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Milton Friedman Speaks: Free Trade: Producer vs Consumer (B1232) - Full Video — Transcript

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0:06Music
0:09Reality - captured
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0:14understanding.
0:15Music
0:33The Idea Channel
1:03There's a standard cliche
1:05which I am sure you have
1:06all heard, that if you have
1:08two economists in one room
1:11you are bound to have at
1:12least three opinions.
1:13(Laughter) The subject I
1:17am going to talk about
1:18today, however, is one
1:20subject with respect to
1:23which that is not true.
1:26With respect to the area
1:27of international trade,
1:30with respect to the
1:31question of whether it is
1:33desirable for a country to
1:34have free trade or to have
1:37tariffs and other
1:38restrictions on imports
1:40and exports, in that
1:42particular area economists
1:46have spoken with almost
1:47one voice for some two
1:49hundred years. Ever since
1:53the father of modern
1:54economics, Adam Smith,
1:57published his great book,
1:58The Wealth of Nations, in
1:591776, the same year in
2:03which the Declaration of
2:05Independence was issued in
2:09this country; ever since
2:12then the economics
2:14profession has been almost
2:15unanimous on the subject
2:18of the desirability of
2:19free trade. Of course,
2:24complete unanimity is
2:26hardly ever possible, and
2:28every once in a while
2:30there have been some
2:31deviations from the
2:34straight and narrow path.
2:36Almost always those
2:39deviations have reflected
2:41not a disagreement with
2:44the fundamental message of
2:45Adam Smith, not a
2:46disagreement that in the
2:48good world free trade
2:50would be the best of all
2:51possible courses, but they
2:53have tended to reflect
2:55special circumstances of
2:57the time. Perhaps the most
3:00famous such deviation was
3:03by the most noted and some
3:07would say notorious of the
3:09modern economists, John
3:11Maynard Keynes, the
3:13English economist who gave
3:16his name to the Keynesian
3:17Revolution. In 1931 in the
3:22course of the depression,
3:25John Maynard Keynes who
3:26had been a free trader all
3:27his life came out in some
3:30articles in Britain in favor
3:33of departing from free
3:34trade and of introducing
3:36tariffs. He did so not
3:38because he thought that
3:42was in and of itself the
3:43best policy, but because
3:45he thought that the best
3:47policy was politically
3:48unfeasible. In his view,
3:51the right policy for
3:53Britain at that time was
3:55to go off the gold
3:56standard, end a fixed
4:00exchange rate, allow the
4:03pound sterling to be a
4:04free market currency whose
4:06price would be determined
4:07in the market, as it now
4:09is, of course, in a world
4:11of floating exchange rates
4:12today. But Keynes, an
4:15economist, made the
4:17political judgment that it
4:19was not politically
4:20feasible for Britain to go
4:24off the gold standard.
4:26Tariffs are a step...are
4:29an alternative to
4:31devaluation. After all, it
4:35comes roughly to the same
4:36thing. If, on the one
4:39hand, the price of the
4:40pound sterling was changed
4:42from the four dollars and
4:43eighty some cents, which
4:45then was the price, to
4:49let's say four dollars,
4:51that would make British
4:53goods cheaper to
4:54foreigners; it would make
4:56foreign goods more
4:57expensive to Britain's, and
4:59in that way, it would
5:00redress the problem of the
5:01balance of payments they
5:02were facing. That's one
5:03way to do it and the best
5:05way. But he thought that
5:06was politically unfeasible
5:08and it comes to the same
5:09thing, to introduce a
5:10tariff on imports and a
5:12subsidy to exports. That's
5:13an indirect and concealed
5:15form of devaluation. And
5:17so Keynes came out for
5:18that concealed form. His
5:21political judgment was
5:24like that of many
5:25economists, flawed. And
5:27about three weeks after he
5:28came out for a tariff on
5:30these grounds, Britain
5:31went off the gold
5:32standard. I may say that
5:35this is not an isolated
5:36story. Time and again,
5:39economists in my opinion
5:40have erred when they have
5:42proposed second best
5:43solutions in the area
5:45where they are experts,
5:46namely economics, because
5:48of predictions they make
5:50about political
5:51feasibility in an area
5:53where they are not
5:54experts. At any rate,
5:58Keynes had a very flexible
5:59mind, and one week after
6:02Britain went off the gold
6:03standard- he retracted his
6:04support for tariffs. He
6:08published an article
6:09saying, now that we have
6:11gone off the gold
6:12standard, there's no
6:13longer any point to
6:14tariffs; I return to my
6:15free trade principles. But
6:17later, when he
6:19retracted...when he
6:21reprinted that retraction
6:22in a book of essays, he
6:25appended a footnote, which
6:27is a very revealing
6:28footnote because it shows
6:30how much damage can be
6:31done by the tendency for
6:33people to preach the
6:35second-best solutions. He
6:37said in his footnote, and
6:39I quote, "Not all my free
6:41trade friends proved to be
6:43as prejudiced as I had
6:44thought, for after a
6:46tariff was no longer
6:48necessary many of them
6:50were found voting for it."
6:54In other words, it's often
6:56easier to turn people in
6:58the wrong direction- than
7:00it is to reverse that and
7:01get them back on the right
7:02line. Now, it's often
7:07argued that the reason we
7:10have bad economic policy
7:12is because the experts
7:13disagree; that if only the
7:16experts would agree, if
7:17only all economists were
7:18of the same mind, then we
7:20would have an excellent
7:21and fine economic policy.
7:23The case of free trade and
7:24the tariff is a clear
7:26counter-example. Here is
7:28one case where economists
7:30have all agreed, or
7:32essentially so. As I say,
7:34you have the very minor
7:35deviations like Keynes,
7:36but very few others. And
7:40yet, except for the case
7:43of Great Britain from the
7:45repeal of the Corn Laws in
7:471846 to the First World
7:52War when, for nearly a
7:54century, Britain had
7:55complete free trade with
7:56no tariffs whatsoever on
7:58anything, except for that
7:59case tariffs have been
8:02widespread. The United
8:05States had tariffs
8:07throughout the nineteenth
8:08century. In 1929, one of
8:16these measures, the
8:17infamous Smoot-Hawley
8:19Tariff Bill, which raised
8:22tariffs sharply, has been
8:24given some of the
8:25responsibility for the
8:27subsequent difficulties in
8:29the United States and the
8:30world. Today, we have a
8:34widespread move for
8:37protection: pressures from
8:39the steel industry, I am
8:41sorry to say successful,
8:43to have the government
8:44take measures to restrict
8:45the imports of steel;
8:47so-called voluntary
8:49agreements to restrict the
8:51imports of TV sets from
8:52Japan, and of textiles
8:56from Hong Kong and Korea,
8:58and I know not where
9:00else...and of shoes from
9:03Italy. We have a growing
9:08pressure for quotas on
9:11imports of oil and of
9:14other products. We have
9:17widespread concern that
9:18somehow or other a
9:21weakening dollar, the
9:22decline in the price of
9:23the dollar in terms of the
9:24mark or in terms of the
9:28Swiss franc or the yen,
9:30that a weakening dollar in
9:31that respect, requires the
9:35government to impose
9:36restrictions on imports or
9:38to subsidize exports. And
9:40the interesting question,
9:41and the question I want to
9:42explore with you today, is
9:45why is it that
9:47protection... interference
9:49with international trade
9:50has been so widespread,
9:52despite the almost uniform
9:55condemnation of such
9:57measures by economists?
9:59Why is it that you have
10:01the professional agreement
10:02on the one side, and
10:04observe practice on the
10:06other, which departs so
10:08sharply from that
10:09agreement? The political
10:13reason is fairly
10:14straightforward. The
10:16political reason is that
10:21the interests that press
10:23for protection are
10:25concentrated. The people
10:27who are harmed by
10:29protection are spread and
10:33diffused. Indeed the very
10:36language shows the
10:39political pressure. We
10:41call a tariff a protective
10:43measure. It does protect;
10:47it protects the consumer
10:49very well against one
10:50thing. It protects the
10:52consumer against low
10:53prices. And yet we call it
11:01protection. Each of us
11:08tends to produce a single
11:09product. We tend to buy a
11:15thousand and one products.
11:19If we impose a tariff on
11:20steel, or restrict imports
11:23of steel in other ways,
11:25the people who benefit are
11:26visible and clear and
11:28available and apparent.
11:32They have a very strong
11:34interest to press for
11:35restraints in that
11:36respect. The interests of
11:39the rest of us is very
11:41diffuse. Each of us will
11:42pay a few pennies more.
11:45We don't have the same
11:46interest to oppose it.
11:48If I may take a much more
11:49extreme case which you may
11:50think does not come under
11:51the heading of protection,
11:53but yet it does. We have a
11:55program of subsidizing the
11:57merchant marine, the
11:58maritime industry. That is
12:01really protection because
12:03what we are doing is
12:06taking measures to prevent
12:09the use of foreign ships,
12:12that is, of importing the
12:13services of transporting
12:15goods. Those measures to
12:19benefit the merchant
12:20marine through
12:21shipbuilding subsidies,
12:22through operating subsidies
12:23and so on,
12:25involve a total
12:26expenditure each year of
12:28roughly $600 million. That
12:31amounts to about $15,000
12:34per year for each of the
12:3525,000 people who is
12:37affected. You may be sure
12:40that they have every
12:41incentive to spend a lot of
12:44money on lobbying, on
12:45giving contributions to
12:47political candidates, and
12:48so on to see that
12:49continued. But $600 million
12:54with a population of
12:55two hundred million
12:56people, that's three
12:57dollars apiece for each of
12:58us. Which one of us is
13:01going to go to Washington
13:02and lobby our congressman
13:03to avoid that extra three
13:04dollars of taxes? However,
13:09while on a superficial
13:11level, it's very easy to
13:14see why we have had
13:16tariffs and other
13:17restrictive measures such
13:19as the maritime subsidies,
13:20such as the recent import
13:22quotas, because producer
13:24interest is concentrated
13:27and consumer interest is
13:32diffused, that alone is
13:36not really a fully
13:37satisfactory answer. Let
13:39me take another example of
13:40exactly the same thing.
13:42Why have we had price
13:44supports of farm
13:45products--to take up a
13:46subject of special
13:47interest here, and where
13:49there are special
13:50interests here concerned
13:52with that. We're all of
13:53us special interests; it's
13:54only the other fellow
13:55who's a special interest.
14:00Why have we had farm price
14:01supports? It's exactly the
14:04same argument. Farm price
14:07supports are again a
14:08measure that you will find
14:10it very, very hard to find
14:11any economists, except a
14:13small number of
14:14agricultural economists,
14:16schools in farm belt you
14:19will find it very hard to
14:20find any economist who
14:21will support farm price
14:22supports. They are another
14:25case in which the consumer
14:26is simply being protected
14:27against low prices. Why do
14:30we have them? Because the
14:32agricultural interest has
14:33been concentrated and the
14:35consumer interest diffused
14:37and widespread. Because
14:40you have a relatively
14:41small group of people who
14:42regard themselves as
14:43having much at stake and
14:46therefore they are able to
14:47be more effective
14:48politically than the
14:49diffused consumer
14:51interest. We often think
14:54that this is a country in
14:55which we have majority
14:58rule. That's true, it is a
15:01democracy. We do elect
15:03people to congress. We do
15:04have majority rule. But it
15:08is a very special kind of
15:09majority. It's a majority
15:11that is formed by a
15:13coalition of minorities.
15:16If you want to get elected
15:17to congress the way to do
15:20it is to find 3 percent of
15:22the people who will say to
15:23you, "If you vote for
15:24this, we'll vote for you
15:25whatever else you do."
15:26Then you find another 3
15:27percent and another 3
15:28percent, and you build up
15:29a 51 percent majority
15:32consisting of a coalition
15:33of special interests. And
15:35yet, that overstates the
15:37case. Because it's also
15:40true that special
15:43concentrated groups of
15:45that kind have never been
15:46able to get their way,
15:48unless they could make a
15:50plausible case that it was
15:53in the general interest of
15:55the country as a whole to
15:57promote their special
15:59interest. The mercantile
16:03interest could not have
16:04gotten their way unless
16:06they had been able to
16:07persuade at least a large
16:09fraction of the public
16:10that there was a genuine
16:11national security reason
16:14for maintaining a merchant
16:15marine. The agricultural
16:18interest, the farm price
16:19support proponents could
16:21never have gotten their
16:22way unless they had been
16:25able to establish a case
16:26that appeared plausible to
16:27a large fraction of the
16:28people that there was a
16:30national interest in
16:31preserving a family farm,
16:33or in some other aspect of
16:35agriculture. So the
16:37question in some ways- if
16:40we go below this
16:41superficial level to a
16:42deeper level, the question
16:43is: why is it that the
16:46economists have not been
16:48able to persuade the
16:49public of the virtues of a
16:51free trade policy? After
16:53all, the argument for free
16:56trade is basically a very,
16:59very simple argument. Let
17:01me give you the argument
17:04which Adam Smith made two
17:05hundred years ago. It's as
17:08persuasive now as it was
17:10then. And I quote, "In
17:13every country it always is
17:16and must be in the
17:18interest of the great body
17:20of the people to buy
17:22whatever they want of
17:24those who sell it
17:25cheapest. The proposition
17:28is so very manifest that
17:31it seems ridiculous to
17:33take any pains to prove
17:34it. Nor could it ever have
17:37been called in question
17:39had not the interested
17:41sophistry of merchants and
17:43manufacturers confounded
17:46the common sense of
17:47mankind. Their interest is
17:50in this respect, directly
17:53opposite to that of the
17:55great body of the people."
17:58That was the argument as
17:59he put it two hundred
18:00years ago. And there is
18:01very little that needs to
18:02be added to it. The basic
18:06reason I believe why
18:08economists have not been
18:10able to persuade the
18:11public is the one that I
18:13have already alluded to.
18:15It is suggested by the
18:16title of a famous essay,
18:19which was written many
18:20years ago by a great
18:21economist, Wesley
18:22Mitchell. The title of his
18:24essay was "The Backward
18:26Art of Spending Money."
18:31And he asked, "Why is it
18:33that we are all of us so
18:34sophisticated about the
18:35activities in which we
18:36earn our living and tend
18:39to be so unsophisticated
18:41and backwards in the ways
18:44in which we spend our
18:45money?" And his answer was
18:48the one I have already
18:49mentioned: that each of us
18:52tends to be involved
18:55generally in only one kind
18:56of productive activity. We
18:57spend our working life,
19:00forty hours a week or
19:01sixty hours a week,
19:03whatever it may be, as a
19:06worker producing a
19:07product, as a merchant
19:08distributing a good, as a
19:12professor--well, forty
19:14hours a week teaching is a
19:15little long, but we're
19:17supposed to be putting in
19:18some time on related
19:20ancillary activities...and
19:22most of us do. On the
19:27other hand, we each of us
19:28buy a thousand and one
19:30things, and it's perfectly
19:32understandable therefore
19:34that we devote far more
19:35attention and far more
19:36interest to the way we get
19:39our income than to the
19:42measures that affect how
19:43we spend it. But
19:45unfortunately, this
19:48backward art of spending
19:49money leads to erroneous
19:52views in many directions
19:53and not only in the area
19:55of the tariff and of
19:56protection. For example,
20:01public discourse tends to
20:02be carried out in terms of
20:06jobs as if a great
20:09objective was to create
20:11jobs. Now that's not our
20:13objective at all. There's
20:16no problem about creating
20:17jobs. You can create any
20:20number of jobs in having
20:21people dig holes and fill
20:23them up again. Do we want
20:25jobs like that? No. Jobs
20:28are a price; we have to
20:30work to live, whereas if
20:33you listen to the
20:34terminology you would
20:35think that we live to
20:36work. Now some of us do.
20:40There are workaholics, as
20:41there are alcoholics, and
20:42some of us do live to
20:43work. But in the main what
20:46we want are not jobs; we
20:48want productive jobs. We
20:50want jobs which will
20:51enable us to produce the
20:52goods and services we
20:54consume at a minimum
20:56expenditure of effort. In
20:58a way, the appropriate
21:01national objective is to
21:03have the fewest possible
21:04jobs, that is to say, the
21:07least amount of work for
21:09the greatest amount of
21:10product. In the
21:12international trade area,
21:15the language is almost
21:16always about how we must
21:18export and what's really
21:20good is an industry that
21:21produces exports. If we
21:23buy from abroad and
21:24import, that's bad. But
21:27surely that's just upside
21:29down as well. What we send
21:32abroad we can't eat, we
21:34can't wear, we can't use
21:35for our houses. The goods
21:37and services we send
21:38abroad are goods and
21:41services not available to
21:42us. On the other hand, the
21:44goods and services we
21:45import, they provide us
21:47with TV sets we can watch,
21:49with automobiles we can
21:50drive, with all sorts of
21:53nice things for us to use.
21:55The gain from foreign
21:56trade is what we import.
22:00What we export is the cost
22:03of getting those imports.
22:05And the proper objective
22:07for a nation, as Adam
22:08Smith put it, is to
22:10arrange things so we get
22:13as large a volume of
22:14imports as possible for as
22:17small a volume of exports
22:19as possible. This carries
22:22over to the terminology we
22:24use. I have already
22:25referred to the misleading
22:27terminology of protection.
22:29But when people talk about
22:31a favorable balance of
22:33trade, what is that term
22:36taken to mean? It's taken
22:38to mean that we export
22:39more than we import. But
22:41from the point of view of
22:42our well-being that's an
22:43unfavorable balance. That
22:46means we are sending out
22:47more goods and getting
22:48fewer in. Each of you in
22:50your private household
22:51would know better than
22:52that. You don't regard it
22:54as a favorable balance
22:56when you have to send out
22:57more goods to get less
22:59coming in. It's favorable
23:01when you can get more by
23:02sending out less. This
23:08tendency to concentrate on
23:11the productive side of our
23:13lives and to neglect the
23:16side of consumption is
23:17reinforced by the fact
23:20that even for the
23:22productive side of our
23:23lives the visible effects
23:26of tariffs are good; the
23:29invisible effects of
23:30tariffs are bad, even on
23:32the productive side. I
23:35have already referred to
23:36the steel case. It's
23:39perfectly clear that if
23:41you restrict the imports
23:42of steel, there are some
23:45workers in the steel
23:46industry who will have
23:48jobs they otherwise would
23:49not have. The beneficial
23:51effects for them of a
23:53tariff is perfectly clear.
23:56But if we import less
23:58steel, foreigners earn
24:01fewer dollars. They have
24:04fewer dollars to spend in
24:05this country. There are
24:07people around the country
24:08who will not have jobs,
24:09not have productive jobs
24:12because exports do not
24:14develop. I should not have
24:18to spell this out in great
24:19detail here in Kansas.
24:21This is a great
24:22agricultural state.
24:24Agricultural products are
24:26one of our major exports.
24:30The harmful effects of
24:31steel imports are to
24:32reduce jobs in
24:33agriculture. But that's
24:35invisible. The people who
24:37might have been producing
24:38goods to sell abroad don't
24:40know they might have had
24:41that job, so out of sight,
24:44out of mind. And as a
24:47result, on both the side
24:51of consumption and the
24:52side of producers you have
24:55the concentrated special
24:57interests versus the
24:59diffused general
25:00interests. But then you
25:02will say to me, what's
25:04wrong with all these fine
25:05arguments I hear? What's
25:08wrong with the arguments
25:10by George Meany at the
25:12AFL-CIO convention: that
25:16the high-wage American
25:18workers are being unfairly
25:21competed against by the
25:23low-wage foreign workers;
25:26that we have to protect
25:29our American workers and
25:31their standard of living
25:33from the competition of
25:34foreigners in Japan, or
25:35Korea, or somewhere else
25:37who are willing to work
25:39for much less than the
25:41American worker? What's
25:43wrong with that argument?
25:46Well in the first place,
25:51what does a high wage and
25:52a low wage mean? The
25:55Japanese worker is paid in
25:56yen; the American worker
25:59is paid in dollars. How do
26:01I know how many dollars
26:02equal how many yen? Let me
26:06go at this a little more
26:07indirectly. You can see
26:10the fallacy in this
26:11argument I think most
26:12clearly by taking a very,
26:15very extreme case. Let's
26:18take the most extreme case
26:20of all. Let's suppose that
26:22at the existing exchange
26:24rate, whatever it is,
26:27Japan, to take the example
26:30which is a favorite
26:31"whipping boy," could
26:34undersell us in
26:35everything, that the
26:37Japanese can produce
26:39whatever you name across
26:41the board- from wheat and
26:45soybeans, to television
26:47sets and automobiles more
26:49cheaply than we can. And
26:51let's see what would
26:52happen. We'd rush to buy
26:54them. The Japanese sellers
26:58would be paid for them in
26:59dollars. What would they
27:02do with the dollars?
27:04Nothing for them to buy in
27:05the United States, because
27:07by assumption everything
27:08is cheaper in Japan. What
27:12then would they do with
27:13the dollars? If they would
27:16be willing to burn them up
27:20or to bury them in the
27:21Pacific Ocean, ah, that
27:24would be wonderful. After
27:28all, there is no product
27:29we can produce more
27:30cheaply than green pieces
27:31of paper. (Laughter and
27:38applause) But of course,
27:42the Japanese are not going
27:44to do that. They are not
27:45going to work and produce
27:47goods and send them over
27:48here in order to get
27:50pieces of paper which they
27:52are going to burn up. They
27:54want to get goods and
27:55services and when they
27:57discover that there are no
27:59American goods and
28:00services that are cheaper
28:02than those in Japan, they
28:04will say, "Well, gee, I
28:05had better convert these
28:06dollars back into yen."
28:08But who is going to sell
28:09them yen? Why would
28:11anybody sell them yen?
28:13Because if I have yen I
28:14can buy the Japanese
28:15goods, by assumption, more
28:17cheaply, so nobody would
28:19be willing to sell yen.
28:22Let's suppose, to begin
28:23with, that the rate of
28:26exchange between the
28:27dollar and the yen was, as
28:29it was for a long time,
28:31360 yen to the dollar or
28:34one dollar would buy 360
28:36yen. Well then these
28:37people who had all these
28:38dollars that were useless
28:39to them would say, "If
28:40you'll sell me some yen,
28:42I'll give you a dollar for
28:44300 yen." "No," says the
28:46owner of the yen, "even at
28:48300 yen to the dollar
28:49American goods are too
28:50expensive. They're not
28:51worth it." "Okay, I'll
28:53give you a dollar for 200
28:54yen." And you can see what
28:56would happen. The price of
28:59the yen would be bid up
29:02until what? Well, the
29:05fewer yen you get for a
29:06dollar, the more expensive
29:10Japanese goods are to
29:11Americans. The more
29:14dollars you get for a yen,
29:17the cheaper American goods
29:18are to Japanese. And so
29:21the effect of this would have
29:22to be the yen would rise in
29:27price until it was no
29:30longer true that all U.S.
29:33goods were more expensive
29:35than all Japanese goods.
29:38Because as the yen became
29:39more expensive, Japanese
29:42goods would become more
29:43expensive to U.S. citizens
29:45in dollars and American
29:47goods would become cheaper
29:48to Japanese in yen. And
29:51that would continue until
29:53roughly on the average the
30:01dollar value of the goods
30:03that the Japanese would
30:04buy in the United States
30:05would be roughly equal to
30:07the dollar value of the
30:10goods that the U.S. would
30:11sell. And at that point,
30:16the price of the yen in
30:17terms of the dollar would
30:19be at an appropriate
30:21level. Now I've simplified
30:27the story because over and
30:29above these bilateral
30:33transactions between the
30:34United States and Japan,
30:36of course, these flows of
30:38trade will take roundabout
30:39directions. The Japanese
30:41will spend some of their
30:42dollars in Brazil, and the
30:45Brazilians in turn will
30:47spend their dollars in the
30:48U.S., and the dollars may
30:50flow in very roundabout
30:52circles. But the principle
30:54is the same. People want
30:57dollars not in order to
30:58have pieces of paper but
31:00in order to have U.S. or
31:04other goods. And again,
31:08the actual situation is
31:09complicated by the fact
31:13that in addition to the
31:14flows of goods and
31:15services, there are also
31:17capital flows, also
31:19investments abroad. The
31:22United States throughout
31:25the nineteenth century,
31:26throughout the period when
31:28we were building up and
31:29getting to be the
31:31economically most
31:32developed country in the
31:33world, the United States
31:35had a balance of payments
31:36trade deficit every single
31:38year almost. Why? Because
31:42the U.S. was a country in
31:43which foreigners wanted to
31:44invest capital. The
31:48British were producing
31:50goods and sending them
31:52over to us in return for
31:54pieces of paper, not those
31:56green pieces of paper but
31:58different pieces of paper,
31:59bonds, promising to pay
32:02back a sum of money at a
32:05later time plus interest
32:07on it. And the British
32:09regarded that as a good
32:10investment, and they
32:12regarded it therefore as
32:13worth their while to send
32:14us goods in order to get
32:15those pieces of paper.
32:17There was nothing wrong
32:18with that. On the
32:19contrary, we benefited by
32:22having foreign investment
32:23here that enabled us to
32:24develop more rapidly, and
32:27the British benefited by
32:28getting a higher yield on
32:29their savings than they
32:31could have gotten any
32:32other way. In the
32:33twentieth century that was
32:34reversed. We had what was
32:38called a favorable balance
32:40of trade because the U.S.
32:43citizens were finding that
32:45they could get a higher
32:46return for their money by
32:48investing abroad than they
32:50could at home, and as a
32:52result we were sending
32:53goods abroad in return for
32:54those pieces of paper.
32:56Again, in the post-World
32:59War II world under
33:02American foreign aid and
33:03Marshall Plan programs we
33:05were making gifts abroad.
33:07We were sending goods and
33:08services abroad as an
33:11expression...our belief
33:14that that was a
33:15contribution to a peaceful
33:16world. So the situation is
33:19more complicated, but the
33:21fundamental point is the
33:22same. So long as you have
33:27a free exchange rate,
33:29which is free to determine
33:31in the market the price of
33:34the dollar in terms of the
33:35yen, there is no balance
33:37of payments problem. There
33:40is no sense in which
33:42American industry is in
33:44danger of being undercut
33:46by foreign industries and
33:47destroyed. Let me put the
33:49matter to you a little
33:50differently. Suppose on
33:53the average an American
33:56worker is roughly twice as
33:58productive as the average
34:00Japanese worker. That's
34:02roughly what the situation
34:03is. On the average the
34:05American worker takes home
34:06from his work as pay for
34:09his activities a sum of
34:11money which will buy about
34:13twice as large a basket of
34:15goods as his Japanese
34:17counterpart can buy. If
34:19that's the case, we cannot
34:22afford--well that's a
34:23little exaggeration, we
34:25should not afford--we
34:27should not use any
34:29American worker in an
34:30activity in which he is
34:31less than twice as
34:32efficient. This is what
34:36was dubbed 150 years ago,
34:38in the jargon of
34:39economics, the principle
34:41of comparative advantage.
34:44We may be more efficient
34:46in everything than the
34:47Japanese. That doesn't
34:50mean it pays us to produce
34:51everything at home. We
34:53should concentrate our
34:54efforts on those
34:56activities in which we are
34:57the most efficient. Let me
35:00put it to you in a simple
35:01way. In a domestic
35:03illustration, I have a
35:05lawyer who is a very good
35:07typist. Does that mean he
35:09should dispense with his
35:10secretary and type his own
35:11letters? He may be a
35:13better typist than his
35:14secretary but if he's only
35:17one and one-half times as
35:18good a typist but five
35:20times as good a lawyer,
35:22both he and his secretary
35:24are better off if he
35:25concentrates on doing the
35:27law and she concentrates
35:29on typing the letters --
35:30or in this day and age I
35:31should say she
35:32concentrates on doing the
35:34law and he concentrates
35:35on typing the letters.
35:37(Applause) As it happens,
35:42I have a daughter who is
35:44an attorney, so that's
35:47personal as well as
35:48general. In the light of
35:51all this analysis, let us
35:53consider some current
35:56issues. Take the case of
35:58steel. What about the
36:00argument of steel that we
36:01need a steel industry for
36:03our national defense?
36:05Well, you know there was a
36:07famous statement by- I
36:08think it was Emerson, that
36:10patriotism is the last
36:11resort of the scoundrel.
36:16I don't want to call the
36:16steel people scoundrels,
36:17they're not. They're
36:18perfectly decent human
36:19beings. They're like you
36:20and me and like you and me
36:22they know very well that
36:24what's good for them is
36:25good for the country.
36:26(Laughter) And we're all
36:29sincere about that. It's the
36:32greatest human capacity we
36:34have is not to reason but
36:36to rationalize. (Laughter)
36:42But what of the validity
36:43of that argument? Well,
36:46there are two things to be
36:47said about it. Have
36:49complete free trade in
36:50steel, there is not the
36:52slightest chance in the
36:53world that the U.S. steel
36:54industry would disappear.
36:57The advantages of being
36:58close to sources of
37:00supply, to sources of
37:02fuel, to market- would
37:04certainly guarantee that
37:06we would have a very large
37:07steel industry. It might
37:08be that foreign imports
37:10would amount to 15, 20, 30
37:12percent of the total. But
37:14so far as our national
37:15defense needs are
37:16concerned, insofar as we
37:18cannot satisfy them by
37:19importing steel from
37:20abroad, we would always
37:21have a domestic steel
37:23industry. But second, ask
37:26a steel man whether before
37:28he builds a factory he
37:31gets estimates of the cost
37:32of building it. He'll look
37:35at you as if you're mad
37:36and say, "Of course, of
37:37course I get estimates."
37:39And I will say to him,
37:40well now tell me do you
37:41get estimates of building
37:42it just one way? "Oh no,
37:44we get estimates of
37:45building it in a variety
37:46of alternative ways and
37:47then pick the best." And
37:49my standard answer to the
37:50steel man who gives the
37:51national defense argument
37:53is to say that when the
37:54steel industry presents to
37:55this country cost
37:56estimates of alternative
37:59ways of providing for our
38:01national security I will
38:03believe that your argument
38:04is sincere and not simply
38:06an excuse for
38:07self-interest. Because
38:09there are many ways. If
38:11the problem is of steel,
38:12you can stockpile steel.
38:13It's the easiest thing in
38:14the world to stockpile.
38:17Some of it may rust but
38:19that's not a very serious
38:20problem. Aside from
38:23stockpiling it, you can
38:25maintain some steel plants
38:26in mothballs the way we
38:27maintain ships in
38:29mothballs, and so on.
38:30There are lots of alternatives.
38:32Have you ever seen
38:34a cost estimate by
38:35the steel industry of how
38:36much it would cost to
38:38protect our national
38:39security one way or the
38:40other? The same thing has
38:43been true over the years
38:46of the continuous argument
38:47by the oil interests that
38:49we ought to have, at one
38:50point, it was an oil
38:51import quota, or
38:52percentage depletion, or
38:53all sorts of other things
38:54on national security
38:55grounds. I believe it is
38:58an excuse and not a
38:59reason. What about this
39:00argument of unfair
39:02competition? What about
39:03the argument that the
39:04Japanese dump their goods
39:06below cost? Well as a
39:09consumer, all I can say is
39:13the more dumping the better.
39:14(Laughter and applause)
39:21If the Japanese
39:23government is so
39:24ill-advised as to tax its
39:27taxpayers in order to send
39:29us, at below cost, TV sets
39:34and other things, why
39:35should we as a nation
39:37refuse reverse foreign
39:38aid? (Laughter) What about
39:48the problem of the price
39:49of the U.S. dollar, the
39:51weakening of the dollar
39:52abroad? It is an
39:53artificial problem to
39:54which we should pay no
39:55attention. The market will
39:57set a price, let it. So far
40:00as we as a nation are
40:01concerned, the important
40:03thing is to get our
40:04internal house in order.
40:06If we followed policies at
40:08home which would eliminate
40:09inflation, and provide the
40:12basis for sound and
40:13healthy economic growth,
40:16the price of the dollar in
40:17foreign exchange markets
40:18would take care of itself.
40:21And if we follow policies
40:22as we have been of
40:24steadily rising inflation,
40:26or unsteadily rising
40:27inflation, I should say,
40:28ups and downs, well then,
40:31of course, the dollar is
40:33going to become worth less
40:34at home and it will be
40:35worth less abroad than it
40:37otherwise would be. It is
40:39not a problem. I come
40:41again to the problem of
40:42farm policy here,
40:44agricultural policy. That
40:48is an area which has been
40:49very intimately related to
40:50foreign trade. You will
40:52remember some years back
40:54when there was a great
40:55scandal about the extent
40:57to which the American
40:58taxpayers subsidized the
41:00Soviet Union by selling
41:05agricultural products at a
41:07price below the domestic
41:10price. But take the
41:11problem of farm policy. I
41:13have already expressed the
41:15view that there is no
41:17national interest
41:18whatsoever in farm price
41:20supports, or in government
41:22attempts to manipulate the
41:23price of farm products-
41:25any more than there is in
41:26government attempts to
41:27manipulate the price of
41:28steel, or of any other
41:30product. But it's much
41:33more fundamental than
41:34that; agriculture is one
41:37of our major export
41:38industries. It is an area
41:40in which we have been
41:41incredibly efficient, in
41:43which we can produce goods
41:44and out-compete almost
41:46everybody in the rest of
41:47the world. There is
41:49nothing that would be in
41:50the greater self-interest
41:51of the agricultural
41:52producer than for the U.S.
41:54to have complete free
41:55trade. That would generate
41:58a greater supply of
41:59dollars abroad to produce
42:00a better market for U.S.
42:02products. I submit to you
42:04that the movement toward
42:06having farm price supports
42:08is a very shortsighted
42:09movement. What will be its
42:12results? It can only have
42:17the effect of either
42:20destroying export markets
42:22or requiring the
42:24government once again to
42:26subsidize exports. If we
42:29have a high artificial
42:30price at home, which is
42:32above the world price,
42:34nobody in the world is
42:35going to buy American
42:36products unless somebody
42:39or other sells these to
42:40them at the world price.
42:42Hence, a system of
42:44artificially high domestic
42:46agricultural prices
42:47necessarily requires a
42:50system of government
42:51subsidies for the export
42:52of wheat abroad. I submit
42:56to you that that's not in
42:57the interest of the
42:58American consumer, it's
42:59not in the interest of the
43:00American taxpayer, and in
43:01the longer run it is not
43:02in the interest of the
43:03American farmer. What do
43:06we do from here? What's
43:10the answer? Suppose we
43:13could be as successful as
43:15the British were in the
43:161820s and '30s, and get a
43:19national crusade going to
43:21move toward free trade.
43:23What should we do? Many
43:25people say that what we
43:26should do is to try to
43:29engage in reciprocal
43:30tariff reductions. True
43:32enough, they will say, our
43:34tariffs hurt us. But look
43:35at what those foreign
43:36countries are doing. Japan
43:38has tariffs on imports.
43:40How can we compete without
43:41tariffs, while they
43:44restrict trade with
43:45tariffs? The answer to
43:48that is very straightforward.
43:50The Japanese by imposing
43:52tariffs and other
43:53restraints on their
43:54international trade hurt
43:56themselves; but they hurt
43:58us, too. No doubt...they
44:02diminish the efficiency of
44:04the international division
44:05of labor--they hurt us and
44:07themselves. But if we
44:10impose tariffs in return
44:15we only hurt them and
44:16ourselves still further.
44:19It's hard for me to see
44:20any justification in
44:22harming ourselves in order
44:24to harm somebody else.
44:26That's not a very sensible
44:27policy. Moreover it
44:30doesn't work. We have been
44:33trying for many years to
44:35engage in reciprocal
44:36tariff reductions. Every
44:37now and then one comes
44:38through. But on the whole,
44:41it has been a very
44:42unsuccessful policy. I
44:44believe that we should-
44:46the right policy for us,
44:47I'm not saying we'll do
44:48it, but the right policy
44:50for us would be to act
44:52like the great nation we
44:53are, to say we are not
44:56going to determine what we
44:58do on the basis of what
44:59Hong Kong and Korea and
45:01Japan do. We are a great
45:04nation and we are
45:05unilaterally and on our
45:06own going to move to
45:08remove every barrier to
45:09international trade. We're
45:11not going to do it
45:12overnight. People have
45:15made plans on the basis of
45:17existing tariffs. Let's
45:18take a five-year period,
45:20or a ten-year period,
45:22that's less important. But
45:24let's each year reduce by
45:26one-fifth every tariff
45:28barrier, eliminate every
45:31subsidy to exports by
45:33one-fifth, and over a
45:34five-year period get to a
45:35period at which we have no
45:37tariffs and no subsidies
45:39to exports. We should do
45:42that and we should also
45:43completely stay out of the
45:44market of foreign
45:45exchange. Your government
45:47on your behalf has been
45:48speculating in the foreign
45:50exchange markets for the
45:51last seven years and has
45:52cost you, up until last
45:55year and not counting the
45:56speculation of this year,
45:57$550 million of losses on
46:00those transactions. Money
46:02down the drain. Let's stop
46:04that. What is the chance
46:06that we shall follow these
46:07measures? Well...candidly,
46:10I think the chance is
46:11zero... (Laughter) ...and
46:15yet hope springs eternal.
46:20If we know the ultimate
46:21direction we want to go
46:22in, then that will improve
46:24the chances that the
46:25separate steps we take
46:26will move in that
46:27direction rather than away
46:28from it. Moreover I go
46:30back to my mentor, Adam
46:32Smith. In 1776, when he
46:35wrote his great book, The
46:36Wealth of Nations, he
46:37wrote and I quote, "To
46:39expect, indeed, that the
46:41freedom of trade should
46:42ever be restored in Great
46:44Britain, is as absurd as
46:47to expect that an Oceania
46:48or Utopia should ever be
46:50established in it. Not
46:52only the prejudices of the
46:53public, but what is even
46:55more unconquerable, the
46:57private interests of many
46:58individuals, irresistibly
47:00oppose it." He wrote that
47:02in 1776, seventy years
47:05later Britain had complete
47:06free trade. What he had
47:08said was impossible and
47:09absurd had been
47:10accomplished, one of the
47:12few places in which he was
47:14wrong. That move toward
47:17complete free trade
47:19ushered in the great
47:21period of Britain's
47:22prosperity and glory. And
47:25ever since Britain has
47:26departed from free trade
47:28she has been declining in
47:31prosperity and glory. I
47:34don't mean to say that
47:35that's the only source of
47:36her decline; it certainly
47:38is not. But it is not an
47:40unimportant source. In the
47:44same way, the U.S. has
47:47been a great nation and we
47:49have prospered despite the
47:50tariffs and despite the
47:52restrictions on trade. But
47:54we could set a great
47:55example to the world and
47:57benefit the world as a
47:58whole, contribute not only
48:00to prosperity but to peace
48:02around the world, by
48:04moving in the direction of
48:06free trade. Because once
48:08again, go back to the
48:09British experience, the
48:10century of free trade was
48:12also the century of the
48:13greatest international
48:14peace. Why? Because if you
48:18eliminate government from
48:20these matters you enable
48:21individuals to deal with
48:22one another. If you
48:24introduce protection,
48:27tariffs, restrictions on
48:28trade, they become matters
48:29for government to
48:30government wrangling and
48:32they are an enormous
48:33source of division. So in
48:35the name of both
48:36prosperity and world
48:37peace, there are few steps
48:39that we could take which
48:40would contribute more than
48:42a complete move toward
48:45free trade. Thank you.
49:14Yes sir? My question is about
49:15oil from the North Slope
49:17of Alaska. Why don't we
49:20sell it to Japan, and what
49:22would be the implications
49:23of doing that? The only
49:25reason we don't sell it to
49:26Japan is the same reason
49:28why we have had tariffs
49:29and protection and farm
49:30price supports, because of
49:32the nationalistic,
49:35protectionist interests.
49:36From an economic point of
49:37view it is absolutely
49:40absurd for oil from the
49:43North Slope to be shipped
49:44down to California to be
49:45sent over by expensive
49:47land transportation to the
49:48Middle West, and at the
49:50same time for Japan to be
49:52importing oil from the
49:53Middle East. If you
49:55allowed the markets to
49:56work there would be no
49:58problem; there is no
49:59question that oil from the
50:00North Slope would go to
50:03Japan. But this is another
50:04case in which what is
50:06sensible is being
50:08prevented by erroneous
50:10governmental policy.
50:11Governmental policy has
50:13nowhere in my opinion in
50:15recent years done more
50:17harm than in the area of
50:19energy, in which we have
50:21been saying, "It's
50:22unpatriotic to produce
50:23oil, and if you produce
50:26oil you're going to get
50:27hit with a heavy tax. It's
50:28patriotic to import oil,
50:31and we're going to
50:32subsidize the import of
50:33oil from abroad." It's
50:34absolutely absurd. The
50:36U.S. government has the
50:37unique capacity for
50:38getting things upside
50:39down. In the days of Mr.
50:42Eisenhower--he was our
50:44greatest postwar president
50:46in my opinion, even though
50:48he did come from Kansas...
50:49(Laughter) ...it is still
50:53a very fascinating fact
50:55that the oil interests in
50:56this country and the
50:57people in this country
50:58were concerned about the
50:59competition from cheap
51:01foreign oil, so they
51:02induced President
51:04Eisenhower to impose an
51:06import quota on the
51:08production of cheap
51:10foreign oil. So when
51:11foreign oil was cheap, we
51:13insisted that we use
51:14scarce domestic expensive
51:16oil and not use cheap
51:18foreign oil. Now in the
51:20past three years the
51:21situation has been
51:22reversed. Foreign oil is
51:24expensive and difficult,
51:26and U.S. oil is cheaper
51:27and more readily
51:28available. So what do we
51:29do? In our great wisdom we
51:34restrict the production of
51:35domestic oil and we
51:37subsidize the import of
51:38foreign oil. How silly can
51:41you be? Yes sir? We read
51:43about the dollar being
51:45weak on the dollar
51:47exchange. How did it
51:49become politically
51:50feasible to unpeg the
51:52dollar, and what are the
51:53advantages and
51:54disadvantages of an
51:55unpegged foreign currency
51:56versus a pegged foreign
51:57currency? It became
52:00politically feasible...let
52:02me put that in a different
52:04way. The one thing that
52:06makes anything politically
52:07feasible is a real crisis
52:11in which you have to do
52:12something. We are all of
52:14us stick in the muds; none
52:17of us likes to change our
52:18ways unless he has to. Why
52:20did Britain's going off
52:22the gold standard in 1931
52:23become politically
52:24feasible? Because there
52:25was nothing else you could
52:26do. It was in a desperate
52:29state and it no longer
52:30could hold it. Why did the
52:32unpegging of the dollar in
52:331971 become politically
52:35feasible? Because there
52:37was nothing else you could
52:38do about it, because there
52:40was a world crisis and you
52:42had to do something. And
52:44what you had to do...the
52:45only alternative would
52:47have been either
52:48far-reaching exchange
52:50control over every aspect
52:52of international
52:53transactions, which
52:54wouldn't have worked for
52:55very long either, because
52:57human beings are too
52:58ingenious in finding ways
52:59around such controls, and
53:05so you either had to do
53:06that, or you had to unpeg
53:07the dollar. That's what
53:08made it politically
53:09feasible. Why was it
53:10desirable to do so? For
53:13reasons I think that have
53:14already become clear in
53:15what I said, because the
53:17most efficient way to make
53:21sure that flows of trade
53:23between different
53:24countries are appropriate
53:26is to have a free market
53:27exchange rate for
53:28currencies. The case for
53:30unpegging the dollar is
53:32identical with the case
53:34for not having wage and
53:35price controls at home.
53:36There is no difference in
53:38principle between freezing
53:40the dollar's price and
53:43freezing the price of oil
53:44or any other product.
53:46Indeed it's fascinating,
53:48when you come to political
53:49feasibility, when
53:51President Nixon on August
53:5215, 1971 unpegged the
53:54dollar he established a
53:56free market in the dollar.
53:58He simultaneously went in
53:59the opposite direction by
54:01freezing domestic prices
54:02and wages. His left hand
54:05did not know what his
54:06right hand was doing. Yes
54:10sir? My question was on
54:14economists have been
54:16speculating on the issue
54:17of reestablishing price
54:17and wage controls, but I
54:19guess you just commented
54:20on that. Would you like to
54:22elaborate on that a little
54:23further? I am afraid that
54:25the chances that we shall
54:26have price and wage
54:27controls are unfortunately
54:31not negligible. It is a
54:34device that governments
54:37have repeatedly resorted
54:38to, to try to cover up the
54:41effects of their own
54:42policies. It is offered as
54:46a cure for inflation. It
54:48is not a cure for
54:49inflation; it has never
54:50been a cure for inflation.
54:52It is an alleged cure that
54:55is far worse than the
54:56disease because its effect
54:59is to repress the
55:02symptoms, to repress the
55:05consequences of the more
55:06basic force. I always say
55:08that if you want to
55:09analyze wage and price
55:10controls, the simplest
55:11analogy that brings it
55:12home is to think of a
55:15kettle on your stove in
55:17which there is water, and
55:18the water is boiling. It
55:19has got a cover on it and
55:22the boiling water is
55:23threatening to throw the
55:24cover off. Now the obvious
55:27sensible thing to do is to
55:28turn down the heat under
55:29the kettle. Another thing
55:31you can do is to take a
55:32brick and put it on top on
55:33the kettle and at the same
55:36time turn up the heat.
55:39(Laughter) That is
55:40precisely what President
55:42Nixon did in 1971 when he
55:45simultaneously put a brick
55:47on top of the kettle by
55:49freezing prices and wages,
55:51and at the same time
55:52launched on a more
55:53expansive monetary and
55:55fiscal policy, which
55:56turned up the heat under
55:57the kettle. And what
55:58happened? The lid of the
55:59kettle blew off. You held
56:01it down for a little while
56:03and then you had a 12
56:04percent...13 percent
56:05inflation. That has been
56:07the experience every time
56:09not simply over the past
56:1020-30 years but for two
56:11thousand years. Emperor
56:13Diocletian tried the same
56:14thing in Rome two thousand
56:16years ago with identically
56:17the same results. So I
56:19have nothing but a
56:21negative opinion about
56:23wage and price controls.
56:25Yes sir? Well, I have seen
56:29that the free trade ideal
56:31has remained mostly an
56:33ideal we are striving for.
56:36We have seen that in
56:38continental Europe they
56:40are leaving it aside every
56:42time some of their
56:43economic advantages are
56:45involved. I am very
56:47concerned with what
56:49happens to the farmer here
56:51in Kansas, I have been a
56:52longtime resident, and I
56:54have been thinking the
56:55following: last year we
56:58exported a lot of grain,
57:02it went to Europe, and I
57:03think two-thirds went to
57:05Russia, to the Soviets.
57:07Now what happened in those
57:11countries...the purchasing
57:13countries? They had to pay
57:16in their currency about 15
57:18percent less than what
57:20they paid a year before.
57:23This was due to the dollar
57:25devaluation. By that
57:30situation I figure that
57:33the Russians have received
57:34a bonus of maybe a billion
57:37and a half dollars which
57:40inflation has paid for, in
57:42other words the American
57:44taxpayer. So what would
57:47you think, Dr. Friedman,
57:50if somebody came up with
57:52an innovation, with an
57:53idea, to establish an
57:57offset, an equalization
57:59for this bonus of the
58:02dollar devaluation to
58:04people that buy in
58:05Rotterdam, to people that
58:07buy in Russia? I think it
58:10would be a very bad idea.
58:12I would say, Dr. Friedman,
58:14it would require no
58:16bureaucracy whatsoever. It
58:18would be handled by the
58:22bank that receives the
58:23payment drafts and then
58:26this money could genuinely
58:29be given to the farmer out
58:31of whose hide it was taken
58:33in the first place. It was
58:34not taken out of the hide
58:35of the farmer, I beg your
58:37pardon. A market is a
58:38market. You know I did not
58:40hear any complaints from
58:41farmers at the time that
58:43farm prices were
58:44abnormally high, did you?
58:48What is this? Are we going
58:49to have a game of heads I
58:51win, tails you lose?
58:53Agriculture is an industry
58:55like every other industry.
58:57The farmer is an
58:58entrepreneur and a
58:59businessman. He is in a
59:00business which has a
59:01characteristic feature of
59:02having a fluctuating
59:03income. Obviously, in
59:06going into that business,
59:08he takes into account the
59:10fact that some years his
59:11income will be high and
59:12some years his income will
59:14be low. I do not believe
59:16it is true, as you say
59:18that anything has been
59:19taken out of the hide of
59:21the farmer. On the
59:22contrary, if we take the
59:24experience of the United
59:25States over the past 20
59:27years we have had enormous
59:29governmental subsidies to
59:32the farmer. Now the farmer
59:33hasn't benefited from
59:34that. Let me go slowly.
59:37You see the problem with
59:38all of these things like
59:39you are describing is that
59:40they never have the
59:41results that the
59:42well-intentioned people
59:43who propose them intend
59:46them to have. What is the
59:47effect of spending a lot
59:49of money trying to help
59:50the farmer? The effect of
59:53it is, first of all, to
59:54encourage more people to
59:55be farmers than otherwise
59:56would; second of all, to
59:58make costs of producing
1:00:00agricultural products
1:00:01higher than they otherwise
1:00:02would be because the
1:00:03counterpart of this is
1:00:05that you take land out of
1:00:08cultivation. It has a lot
1:00:10of side effects which eat
1:00:11up a large fraction of the
1:00:13gain, but that doesn't
1:00:15reduce the cost to the
1:00:16taxpayer. The taxpayer has
1:00:18paid twice. He has paid in
1:00:20the form of higher prices
1:00:21for his food than he
1:00:22needed to pay and he has
1:00:24paid, second, in the form
1:00:26of the taxes. Now so far
1:00:28as the Russian case is
1:00:29concerned, I believe you
1:00:31have to be very careful
1:00:33here. I think we should
1:00:36allow the Russians freely
1:00:37to buy all the
1:00:38agricultural products they
1:00:39want- provided they pay
1:00:41for it with their own
1:00:42money, out of their own
1:00:43pockets and we don't
1:00:45subsidize them. The real
1:00:47problem with the Russian
1:00:49purchases is that in large
1:00:51part it has been
1:00:52subsidized by loans from
1:00:54Western countries. Insofar
1:00:57as those loans are made by
1:00:58private people, that's
1:00:59their business; they are
1:01:00risking their money.
1:01:02Insofar, however, as they
1:01:03have been
1:01:04government-guaranteed, as
1:01:05they often have, I am
1:01:06opposed to that. I do not
1:01:07believe that we ought to
1:01:08guarantee loans to the
1:01:10Russians. But then I think
1:01:12we ought to say, "Okay, if
1:01:13the Russians want to buy
1:01:14wheat, fine." So far as
1:01:16the common market is
1:01:17concerned, they have
1:01:18engaged in agricultural
1:01:19protectionism on a large
1:01:21scale as you say. They are
1:01:24making a mistake in doing
1:01:25that. They are already
1:01:29suffering by paying a
1:01:31higher price for their
1:01:32agricultural products than
1:01:33they need to. We ought to
1:01:34encourage them to reduce
1:01:36their barriers of course
1:01:37on trade. But I
1:01:39think...how many times
1:01:40have you and I heard the
1:01:43story that here is a
1:01:45particular government
1:01:46reform which will not
1:01:47require a bureaucracy? I'm
1:01:49sorry, sir, there is no
1:01:51such animal. I stand
1:01:54corrected, with pleasure.
1:01:55Thank you. Yes sir? Dr.
1:02:06Friedman, there are people
1:02:08in agriculture who feel
1:02:10that farm programs work to
1:02:11the disadvantage of the
1:02:13American farmer, but
1:02:14perhaps for a different
1:02:15reason than you cited in
1:02:16the formal portion of your
1:02:18lecture. What would you
1:02:19say to the argument that
1:02:22someone in agriculture may
1:02:23make that farm price
1:02:25support programs for
1:02:26agriculture are a
1:02:27disadvantage to the
1:02:28farmer, because an
1:02:30urban-oriented congress
1:02:31has learned how to use
1:02:34farm subsidies to increase
1:02:37domestic farm production
1:02:39far and above what the
1:02:40free market itself would
1:02:41have dictated? Well there
1:02:46are...you are raising, as
1:02:49you realize, an extremely
1:02:50complex question which
1:02:52does not admit of a one-
1:02:53or two-sentence answer. I
1:02:55realize, and I did not
1:02:56mean and I do not mean to
1:02:58suggest that all farmers
1:03:00or all farm organizations
1:03:01are in the same class;
1:03:02they are not. The Farm
1:03:03Bureau Federation has over
1:03:05most of its existence been
1:03:07a staunch supporter of
1:03:09free markets in
1:03:10agriculture. It has in
1:03:12general been opposed to
1:03:13the kind of restrictive
1:03:14measures and price
1:03:15supports and so on that
1:03:16have been followed. And I
1:03:19believe that the argument
1:03:20you make is a valid one.
1:03:21That is why I said earlier
1:03:23that although the taxpayer
1:03:25has paid heavy sums, it is
1:03:27not clear that the farmer
1:03:28has benefited. But also it
1:03:30is not clear that the
1:03:31consumer has benefited,
1:03:33because what we have done
1:03:34in large part over past
1:03:35periods is to dispose of
1:03:38those artificially
1:03:40produced surpluses not by
1:03:43selling them at home at
1:03:44low prices, but by giving
1:03:46them away abroad at low
1:03:47prices. So that it is not
1:03:50in my opinion the
1:03:51urban-oriented legislator
1:03:53who has been benefiting
1:03:55his constituents in this
1:03:56way. It's a very
1:03:58complicated question.
1:03:59There is no doubt that
1:04:01resistance to high farm
1:04:02price supports has been
1:04:04increased by the presence
1:04:06of a larger and larger
1:04:07urban population and a
1:04:08larger representation. I
1:04:09think what you are
1:04:12describing is a much more
1:04:13general proposition.
1:04:16Almost every government
1:04:18policy may have short-term
1:04:22benefits to small groups,
1:04:25but in the long run it
1:04:27tends to help nobody but
1:04:28simply wastes the money.
1:04:30And the reason for that in
1:04:31general is the kind of
1:04:32thing you are describing
1:04:33here, because if
1:04:35government is going to
1:04:36give away a billion
1:04:37dollars, it pays people to
1:04:39spend a billion dollars to
1:04:40get it. Now the people who
1:04:43get it aren't always the
1:04:44ones who spend the money.
1:04:47Some people are
1:04:48disappointed. They engage
1:04:50in a lottery, they spend
1:04:51money in the hope of
1:04:52getting a government
1:04:53measure which will benefit
1:04:54them, and they lose. Other
1:04:55people win the prizes. But
1:04:57on the average, the group
1:04:58as a whole is likely to
1:05:00lose. Why does it lose?
1:05:04Because in addition to the
1:05:05money that is taken from
1:05:06the taxpayers, a
1:05:07commission is taken off
1:05:08the top by the bureaucrats
1:05:14who collect it and the
1:05:16bureaucrats who distribute
1:05:17it. So you take a dollar
1:05:19out of the right hand
1:05:20pocket of people in order
1:05:21to put 75 cents back in
1:05:23the left hand pocket. And
1:05:25that's the kind of thing
1:05:26you have in the case of
1:05:27agricultural subsidies in
1:05:29my opinion. Yes? In a
1:05:32recent interview in U.S.
1:05:33News & World Report,
1:05:34Secretary of Treasury
1:05:35Blumenthal blamed our
1:05:37current rising inflation
1:05:39in large part on our
1:05:40foreign trade and unions.
1:05:42He did, however, say that
1:05:43the government was little
1:05:44to blame. Would you like
1:05:45to comment on that? Yes...
1:05:50(Laughter) Unfortunately
1:05:54it is one of the defects
1:05:56of our political system
1:05:58that we always put a
1:06:00secretary of the treasury
1:06:01and other high government
1:06:02officials into a position
1:06:05in which when they make
1:06:06public statements they are
1:06:07almost driven to--well,
1:06:09what's the word I want to
1:06:10use? I want to use a
1:06:11polite word--equivocate.
1:06:14Secretary Blumenthal knows
1:06:16as well as you and I do
1:06:17that inflation does not
1:06:19come from trade unions.
1:06:21That doesn't mean that
1:06:22trade unions aren't
1:06:23grasping, of course they
1:06:24are, but they don't
1:06:28produce inflation for one
1:06:29simple reason. They do not
1:06:31own a printing press on
1:06:33which you can turn out
1:06:34green pieces of paper. The
1:06:37only such printing press
1:06:38is in Washington. I say
1:06:40printing press, but of
1:06:41course in the modern age
1:06:42we do it in a more
1:06:43sophisticated way. We use
1:06:45bookkeepers and
1:06:46accountants, and
1:06:47computers, but it comes
1:06:48down to the same thing.
1:06:50Inflation is made in
1:06:51Washington because only
1:06:52Washington can create
1:06:53money, and any other
1:06:55attribution of inflation
1:06:57to other groups is wrong.
1:06:58Consumers don't produce
1:07:03it, producers don't
1:07:06produce it, the trade
1:07:09unions don't produce it,
1:07:11foreign sheiks don't
1:07:12produce it, oil imports
1:07:14don't produce it. What
1:07:16produces it- is too much
1:07:17government spending and
1:07:19too much government
1:07:20creation of money, and
1:07:21nothing else. (Laughter)
1:07:29Before you clap, let me
1:07:31point out that the reason
1:07:33why we have too much
1:07:34spending and too much
1:07:35printing of money is
1:07:36because you people want
1:07:37it. You and I, we're
1:07:39citizens, we run this
1:07:40country. If Congress has
1:07:42been voting higher and
1:07:43higher spending, why?
1:07:46Because it has been
1:07:47politically profitable for
1:07:48them to do it. If they
1:07:49have been voting higher
1:07:50spending and not voting
1:07:52the higher taxes to pay
1:07:53for it, why? Because it
1:07:55has been politically
1:07:56profitable to do it. We
1:07:57would all like to get
1:07:58something for nothing, and
1:08:00so the political process
1:08:02has been leading to
1:08:03Congress increasing
1:08:05spending, not increasing
1:08:07taxes, and financing the
1:08:08difference by the hidden
1:08:09tax of inflation. I think
1:08:11we are unwise, but let's
1:08:15not blame the others. The
1:08:17problem...you know in that
1:08:19famous statement of the
1:08:20cartoonist, "We have met
1:08:22the enemy and they is us."
1:08:23(Laughter and applause)
1:08:27Yes sir? If we lower our
1:08:31government's tariffs, what
1:08:33will happen to our unions?
1:08:36Which unions? Those
1:08:39unions which are in export
1:08:40industries will benefit;
1:08:42those unions which are in
1:08:44industries which at the
1:08:46moment could be
1:08:48substituted for by imports
1:08:50would lose. There is no
1:08:52single statement that can
1:08:54be made about unions any
1:08:56more than there is about
1:08:57any other organization.
1:08:58What is true is that free
1:09:01trade... Let's broaden
1:09:03your question because we
1:09:05ought not to look only at
1:09:06unions. We have unions
1:09:09that are labor monopolies.
1:09:11We also have producer
1:09:12monopolies. We also have
1:09:14restrictions on free
1:09:16competition on the side of
1:09:17producers. There is no
1:09:19more effective way in my
1:09:22opinion of promoting
1:09:23competition than free
1:09:25trade. If you want to cut
1:09:27down monopoly power in
1:09:28this country, the way to
1:09:30do it is not to double the
1:09:32budget of the Department
1:09:33of Justice's Antitrust
1:09:34Division and have more
1:09:36twenty-year suits against
1:09:37IBM. The way to do
1:09:41it...the most effective
1:09:42single way to do it would
1:09:44be to enact free trade, so
1:09:47that competition worldwide
1:09:49would come to bear and
1:09:51that would undermine
1:09:53monopoly powers all over
1:09:56of unions on the one hand,
1:09:58and of industrial
1:09:59monopolies on the other.
1:10:01Yes ma'am. From what I've
1:10:03read and have learned I
1:10:04seem to feel more sympathy
1:10:06for your policies and your
1:10:09opinions than the others.
1:10:10I wondered what books or
1:10:12writers, besides Adam
1:10:13Smith, whom you mentioned,
1:10:15influenced you more
1:10:16towards the positions you
1:10:17hold? What facts, you
1:10:19know...what learnings and
1:10:20things? Well, that's a
1:10:22very interesting and a
1:10:23very difficult question to
1:10:25answer, because I really
1:10:28can't answer you in terms
1:10:30of a single book, or a
1:10:32single one or two books. I
1:10:35was trained as an
1:10:36economist at the
1:10:37University of Chicago in
1:10:38an excellent Department of
1:10:39Economics--I think the
1:10:40greatest in the country,
1:10:42even before I was there.
1:10:43(Laughter) It's an
1:10:51interesting thing that
1:10:52professional economists in
1:10:53general, in their
1:10:54professional work, are led
1:10:56by a study of the way in
1:10:58which a market operates to
1:11:00be far more sympathetic to
1:11:01the use of the market than
1:11:03are most other groups. The
1:11:05great books in this
1:11:06tradition after Adam Smith
1:11:08are, of course: the works
1:11:11of David Ricardo, John
1:11:13Stuart Mill, Alfred
1:11:14Marshall, and, coming down
1:11:15to the present day, Frank
1:11:17Knight, Friedrich Hayek,
1:11:19Ludwig von Mises--and you
1:11:21have a great series of
1:11:22books; in Britain, Lionel
1:11:24Robbins...John Jewkes.
1:11:25It's very hard to name
1:11:26just one or two. I think
1:11:29one of the most important
1:11:30of all the books that
1:11:32influenced a lot of
1:11:33people, myself included,
1:11:35was Friedrich Hayek's
1:11:36book, The Road to Serfdom,
1:11:38published in 1944; and it
1:11:41remains a powerful and
1:11:42compelling book on what I
1:11:44think is in not so much
1:11:46the area of free trade as
1:11:47in the broader problem,
1:11:49the major problem of our
1:11:50time. Yes? In your formal
1:11:53lecture you mentioned the
1:11:55dollars and the yen and
1:11:56how they should try to
1:11:58equal. How long will this
1:11:59take? And what about the
1:12:01steel worker who is now
1:12:03being laid off? What will
1:12:04happen to this person?
1:12:05Well, in the first place,
1:12:10it takes a very short
1:12:11period of time. The
1:12:13foreign exchange market is
1:12:14a very free and volatile
1:12:15market. With respect to
1:12:17the steel worker that is
1:12:18laid off, that is a
1:12:21problem that should not be
1:12:22related to international
1:12:23trade. We want to have an
1:12:26economy and a society in
1:12:28which you have
1:12:29flexibility, in which
1:12:30people shift from
1:12:31producing one product to
1:12:32producing another as
1:12:33demand changes--if the
1:12:35public at large suddenly
1:12:36decides that they would
1:12:37like to buy one kind of
1:12:39clothing instead of
1:12:40another kind of clothing.
1:12:41If people decide they
1:12:42don't want to have their
1:12:43hair cut, what should be
1:12:44done about the unemployed
1:12:45barbers? And so on down
1:12:48the line. And the answer I
1:12:50believe there is, in the
1:12:51first place, we now have
1:12:55mechanisms, in my opinion
1:12:56an unduly complex and
1:12:59extensive set of
1:13:00mechanisms, to take care
1:13:02of people who are
1:13:03temporarily displaced on
1:13:05this ground. In my opinion
1:13:07our present mechanisms are
1:13:08unwise, and what we should
1:13:10have from this point of
1:13:11view is a general
1:13:12provision all over to make
1:13:15sure that nobody is in
1:13:16distress. One steel worker
1:13:18may be a real problem;
1:13:20another may have immediate
1:13:22other sources of income
1:13:23which displace it. We
1:13:24ought not to have any
1:13:25program for steel workers;
1:13:27we ought not to have any
1:13:28program for barbers. If we
1:13:31are going to have a
1:13:32program, we ought to have
1:13:33a program to help anybody
1:13:34who is in distress. I have
1:13:36discussed this at some
1:13:37length in connection with
1:13:38proposals for a negative
1:13:40income tax elsewhere, and
1:13:41in my opinion, that would
1:13:43be an effective and ample
1:13:44solution to the problem.
1:13:46Yes sir? Dr. Friedman, we
1:13:48recently had a guest
1:13:49convocation speaker... I
1:13:50just realized this will be
1:13:53our last question because
1:13:54we'll run out of time.
1:13:56...we recently had a guest
1:13:58convocation speaker by the
1:13:59name of Jane Fonda who
1:14:01spoke to an over-capacity
1:14:03and, I might say,
1:14:05enthusiastic crowd
1:14:06regarding the fear of big
1:14:10business influencing
1:14:12government decisions and
1:14:13running the world
1:14:14virtually, and I would say
1:14:16that she influenced a lot
1:14:18of people here. Although
1:14:20her speech might have been
1:14:21alarmist, there seemed to
1:14:22be quite a bit of
1:14:23credibility to it. Could
1:14:26you have some comments as
1:14:27far as what you feel?
1:14:28Sure. There is a great
1:14:29deal of merit in the
1:14:30position she was taking.
1:14:32One of the reasons...you
1:14:35must distinguish sharply
1:14:37between being pro-free
1:14:38enterprise, which I am,
1:14:40and being pro-business,
1:14:43which I am not. Those are
1:14:45two different things. The
1:14:47reason I am pro-free
1:14:48enterprise, the reason I
1:14:50am for a free market on a
1:14:52political level, is
1:14:54primarily because I
1:14:56believe the problem in
1:14:57this world is to avoid a
1:15:00concentration of power--to
1:15:02have a dispersal of power;
1:15:04that unless we have a
1:15:05dispersal of power, we
1:15:06will not be able to
1:15:07maintain a free society.
1:15:09Now Jane Fonda is right
1:15:12that if we have a system
1:15:13under which government is
1:15:15in a position to give- and
1:15:17does give large favors it
1:15:19is human nature to try to
1:15:21get those favors, whether
1:15:23those people are large
1:15:24enterprises such as the
1:15:26oil industry or the
1:15:27automobile industry or the
1:15:28steel industry, or whether
1:15:30they are small people like
1:15:32the farmers who were
1:15:33driving tractors around
1:15:35Washington, or whether
1:15:37they are representatives
1:15:39of other special groups.
1:15:42And in my opinion, the
1:15:43only way you can prevent
1:15:44that and make sure that
1:15:47businesses operate in the
1:15:49public interest is to
1:15:51force them to engage in
1:15:55competition one with the
1:15:56other. So that she is
1:15:59right insofar as she says
1:16:01there is a great danger of
1:16:03having large, small, and
1:16:05in-between corporations
1:16:07exert undue influence on
1:16:08government. Where people
1:16:10like Jane Fonda go wrong
1:16:14is in not recognizing what
1:16:16the answer is. They think
1:16:19that the cure to big
1:16:21government is to have
1:16:22bigger government--except
1:16:24with them running it
1:16:25instead of the people who
1:16:26now run it. (Laughter and
1:16:33applause) But in my
1:16:36opinion the only effective
1:16:37cure is to reduce the
1:16:39scope of government, to
1:16:41get government out of the
1:16:42business. If government is
1:16:44prohibited from engaging
1:16:47in activities, which can
1:16:49benefit special groups,
1:16:50then those special groups
1:16:51will not have any
1:16:52incentive to go to
1:16:53Washington. For example,
1:16:55to dream an ideal, suppose
1:16:57we could have a
1:16:58constitutional amendment
1:16:59prohibiting congress from
1:17:02making any laws imposing
1:17:04tariffs. Well, there would
1:17:06be a lot of lobbyists in
1:17:08Washington who would lose
1:17:09their jobs overnight. That
1:17:13would reduce the incentive
1:17:16for corporations to try to
1:17:18affect government, and
1:17:19similarly down the line.
1:17:21So we must separate
1:17:23diagnosis and problem from
1:17:26cure, and I believe that
1:17:28that's the area in which
1:17:30she is likely to mislead
1:17:32the public. I want to say
1:17:33one more thing. If you've
1:17:35got a choice between big
1:17:36government and big
1:17:37business, there is one
1:17:40important difference. No
1:17:44big business, whether it
1:17:45be General Motors or U.S.
1:17:47Steel or any other, can
1:17:49get a dollar from you
1:17:51unless you voluntarily pay
1:17:53it off and think you are
1:17:54getting your dollar's
1:17:55worth in return. General
1:17:57Motors cannot send a
1:17:58policeman to take money
1:17:59out of your pocket; it can
1:18:02only get money from you
1:18:03insofar as it can produce
1:18:05a product that you think
1:18:06worth buying. It may
1:18:09indirectly get money out
1:18:10of your pocket by
1:18:11operating on government to
1:18:12impose tariffs on foreign
1:18:13cars; that's why we ought
1:18:15not to do that. But in the
1:18:16market no business however
1:18:19big can get money from you
1:18:20except by providing you
1:18:22with something you value
1:18:23in return. That's hardly
1:18:25the case with government.
1:18:27Big government can send a
1:18:28policeman and take money
1:18:30out of your pocket whether
1:18:32you believe you're getting
1:18:33your money's worth or not.
1:18:34That's an enormous
1:18:36difference. It's the
1:18:38difference between freedom
1:18:39and coercion, and it's a
1:18:41difference that we can
1:18:42only maintain if we keep
1:18:45down the size and scope
1:18:47and role of government.
1:18:49Thank you.

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