let’s have some competition and variety. If the government is a better way of doing it, okay, it’ll succeed. We just had that in the case of schooling. We really have it in the case of the welfare program. I would also add to it, in the case of the post office.

MR. NEWMAN: Cannot the government always make itself better in any of these fields, through its taxing power?

MR. FRIEDMAN: It can—it can to some extent. It can to some extent impose handicaps on other people by taxing them while itself it’s untaxed. However, even with that advantage, if other people are free to come in, the innate inefficiency of government is so great, that it won’t help them. Let me illustrate that. Why is it that we have a law making it illegal for people to carry mail for profit—first-class mail for profit? If the government’s—if the thing

you were mentioning were enough, you wouldn’t need it. We have it because if you didn’t

have it, a large part of the postal business would be taken over by private enterprise—as it

should be.

MR. NEWMAN: Why do you think government is innately inefficient, Dr. Friedman?

MR. FRIEDMAN: Government is innately inefficient because the—fundamentally

because there is not the mechanism of eliminating the inefficient which there is in the private

market of loss and bankruptcy. And secondarily, because the incentives which move people

who run government enterprises are not to be efficient. See, people have a great confusion

this way, they think that because you label somebody a public servant he is supposed to serve

the public in the way in which somebody who’s running his own business is serving his own

interest. This is false. Everybody serves his own interest, as he views it. The people who are

21 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

running businesses in the Soviet Union are serving their own interest just as much as the

people who are running them in this country, even though they’re labeled government

servants. The difference is, what it is in your interest to do. If you’re running a business in the

Soviet Union you have to reckon with different rewards and punishments. And if you’re

running a business in the United States—your punishments may include getting shot—

whereas in the United States the worst that will happen is that you’ll lose your money. And

therefore—and moreover, the way to get ahead in the Soviet Union is not necessarily be most

efficient, but to do whatever will please the people at the top who are going to promote you.

Similarly, if I have a government enterprise, the people who run it are pursuing their own

interests many of which are not personal, they may be perfectly generous, well-intentioned people, just as many businessman and private people are. But what gets them ahead is not making trouble and not causing trouble. It’s the man in government enterprise who ventures and does something unorthodox and risky which may be his one chance in five of being a big success, and four chances in five of being a small failure, who’ll be much more deterred than the private individual. Because the private individual will reap the benefits of that success, the government official will not reap the benefit of the success, and he’ll get penalized because of the failure. And thus there’s a strong tendency in a government agency to be conservative in this sense.

In addition, once you get things handled through the political mechanism, there’s a strong

tendency for a government enterprise to be run by the producers as it were, rather than by the

consumers. The school system is run largely by the teachers and the teachers’ union; it has to

be that way. The post office is run by the post office—

MR. NEWMAN: This I know is one of your basic beliefs, and you apply it of course to the

professions and to many other fields; that since the producers are much more closely knit

than the consumers, if you give the producers a chance to dictate, they will.

MR. FRIEDMAN: The only effective way to offset that, I think, and the only way to

produce the efficiency, is by competition. And that’s why you have to maintain alternatives in

22 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

my opinion. That’s why I would like to see an alternative of private schooling, an alternative of private post office, an alternative of private arrangements for social security, and so on down the list. That’s why private charity is much more flexible and adjustable than governmental arrangements.

Before you went on to money, I wanted to draw this common—

MR. NEWMAN: I know you even apply this to medical profession, don’t you, and all the question of licensing.

MR. FRIEDMAN: Oh yes, I believe that you have there a private monopoly. I often have fun by asking people, “What do you suppose is the most powerful trade union in the United

States?” And almost never does anybody give the right answer, which is the American

Medical Association. It’s a powerful trade union, and it has governmental power at its beck and call, because essentially it can say, “You may practice medicine; you may not practice medicine. You may open up a medical school; you may not open up a medical school.” Now, this is a very complicated and controversial subject, but it essentially does go back to the license—your regulations under which some people are permitted to practice medicine and others not. And that covers, of course, many things other than medicine. It’s true in a variety of fields, that competition is reduced by requiring a government permit to operate.

Now, I might note that that’s true of radio and TV as an example, which in my opinion would be far better off if it were thrown wider open to competition—people could bid for the right to come in, instead of having to get a permit from the FCC. It’s true in a wide variety of occupations, from barbers to professional wrestlers, whatever you name.

It’s true in a very, very different sense in the regulations which limit competition through international trade. If you were to ask me what governmental measure would do the most to stimulate competition and reduce monopoly, I would say eliminating tariffs and import quotas, getting free trade abroad.

MR. NEWMAN: And doing that without—necessarily without reciprocation.

23 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

MR. FRIEDMAN: Well, you’ll never do it through reciprocation and there’s no reason

why we shouldn’t do it. We’re hurting ourselves by our tariffs; let’s get rid of them.

MR. NEWMAN: Dr. Friedman, I’m determined to get to the money supply question, but I think I will not put it to you directly. I think I will ask you what you think of what the Nixon administration is doing in the economic field at the moment, through the retention of the 10% surtax, through the hope of a surplus in the Federal budget, through high interest rates. How well do you think that’s going to work?

MR. FRIEDMAN: Well, I think that one has to—you’ve asked a very very complicated question, and you have to separate the pieces. I am, of course, as you realize, a partisan of the

Nixon administration, and worked with him in the campaign. I think that with respect to inflation, in my opinion there is one and only one way in which you can stop inflation, and that’s by reducing the rate at which you create money. Now, this again is a complicated technical subject; it’s very hard for anybody to understand how anybody can create money.

And yet, the fact is that the amount of money in the country, the number of dollars in currency that you carry in your pockets, the deposits you have to your credit at banks—the total sum of those is fundamentally determined in a Grecian temple on Constitution Avenue in

Washington where the Federal Reserve Board holds forth. They have powers which enable them to make that go up at 10% a year, to make it go down at 10% a year. Through the exercise of those powers in 1929–33, as I said earlier, they permitted or made it go down by

33% in three years and produced the worst depression in the history of the United States. By the exercise of those powers they have in the past four years permitted it to go up, at an abnormally high rate. The rate has varied from year to year, and it depends on the particular definition of money, but it’s been a rate of anywhere from about 6% to 12% depending on the period of time.

In my opinion, that is a fundamental reason why prices have gone up. As of the moment, the Federal Reserve Board has reversed policy very sharply. Since December of last year it’s been permitting the quantity of money to go up at a rate of only about 2% a year. Indeed,

24 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

from my point of view that’s too low a rate. If you’re going to bring a racing car to a halt, I

think you better do it gradually and not jam on the brakes all at once and send the occupants

through the windshield. And I am a little afraid that the Fed may have jammed on the brakes

somewhat too hard.

Now, so far as the tax point is concerned, that in my opinion is very much less important.

I believe that taxes and spending are very important from the point of view of what they mean

about what happens to our income, what it goes for. I believe they’re important in terms of

what interest rates may result. But I do not believe that they are very important—they have a

little importance—with respect to stopping inflation. And that is the reason why I myself have

been opposed to continuing the surtax. I believe that continuing the surtax is likely simply to

encourage a larger level of government spending. So if you ask me about the whole program,

I would split it into two parts. I would say on the monetary side what’s happening is in the

right direction and may if anything be overdone. The influence of the Nixon administration is

being brought to bear on that monetary policy and being brought to bear intelligently and

well. On the fiscal side, I recognize that my position is a minority one, that the widely

accepted position is a surplus, is anti-inflationary, and I can well therefore see the political

imperatives that cause Mr. Nixon to feel that he must go for a surplus. And it does have, from

my point of view, one indirect advantage. And that is that, trying to get a surplus and trying to

maintain fiscal restraint does mean holding down government spending. And since in my

opinion we’re not getting our money’s worth through that government spending, and we

would get more for our money if we spent it ourselves, it seems to me that’s a very good by-

product.

MR. NEWMAN: Dr. Friedman, I have to ask you about something you did during World

War II when you were working in the Treasury in Washington. You had something to do with

the institution of withholding. Have you since come to regret that?

MR. FRIEDMAN: Well, that’s a very very hard question. I think that withholding was absolutely essential during the war to raise the kind of taxes we did. But I also do believe that

25 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

it would be impossible today to have the level of taxation we have, if it weren’t made largely painless through withholding. So I have had very mixed feelings about whether I contributed to a good thing or a bad thing. I have no doubt that it was good from the short-term point of view.

MR. NEWMAN: You were saying that you realize that your position on surplus in the budget was a minority position; actually you probably would be uncomfortable if you were not in the minority position. But—

MR. FRIEDMAN: I might say that it’s less of a minority position now than it was five years ago.

MR. NEWMAN: Than it used to be. But you have undertaken, so to speak, to hack away at the position that had been held in economics in this country, in Britain and many other places, by John Maynard Keynes. And the Keynsian doctrine of the managed surplus and the managed deficit as the way to avoid depressions really had a grip and it still has.

MR. FRIEDMAN: Oh yes, it’s dominant.

MR. NEWMAN: I ask you about this because it got such a grip and it has held that grip for so long—and here you are, another economist, seeking to knock it down. This kind of thing leads people to wonder which economists they should credit and how they can know.

How do you tell one economist from another if you’re simply a layman?

MR. FRIEDMAN: Well, there is no easy answer to that, and there’s no way to tell one economist from another except by the proof of the pudding. The proof of the pudding is the eating. And I think it’s true that, if you take the economist professions first, there are trends within that profession, and within that profession as within any other science there is a tendency for those theories and those propositions which have greater conformity with experience to displace those which do not. Now, for example, the Keynsian revolution didn’t happen by accident; the Keynsian revolution occurred because the theories that were current in the 1930’s and the interpretation of the facts in the 1930’s did not explain the great

26 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

Depression. And Keynes came along with an alternative explanation and for a time it was widely accepted. But his explanation hasn’t been working very well. Many of the inferences that were drawn from Keynes turned out to be wrong and to be disproved. For example, it was widely believed as a result of Keynes’s influence that the great problem in the post-war period would be depression; it turned out to be inflation.

The result of this is that there’s been a drastic change in thinking within the profession.

The fact is that while everybody today uses Keynsian language, nobody today in the profession any longer accepts the ideas that Keynes expressed or that were current let’s say in

1945 to 1950, However, there’s a great lag in these matters. The people who are legislating and influencing policy are now reflecting what they learned in college 20 and 25 years ago.

And as a result, the attitudes in the profession itself are very different from the attitudes in the public. In fact, it seems to me kind of ironic that just when this Keynsian doctrine of the managed budget has really captured the civil servant and the politician and the journalist, just at that time it has lost almost complete credence, or a large part of its credence has been lost on the part of the profession itself.

Well that doesn’t answer your question because I think there is no answer. How do you choose a good doctor? In one sense it’s a paradox. If you knew enough to choose a good physician, you wouldn’t need a physician, you’d be able to doctor yourself. And yet people do choose physicians and they don’t do it entirely at random. They do it by observing what the experience is of the patients whom the physicians have. And the same way, the only way in which the public can choose economists is by seeing which economists have the better track record in making predictions and making forecasts, in interpreting things that seem to hold water and so on. And I’m afraid there’s no— fortunately, it’s a good thing there’s no easy answer. If there were an easy answer you’d be well on the road to...dictatorship. What you and I want in our society is a pluralistic society in which many voices are heard, people are competing for attention, in which it's possible for opinion to ...

MR. NEWMAN: Including economists who compete.

27 From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

MR. FRIEDMAN: Oh yes, they certainly compete. We want competition in economists as much as in anybody else. That's why I've always been opposed to the idea that we should have any license or provision for economists.

MR. NEWMAN: Thank you very much, Dr. Friedman. Milton Friedman has been

SPEAKING FREELY. This is Edwin Newman, NBC News.

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