The Daily Hatch

The massive growth of central government that started after the depression has continued ever since. If anything, it has even speeded up in recent years. Each year there are more buildings in Washington occupied by more bureaucrats administering more laws. The Great Depression persuaded the public that private enterprise was a fundamentally unstable system. That the depression represented a failure of free market capitalism, that the government had to step in to perform the essential function of stabilizing the economy, of providing security for its citizens. The widespread acceptance of these views, sparked the enormous growth in the power of government that has occurred in the decade since and that is still going on. We now know as many economists knew then that the truth about the depression was very different. The depression was produced or at the very least, made far worse by perverse monetary policies followed by the U.S. authorities.

Far from being a failure of free market capitalism, the depression was a failure of government. Unfortunately, that failure did not end with The Great Depression. Ever since, government has been attempting to fine tune the economy. In practice, just as during the depression, far from promoting stability, the government has itself, been the major single source of instability.

DISCUSSION

Participants: Robert McKenzie, Moderator; Milton Friedman; Robert Lekachman, Professor of Economics, City University, New York; Nicholas Von Hoffman, Syndicated Columnist; Peter Temin, Professor of Economics, MIT; Peter Jay, British Ambassador to the United States, 1977_1979

MCKENZIE: And now we join the invited guests here at the University of Chicago, as they discuss Friedman’s interpretation of those events and their implications for today.

LEKACHMAN: The 1929 crash, the succeeding calamities, were not the first of their kind. Capitalism has been subject to severe depressions since the beginning of the industrial revolution. This was the first time, however, government tried to intervene seriously. It did it very badly. The lesson I would draw is a very simple one: Government is unavoidable; the expectations of the public are proper; government ought to do better oddly enough the government did do better until very, very recently. Until, I would say, October 1973, even, government did reasonably well in fulfilling the expectations of the public. I’m an unrepentant proponent of government intervention, intelligent government intervention. But I would describe much of the intervention which has followed the great 1929 crash as quite intelligent.

MCKENZIE: Let’s take a further look, though, at this argument that just as during the depression, far from promoting stability, the government has itself been the major single source of instability.

VON HOFFMAN: I_I don’t think there is any stability this side of the graveyard. I mean, I think __ I don’t think it matters what system you’re working under, you are not going to __ you are not going to have a level and hold it under any system with living human beings.

TEMIN: Governments are larger now and therefore more of a source of an influence for good and for bad. And I think like Mr. Von Hoffman that you can’t get perfect stability, given that you’re going to have governments, given that there are legitimate functions of governments, there are also risks in having the government be as active as it is.

MCKENZIE: Peter Jay.

JAY: I think that government is a god that has failed. I think that we have too much of it and need less of it. I think it has failed to prevent both the modern forms of economic instability and the prewar ones. I do not, however, think that government is the original or primary source of that instability, and I do not think that simply getting rid of the government, or greatly reducing it, which I’m in favor of, will, by itself, remove the instability.

LEKACHMAN: I would put it this way: There was __ there was a great economist, with a suitably esoteric doctrine, which could nevertheless be translated as Dr. Friedman did in the film, into simple English, at the same time as there was the widespread hardship of The Great Depression and the natural yearning of human beings not to repeat anything like it. So you have a coincidence of an appropriate theory, with an appropriate public sentiment, and I suppose the symbol in the United States was the passage of 1946 of the Employment Act of that year. Which, it was a weak measure, but it was nevertheless a public declaration of an obligation of government to do something about employment, and economic prosperity, and a good thing, too.

MCKENZIE: Now that’s the __ really the crux of the matter. Do you agree it was a good thing too, that obligation was accepted by government at that stage?

JAY: I think it’s very important here to distinguish two completely different issues. There is the rather narrow issue as to whether Keynes was right or wrong in believing that you could stabilize the economy with regard to really one essential variable _ unemployment _ by a certain technique which he talked about. We may now think that he was wrong, but that’s a quite separate issue from the broad political philosophical issue associated with socialism, associated with social democrats, and many other so-called left wing political thinkers, that the duty of government, so far as it can, is to concern itself not only with defense and law and order and the traditional things, but also with the social welfare and the economic welfare of a society. Now that’s a broad philosophical __

MCKENZIE: Is that a disaster, as Milton seemed to be implying, or was it a good and helpful, useful thing to happen?

JAY: Well, that is one of the great __ perhaps the greatest of all debates in political philosophy, as to whether or not it is right or is not right to believe that a society, collectively, should concern itself with these things and has the right, having concerned itself, through law and through government and in other ways, to move to try to correct these things.

VON HOFFMAN: Well I just __ it seems to me that Americans have believed that for the last century. I mean William McKinley ran on the slogan of a full dinner pail, so that the notion that this is a government responsibility for prosperity dates from the 1930’s I think is erroneous. What I wonder about after having seen that film is this: We have in 1929 __ we have the man who could have saved it dead two years and in 1946 we’ve got the man who might have saved it dying. So what I have to ask is: Are we doomed to find out the right answer only too late? Is it possible that our __

TEMIN: Or should we just look for somebody who’s recently died.

VON HOFFMAN: Exactly. Rummage the morgues. (Laughter)

MCKENZIE: Well, you asked the question __

FRIEDMAN: No, and I think the question is a very different one. And it goes to much of the discussion to this point. Everybody looks for the right man. You say, “Government __

VON HOFFMAN: You brought’em up.

FRIEDMAN: Those men at that time. Quite right. But a system which depends on the right man is a bad system. The Federal Reserve was a bad system because it depended on the right man working it. The idea of demand management, of the kind of thing we’re talking about where Keynes’ death mattered, was a bad system because it depended on a particular man working it. The notion that the problem that Bob Lekachman brought up, that the problem is not the government interferes, but it does it unintelligently, is again a demand for the right man, the man on the white horse who will know what to do. My whole view is very different. It is that it’s the system that’s wrong, and that we’ve got to have a system that the right way to accomplish these objectives is to have a system which doesn’t depend on whether you happen to have the right man pushing the buttons at the right time.

TEMIN: The problem is somebody has to __

FRIEDMAN: Which relies on the __ on establishing a framework within which an invisible hand, within which the activities of people all over are jointly to produce the kind of result. It won’t produce perfect stability; but it’ll produce a far higher degree of stability, a far greater level of freedom, and a far greater level of prosperity than the kind of thing we’ve had with these governmental interventions.

TEMIN: Somebody still has to design the system. You can’t take the people out of it entirely.

FRIEDMAN: Of course.

TEMIN: Unless you’re in the grave as it says.

FRIEDMAN: Of course, but the __ that doesn’t __

TEMIN: But the question is __ I mean it’s said that generals always fight the last war. How do we know that the system won’t fight the last war? We probably won’t have another depression exactly like 1929 to ’33.

MCKENZIE: But, but __

TEMIN: But that doesn’t say we won’t have another depression or another stagflation or another crisis of some other source.

MCKENZIE: But is this process reversible? Because you argued that the public, having been appalled by The Great Depression, in effect demanded of government that they accept responsibility for wellbeing of the economy, for management of the society and so on. Now, that expectation having been raised, can it be reversed?

VON HOFFMAN: Let me answer a question you didn’t ask and say that it seems to me that what we’re getting here is the question of sort of social astrophysics. And that is, do we have an unseen hand, or are we on the war star where we are trying to design a computer that is going to take care of the navigation of this thing. In other words, it seems to me that’s our central question. Is there a mechanism that you can put right in the center of the spaceship that will operate regardless of who is the captain on the quarterdeck at any one moment in time? I don’t think that’s an economic question. I think that’s a question that goes to religion.