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Milton Friedman Speaks: What is Wrong with the Welfare State? (B1229) - Full Video — Transcript

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0:06Music
0:10Reality – captured in user friendly symbols and process for understanding.
0:19Music
0:33The Idea Channel
0:35Would you please join me in welcoming Dr. Milton Friedman.
0:38(Applause)
1:01Thank you ladies and gentlemen, I’m glad to be here tonight. I must say I am strongly
1:05tempted after the title, “What Is Wrong with the Welfare State?” with a question
1:10mark, to say “nothing” and turn around and walk off the stage.
1:14(Laughter)
1:15That would make it easier on all of us, but I learned long ago that it was good policy
1:21to be honest.
1:30What I want to talk about tonight are, first of all, the origins of the welfare state;
1:39and second of all, why it is that the noble objectives which have animated the growth
1:46of the welfare state have produced results that disappoint almost everybody- regardless
1:53of whether they were initially in favor or initially opposed to the various measures;
1:59and finally, ask ourselves what if anything is the alternative to it and what can we do
2:05about it?
2:06As to the origins of the welfare state, they go a long way back. There was a book which
2:14was published quite a long time ago by a man by the name of Cecil Driver called Tory Radicals,
2:22and it referred to a group of people in Great Britain in the early part of the nineteenth
2:27century, 150 and more years ago. William Oastler, Lord Shaftesbury: these were a group of people
2:39from the upper classes of the British aristocracy who were very much concerned about the welfare
2:47of the ordinary people of the lower classes and who became the driving force behind a
2:55whole series of legislation--the so-called Factory Acts, the first Twelve-hour Day and
3:04then Ten-hour Day Act, and so on--which they promoted from a point of view of noblesse
3:14oblige. Their whole attitude was, “After all, some people know better than other people
3:22what’s good for people, we are among the elite, we know what’s good for the ordinary
3:27man, we don’t want to force it down his throat, but we believe that in a properly
3:33structured society he would recognize that we do know better and would assign to us the
3:40task of structuring things for his benefit.” That was the notion which the Tory Radicals
3:48had at that time, and it is in many ways the basic motivating force on a moral and ethical
3:57level behind the movement for the welfare state.
4:01The closest modern descendant of that movement is John Kenneth Galbraith who is also a Tory
4:09Radical today. He and those who share his views, again believe themselves to be an elite
4:20who know what is good for the ordinary man, who again do not wish to impose their views
4:26on the ordinary man, but who believe that the ordinary man, too ought to recognize the
4:31superiority of the elite, and assign to them the task of choosing what goods they consume,
4:39what products are available, and so on. The fundamental driving force is paternnalism.
4:46It’s an attempt to do good for other people.
4:53Now interestingly enough, the other source of the modern welfare state comes from a very
5:01different yet not wholly unrelated tradition. It comes from Bismarck’s Germany. Bismarck’s
5:09Germany, as it was established in the late nineteenth century, was a centralized bureaucratic
5:18state, and it was the first modern state which introduced on a fairly large scale the kind
5:25of welfare measures that have become common in most societies in the modern day.
5:33The movement toward a welfare state in its modern form dates in Great Britain back to
5:40the early decades of the twentieth century. It was already before World War I that in
5:49small measures Britain started down the path of introducing governmental provision for
5:57one contingency after another. What ultimately came to be known as Cradle to the Grave had
6:05its start in the early 1900s in the main, with measures for governmental provision for
6:12the old and for the mentally deficient. It was followed by Sweden in the 1920s and 1930s.
6:20Many of you will remember a very famous book called The Middle Way which told about how
6:26Sweden was establishing a new, different means. The welfare state came to the United States
6:33relatively late. It came to the United States really in any significant form only in the
6:411930s after the Great Depression and the beginning of the New Deal.
6:48Now the interesting thing is that in every case the welfare states are in trouble. The
6:56United Kingdom has obviously been having great difficulties--social, economic, political.
7:05For a while everybody was saying, “Ah, but there’s Sweden,” but now Sweden is in
7:10trouble; it is having great difficulties. Its government has changed form, which is
7:16a minor matter because the substance hasn’t changed; but it is having a good deal of discontent
7:24and a great deal of economic difficulty. Denmark is in trouble. The United States- as we have
7:34moved farther and farther down the road, we have had more and more dissatisfaction with
7:39what has occurred. In the case of the United Kingdom it is tempting to attribute the problems
7:46of the United Kingdom, and many British have done so, to the consequences of World War I
7:52and World War II. To say that World War I decimated a whole of a young generation
8:00that would have provided the leadership for Britain, and World War II destroyed its economic
8:06capacity. And yet, in a great book that was first published in 1899 and of which a revised
8:16edition was published in 1913, A. V. Dicey, a famous constitutional lawyer, outlined
8:26what was going to happen in Britain in coming decades. In the 1913 edition of his The Relation
8:34between Law and Public Opinion in the Nineteenth Century, Dicey already saw what was going
8:44to happen from the developments that were going on. He dated the turn in Britain back
8:52in the 1880s and 1890s, a turn from individualism to collectivism, and he discussed what were
8:58going to be the far-reaching consequences of the changed role that was being assigned
9:04to the state vis-à-vis the individual. And if you read that preface, that 1913 preface,
9:11there is nothing that has happened from that day to this that was not pretty clearly foreshadowed,
9:18so that it wasn’t the war. In any event, Sweden is decisive evidence because, if it
9:25was the war that caused the problems in the U.K., Sweden stayed out of both wars and indeed
9:33profited enormously on an economic level from them, and you certainly cannot blame the problems
9:39that have been arising in Sweden on the war.
9:44The thing about the welfare state is that when you start on this route everything goes
9:50fine. To begin with, you are imposing taxes on 90 percent of the people--small taxes--and
9:58are able to give considerable benefits to 10 percent of the people. But the problem
10:03is that as time goes on, more and more people come in and either express a desire, or are
10:14given a chance, at a part of the proceeds. So you gradually get to the position where
10:2050 percent of the people are providing benefits to another 50 percent of the people. And then
10:26you ultimately get to the position where 100 percent of the people are paying taxes, in
10:32order to provide benefits to 100 percent of the people. You are then in that situation
10:38which Frédéric Bastiat described so well 150 years ago, when he said that government
10:44is that fiction whereby everybody believes he can live at the expense of everybody else.
10:52The question remains, however, what goes wrong? Why is it that such noble objectives lead
11:02to such disappointing results? After all, the objectives of promoting the welfare
11:11of the ordinary man, of eliminating poverty and disease, providing security for old age
11:18and against mishaps of fortune--those are noble objectives. I do not believe that there
11:25is anybody who can regard them as an undesirable. Why is it that the attempt to effectuate such
11:33noble objectives by using the machinery of government- tends to produce results which
11:42are so disappointing?
11:47In my opinion the fundamental answer is very simple: using government to achieve these
11:53objectives means trying to do good with someone else’s money, and when you try to do good
12:01with someone else’s money there are two basic flaws in the process. The first of those
12:09is that nobody spends somebody else’s money as carefully as he spends his own, and
12:15therefore you are going to have waste and ultimately fiscal catastrophe. But the second
12:21is that you cannot do good with someone else’s money unless you first take it away from him.
12:30And therefore- force, coercion, sending a policeman around to pick somebody else’s
12:37pocket, is at the very heart of the welfare state, and the situation becomes one in which
12:44bad means corrupt the good intentions. When you try to use bad means to achieve good objectives,
12:56the end result is likely to be that the badness of means will triumph over the goodness of
13:02the objectives.
13:04New York City provides a perfect illustration of this point. There is no city in the country
13:14that is more welfare state oriented. There is no city in the country, and few in the
13:21world, that have so long a list of programs allegedly designed to benefit those in a state
13:29of difficulty. Some five or ten years ago John Kenneth Galbraith, whom I mentioned before,
13:41wrote an article about the problems in New York in the course of which he said that there
13:45was no problem New York had which could not be solved by having the government spend more
13:51money on it. Since he wrote, the budget of New York has roughly quadrupled and the problems
14:01of which he spoke- have gotten worse rather than better. Why? Well in the first place,
14:13if the government spends money on it, somebody else has less money to spend. The government
14:21has been spending more money on these problems but more money has not been spent on these
14:25problems, because the government can get money to spend only by taking it away from somebody
14:31else. And since no one spends somebody else’s money as carefully as he spends his own, it’s
14:39not surprising that money spent by governmental officials has produced less satisfactory,
14:46less efficient results than if people had been spending their own money.
14:55It so happens, of course, that New York has been, from this point of view, fortunate in
15:02not having one of those printing presses on which you can turn out green pieces of paper
15:08so that, unlike Great Britain, unlike Sweden, and unlike the United States as a whole, the
15:16fiscal problems of New York could not be concealed by inflation, by printing money, and trying
15:24to acquire resources for a time with inflation. In the case of the United Kingdom that has
15:31proven a very fruitful resource and it has enabled Britain to postpone the evil day,
15:40but New York fortunately had no such recourse, which is why the results showed up more clearly
15:47and more sharply. In lieu of a printing press, all New York had were some senators and congressmen
15:59to go down to Washington. But given the great burst of sympathy for New York from the rest
16:06of the country, those missions to Washington were not uniformly successful. And the result
16:17is that on a fiscal level New York is bankrupt. Whether it calls itself bankrupt or not is
16:24largely irrelevant; the fact remains that it is. It is bankrupt not in spite of, but
16:34because of, the attempt to do good with other people’s money. That’s one of the consequences,
16:42a necessary consequence, of the welfare state approach.
16:47But a second consequence is a loss of freedom. If you use force to effectuate objects, good
16:58or bad, there is going to be a loss of freedom. New York has lost freedom and New Yorkers
17:04have lost freedom in a double sense. The City of New York has lost freedom and the citizens
17:09of New York have lost freedom. They may elect a mayor but he’s a figurehead. The actual
17:15power in running New York is now in the hands of a commission appointed by the State of
17:20New York to supervise the bankrupt City of New York, and the mayor and the elected officials
17:30have very little power to do anything. So you have lost freedom in that sense, but the
17:37individuals have lost freedom in a more important sense: that the citizens of New York, over
17:43that considerable part of their income which is being spent for them by governmental officials,
17:49no longer have freedom to dispose of it. As individuals, they do not have freedom in the
17:56housing area, to enter
17:57into contracts with their neighbors. Here again, A. V. Dicey, in that preface I referred
18:07to before, was enormously prescient and farsighted, and I want to quote for you from his preface.
18:17He was talking about a measure to provide for mentally deficient people--state insane
18:26asylums, if you want to call them that, or the equivalent--and he wrote: “The Mental
18:33Deficiency Act is the first step along a path on which no sane man can decline to enter,
18:43but which, if too far pursued, will bring statesmen across difficulties hard to meet
18:51without considerable interference with individual liberty. If too far pursued, will bring statesmen
19:00across difficulties hard to meet without considerable interference with individual liberty.”
19:06You are all aware of how depressingly true those words have become in the case of Russia.
19:16He talked about Mental Deficiency Acts and Russia has now been using insane asylums or
19:24their equivalent as a way of disciplining dissidents. Anybody who is a dissident is
19:31obviously suffering from a disease of being antisocial and he must be cured by being placed
19:39in a hospital where he can get appropriate shock and other treatment from so-called psychiatrists.
19:48What’s true in the case of the Mental Deficiency Act applies equally in respect of other measures.
19:58If we assign to others the task of taking care of us, we cannot retain our freedom to
20:08pursue our own lives as we would.
20:11Now let me turn from this general analysis to a more detailed analysis of why it is that
20:19the welfare state measures have so almost invariably disappointed their well-meaning sponsors.
20:31If you ask anybody, people who call themselves liberals--although that is a term I do not
20:41myself wish to apply to them. I am a liberal; I believe in freedom. Liberalism means of
20:49and pertaining to freedom. Those people who now call themselves liberals have misappropriated
20:56the term because for them it simply means that they are liberal with other people’s
21:02money.
21:03(Laughter and applause)
21:10But suppose you asked one of those people who styles himself a modern liberal, “What
21:15do you think about public housing? Do you think that was a good program?” “Oh,”
21:19he’ll say, “that program had some bad features. You know we had those wonderful
21:23houses in St. Louis, the Pruitt Igoe Houses; we had to blow them up.”
21:29We have in the course of public housing torn down more dwelling units than we have put
21:35up. In every city and state of the country public housing units have become a source
21:41of crime and indigence. They have done harm. I remember very, very well a personal episode
21:50along these lines when quite some many years ago I was in Los Angeles not long after the
21:56Watts riots. I had a guided tour through the Watts area of Los Angeles, and the man who
22:06was guiding me was a wonderful fellow who was in charge of a project sponsored by a
22:13trade union for self-help for the people in Watts. And I said to him, “Well, there are
22:21some houses over there; they look pretty good--those dwelling units, those apartments.” And
22:25he said to me, “That? That’s the worst thing that ever happened to Watts,” he said.
22:29“Those are public housing.” And then he went on and he said, “Do you suppose it
22:34really helps the youngsters in Watts to segregate all those who are poor in one place, to take
22:40all the divided families? Because after all, a large fraction of the poor come from those
22:45in which the family is broken up. So you have all the children with only one parent and
22:51their parents all put together in the one building, and they have only one another to
22:55work with. That’s terrible. We need to have a very different kind of set up.” What he
23:02said is right. Wherever it’s been used, public housing has been a disaster. But If
23:07you ask the proponents of it, people who have been proponents in the past, they will agree
23:15but then they will say, “But that’s because we didn’t do it right. We ought to spend
23:20more money on it. We ought to have scattered public housing instead of concentrated”--or
23:25we ought to have this, that, or the other thing. And over and over again, you will find
23:31that the reaction is: what we have done in the past has not worked but that’s
23:36because we haven’t done it right; we ought to spend more money on it.
23:41I can understand that attitude in the 1930s, the 1940s, when we were starting in this country
23:49on the road and when we had not sufficiently absorbed the experience of other countries,
23:54but it is much harder to understand in the 1970s when we now have 40 years of experience
24:00behind us, and we have seen exactly the same thing happen in area after area after area.
24:08Doesn’t the time come when we have to say, “It’s not the particular program; it’s
24:13the system that’s wrong”?
24:18Why is the system wrong? Fundamentally, it’s because the laws of the market work as well
24:30in the political arena as they work in the economic arena. We have all of us had a tendency
24:40to look at economic organization and political organization in very different ways. When
24:46we come to the economy as economists, political scientists or what-not, we say well…it has
24:51laws of its own. We ask if you change this, what will happen? And we say of course we
24:56will treat people in the market as pursuing their own interests: the worker will try to
25:00get the highest wages, the consumer will try to get the lowest price, the employer will
25:04try to get the best deal, the producer will try to make the most profit. But then when
25:09we come to the political arena, we tend to look at it a little differently. We tend to
25:13say, well now, let’s figure out what would be the right thing to do from the social point
25:17of view, let’s persuade our fellows to vote for it, and once we’ve voted for it we’ll
25:22have the results we want. But surely we have to look at it from a different point of view.
25:30We have to say that people who are in the political arena are also people; they are
25:34also trying to do what’s best for themselves. The politicians are in business; they are
25:40trying to maximize the number of votes they get…or maybe not the number of votes, but
25:44they are trying to act in such a way as to get enough votes to get elected. The bureaucrats--I
25:50don’t mean that in any invidious way; I’ll become more invidious about them later…
25:57(Laughter)
25:57…but at the moment I don’t want to start that way…you or I as a bureaucrat, if we’re
26:04in that position, we’re going to pursue our own interest. Now in saying that we pursue
26:10our own interest, they don’t have to be narrow interests. The great martyrs in the
26:16world have pursued their own interest as they have seen it, but everybody is going to pursue
26:21his own interest. As a great friend of mine, an economist at UCLA, Armie Alchian, always
26:27says: “There is one thing you can depend on everybody else to do; you can absolutely
26:31depend on him. You can always depend on him to put his interests ahead of yours.”
26:38So if we’re going to analyze the political arena, we have to look at that as a different
26:43kind of market in which there is also competition. If the government is going to distribute a
26:48million dollars for whatever program, no matter how, it will pay people to spend up to a million
26:54dollars to get it to go to them instead of somebody else. If goodies are going to be
26:59distributed, well then you’d better go out and try to get your share of the goodies.
27:05If you have a perfectly operating market, if you have what we economists call equilibrium,
27:11you will end up with…just as equilibrium in the economic market leads to zero profits,
27:18so equilibrium in the political market leads to no net gain to anybody. Because you are
27:23going to distribute a million, people spend a million to get it, you’re back where you
27:27started from.
27:30This is not a fanciful view. Let me give you a couple of very simple examples which aren’t
27:37strictly in the welfare state area, but in which the same principle applies. Consider
27:43the issuance of TV and radio licenses. If you can manage to get the FCC to grant you
27:50a license for a TV station, under the law you will pay nothing for it directly to the
27:56FCC. That license will immediately be worth a considerable number of millions of dollars.
28:03We could name some fortunes in this country that have derived from that, and some of the
28:07names would even be known to you. Now…given that that’s the process, it pays you, if
28:18you are interested in getting one of these so-called free grants, it pays you to devote
28:25a lot of effort and energy and money to making sure you get it instead of somebody else.
28:32And so you will go in for a big publicity campaign, you will wine and dine the appropriate
28:37legislators, you will see if there is some way in which you can indirectly get influence
28:42on the commissioners, you may put on a big program of getting public opinion polls, of
28:48developing a fancy package, and so on. You can see what happens; you spend money and
28:53not only do you spend money--there is only one of these going to be distributed--but
28:58it will pay 10 or 100 people to spend some money in order to try to get it. And on the
29:04average, it will pay the whole of them to spend as much money in total as the value
29:11of the TV license once distributed. Nobody has any net benefit; no benefit from that
29:16program.
29:18Take the case of urban renewal legislation. If you have urban renewal, first of all it
29:27will pay you to spend money on influencing the legislature to have the particular area
29:34where you’ve got some property you’d like to get rid of- included in the urban renewal
29:38area. I may say in this game there are universities, some of which I have been associated with,
29:45which have not been innocent of playing this game. Once the urban renewal legislation has
29:52passed, it will pay you to bid among one another to get the property which is going to be taken
29:56over.
30:01So that the first proposition is that if you’re going to spend somebody else's money, somebody
30:08else’s money is going to be spent, there will be many claimants for it and not only
30:13those to whom the well-meaning people initially intended it to go. In the second place in
30:21this competitive game, who are the most efficient competitors? Is it the poor suckers at the
30:26bottom who haven’t got any money? There may be no direct and close relationship between
30:35ability to compete in the political arena and ability to compete in the economic arena,
30:42but they are not wholly unrelated. Those people who have not had the qualities which enable
30:47them to succeed in the economic arena- are not likely to have the qualities that will
30:51enable them to succeed in the political arena.
30:55There has been the great fear over the centuries of democracy on the ground that the have-nots
31:02would get together against the haves, that the bottom 51 percent would get together in
31:08a majority rule and despoil the top 49 percent. That fear has proved unjustified, and for
31:15very good reason; it’s not a sensible coalition. If you are organizing an electoral coalition,
31:22that’s a silly way to organize it. What you want to do is you want to leave out the
31:27top 5 percent, because the money you can take from them is more important than the votes
31:33they can provide; you want to leave out the bottom 44 percent because, first of all, they
31:43are likely to be more easily duped with respect to providing them with your votes, but they
31:49aren’t likely to be very efficient, good competitors. And then you form a coalition
31:55of the 51 percent in-between and benefit that 51 percent at the expense of the people at
32:02the very top and of the people at the very bottom. A colleague of mine, George Stigler,
32:07in writing an article on this subject, called this proposition Director’s Law after another
32:14associate or relative of mine, my brother-in-law, Aaron Director, who first developed this idea
32:19that this was what you would expect to happen.
32:23Now that’s an oversimplified picture because, of course, the 51 percent doesn’t become
32:28a single coalition in the middle; it’s made up of lots of little minorities. We talk about
32:34being guided by majority rule but we’re not, and yet we are. We are run- in a political
32:45system you are run- by a majority which is composed of a coalition of minorities. You
32:52get 5 percent who feel very strongly on one issue and are willing to give up their vote
32:56on that issue, forget about everything else; you get another 5 percent, another 5 percent,
33:03and if you want to get elected to office--if any of you in this room have political ambitions,
33:09the way to get elected to office is to figure out how you can construct a coalition of enough
33:165 percents so you get 51 percent. That’s why special interests are so powerful and
33:23get their way.
33:26Of course, over and beyond the concentrated minorities who will get their way in the political
33:33process you have another group that develops as the welfare state grows, that becomes increasingly
33:42important. And these are the government officials--elected and unelected. This applies to the welfare
33:51measures, but of course it applies to many other issues. You now have, for example, a
33:57newly established Department of Energy, which has 19,000 employees, which has contracts
34:05with contractors who employ another 100,000 people. So you now have 119,000 people who
34:12are being paid to devote a large part of their energy to getting government more and more
34:18deeply involved in the problem of production, distribution, and consumption of energy. But
34:24the same thing is true in the welfare area. Some years back, when Patrick Moynihan was
34:34not a senator of the State of New York, but was advisor to President Nixon, he was responsible
34:42for trying to get through congress a welfare reform program called the Family Assistance
34:48Plan, a form of the negative income tax…a program not very dissimilar to the one which
34:54President Carter has now said he’s going to try to get through. Moynihan failed. He
34:59wrote a book about that failure and it’s a fascinating book. Why did he fail? Well,
35:04there are a number of reasons, but one of the most important to which he refers was
35:09the welfare establishment. Enacting that law would have put out of business a lot of people
35:16who had nice jobs, exerting real influence in administering one or another welfare program,
35:23because this would have been a substitute for AFDC, for food stamps, and for a half-dozen
35:28other programs. Now again, don’t misunderstand me. I’m not saying these members of the
35:35welfare establishment opposed it out of deliberate malice or with the belief that they were doing
35:44harm--not at all. But everybody is perfectly capable of persuading himself that what’s
35:51in his interest- is in the nation’s interest. And the bureaucrats: “Here I am, I’m running
35:57a bureau. We’re doing good work; we’re doing important things. You mean to say you’re
36:01going to put me out of business? That’s not the way to improve the national welfare.”
36:07And so you get a concentrated group of governmental bureaucrats, who make it more and more difficult
36:16to follow policies which are in the general interest, if they tend to conflict with their
36:22own bureaucratic interest.
36:24Let me go from this general level of analysis and get down to specific cases. Let me first
36:30give you some numbers to show you that I’m not making up the problem I’m talking about.
36:35We have had an enormous number of welfare measures passed over the past 50 years in
36:41the name of helping the poor. The total expenditures on all these programs--the total expenditures
36:49by the federal, the state, and the local governments excluding private expenditures,
36:54excluding private charity and the rest—total government expenditures amount today to one-seventh
36:59of the national income. To put this in terms that are more meaningful, the government
37:07publishes figures on the number of people who are regarded as being in poverty. Now
37:13I warn you that’s a wholly arbitrary number; these levels that divide people between the
37:21not poor and the poor are arbitrary, but take them for what they are. The government estimates
37:27something like 12 percent of the people are in what they call low-income status or poverty.
37:37Suppose I divide the total amount of money spent on these programs by the number of people
37:42labeled poor. The answer comes out to $9,000 per person or $36,000 per family of four,
37:52to take the mythical family of four so much beloved by statisticians. Compare this with
38:01the average per capita income of everybody; the per capita income--per person income--of
38:07all the people in the United States after taking away taxes, disposable income, is $6,500.
38:15If that $9,000 per person were really going to the poor, they’d be among the rich.
38:21(Laughter)
38:26That income given to them would put them in the top 20 percent of the income distribution.
38:31But of course it isn’t going to the poor. It’s going to you and me. It’s going to
38:36the governmental officials. It’s going to the various programs that are enacted in the
38:41name of helping the poor but end up helping you and me.
38:46Let me get closer to home and go away from these numbers. Consider one of the major programs
38:53which in a way is not really a social welfare program but yet it illustrates the general
38:58point so beautifully that I can’t resist referring to it, and moreover it applies to
39:02you and me. I have in mind governmental expenditures on higher education. Now Rochester, being
39:11a private institution like the University of Chicago, is less guilty than most others.
39:18The worst cases are the state universities, but we all of us have our hands in the federal
39:24pot and, if not in the federal pot, in the state pot.
39:28But consider the situation of higher education. You have a great deal of tax money being spent
39:38on higher education. Who benefits? Primarily the people who go to the institutions of higher
39:45education--the students. Where do they come from? They come disproportionately from
39:51the upper-income classes. Even those of them who come from the lower-income classes as
39:57I myself did, are going to be converted by their college education in large part and
40:05by their own qualities- into people in the upper-income classes. Those individuals from
40:11low-income families who have the ability and the energy and the drive to go to college
40:17are the richer ones of the low-income class. They are the ones who have personal wealth,
40:21personal qualities. In any event, the facts are clear: graduates of college are on the
40:28average a very much higher income class than people who don’t go to college. So what
40:32do you do? We impose taxes on everybody, including those who don’t go to college, in order
40:40to subsidize the people who do go to college. As I say when I want to be demagogic, we impose
40:45taxes on the people in Watts to send the children from Beverly Hills to college. That’s a
40:51literally exact statement; it’s put demagogically but the facts are literal. A study in the
41:00state of California some years back showed that 50 percent of the students at the state
41:06universities of higher education came from the top 25 percent of the income scale- and
41:125 percent came from the bottom 25 percent. What’s true there is true everywhere. There
41:20is no social program in this country, in my opinion, which is so clearly a case of imposing
41:29taxes on low-income groups to benefit high-income groups as government subsidies to higher education-
41:39clearly a case of this middle coalition taxing the poor and the very rich to benefit themselves.
41:48Now that case is dramatic and shows these forces at work, and it also shows how hard
41:53it is to do anything about it. How many people in this room, how many of my colleagues at
42:01the various universities, or your fellow students are going to go out tomorrow and campaign
42:06for cutting down government expenditures on higher education? How often do you hear
42:14people in colleges, universities or graduates of colleges and universities who will scream
42:19their head off about how we must have equality, and down with regressive taxes, and we have
42:27to tax the rich and help the poor? How many of them have you heard denounce this utterly
42:34unconscionable program of imposing taxes on the poor to send people who are going to be
42:40well-to-do to college? Why not? Because we know that what’s good for us is good for
42:46the country.
42:52I think it’s a good thing that everybody should have an opportunity to go to college
42:55if he has the will, the capacity to do so, provided he is willing to pay for it himself.
43:02If he can’t do it in advance, fine; let’s set up mechanisms whereby we can finance him
43:09through college in return for a commitment on his part to pay it back later. And we can
43:15go into details about the form and so on…I’m just trying to get at
43:18the principle of the thing.
43:20Let me give you some other examples. A major one of these programs, the most expensive,
43:25is Social Security. Now Social Security, as you may know, is one of the most extreme cases
43:36of misleading advertising that I know of; it’s not social and it’s not security.
43:42(Laughter)
43:45What it is is a combination of a bad tax and a bad relief program--a bad distributive program.
43:57It is sold as if individuals who pay Social Security taxes are paying for their own benefits
44:06that they are going to get later on; that’s the language in which the Social Security
44:09Administration sells it. That’s extremely misleading. What’s happening is that people
44:16today are paying taxes on their wages; people today are receiving payments from the government.
44:24The relation between the taxes Mr. X pays and the benefits to which he is entitled is
44:30very, very slight. There is a tiny bit of a relationship to maintain this fiction, but
44:36on the whole there is very little relationship. Two people who pay the same amount of money
44:40throughout their lives may get very different benefits. But let’s leave that aside.
44:46I want to go to the point I’m talking about, about the tendency for those of us in the
44:51middle class to impose programs that benefit us at the expense of people below us. Social
44:59Security does involve a very large transfer from the young to the old; that is, today’s
45:04young pay taxes which go to pay benefits to the old. But over and above that, it involves
45:09a very substantial transfer from low-income groups to middle-income groups. How come?
45:17Well consider, at what age does a young man or young woman from the lower-income groups
45:23go to work? Sixteen, seventeen, eighteen- he or she will start to pay Social Security
45:30taxes at that time. At what time do we go to work, or do our children go to work?
45:37You and they stay protected in schools, stay at college. They generally start to work at
45:4624 or 25 maybe, and then they start to pay taxes. If you do a little actuarial calculation,
45:53as nowadays you can all do on one of those handy Hewlett-Packard calculators, you will
45:59discover that the effect of this is to make the total payments of those who start earlier
46:08about a third higher in actuarial value than the payments of those who start later. But
46:13that’s only half the story. Have you ever looked at the statistics of average length
46:18of life? Who do you suppose has the longer expected length of life, those in the lower-income
46:24groups or those in the higher-income groups? Those in the higher-income groups. As a consequence,
46:31those of us in the middle- and upper-income groups pay less taxes, because we start paying
46:37later and we get more benefits because we live longer, with the end result that you
46:42have a program enacted in the name of helping the poor and keeping the poor out of the poorhouse,
46:49which has the effect of benefiting middle-income groups at the expense of relatively low-income
46:54groups. Over and above that there are lots of inequities. There are lots of people in
46:58the middle-income groups who don’t benefit, some in the low who do. I’m not saying there
47:02isn’t. It’s an enormously complicated program and there are many different considerations.
47:08But taken as a whole, it is a marvelous illustration of the tendency for legislation enacted in
47:17the name of helping the poor to turn out to be a way in which middle-income people help
47:23themselves.
47:24The only program I know of for which a good case can be made that the people who get the
47:32money have lower average incomes than the people who pay the taxes--the only program
47:38I know of is direct welfare, AFDC and direct welfare. And it’s not an accident that that’s
47:45the program which draws the greatest opposition and to which there is the greatest discontent
47:52on the part of the population as a whole. Now it is a lousy program, I agree; so are
47:56all the others. It’s no worse than the others. There is a welfare mess and I have, as you
48:02may know, long been in favor of major reforms of the welfare program, of substituting a
48:08negative income tax for the whole collection of programs. But my point is that that’s
48:13the only one I know of, and it’s only a small fraction of the total expenditures on
48:18programs labeled as being for poverty.
48:21Over and above the waste of resources through these welfare-state measures, they have further
48:27effects which I think are very serious from the point of view of the maintenance of a
48:33free society. In the first place, calling on the government to solve problems strains
48:43that social fabric of agreement on basic values that is necessary to maintain a stable society.
48:53In order to have any kind of a stable society you have to have people agree with one another;
48:58you have to have them have a certain minimum common set of values and beliefs, and you
49:04want to avoid straining that set of beliefs. Now the great virtue of the market is that
49:12people who hate one another in other respects can cooperate with one another on the market
49:16without any difficulty. As I often say, when you buy bread at the grocery you don’t know
49:23whether the wheat from which that came was grown by a black or a white, an Indian or
49:30a Chinaman, a Mohammedan, a Christian, a Jew, somebody you like, somebody you dislike, and
49:36it doesn’t make a darn bit of difference. And even though you and he disagree violently
49:41on every issue, you can cooperate--he can produce the wheat and you can buy the bread.
49:45That’s the great virtue of the market…that it permits cooperation without conformity,
49:52without people having to agree with one another. Political mechanisms have the opposite arrangement.
49:58You have to enforce conformity on people. You have to decide on the standards, you have
50:03to decide on who is going to pay, who is going to get; and when 51 percent of the people
50:08say one thing and 49 percent say the other, 100 percent do what the 51 percent say. As
50:16a result, the more you have to use political mechanisms, the more you tend to strain
50:22the social fabric and this has shown up very drastically. This is the reason why you can
50:28go much farther in this direction in homogeneous societies like Sweden’s than you can in
50:33heterogeneous societies like our own. But it is showing up in the form of divisiveness,
50:43of things like the tendency for Quebec to try to get independence, for Scotland to try
50:49to become separate--after all, if the government is going to handle the oil, the Scots want
50:53to have their hands in the oil pot…so that one of the effects of resort to welfare state
51:03measures is to promote regionalism and divisions within our society. In the United States this
51:11has shown up by the growth of ethnic particularism, ethnic divisiveness. We used to be proud of
51:19being a melting pot, in which we got a common set of values, while each of us was able to
51:25go our own way with respect to our local customs and our local backgrounds. But now that there
51:32is a great deal to be gained by forming cohesive minority blocs, political entrepreneurs are
51:38out forming blocs of people from particular ethnic backgrounds, and they are now going
51:44to become more cohesive blocs which tends to divide the society.
51:51The welfare state measures develop an acceptance on the part of the public at large of regimentation.
51:59It develops it on the part of the poor who get their benefits by being told what to do.
52:06I remember years ago a fellow, who was doing a study of the welfare programs in New York
52:14City, came to me and he said, “I’ve been reading your book Capitalism and Freedom,
52:19he said, “and you talk about the conflict between growth of the government and human
52:24freedom.” He said, “You don’t know what you’re talking about.” He says, “You
52:28don’t have your freedom interfered with very much. If you really want to see this
52:32conflict in action, you go down to Harlem and you look at the people who are on welfare.
52:37They can’t move from one place to another without getting the permission of their welfare
52:43supervisor; they can’t put in a telephone without getting it approved, etc., etc., etc.
52:48They are the people who are having their lives regimented.” Well it’s not only they.
52:56Those of us who are subject to Medicare have to know about the forms we have to fill out.
53:03Those of you who are students who are getting federal aid or loans and what-not know about
53:10the conditions to which you have to subscribe. All of us who know that our future benefits
53:15are going to come from the government have to think three times before we engage in actions
53:21that might prejudice our future acceptability. So the effect of the growth of the welfare
53:28state is also to develop an acceptance of regimentation.
53:31Furthermore, it undermines the ethical and moral standards of the people; it undermines
53:39those standards by instilling the notion that nobody is responsible for himself; that if
53:45something is wrong…somebody else is responsible for it. Now, of course, what happens to people
53:51is not wholly the result of their own behavior or their own actions; society does have an
53:56effect, outside forces do affect them. But unless you adopt broadly the view that individuals
54:02are to be responsible for themselves, you cannot get, in my opinion, a decent free society.
54:10In my view, we are fast approaching the kind of situation that Dicey outlined in which
54:17we must be fearful about the extent to which the growth of the welfare state is encroaching
54:23on our freedom--encroaching on it indirectly by its fiscal effects, by putting us in a
54:29situation where the fiscal crisis that it tends to produce as in Britain, as in New
54:38York City, interferes with our freedom, interfering with our freedom through the extent to which
54:44we become subject to bureaucratic control.
54:47What can we do about it? Well obviously, the right way to do it would be to get rid of
54:54these social welfare measures and promote our basic objectives by other means. In getting
55:04rid of these welfare measures we cannot abandon them overnight. We have induced millions of
55:10people to become dependent on them. We would have to get rid of them gradually. That’s
55:19why I have always been in favor of introducing a negative income tax as a substitute for
55:24a great many of them, as providing a way in which you could gradually get out. But I have
55:30to admit, that that’s a romantic approach and is inconsistent with everything I have
55:36been saying tonight, because it goes back to the idea that the way you attack government
55:43is by trying to figure out the right answers, persuading people, and getting it legislated.
55:48And we know that isn’t the way government works. What we need to do is to look at an
55:53object analysis of the forces set in motion that may lead to a reversal, and there are forces set in
56:00motion--very strong forces--because as the welfare state moves and grows, you get bigger
56:09and bigger taxes with fewer and fewer benefits. And people don’t like to pay the taxes without
56:14getting the benefits. And therefore, the objective circumstances develop under which you can
56:20have a tax revolt.
56:23You have seen that, and I think that Great Britain may be giving us a very favorable
56:29example from that point of view. Here you have a situation in Great Britain…
56:33Great Britain went much farther than we did. In the United States total government spending
56:38at all levels has gone to 40 percent of our income; in Great Britain it went up to 60
56:42percent of their income. Great Britain had a much more severe financial crisis than we
56:48did; its inflation reached something like 25 percent a year instead of ours, just a
56:53mere 12 percent a year. Great Britain has, as a result, had enormous pressure on its political
57:03system, and the Labour government of Great Britain in the past two years, for example,
57:08has behaved in a way to reduce the ratio of government spending to income and to reduce
57:14the welfare measures.
57:16So I think that there is some chance, and that chance I think derives from the impact
57:28of two things: the inefficiency of government which causes discontent with government policies,
57:35and the burden of taxes which cause a tax revolt.
57:39In thinking ahead to alternatives, I want to close on a different note. The objectives
57:48of those well-meaning people who were behind the development of the welfare state are good
57:52objectives and we must not denigrate them or lose sight of them. What is needed is the
57:59recognition that there are other ways of promoting those objectives than the use of force and
58:05the use of government. There is a strong tendency to believe that you either must have the government
58:13do it or else, at the other end, you have only narrowly defined market activities with
58:22everybody looking after himself. That’s wrong; there is a great middle ground. There
58:30is a great area in which you can have voluntary activity by individuals who cooperate with
58:36one another for common purposes. That is what we have always had. The nineteenth century
58:43in the United States, when government spending never reached more than 10 percent of the
58:49national income and federal government spending never reached more than 3 percent, when we
58:55had essentially no welfare state measures on the federal level certainly and few on
59:00the state level, was the period of the greatest outburst of the eleemosynary, charitable activity
59:09that the world has ever seen. You had the great development of nonprofit hospitals,
59:16you had the foreign missions, and you had the establishment of great universities like
59:25this one. The market is an effective means for voluntary contribution in promoting charitable
59:34activities as well as all other activities and in trying to reduce the role of government.
59:41One of the worst things, in my opinion, that has happened as a result of the welfare state
59:45is the destruction of private mechanisms. What we need to do is to strengthen those
59:52and use those instead of the compulsory mechanisms of the state. Thank you.
59:57(Applause)
1:00:14Professor Friedman, in 1946 a McGraw-Hill publication reported that the total tax take
1:00:21in the United States was about 22 percent and suggested that if it became 25 percent
1:00:27that it would lead to the destruction of our capitalist economic system. Now it’s 40
1:00:34percent as you suggested tonight. Is this a gradual destruction that takes place or
1:00:39is it catastrophic? How much can the tax take become before it really gets to be dangerous?
1:00:45It’s dangerous now, but there is no magic number. It’s clear that as that number grows
1:00:55it becomes more and more difficult to maintain a free society, but where the breaking point
1:01:01is will vary from case to case. To illustrate; in the case of Chile the breaking point came
1:01:08at 40 percent. The level of government spending had risen to 40 percent of the national income
1:01:16under Allende. And that was the point at which the breaking point came, and the system fell
1:01:20apart, a military government stepped in, and you had a loss of freedom. But Chile is a
1:01:27much less developed and a much less wealthy country than we are. In Great Britain the
1:01:32percentage has gotten up to 60 percent and Great Britain has not collapsed. The breaking
1:01:38point there is apparently higher than 60 percent. In Israel the percentage is something like
1:01:4670 percent. Now I should explain a little bit to you on that, because that percentage
1:01:51is a very misleading percentage. You know accountants are marvelous people, and the
1:01:58way in which you run the national accounts there is really nothing to prevent government
1:02:05spending as a ratio to national income from being 120 percent- because these are two different
1:02:11concepts. And I believe all of these numbers really greatly overstate the role of government
1:02:17spending. They don’t overstate the role of government influence.
1:02:21Now the other thing that needs to be said is- that government can have a lot of influence
1:02:24over your life without spending any money. Those two are quite different. For example,
1:02:31every automobile you drive has maybe $500 or $700 of equipment on it that is mandated
1:02:35by the government. You paid for it; that doesn’t enter into government spending. Or again,
1:02:44the administrative body that administers the Interstate Commerce Commission doesn’t spend
1:02:49much money, but its effect has been to destroy the railroad industry. So that you can have
1:02:55great effects without spending money.
1:02:58So the simple answer to your question is that there is no magic number but the larger it
1:03:02is, the more dangerous it is.
1:03:05I have a question about public housing. I agree with you when you say that the number
1:03:11of dwellings destroyed is greater than the number of dwellings put up. But you are comparing…the
1:03:17dwellings that are destroyed are three-story apartment buildings left over from the nineteenth
1:03:22century and the dwellings that are put up are about twenty stories high and have about
1:03:29eight families per floor.
1:03:30Oh, I mean the number of dwelling units, not the number of buildings. When I spoke
1:03:37I was not careful and I should have been. I meant the number of dwelling units where a
1:03:44dwelling unit is something that houses a family. So in the case of the buildings you’re talking
1:03:48about, I wouldn’t count that as one eight-story building versus one three-story building.
1:03:53The number of dwelling units built is less than the number destroyed. How does that improve
1:04:00the housing?
1:04:02Maybe you dislike the public housing because of the institutional look to it and it looks
1:04:09more like a hotel and looks less homey.
1:04:11No, no, that has nothing to do with it.
1:04:13The alternative is either you have a public house, or you have a badly maintained apartment
1:04:22building by an absentee landlord and...
1:04:25There are no dwelling units in this country that are more badly maintained than public
1:04:29housing dwelling units.
1:04:30(Applause)
1:04:30In the South Bronx people are destroying their houses…
1:04:34Of course. Why?
1:04:36They are burning their houses to move into public housing.
1:04:39Of course, but why are they burning those houses and abandoning them? Why?
1:04:42Because they are badly maintained.
1:04:44No siree, because you have rent control in New York City which makes it uneconomical
1:04:50to maintain the houses, and it means that the only way in which you can get any money
1:04:53out of them is by burning them down.
1:04:55Also absentee landlordism is very…
1:04:57Absentee landlordism, of course. But do you mean to say that the public housing units
1:05:02are not under absentee landlords?
1:05:03(Laughter and applause)
1:05:13Look, you must understand… I think it’s important for people to have decent housing.
1:05:17My objection to public housing is that it has made the housing of the poor worse. You’ve
1:05:23torn down dwellings in which they lived. If you take the whole housing program, urban
1:05:29renewal plus public housing, the situation is even worse:
1:05:33You’ve torn down more dwelling units than you have put up. Of those you put up, a considerable
1:05:38fraction have not been available to the poor. You’ve torn down low-income dwelling units--take
1:05:44any urban renewal area in this country you want—you’ve torn down low-income dwelling
1:05:49units and you’ve put up luxury apartments. And that’s helping the housing of the poor?
1:05:54Not by a long sight. So that the problem is…and then in the public housing units you’ve
1:06:00set up, because of the income requirements and so on, the people who can qualify for
1:06:06them tend to be broken families. They have an abnormally high rate of juvenile delinquency,
1:06:16of sabotage, of destruction, they are poorly maintained.
1:06:20You see…the problem that this young man is illustrating is the tendency that we often
1:06:25have to take the will for the deed. The problem isn’t the objective of the public housing
1:06:31units; the point is to go out and see what’s actually happened with them. And there is
1:06:35hardly anybody who has studied the subject who will defend the public housing program
1:06:40as having improved the housing of the poor.
1:06:44I was interested… before you had mentioned a comparison between nineteenth-century and
1:06:49twentieth-century America. I’d like to know if you that… I don’t see how that could
1:06:54be considered a legitimate comparison in terms of the fact that there were unlimited resources
1:06:59essentially in the nineteenth century and now we have a kind of very limited resource
1:07:04and allocation situation. At least this seems to be the thrust of a lot of you economists
1:07:08who say…
1:07:09No, but that’s fundamentally wrong.
1:07:11Well just let me finish the question. In the nineteenth century when you had a completely
1:07:21free economy, you seemed to have situations developing where tycoons would come along
1:07:26like Rockefeller or the railroad barons essentially and they’d come to dominate society. So
1:07:31is it not a choice, do we not have a choice between developing that kind of situation
1:07:37where John D. Rockefeller and that crowd will decide what’s good for our society or whether
1:07:42the government officials will?
1:07:43Well…let’s take the Rockefellers and just stick with them…
1:07:45He created the University of Chicago incidentally.
1:07:48I know, he founded the University of Chicago. John D. Rockefeller did a great deal of good
1:07:54for this country. He developed and promoted…I’m not talking about his charitable activities--that
1:08:00was separate; not even about the founding of the University of Chicago. But he developed
1:08:06into a major industry the oil industry of refining, discovering, and making oil available;
1:08:13he reduced its cost. He never got a dollar from anybody with a gun; he got his money
1:08:20by selling people products at a lower cost than other people could provide it. His grandson,
1:08:25Nelson Rockefeller, did enormous harm to the country by operating through the political
1:08:30channel. If we had the nineteenth century version, and Nelson Rockefeller with all his
1:08:44accumulated wealth had tried his hardest to spend that in such a way as to reduce the
1:08:51freedom and the affluence of other people, he could not have come close to achieving
1:08:56what he did achieve in that direction as a political figure. He couldn’t even have
1:09:01afforded to put up the Albany Mall,
1:09:04(Laughter)
1:09:06…let alone to have undertaken the measures which made New York State a basket case, which
1:09:14changed the educational structure of New York State in my opinion in a very adverse direction.
1:09:19But let me go back to your first question. First place, it is simply not true that we
1:09:24have limited resources now whereas we had unlimited resources in the nineteenth century.
1:09:27On the contrary, from every important economic point of view we have a greater volume of
1:09:32resources now than we had then. Tell me, in 1850 how much oil did we have? It hadn’t
1:09:41been discovered; it was useless. We had no oil. The first oil well was drilled in Titusville
1:09:50in 1858. We have more oil now than we had in 1850 in any meaningful economic sense.
1:09:58Before nuclear power was discovered, how much nuclear power and energy did we have? The
1:10:03progress of technology has had the effect of increasing the effective volume of resources
1:10:12available to us, so that we have far greater resources available now than we had in the
1:10:17nineteenth century as a result of the technological and business developments that were produced…
1:10:23Is government regulation of the resources necessary?
1:10:25Not at all. Government regulation of the resources of the kind we have had has led to waste and
1:10:30misuse of resources. Go back and look at your analysis. What matters are the resources that
1:10:39are available to be used, not those that will be discovered later on.
1:10:44Of course one more thing needs to be said. We are of course wealthier and better off
1:10:50than were the people in the nineteenth century, but we are their heirs. We could not be where
1:10:58we are if they had not done what they did, and I think it’s a false comparison not
1:11:04to take into account the debt which we owe to the enormous economic progress and development
1:11:11of the nineteenth century, to the fact that our ancestors came here with empty hands and
1:11:17have made it possible for us to have a decent life. I hate to use the old cliché about
1:11:23standing on their shoulders, but that’s what we do.
1:11:26Professor Friedman, how is it that Germany which has one of the highest social security
1:11:34systems in the world is better off economically than the U.S.A.?
1:11:38Germany is not better off economically than the U.S.A. It’s a great deal better off
1:11:42economically than Great Britain is at the moment, but it is not a great deal better
1:11:47off than the United States. It is relatively well off, why? Because in 1948 there was a
1:11:53man by the name of Ludwig Erhard who had the good sense on one Sunday afternoon--and he
1:12:00did it on Sunday because the American, British, and French occupation forces offices were
1:12:05closed on Sunday, and he knew if he did it on a weekday they would countermand his order—and
1:12:10so on that Sunday, he abolished all price and wage controls and rationing that had been
1:12:15in existence, and he unleashed in Germany a free market economy. And Germany, with a
1:12:22free market economy, had an economic miracle. That miracle will not last if Germany long
1:12:29continues to hamper its free market economy by a still greater growth of social security,
1:12:37welfare, and other measures. But in general, the actual extent and level of those measures
1:12:46is not terribly different in Germany from what it is now. In some areas it's greater;
1:12:51in some areas it's less. But the most important difference between the two countries is that
1:12:58Germany in the past 30 years has been willing to rely to a far greater extent on private
1:13:04markets and private market arrangements than we have.
1:13:08I was saying before in answer to an earlier question there is no magic number--30 percent,
1:13:1225 percent, 40 percent--which a government can spend while having a viable economy. How
1:13:19much it can spend depends on the other policies which it follows. It depends also on the attitudes
1:13:25and structure of the people, as I was saying with a homogeneous people you can go much
1:13:29farther than with a heterogeneous people. So I would say that Germany has done as well
1:13:34as it has despite, and not because, of the welfare measures you were mentioning.
1:13:41In America, it has been argued by some that there are no pervasive values that would form
1:13:52the basis of the private sector performing in the altruistic manner you think it will,
1:13:57but instead the only pervasive value in this country is material self-interest, and therefore
1:14:05the private sector is not inclined to perform in the altruistic way that you think it will,
1:14:12and as a result of that, the welfare state has sprung up as the only alternative for
1:14:17the disadvantaged in this society.
1:14:18Well, let's look at the situation. Was it a pure interest in material welfare and self
1:14:24well-being that built the University of Rochester and the thousands of other private universities
1:14:29around the country? Was it the material interest and immediate self-welfare that produced the
1:14:34private nonprofit hospitals around the country that were so prominent a feature, let alone
1:14:41the Carnegie libraries, let alone all the others? It’s quite the opposite. There
1:14:46is no question about the evidence that the United States has had a unique…almost unique
1:14:53experience of private charitable, eleemosynary activity on a broad scale.
1:14:58But now I come to the other score. Again, you are looking at it in terms of objectives
1:15:05and not results. You are assuming that these welfare programs do help the disadvantaged;
1:15:12you are assuming that government activity helps the disadvantaged. If I take people
1:15:16of your race, in what respect are the black people in this country most disadvantaged?
1:15:23In respect of the kind of schooling they can get. Why? Because that schooling is provided
1:15:28by the government. Where do you get the idea that the disadvantaged are being helped? The
1:15:35blacks are in the first place forced to have bad schooling because the state provides it.
1:15:40In the second place, having been put under that disadvantage, they are being prevented
1:15:44from getting on-the-job training by a minimum wage law, which is the most anti-Negro law
1:15:49we have on our books, all in order to help the poor no doubt. That’s said to be the
1:15:55purpose of it, but what’s the effect of it? So what I’m trying to say to you is
1:16:02that it’s all very well to talk about using the state, but explain to me how it is that
1:16:09a people who in their separate lives are driven only by material self-interest are somehow
1:16:16in their collective capacity driven by altruistic impulses. How do you reconcile the one to
1:16:23the other? See…the basic situation as it appears to me is almost the opposite: most
1:16:28people are selfish in a narrow material sense, and when the government is run by most people--when
1:16:35you have a majority democracy--the government is going to reflect their preferences and
1:16:41their tastes. The only way in which you can have nonmaterial values become effective is
1:16:48by having a society in which a minority can express itself. Which are the most materialist
1:16:54countries in the world? There is no country in the world more materialist than Russia.
1:17:00All it talks about is its five-year plans, its material accomplishments, its material
1:17:05plans. It is not altruistic. At any time in any society--I don’t care what it is--the
1:17:15fraction of the public that is going to be interested in the well-being of others and
1:17:20in things other than their fairly narrow self-interest is going to be a minority.
1:17:25And the question is: how do you construct a system in which that minority is least hindered?
1:17:30And in my opinion, that’s a system in which government has very limited power, and in
1:17:36which private voluntary activity has a maximum of opportunity to develop.
1:17:42Thank you.
1:17:47Given that the best intentions of the government have failed to provide adequate…
1:17:50Government has no intentions. Only people have intentions.
1:17:56…the best intentions among the people in power in government has failed to provide
1:18:00adequate housing for the poor…
1:18:02Go slowly. I never talked about the best intentions of the people in power in government; I talked
1:18:08about the good intentions of the people who promoted that legislation. Once you get legislation--the
1:18:15people who get in power in government are people who want power; not people who have
1:18:19good intentions. That’s a very different thing.
1:18:25No…it’s not really the question I had in mind.
1:18:28(Laughter)
1:18:29Okay, we’ll work our way around to it.
1:18:33What I was hoping to ask is, what specific policies do you propose which would lead to
1:18:39adequate housing for all the poor?
1:18:43Well in the first place, you know these are words that really have no clear meaning: “adequate
1:18:49housing for all the poor.” Those are not definable words. What’s “adequate”?
1:18:57What we now consider inadequate would have been considered a palace 150 years ago; it
1:19:04would be considered a palace abroad. I don’t know if you all know the story about the movie
1:19:11that was made out of John Steinbeck’s Grapes of Wrath. And it was shown during the war
1:19:17or I think shortly thereafter, but I think during the war, in the Soviet Union, and it
1:19:21had to be withdrawn because the people were so excited and interested about the quality
1:19:26of the clothes and shoes that the Okies going out West were wearing…it backfired. So adequate?
1:19:35Poor? The income which we now use in this country as a governmental standard to separate
1:19:43the poor from the not poor is higher than the average income of all the people in the
1:19:47Soviet Union. It’s decidedly higher than the average income of most of the people in
1:19:52the world. These are not absolute standards; they are relative. So you have to ask a very
1:19:56different kind of question: What kind of system will give the widest range of people the greatest
1:20:01opportunity to make the most out of themselves, out of their own capacities, their own resources?
1:20:08What are the plans for doing that? I’m not going to try to have a program which will
1:20:13give adequate housing to the poor. I want to have a system under which individuals can
1:20:18have as much opportunity as possible to develop themselves, and in which other people can
1:20:23have as much opportunity as possible to help other people. I say that system would be a
1:20:30system of essentially free enterprise, private enterprise capitalism with a very limited
1:20:37government. And in that system you have in fact achieved a higher standard of housing
1:20:43than you have through other methods. The number of privately built houses has always vastly
1:20:48exceeded the number of government built houses. So I’m not answering your question directly
1:20:55but I’m going at it indirectly. You and I seem to have been involved in indirect circles.
1:21:00Thank you.
1:21:04Professor Friedman, there are certain social goods that cannot be supplied by the private
1:21:10marketplace.
1:21:12Such as what?
1:21:14Well, let’s say there are goods that the marginal benefits cannot be separated or that
1:21:21they are so lumpy that…
1:21:22Such as what? I want examples.
1:21:25Roads, for instance.
1:21:27Roads? You can have private toll roads. You’ve had them for years. Is there any reason why
1:21:32this interstate highway that you have, the New York Thruway, is there any reason why
1:21:38that couldn’t be leased out to private enterprises to run and they could finance it by charging
1:21:43a fee?
1:21:45Okay, my question concerns social goods. Do you accept the fact that there are certain
1:21:51goods that the private economy cannot supply?
1:21:56I accept that there are goods which the private economy is not likely to supply. I accept
1:22:01that there are goods in which it is difficult through a private economic system to charge
1:22:06everybody who gets the benefits from them. In those cases, however, it is also true that
1:22:12it’s not easy for the government to supply them. You see the problem with the direction
1:22:17you are going in is that there is a strong tendency to say, “Here’s a market failure.”
1:22:23I have no way in which Rochester University can be made to pay those citizens of Rochester
1:22:31whose shirt is dirtied by the amount of smoke that comes from Rochester University’s chimneys.
1:22:37Alright, that’s a market failure. Rochester is imposing a cost on people; it ought to
1:22:42pay them for it. It’s buying their services in effect; their services of letting their
1:22:47shirts get dirty so that Rochester can heat its buildings. That’s true, that’s a problem,
1:22:57but in those same cases it’s also difficult to have government do anything about it. And
1:23:02if you are going to consider cases of market failure like that, you have to put into the
1:23:07balance the fact that when government seeks to achieve an answer to it you are likely
1:23:12to have a government failure.
1:23:14I agree. Okay, I was leading up to this question: considering that there are externalities
1:23:23like, as you said, pollution, how can government limit itself to distinguish between the social
1:23:31goods and the private goods?
1:23:33Well it cannot, and there is no easy way to limit it. There are hard questions; there
1:23:40isn’t an easy answer for every question. And my answer would be to you twofold.
1:23:47It would be first of all, if government decides to do something in that area, it will do least
1:23:53harm and most good if it does it via effluent charges or the equivalent, rather than via
1:23:59setting standards or imposing specific requirements. Second, government ought not to step in and
1:24:07try to do anything unless there is a very, very strong case that the net disadvantages,
1:24:15the net third-party effects are of significant magnitude, because the costs of doing it are
1:24:22significant. Government is going to do it imperfectly and you are comparing one imperfection
1:24:28with another. And I think we have had a great deal of experience by now which suggests that
1:24:34you are about as likely to make matters worse- as you are better. That’s not a clean and
1:24:39neat answer, and I don’t think you can get a clean and neat answer, because I think in
1:24:43all of these cases you are dealing with a balance sheet in which there are certain advantages
1:24:49of the proposed action, there are certain disadvantages, and you have to weigh them
1:24:53up. And all I’m urging is that you make sure you look at both sides of that balance
1:24:57sheet and not only at one; that you don’t take the naive view which so often is taken
1:25:01that, lo and behold, there’s an evidence of a market failure- Boom!, government should
1:25:06step in and do something about it--without taking into account the possibility of a government
1:25:10failure as well. Thank you.
1:25:12If the middle class controlled this coalition that you were talking about earlier, why are
1:25:16they so upset with the way the government is handling their life and their share of
1:25:20the pie?
1:25:20I was explaining that to you earlier, and that was because they really don’t get anything
1:25:26out of it. They are you see, each one separately… it’s a fallacy of composition. It is true,
1:25:32every individual program works this way, but what you gain on the one, you lose on the
1:25:37other. And the problem is that you have a system under which each one of us tends to
1:25:44have concentrated interests in certain ways and the costs are diffuse. And therefore,
1:25:49each one of us gets our program, but at the expense of paying everybody else’s. And
1:25:56so the net outcome is- that we may be worse off. And what you have is a situation in which
1:26:02you have, as it were, a local equilibrium but you don’t have a global equilibrium
1:26:06in which there is a drastic rearrangement which would make everybody better off.
1:26:13But if that’s the situation, why can’t we find a method to overcome all these impediments
1:26:18and arrive at this global equilibrium because…
1:26:21I hope we can. The purpose of my talking this way, and of your listening, and of our trying
1:26:26to persuade one another is to try to see if we can find a way to do it. And I think the
1:26:30way to do it is to try to wrap these programs together and attack it through some kind of
1:26:38constitutional limitations on the aggregate amount that can be spent in these ways.
1:26:43Thank you.

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