All achievers

Milton Friedman, Ph.D.

Nobel Prize in Economics

We have government of the people, by the bureaucracy, for the bureaucracy.

1935: Rose and Milton Friedman. Rose Director met Milton Friedman in 1932, when the two were seated next to each other in alphabetical order as graduate students at the University of Chicago. In their book Two Lucky People Milton acknowledged Rose as having been a crucial partner in nearly all his economic and public policy work. The Friedmans were married for 68 years.

Milton Friedman was born in New York City, the fourth child and only son of working-class Jewish immigrants from a Hungarian community in what is now Ukraine. When he was a year old, the family moved to Rahway, New Jersey, where Friedman’s parents kept a dry-goods store. Although their financial position was precarious, and no member of the family had been to university before, it was decided early that Milton would attend college. He read voraciously, enjoyed school and showed a particular talent for mathematics. He earned a degree in mathematics from Rutgers University, graduating in 1932 during the very depths of the Great Depression. Although scholarships covered his tuition costs, he worked throughout his student years to meet his living expenses.

After graduation, Friedman was interested in pursuing further studies in mathematics, but the dire state of the national economy inspired him to pursue economics instead, and he accepted a scholarship from the University of Chicago. While earning a master’s degree in a single year at the university, he met a fellow economics student, Rose Director. The two hoped to marry, but were long dissuaded by the financial difficulties of starting a family during the Depression. Friedman was awarded a year’s fellowship to continue postgraduate studies at Columbia University. After another year in Chicago as a research assistant in the economics department, he was then hired by the National Resources Committee in Washington to work on a large consumer budget survey.

1947: Economists representing the emerging Chicago School: Milton Friedman, George Stigler, and Aaron Director, at the first meeting of free-market intellectuals, the Mont Pèlerin Society. Friedman earned a bachelor’s degree in 1932 from Rutgers University, his masters in 1933 from the University of Chicago, and a Ph.D. in 1946 from Columbia University. (Hoover Institution Archives)

In 1937, Friedman joined the research staff of the National Bureau of Economic Research in New York City. With a steady income finally assured, Milton Friedman and Rose Director were married in 1938. They have collaborated on many books and projects over the years. Friedman’s studies of income from independent professional practice served as his doctoral dissertation for Columbia University, but publication of his dissertation was delayed until after World War II. In 1940, Friedman accepted a job at the University of Wisconsin but was forced to resign within a year. Friedman had fallen into conflict with other members of the faculty over America’s entry into World War II, which Friedman favored and others opposed. During World War II, he worked in the Treasury Department, where he helped create the federal withholding tax system. Prior to that time, Americans had paid their taxes in a single lump sum each year. During the last years of the war, he suspended economic research and was employed as a mathematical statistician by a special projects group at Columbia University, concentrating on problems of weapons design, military tactics and metallurgical experiments.

1957: In Milton Friedman’s book A Theory of the Consumption Function, he presents a new theory of the consumption function, tests it against extensive statistical J material and suggests some of its significant implications. Central to the new theory is its sharp distinction between two concepts of income: measured income, or that which is recorded for a particular period; and permanent income, a longer-period concept, in terms of which consumers decide how much to spend and how much to save. Milton Friedman suggests that the total amount spent on consumption is on the average the same fraction of permanent income, regardless of the size of permanent income. The magnitude of the fraction depends on variables such as interest rate, degree of uncertainty relating to occupation, ratio of wealth to income, family size, and so on. “Friedman described Keynes’ theory of a declining propensity to consume as ‘very imaginative and thoughtful.’ But in A Theory of the Consumption Function, Friedman demonstrated that while the hypothesis seemed to make psychological sense, it was empirically false. In relating income to propensity to consume, Keynes had erred in not distinguishing between ‘transitory’ and ‘permanent’ income. In fact, consumption does not decline as incomes generally rise.”

After the war, Friedman’s dissertation was finally published, and he was awarded his Ph.D. from Columbia University. The resulting book, Incomes from Independent Professional Practice, introduced the concepts of permanent and transitory income. This study of professional income, integrated with his prior work on consumer budgets, served as the basis of his landmark Theory of the Consumption Function. After one year at the University of Minnesota, Friedman accepted an appointment at the University of Chicago, where he taught for the next 30 years, while simultaneously maintaining a staff position with the Bureau of Economic Research.

1962: Capitalism and Freedom, written by Milton Friedman, in collaboration with his wife, Rose, provides the definitive statement of his immensely influential economic philosophy — one in which competitive capitalism serves as both a device for achieving economic freedom and a necessary condition for political freedom. Among other concepts in Capitalism and Freedom, Friedman takes a radical stance against all forms of state licensure, including ending the mandatory licensing of doctors and introducing a system of vouchers for school education.

At the bureau, Friedman conducted a long-term study of the role of money in the business cycle. At the university, he established a “Workshop in Money and Banking,” which led a revival of interest in monetary studies in the United States. Friedman made a name as one of the university’s exponents of neoclassical economics, opposed to the Keynesian economics then in favor at most universities in Europe and America. Within the larger grouping of the Chicago School, Friedman and like-minded colleagues are regarded as monetarists. They see money supply as the major determinant in the business cycle and inflation, and regard it as the most effective instrument of government economic policy. Rather than the fine-tuning of Keynesian fiscal policy, Friedman recommended that central banks such as the Federal Reserve adopt a general rule of controlling the money supply to suppress inflation and allow prices to find their natural level. Friedman long argued that most other forms of government intervention in the economy are not only counterproductive in economic terms, but are fundamentally contrary to the values of a free society.

1969:  Time magazine cover with Milton Friedman. Friedman was active in public affairs, serving as an informal economic advisor to Senator Barry Goldwater in his unsuccessful campaign for the presidency in 1964, to Richard Nixon in his successful 1968 campaign, to President Nixon subsequently, and Ronald Reagan in his 1980 campaign.

In the early 1960s, Friedman’s ideas began to gain adherents beyond the fraternity of academic economists, largely through a series of persuasive books for the general reader, including Capitalism and Freedom (1962), written in collaboration with his wife, Rose D. Friedman. The following year saw the publication of his monumental Monetary History of the United States, written in collaboration with Anna J. Schwartz.

1976: Professor Milton Friedman taught economic theory at the University of Chicago for thirty years. He was widely regarded as the leader of the Chicago School of monetary economics, which stresses the importance of the quantity of money as an instrument of government policy and as a determinant of business cycles and inflation. In 1976, he was awarded the Nobel Prize in Economics for his research on consumption analysis, monetary history and theory, and the complexity of stabilization policy. In 1977, Friedman retired from active teaching at the University of Chicago and was named a Senior Research Fellow at the Hoover Institution at Stanford University.

The success of his works with the general public brought him into a more prominent role in public policy debate. Friedman served as an informal economic advisor to the 1964 presidential campaign of Senator Barry Goldwater. Goldwater was defeated, but Friedman’s ideas were reaching a wider audience. From 1966 to 1983, he wrote a regular column for Newsweek magazine.

1980: Free to Choose: A Personal Statement was co-written by Milton Friedman and his wife, Rose Friedman. The book maintains that the free market works best for all members of a society, provides examples of how the free market engenders prosperity, and asserts that it can solve problems where other approaches have failed. Free to Choose topped the bestseller list for five weeks — and had a profound impact on public discussions of freedom.

Friedman advised the successful presidential campaign of Richard Nixon in 1968. During the Nixon presidency, Friedman served on a committee to study the feasibility of returning to an all-volunteer armed force for the first time since before World War II; the recommendations of this committee led to the abolition of the military draft in 1973. Despite his interest in public policy, Friedman consistently refused appointments to full-time government positions, preferring to concentrate on his scientific work and to promote his public policy beliefs outside of government.

1981: Milton Friedman, George Shultz, President Ronald Reagan, Arthur Burns, William Simon, and Walter Wriston at House Economy meeting with advisors. Milton Friedman served as an informal economic advisor to Senator Goldwater in his unsuccessful campaign for the presidency in 1964, to Richard Nixon in his successful campaign in 1968, to President Nixon subsequently, and to Ronald Reagan in his 1980 campaign. Friedman was a member of President Ronald Reagan’s Economic Policy Advisory Board, named in early 1981 by President Reagan. (Life)

In 1975, Friedman made a controversial visit to Chile during the military dictatorship of General Augusto Pinochet to give a series of lectures on economics. Other University of Chicago professors and graduates later served as advisors to the Chilean government. Although Friedman never advised the regime directly, he believed the adoption of free-market policies helped prepare the country for its eventual return to democratic rule. Friedman gave similar lectures in South Africa and Rhodesia (now Zimbabwe) in the 1970s. He was later to travel as far as China to speak on his free-market ideas.

1986: Nobel Prize-winning economist Milton Friedman attends a Beverly Hills charity dinner in his honor. For much of the 1980s, Friedman's economic policies helped shape the United States and the world. "Known at his pinnacle as 'Margaret Thatcher’s favorite economist' and hailed almost universally as the instigator of monetarist economics, Friedman was a pivotal intellectual inspiration for the Reagan and Thatcher revolutions of the 1980s. Friedman did not invent monetarism — it had been first discussed centuries earlier — but he did combine academic pre-eminence and popular showmanship to propel it to the forefront of politics. (George Rose/Getty)
1986: Nobel Prize-winning economist Milton Friedman attends a Beverly Hills charity dinner in his honor. For much of the 1980s, Milton Friedman’s economic policies helped shape the United States and the world. Known at his pinnacle as “Margaret Thatcher’s favorite economist” and hailed universally as the instigator of monetarist economics,  Milton Friedman was a pivotal intellectual inspiration for the Reagan and Thatcher revolutions.

Friedman’s earlier scientific work now received international recognition. He was awarded the 1976 Nobel Prize in Economics “for his achievements in the fields of consumption analysis, monetary history and theory and for his demonstration of the complexity of stabilization policy.” That year, he retired from the University of Chicago, although he retained the title of Paul Snowdon Russell Distinguished Service Professor Emeritus of Economics at the university. From 1977 until his death he was a senior research fellow at the Hoover Institution on War, Revolution and Peace at Stanford University.

In 1988, President Ronald Reagan awarded Milton Friedman with the Presidential Medal of Freedom, the nation’s highest civilian award. That same year, Friedman received the National Medal of Science. (© Ed Kashi/CORBIS)

In 1980, Milton Friedman’s ideas were featured in a ten-part public television series, Free to Choose. Friedman and his wife, Rose, published a popular companion volume to the series; it became the bestselling nonfiction book of the year. That same year, Friedman advised presidential candidate Ronald Reagan, whose views closely reflected Friedman’s laissez-faire philosophy. In the first year of the Reagan administration, Friedman served as a member of the President’s Economic Policy Advisory Board.

1993, San Francisco: Milton Friedman and technology entrepreneur Sandra Kurtzig discuss the steps to success in business, the state of the U.S. economy, and the social responsibilities of entrepreneurs to their communities in Money, Business and Free Enterprise, an Achievement TV program broadcast to high schools across the country.

The 1980s were a watershed decade for the acceptance of Friedman’s ideas. His views of monetary policy, taxation, privatization and deregulation informed the policy of governments around the globe, especially the administrations of Ronald Reagan in the United States and Margaret Thatcher in the United Kingdom. His ideas were studied throughout the world, and played a major role in the transformation of China’s economy. At the same time, his libertarian views on social issues such as the decriminalization of drugs sometimes put him at odds with conservative admirers of his economic thinking. Many of his magazine essays decrying activist government were collected in the 1983 book Bright Promises, Dismal Performance.

2002: President George W. Bush honors Milton Friedman at the White House for lifetime achievements. “Milton Friedman has shown us that when government attempts to substitute its own judgments for the judgments of free people, the results are usually disastrous. In contrast to the free market’s invisible hand, which improves the lives of people, the government’s invisible foot tramples on people’s hopes and destroys their dreams,” Bush said. (AP)

A second television series and accompanying book by the Friedmans, Tyranny of the Status Quo, appeared in 1984. In 1988, Friedman was awarded the National Medal of Science and the Presidential Medal of Freedom. In that year of honors, Milton and Rose Friedman published a joint memoir of their life together, Two Lucky People. In later years, the Friedmans made their home in San Francisco, where Milton Friedman died in 2006, at age 94.

October 2006: Friedman in San Francisco, California, a month before his death at the age of 94. At the time of his death, Friedman was still working to spread his ideas about free markets through a 90-minute PBS documentary, The Power of Choice: The Life and Ideas of Milton Friedman. Through interviews with the world’s most influential economists and policymakers such as Alan Greenspan and Estonia’s Prime Minister, Mart Laar, The Power of Choice explores Friedman’s tremendous influence on policy — and daily life — in Estonia, Chile, and the United States.

Since his death — and the financial crisis of 2008 — Friedman’s ideas on government regulation of business and finance have been hotly debated, but his teachings retain strong support among economists and policymakers around the world. Since 2002, the Cato Institute, a Libertarian think tank, has awarded a Milton Friedman Prize of $500,000 to the person who has done the most in the previous two-year period to advance the cause of economic freedom, a fitting tribute to the man and to the cause he championed.

Inducted Badge
Inducted in 1971

In the closing decades of the 20th century, no economist had a greater influence on the public policy of governments around the world than Milton Friedman. Awarded the Nobel Prize in 1976 for his groundbreaking studies of monetary history, consumption analysis and stabilization policy, he became a trusted advisor to successive Presidents of the United States. His ideas were spread around the world by a generation of economists he trained at the University of Chicago.

Friedman and his followers held that steady control of the money supply through a country’s central bank, such as the Federal Reserve system in the United States, was the best instrument for stabilizing a currency, avoiding inflation and allowing the free market to go about its business, without excessive taxation or regulation.

Friedman’s ideas gained widespread acceptance in the 1980s through their enthusiastic embrace by world leaders including Ronald Reagan and Margaret Thatcher. Friedman expounded his laissez-faire views in a series of bestselling books and popular television programs, including Capitalism and Freedom and Free to Choose. His ideas were instrumental in the transition from communism to capitalism in Eastern Europe, and have informed the economic policies of governments from South America to the Far East.

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Your career as an economist began during the Great Depression. Many people saw that calamity as a failure of the free market, and a good argument for government intervention in the economy. You came to a different conclusion.

The Depression was caused by government. It was the result of bad government. It was the result of government actions not working the way they were intended to. The Federal Reserve System was established in 1914 for the purpose of preventing things like the Great Depression. And yet, its existence was responsible, in my opinion, for the depth of the Depression. So that you cannot look at the aftereffect without looking at what came before, given that you made the terrible mistakes that led to the Great Depression.

I have never criticized the remedial actions that were taken immediately thereafter to help the people who were so badly hurt. That was a desirable thing. And it was the reaction to it. The bad things about the New Deal were not those. The bad things about the New Deal was not the Works Progress Administration, which offered temporary jobs, the Civilian Conservation Corps. That was not the bad things. Those were the good.

The bad things about the New Deal were the more permanent changes introduced in the institutions of the country. One of them has recently come home to roost in the Federal Savings and Loan Insurance Corporation. And that’s a strict New Deal consequence. That was established then.

Why was it established? If a private organization makes a mistake, does things badly, it will lose money and it will have to go out of business. If a public organization does things badly and a governmental organization does things variedly and makes bad mistakes, it will be expanded. It will be expanded because they will say, “Well, it’s all because we just didn’t have enough resources.” Or else, it will be allowed to stay and another organization will be set up to do what it was supposed to do.

That is this case. The Federal Reserve System was established to prevent the kind of bank runs and bank failures that happened during the Great Depression.  But they made it worse, much worse, by not doing what they were set up to do. They were supposed to provide the liquidity, and instead they reduced liquidity. The quantity of money in the United States failed by a third between 1929 and 1933. The Federal Reserve System at all times during that period had the power to prevent that decline, and it was established for the purpose of preventing that from happening. It didn’t do it.

And so what happened? The Federal Reserve System wasn’t abolished, unfortunately, but the Federal Deposit Insurance [Corporation] was created to do what the Federal Reserve System was supposed to do, to prevent bank runs.

To clean up after them?

Milton Friedman: Right, to clean up after the mess that had been left. And they’re both there, and that’s the major problem with government.

I have never argued that government initiatives may not be just as good as private initiatives. The problem with government is not in the things it tries but in the absence of any mechanism for recognizing error. What you need — what the private system abounds in — is survival of the fittest. What the governmental system abounds in is expansion of the mistakes. And there is no mechanism for eliminating governmental agencies which either have — no longer are needed or have behaved perversely.

If you’re trying to think back and ask yourself, how many government agencies can you think of that have ever been abolished, you can count those on the fingers of one hand. One of the government agencies that was abolished was — there once existed a system of personal savings, where the Post Office had savings. How come it became abolished? Because when it was passed, the law was passed, and it could not pay — it was limited to paying interest at the maximum of two percent. Now, during the Great Depression, that was wonderful because it was safe. And Postal Savings deposits expanded, became very large. So during the later ’30s, and particularly after the war, when interest rates started going up and above two percent, everybody took their money out of Postal Savings. There was no more money in there, and it was allowed to die. Now, that’s one of the very few examples of a government agency that has been eliminated. Can you name any others?

Very few.

Milton Friedman: Somebody mentioned the other day that the Reconstruction Finance Corporation, which was established in 1931 or ’32, may have been allowed to die. I’m not sure about that one. But there are very few you can name.

They are a handful, yes.

Milton Friedman: On the other hand, we have no difficulty in naming businesses enterprises that have gone broke.

You’re saying that the free market is a harsh master, that if you fail, you fail.

Milton Friedman: Absolutely. You bear the consequences of your own action.

Now, we don’t have a free market. Don’t kid yourself. And the biggest enemies of the free market, the two biggest enemies of the free market are two separate groups — my academic colleagues and business people. Business people are enemies of free markets, not friends. The academic people are all in favor of freedom for themselves, except even now they’re not even in favor of that with this politically-correct nonsense that’s going on.

But historically, academic people have always been in favor of freedom for themselves. They want to say what they want, write what they want, do whatever research they want. But they’re all against freedom for everybody else. They think they know what’s better for the society, the poor people, than the poor people do. They think they can run the economy better than the businesses can.

The business people are just the opposite. They’re all in favor of freedom for everybody else, and at the drop of a hat you can get any leading businessman to give you an eloquent speech on the virtues of a free market. But when it comes to their own business, they want to go down to Washington and get a special tariff to protect their business. They want a special tax deduction. They want a tax subsidy. And Chrysler is on the verge of failing, which it should have done. It should have been allowed to fail. Chrysler goes down and exercises political influence and tries to get the government to lend it money to subsidize it.

So businessmen in general — not all, there have been some notable exceptions — and I don’t want to include everybody. But in the main, most businessmen are enemies of free markets.

The real beneficiaries of free markets are the invisible man, the small consumer, the ordinary worker. Those are the real people who benefit from free markets. But unfortunately, they don’t have the kind of political clout that a PAC — political action committee — from big business has.

1977: At the age of 65, Milton Friedman retired from the University of Chicago after teaching there for thirty years. Friedman and his wife moved to San Francisco, where he became a visiting scholar at the Federal Reserve Bank of San Francisco. From 1977 on, he was affiliated with the Hoover Institution at Stanford University. During the same year, Friedman was approached by the Free To Choose Network and asked to create a television program. (AP)

You know about the Keating Five. It’s an excellent example of the point I’m trying to make.

People will always say, in these circumstances, that government needs to come in, in a crisis like this, because it’s necessary to save jobs.

Milton Friedman: Yes, they always say that. But the actual effect is almost always to lose jobs and not to save them. I shouldn’t put it that way. The effect is to save some jobs at the expense of losing more other jobs.

One of the great economists of the 19th century was Alfred Marshall. And he has as a sort of model for one of his books, “the Seen and the Unseen.” And it’s a marvelous model for this. What happens in economics over and over again is that there are two sets of effects on any action, the immediately visible effects and the widespread invisible effects. And the widespread invisible effects are often much more important than the visible ones, but people don’t see them.

Let me give you very simple examples. We have a quota in the amount of sugar that can be imported from various countries. The visible effect of that is that there are about a couple of hundred thousand growers of beet sugar who benefit greatly from it, who are able to keep on growing beet sugar. They don’t benefit so greatly, because most of the money goes into paying the expenses of growing beets, and indeed, if there were no such quota, they would find something else to do. But in the short run, it would appear the visible effect is that they are able to have a market they would otherwise not have. The invisible effect is that every consumer in the United States pays twice as much for the sugar he or she buys as a world price.

Now, you’re a consumer. How much attention do you pay to the fact that you pay twice as much for sugar as you ought to? Is the fact that you pay twice as much for sugar as you ought to going to lead you to go down to Washington and testify against the sugar quota? Are the beet sugar farmers going to go down to Washington and testify in favor of the sugar quota?

It’s a typical example of the seen versus the unseen. The concentrated visible versus the dispersed invisible. And the major reason why roughly half the income of this country is controlled by governmental agencies instead of by the people who earn it is because of this contrast between the visible and the invisible.

Friedman inspired Prime Minister Margaret Thatcher’s economic reforms of the 1980s. His theory that inflation resulted from too much money chasing too few goods inspired a generation of central bankers and played a pivotal role in forming the governing philosophies of Thatcher and President Ronald Reagan in the United States.

We talk about the majority government. It is a majority government. But it’s a very funny kind of a majority. It’s a majority made up of a whole bunch of minorities.

You’ve got one-tenth of one percent of the people who are beet sugar growers. They’re part of the vast majority. You’ve got another two-tenths of a percent—maybe one or two percent of the people who are in the textile industry. And they make us pay twice the world price for shirts and for other things because of textile tariffs and textile agreements around the world.

And so down the line you’ve got all of these special interests. You’ve got labor unions. You’ve got these and those. And each one separately is a little minority but they all get together. Each minority is more interested in its own little problem than what happens with the rest of the country. And so it’s willing to give its vote to the other thing if they’ll give it — it’s a case of log-rolling.

So what we have is a log-rolling majority in which the majority of the people are not in fact represented. Is there any doubt in your minds — suppose you were able to get an effective poll from the people at large on this question: the government imposes quotas on the import of sugar; the result of that is that X-thousand farms are able to grow beet sugar who otherwise would not, and that you are paying twice the world price for sugar — are you in favor of this? Is there any doubt to you in your mind that a majority would say they’re opposed to it?

Let me give you another example which is much more important and much more dramatic. Of course, the most socialized industry in the United States is the military. Then next to the military, the most socialized industry is schooling. Nine out of ten youngsters — leave for a moment the colleges and universities aside, although it’s true for them too, but let’s stick to elementary and secondary schooling — everybody recognizes that over the course of decades the amount of money that’s going into that in real terms after adjustments for inflations — it’s been going up per student very sharply — and everybody recognizes that the quality of education has been going down. There’s not the slightest doubt.

All socialist enterprises are the same, whether you take them in Russia, in Poland or Czechoslovakia or in the United States. Socialized enterprises produce poor quality products at high prices with much conferred special benefits on small growers. That’s the characteristics.

One proposal for privatizing education for improving it is one that I made first close to 30 years ago in a book that was published — well, it was in an article first, then the book that was published just about 30 years ago — is a voucher system, which has gotten a lot of attention, which is simply the idea that parents should be able to decide what school their children go to.

What you should do is to say to every parent — if you send your child to a public school, to a government school, it’s costing the taxpayer now roughly abut 4,000 to 5,000 dollars per student. So if you decide to send them to any other kind of a school, we’ll give you a voucher worth 3,000 dollars, so we can make some money out of it too. Let’s say, just for example, by which you can choose any school you want, governmental, private, nonprofit, profit-making, Catholic, Jewish, Protestant, whatever, any school you want. The parent should have the choice. Those of us who are in the upper income classes have that choice now, because we can afford to pay twice for schooling, once through taxes and once directly toward tuition. People who are hurt by the present system are the poor people, and the people who are hurt worst are those in the inner cities who cannot get a decent education for their children.

Now, the voucher system, there have been some, quite a large number of public opinion polls about how people feel toward various proposals including the voucher system. In every poll that has been taken, the group which gives the largest majority in favor of the voucher system are the blacks. The blacks vote two-to-one in favor of the voucher system. There is not a single black leader who has come out in favor of the voucher system.

I once tried to persuade Jesse Jackson. I happened to be riding on a private plane with him from somewhere to Washington — I’ve forgotten from where — and I got him started on it. And he acted as if he’d never heard of the idea, but of course he had. “Well, wonderful, splendid idea.” “Will you send your own children?” “Well, several of them are going to private schools, of course.”

Well, at any rate, you never heard another word from Jesse Jackson in favor of the voucher system. Why? Because where do the black leaders get their political clout? From being able to appoint people to school boards, from being able to get jobs in the school system for some of their people. They can get support out of the voters by voting for more money for education. But if once a voucher system were adopted, they would no longer have any political clout. And that is why every attempt to get a voucher system — and there have been many of them — has been destroyed and frustrated by the people with invested interest in not having it, in particular, the officials of the teachers’ trade unions, by the state employees’ unions and the political people like Jesse Jackson and other such political leaders. But the reason I cite this example — and I think it’s so dramatic — is because of the unwillingness of the black leaders to support something of which the major beneficiaries would be the people they’re supposedly representing.

From 1986-1994, Milton Friedman and Michael Walker of the Fraser Institute hosted a series of conferences on economic freedom. Their goal was to create a clear definition of economic freedom and a method for measuring it. This resulted in the first report on worldwide economic freedom, Economic Freedom of the World. (George Rose)

So for all of the examples you’ve cited here in the last few moments, for a young person who is looking at how society is organized and trying to get this in his or her mind, you’re saying that governmental interference in the economy and management of things necessarily leads to vested interests?

Milton Friedman: No. It’s necessarily controlled by vested interests. There’s a pot of money there in every one of these cases and just as bees will go to honey, people will go to a pot of money. And the people who will be most effective in getting control of that pot of money are people who are trying to grab it for themselves rather than people who are trying to spend it on behalf of somebody else. Everybody wants to spend somebody else’s money. And nobody spends somebody else’s money as carefully as he spends his own. And that’s a fundamental principle. There’s only one way in my opinion in which you can exercise control over this process and that’s by effective constitutional limitation backed by public opinion.  If it’s not backed by public opinion, it will do no good.

Do you mean to put a limitation on spending?

Milton Friedman: No, much broader than limitation on spending. Limitation on spending would be one step. But a much broader limitation…

We have free speech because of the First Amendment of the Constitution. In our book Free to Choose, we listed the amendments we would like to save to the Constitution. They’re much broader than that. Such as, Congress shall make no laws prohibiting any trades between consenting individuals with respect to goods that it’s legal to trade. Now, that would eliminate all tariffs. It would eliminate the sugar quota, that you may not see off-hand that it would. But it would if you think about it a little because individuals includes foreign individuals and not only domestic individuals.

I would really like much broader constitutional limitations. There are many other things you can think of. For example, you might have a constitutional amendment that nobody can be elected to Congress and Senate unless he’s more than 60 years of age. That would eliminate the people, the possibility of people being elected to Congress in order to be able to get benefits after they leave Congress. You see, that’s the defect — I happen to be in favor of term limitation proposals simply because maybe that’s a possible thing you can get. But the defect of term limitation proposals is if you have young people who enter Congress, and they’re limited to 12 years, they’ll use those 12 years to get brownie points with people on the outside who will give them a job later. So it would be much more effective to limit the legislature to people [over 60] or to make it a part-time job or an unpaid job.

Anyway, there are lots of solutions. I’m not going to go through the solutions here. Our books, Free to Chose, and an earlier one, Capitalism and Freedom, are much better from that point of view than what I can say here. But what I will say: you will not solve these problems by taking them up on a one-by-one basis. You will never get rid of the sugar quotas by having sugar consumers testify against it. You might get a constitutional amendment that there shall be no tariffs or other interferences with foreign trade, which lumps everything together so people can see that they have a real interest in it. But if you’re trying to do it piece by piece you’ll get killed every time.

You’ve talked about various governmental approaches that you think are ineffective, sometimes worse than that. The one approach that you do think is effective, and with which you are most associated, is monetary policy. What is it that monetary policy does?

Milton Friedman: Oh no, no, excuse me, you have misinterpreted by position. I would like to get rid of the Federal Reserve too. I would like to have money controlled by a computer. However, that’s not what’s happening. And I’m a realist. You’re going to have a Federal Reserve System. And therefore, it’s relevant to ask, given that there’s a Federal Reserve System — even though it would be a better world if we could get rid of them — how should Federal Reserves operate?

So I’ve been concerned with monetary policy by trying to see how to make it less harmful than it is likely to be. I don’t want to say that government — it’s necessary — there are certain things that it is essential for government to do. I’m not an anarchist. I believe in a government, but a limited government. And the government should be limited, in my opinion, to very simple functions. Number one, to be defending the country against foreign enemies.

I have tried for a long time to see how to make national defense a private enterprise, and I’ve never succeeded. It’s easy to see how to privatize schooling, but I don’t know how to privatize national defense. So I’m reconciled to the fact that we’re going to have to pay twice as much as we should have to pay in order to get them to fight the national defense. Because anything government does, on the average — there are some things that are more, some less — on the average anything government does costs twice as much as if it were being done by private enterprise.

So one function of government is protect the country against foreign enemies, national defense. The second function of government, and one which it performs very, very badly is to protect the individual citizen against abuse and coercion by other citizens, to keep you from being hit over the head and mugged on the street, your house broken into and so on. And I believe that the government performs that function very ineffectively because it’s doing so many things it has no business doing.

The third function of government, and a very important function, is to define the rules of the game we play. What’s private property? If an airplane flies 10,000 feet over your house, is he violating your private property? If he flies 10 feet over your house, is he violating your private property? There is nothing natural about where the lines should be drawn. So we have to have some mechanism for making the rules about that, and that is an appropriate government function.  And fourth, it’s appropriate for government to provide a mechanism for adjudicating disputes about the meaning of those rules, a judicial system.

Those are the four essential functions of government, in my opinion, and those are the only functions that are essential. There may be some other areas in which if you started with nothing more than that, you might — government might conceivably do more good than harm. But from where you are now, if you could only move back in that direction, it would be marvelous. But there is no way you’re going to do it. So, the best you can hope for is that you can hold down government, keep it where it is, and let the private economy expand so that government becomes a smaller and smaller fraction of it. And even that is a very optimistic expectation, though it’s possible.

1983: Economist Milton Friedman at home. (Corbis via Getty Images)

But going back to monetary policy, what is monetary policy concerned with? It’s concerned fundamentally with what happens to the quantity of money. What’s money? There is again no natural definition of money.  The first thing, money is whatever you use to engage in transactions, whatever it is that people are willing to accept, not because they want it, but because they know that somebody else will accept it in return for something they want.

And you know, in the history of the world, you can hardly name a commodity that has not been used as money at one time or another.  There’s an island in the Pacific which uses great big stones as money, the Island of Yap. There are parts of Africa and India which for many centuries used cowrie shells, little shells that you pick up on the beach, as money.  The colonies of Virginia and North Carolina and so on — those seven grouped colonies — for many years used tobacco as money. But of course, the thing that has mostly been used as money historically have been silver and gold as monies.

But we’ve gotten beyond that and now we use pieces of paper as money. The pieces of paper in your pocket, the equivalent of those deposits which you have in your bank on which you think you can write checks and other people will accept your checks, or you can go down to ATM and withdraw some cash, so that the sum of the paper you carry around in your pocket and one or another class of deposits — they are very different deposits — is money.

The question is, who determines how much money there is? And the answer is, in our present system, there are 19 people who sit around a table in Washington once every two weeks who have the power, the unlimited power, to double the quantity of money over the next year or to cut it in half over the next year. Those 19 people are the seven members of the Federal Reserve Board and the 12 presidents of the Federal Reserve Banks or the regional Federal Reserve Banks. Only five of those 12 presidents have a vote on that open-market committee at any time, but all 12 attend every meeting and influence the action that occurs. They have the unquestioned power to do this, and it was the way they exercised that power during the Great Depression that was responsible for the depth of the Depression. It was the way they exercised that power during the 1970s that was responsible for the inflation during the 1970s and is fundamentally responsible for the savings-and-loan debacle.

The Federal Reserve, over the whole of its existence, has done much more harm than good. Yet, I want to give a tribute to Alan Greenspan, the present chairman of the Federal Reserve. As its penance for my sins, I have read the statement of every chairman of the Federal Reserve since its beginning to Congress — when he reports to Congress. And I hate to tell you how many of those I’ve read. Until Alan Greenspan came along, in not a single one of those did any chairman ever say, we may have made a mistake. Every one of those reports, when times are good in prosperity, they say, “We’re responsible for what good times you have.” In bad times, they say, “The times are bad in spite of us; we did everything we could to offset it.” Even in the depth of the Depression in 1932 and ’33, the chairman of the Federal Reserve Board was saying, “You cannot imagine how much worse things would have been if we hadn’t done our duty.” But Alan Greenspan is the first chairman of the Federal Reserve who in public testimony before Congress said, “We may have made a mistake.” And I give him very high marks for that.

So, as I say, this has been a system which has done far more harm than good. And I’m concerned with the question of how can we rein them in so that they do less harm and more good? And the problem is to exercise accountability, to make them accountable. And there are various ways in which this could be done. The main thing I’ve always argued for and I’m not sure it’s the best way — and indeed, a former student of mine has suggested what I now think is a better way.

What I’ve always argued for is requiring them to keep the quantity of money growing at a steady and relatively slow rate. Now, that’s — they’ve departed from that, and every single mistake has been connected with the departure from that. And almost always after — there are one or two occasions on which the departure was justified. But most of the time it has not been. And the problem is how do you get that rule in law and how do you make it accountable? How do you make it in the self-interest of the members of the board to follow the rule?

As I say, there are various other ways that have been suggested, but that’s the essential problem is to impose rules which will keep the quantity of money from either growing very rapidly or declining very rapidly. Either the one or the other is bad. If it grows too rapidly you have inflation. If it declines too rapidly you have Depression.

You’re not going to get rid of minor recessions. But even the present recession, in which we are in now as we talk, has unquestionably been made deeper than it need be because over the past four months the Federal Reserve has let the money supply grow at a very, very low rate, much too low of a rate, a lower rate. If the rate at which it’s been growing over the past four months were maintained indefinitely we would get not stable prices, but declining prices. And what we ought to aim for is a rate of growth for the money supply which gives you relatively stable prices.

Now the Fed is talking about paying more attention to money growth.

Milton Friedman: They’re always shifting their rhetoric. You have to distinguish rhetoric from substance. They’ve often talked about paying attention to money growth, but they almost never have done so. And that’s because they come out of a banker mentality. And the banker mentality is to look at the Fed as a credit instrument and its having something to do with interest rates. It would be too complicated for this present purpose to explain that, but it’s a major mistake, in my opinion. And I believe the Fed can influence interest rates, but it can’t determine them. But it can determine what the quantity of money is. That’s the one thing it can really control, and it ought to be judged on the basis of how well it does that one thing.