The Daily Hatch

worked pretty well for a whole generation. Now anything that works well for a whole generation isn’t entirely bad. From the fact __ from that fact, and the undeniable fact that things are working poorly now, are we to conclude that the Keynesian sort of mixed regulation was wrong __

FRIEDMAN: Yes.

LEKACHMAN: __ or alternatively that we need still more regulation. That’s my conclusion, I might say.

FRIEDMAN: You want the right people manipulating the leaders. But go back. Memory smooths things out. If you really look at that 25_year period you’re talking about, it was not a period of stability; it was a period that was punctuated by the very sharp inflation of the Korean War. It was a period that was punctuated by three recessions in the course of about eight years in the fifties and early sixties. It was a period in which you had a __ inflation really starting to go from creeping to running, in the latter sixties. It was a period which laid the ground work for the kind of situation in which we are now, where you have both higher unemployment and higher inflation. It was __

TEMIN: I don’t think that followed. I mean there were these movements, as we say, but they weren’t the movements like the 1930s. There was a recession in ’58, yes.

FRIEDMAN: I agree.

TEMIN: We all called it a recession. We all worried about it and so on, but it was a small thing, little potatoes.

FRIEDMAN: The same thing was true in earlier periods between The Great Depression. If you take the area between the great depression in the United States of the 1870s and the 1890s, again you had a period like that. If you take it between The Great Depression of the 1890s and World War I, with a minor __ with one minor exception, it was similar to that. So that what you have, and this is a historical fact, is that except for the great depressions, all of which are linked to monetary collapses and to governmental involvement, in the interim period, the society has been reasonably stable.

MCKENZIE: Haven’t we reached the stage, incidentally, where we need not again see anything like the great depression. You say recessions, yes; but it bears no relationship to what we knew __

FRIEDMAN: No.

MCKENZIE: __ in the thirties. Have we solved that problem now? People are deeply __

JAY: No, we haven’t. Because I think the seeds of it remain there. I don’t agree with Professor Lekachman that everything was __ I don’t want to misparaphrase him __ but did pretty well until 1973 and then it suddenly all went wrong. It seems to me that the seeds of the subsequent instability, stagflation, were there before. That each time round the economic cycle inflation went a little faster. Each time around the economic cycle unemployment tended to be a bit higher. But this brings me to what is my disagreement with Professor Friedman. I agree with him that government has failed to correct, and is bound to fail to correct that instability. I do not agree with him that it is the root cause of that instability or simply removing or containing the government will remove that instability. Because his constitution, and I agree with all the things he wants to put into it, but I want to put more into it, leaves big capital entirely free to operate. Now he doesn’t mind that. In response to big capital, you are bound to get __ as a simple, natural reaction __ big labor. He doesn’t mind that. He’s quite happy with that. But my contention is that once you have big labor, you have a way of setting rewards in society, not only by trade unions, but through all sorts of other processes whereby groups get together in order to exploit the political process and legal rights, and to protect themselves from competition, in which, inevitably, people set rewards above what economists call the “market clearing price” for labor. They set levels of rewards which make it impossible that everybody should be employed and you therefore have a built-in tendency to high unemployment. If governments react to that on the Keynesian pattern by trying to inject spending which will enable these people to be employed, then I agree with Professor Friedman that all you get is faster and faster inflation, and that if you like, is caused by the government. But the government is a proximate cause of an original instability that is already there. And there’s nothing in Professor Friedman’s constitution which would correct that inherent, if you like, contradiction or flaw in classical western political economy.

FRIEDMAN: Do you deny, Peter __

MCKENZIE: Let me get the reaction to that __

FRIEDMAN: __no, I want to ask just one question of Peter. Do you deny that big government plays a large part in the rise of big capital and big labor?

JAY: I think they’re interactive. I once said big capital causes big labor, causes big government, causes big failure. That is the tragic story, in my opinion, of the 20th century.

FRIEDMAN: And what about if you start that __

JAY: We have to unravel that.

FRIEDMAN: __ if you start that route with big government. Will it be wrong? Big government causes big capital, causes big labor, causes big failure?

JAY: I don’t think historically that’s what happened. But you and I are agreed, we don’t want big government.

FRIEDMAN: That’s right.

JAY: What we’re disagreed about is what else we need.

LEKACHMAN: I think something is seriously wrong with a beautiful system which develops this big, clumsy, aggressive government, huge corporations, with more influence over their markets than is desirable from the standpoint of free competitive theory, trade unions, which at least according to some opinions, have a similarly malignant influence on their markets. There must be something radically flawed with the capitalist system which allows these institutional developments. This doesn’t alarm me because I’m a socialist, but I would __ I would readily __

FRIEDMAN: There must be something radically wrong with socialist philosophy which allows the __ extraordinary __ the much worse developments that have occurred, wherever there has been any real significant attempt to put a thoroughgoing socialism into practice.

LEKACHMAN: Socialism is a word of many meanings.

MCKENZIE: Now I think we might easily get into a quite serious debate on that point.

VOICE OFF SCREEN: Right.

JAY: I think it’s possible to note in passing that they may both be right.

MCKENZIE: Yes.

JAY: That conventional capitalism, conventional socialism, as conceived in the 20th century, are both wrong and that the polarization of the debate between those simple two alternatives greatly impoverishes the real range of political-economic choices which modern societies have.

FRIEDMAN: But what has happened? Over and over again one claim after another for the kind of socialism __ this kind of socialism or that kind of socialism __ has turned to ashes. And each time the answer has come, “Oh well, it was a wrong brand of socialism that was adopted, or the wrong people were running it.”

VOICE OFF SCREEN: But you’re saying __

JAY: You’re arguing with yourself when you’re saying __

FRIEDMAN: No I’m not.

JAY: The Federal Reserve in 1929 failed to do the right thing. It was the wrong brand of government.

FRIEDMAN: It was the wrong brand, absolutely, but what I’m saying is something different. I can at least point to examples in history of systems of capitalist systems in which the government had a fairly limited role, not my ideal government. Many things, doing many things I would not want it to do. But I’m going to point to such examples over long stretches of history in __ which have been relatively successful. Where the major achievements of humankind, not merely in economics, but in all other areas, have largely arisen. It is very difficult to point to any similar examples __

TEMIN: But then you are pointing back __

FRIEDMAN: __ of where big government has achieved such success.

TEMIN: But you said before you didn’t like to go back. You’re now talking about going back.

FRIEDMAN: No, no. I didn’t say I didn’t like to go back.

TEMIN: They took place in different times.

FRIEDMAN: What I said is going back or forward is irrelevant. What we want to do is __

TEMIN: But it’s not irrelevant to this discussion __

FRIEDMAN: __ the right thing wherever it comes from.

TEMIN: __ because as Bob Lekachman said earlier, things have increased in scale, and the scale of business and increased, and you were saying just before, big government, big labor, big industry, big firms go together, and you didn’t accept it before, when Bob said you’ll accept it now from here.

FRIEDMAN: No, no. I don’t accept it. What I accept is that big government is a major factor promoting big labor and big capital. I did not accept that in the absence of big government you would have the big capital and big labor that worries him.