Milton Friedman at Hillsdale College 2006

July 2006

Free to Choose: A Conversation with Milton Friedman

Milton Friedman
Economist

Milton Friedman is a senior research fellow at the Hoover Institution at Stanford University and a professor emeritus of economics at the University of Chicago, where he taught from 1946-1976. Dr. Friedman received the Nobel Memorial Prize for Economic Science in 1976, and the National Medal of Science and the Presidential Medal of Freedom in 1988. He served as an unofficial adviser to presidential candidate Barry Goldwater and Presidents Nixon and Reagan. He is the author of numerous books, including Two Lucky People (with Rose Friedman).

The following is an edited transcript of a conversation between Hillsdale College President Larry Arnn and Milton Friedman, which took place on May 22, 2006, at the Ritz-Carlton Hotel in San Francisco, California, during a two-day Hillsdale College National Leadership Seminar celebrating the 25th anniversary of Milton and Rose Friedman’s book, Free to Choose: A Personal Statement.

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LA: In Free to Choose you discuss Abraham Lincoln’s “House Divided” speech, which you relate to the great task that the American people face. Like Lincoln, you argue that a house divided against itself cannot stand: America is going to be a government intervention country or it’s going to be a free market country, but it cannot continue indefinitely as a mixture of both. Do you still believe that?

MF: Yes, I very much believe that, and I believe that we’ve been making some headway since Free to Choose appeared. However, even though it is real headway compared to what was happening before, we are mostly holding ground.

LA: What do you think are the major factors behind the economic growth we have experienced since the publication of Free to Choose?

MF: Economic growth since that time has been phenomenal, which has very little to do with most of what we’ve been talking about in terms of the conflict between government and private enterprise. It has much more to do with the technical problem of establishing sound monetary policy. The economic situation during the past 20 years has been unprecedented in the history of the world. You will find no other 20-year period in which prices have been as stable—relatively speaking—in which there has been as little variability in price levels, in which inflation has been so well-controlled, and in which output has gone up as regularly. You hear all this talk about economic difficulties, when the fact is we are at the absolute peak of prosperity in the history of the world. Never before have so many people had as much as they do today. I believe a large part of that is to be attributed to better monetary policy. The improved policy is a result of the acceptance of the view that inflation is a monetary phenomenon, not a real phenomenon. We have accepted the view that central banks are primarily responsible for maintaining stable prices and nothing else.

LA: Do you think the Great Depression was triggered by bad monetary policy at a crucial moment?

MF: Absolutely. Unfortunately, it is still the case that if you ask people what caused the Great Depression, nine out of ten will probably tell you it was a failure of business. But it’s absolutely clear that the Depression was a failure of government and not a failure of business.

LA: You don’t think the Smoot-Hawley tariff caused the Depression?

MF: No. I think the Smoot-Hawley tariff was a bad law. I think it did harm. But the Smoot-Hawley tariff by itself would not have made one quarter of the labor force unemployed. However, reducing the quantity of money by one third did make a quarter of the labor force unemployed. When I graduated from undergraduate college in 1932, I was baffled by the fact that there were idle machines and idle men and you couldn’t get them together. Those men wanted to cooperate; they wanted to work; they wanted to produce what they wore; and they wanted to produce the food they ate. Yet something had gone wrong: The government was mismanaging the money supply.

LA: Do you think our government has learned its lesson about how to manage the money supply?

MF: I think that the lesson has been learned, but I don’t think it will last forever. Sooner or later, government will want to raise funds without imposing taxes. It will want to spend money it does not have. So I hesitate to join those who are predicting two percent inflation for the next 20 years. The temptation for government to lay its hands on that money is going to be very hard to resist. The fundamental problem is that you shouldn’t have an institution such as the Federal Reserve, which depends for its success on the abilities of its chairman. My first preference would be to abolish the Federal Reserve, but that’s not going to happen.

LA: I want to talk now about education and especially about vouchers, because I know they are dear to your heart. Why do you think teachers unions oppose vouchers?

MF: The president of the National Education Association was once asked when his union was going to do something about students. He replied that when the students became members of the union, the union would take care of them. And that was a correct answer. Why? His responsibility as president of the NEA was to serve the members of his union, not to serve public purposes. I give him credit: The trade union has been very effective in serving its members. However, in the process, they’ve destroyed American education. But you see, education isn’t the union’s function. It’s our fault for allowing the union to pursue its agenda. Consider this fact: There are two areas in the United States that suffer from the same disease—education is one and health care is the other. They both suffer from the disease that takes a system that should be bottom-up and converts it into a system that is top-down. Education is a simple case. It isn’t the public purpose to build brick schools and have students taught there. The public purpose is to provide education. Think of it this way: If you want to subsidize the production of a product, there are two ways you can do it. You can subsidize the producer or you can subsidize the consumer. In education, we subsidize the producer—the school. If you subsidize the student instead—the consumer—you will have competition. The student could choose the school he attends and that would force schools to improve and to meet the demands of their students.

LA: Although you discuss many policy issues in Free to Choose, you have turned much of your attention to education, and to vouchers as a method of education reform. Why is that your focus?

MF: I don’t see how we can maintain a decent society if we have a world split into haves and have-nots, with the haves subsidizing the have-nots. In our current educational system, close to 30 percent of the youngsters who start high school never finish. They are condemned to low-income jobs. They are condemned to a situation in which they are going to be at the bottom. That leads in turn to a divisive society; it leads to a stratified society rather than one of general cooperation and general understanding. The effective literacy rate in the United States today is almost surely less than it was 100 years ago. Before government had any involvement in education, the majority of youngsters were schooled, literate, and able to learn. It is a disgrace that in a country like the United States, 30 percent of youngsters never graduate from high school. And I haven’t even mentioned those who drop out in elementary school. It’s a disgrace that there are so many people who can’t read and write. It’s hard for me to see how we can continue to maintain a decent and free society if a large subsection of that society is condemned to poverty and to handouts.

LA: Do you think the voucher campaign is going well?

MF: No. I think it’s going much too slowly. What success we have had is almost entirely in the area of income-limited vouchers. There are two kinds of vouchers: One is a charity voucher that is limited to people below a certain income level. The other is an education voucher, which, if you think of vouchers as a way of transforming the educational industry, is available to everybody. How can we make vouchers available to everybody? First, education ought to be a state and local matter, not a federal matter. The 1994 Contract with America called for the elimination of the Department of Education. Since then, the budget for the Department of Education has tripled. This trend must be reversed. Next, education ought to be a parental matter. The responsibility for educating children is with parents. But in order to make it a parental matter, we must have a situation in which parents are Free to Choose the schools their children attend. They aren’t free to do that now. Today the schools pick the children. Children are assigned to schools by geography—by where they live. By contrast, I would argue that if the government is going to spend money on education, the money ought to travel with the children. The objective of such an expenditure ought to be educated children, not beautiful buildings. The way to accomplish this is to have a universal voucher. As I said in 1955, we should take the amount of money that we’re now spending on education, divide it by the number of children, and give that amount of money to each parent. After all, that’s what we’re spending now, so we might as well let parents spend it in the form of vouchers.

LA: I have one more question for you. You describe a society in which people look after themselves because they know the most about themselves, and they will flourish if you let them. You, however, are a crusader for the rights of others. For example, you say in Free to Choose—and it’s a very powerful statement—a tiny minority is what matters. So is it one of the weaknesses of the free market that it requires certain extremely talented and disinterested people who can defend it?

MF: No, that’s not right. The self-interest of the kind of people you just described is promoting public policy. That’s what they’re interested in doing. For example, what was my self-interest in economics? My self-interest to begin with was to understand the real mystery and puzzle that was the Great Depression. My self-interest was to try to understand why that happened, and that’s what I enjoyed doing—that was my self-interest. Out of that I grew to learn some things—to have some knowledge. Following that, my self-interest was to see that other people understood the same things and took appropriate action.

LA: Do you define self-interest as what the individual wants?

MF: Yes, self-interest is what the individual wants. Mother Teresa, to take one example, operated on a completely self-interested basis. Self-interest does not mean narrow self-interest. Self-interest does not mean monetary self-interest. Self-interest means pursuing those things that are valuable to you but which you can also persuade others to value. Such things very often go beyond immediate material interest.

LA: Does that mean self-interest is a synonym for self-sacrifice?

MF: If you want to see how pervasive this sort of self-interest is that I’m describing, look at the enormous amount of money contributed after Hurricane Katrina. That was a tremendous display of self-interest: The self-interest of people in that case was to help others. Self-interest, rightly understood, works for the benefit of society as a whole.

Milton Friedman – Power of Choice – Biography (Part 1)

Published on May 20, 2012 by BasicEconomics

Milton Friedman was the best. I had the chance to correspond with him and he was a complete gentleman.

Autobiography

I was born July 31, 1912, in Brooklyn, N.Y., the fourth and last child and first son of Sarah Ethel (Landau) and Jeno Saul Friedman. My parents were born in Carpatho-Ruthenia (then a province of Austria-Hungary; later, part of inter-war Czechoslovakia, and, currently, of the Soviet Union). They emigrated to the U.S. in their teens, meeting in New York. When I was a year old, my parents moved to Rahway, N.J., a small town about 20 miles from New York City. There, my mother ran a small retail “dry goods” store, while my father engaged in a succession of mostly unsuccessful “jobbing” ventures. The family income was small and highly uncertain; financial crisis was a constant companion. Yet there was always enough to eat, and the family atmosphere was warm and supportive.

Along with my sisters, I attended public elementary and secondary schools, graduating from Rahway High School in 1928, just before my 16th birthday. My father died during my senior year in high school, leaving my mother plus two older sisters to support the family. Nonetheless, it was taken for granted that I would attend college, though, also, that I would have to finance myself.

I was awarded a competitive scholarship to Rutgers University (then a relatively small and predominantly private university receiving limited financial assistance from the State of New Jersey, mostly in the form of such scholarship awards). I was graduated from Rutgers in 1932, financing the rest of my college expenses by the usual mixture of waiting on tables, clerking in a retail store, occasional entrepreneurial ventures, and summer earnings. Initially, I specialized in mathematics, intending to become an actuary, and went so far as to take actuarial examinations, passing several but also failing several. Shortly, however, I became interested in economics, and eventually ended with the equivalent of a major in both fields.

In economics, I had the good fortune to be exposed to two remarkable men: Arthur F. Burns, then teaching at Rutgers while completing his doctoral dissertation for Columbia; and Homer Jones, teaching between spells of graduate work at the University of Chicago. Arthur Burns shaped my understanding of economic research, introduced me to the highest scientific standards, and became a guiding influence on my subsequent career. Homer Jones introduced me to rigorous economic theory, made economics exciting and relevant, and encouraged me to go on to graduate work. On his recommendation, the Chicago Economics Department offered me a tuition scholarship. As it happened, I was also offered a scholarship by Brown University in Applied Mathematics, but, by that time, I had definitely transferred my primary allegiance to economics. Arthur Burns and Homer Jones remain today among my closest and most valued friends.

Though 1932-33, my first year at Chicago, was, financially, my most difficult year; intellectually, it opened new worlds. Jacob Viner, Frank Knight, Henry Schultz, Lloyd Mints, Henry Simons and, equally important, a brilliant group of graduate students from all over the world exposed me to a cosmopolitan and vibrant intellectual atmosphere of a kind that I had never dreamed existed. I have never recovered.

Personally, the most important event of that year was meeting a shy, withdrawn, lovely, and extremely bright fellow economics student, Rose Director. We were married six years later, when our depression fears of where our livelihood would come from had been dissipated, and, in the words of the fairy tale, have lived happily ever after. Rose has been an active partner in all my professional work since that time.

Thanks to Henry Schultz’s friendship with Harold Hotelling, I was offered an attractive fellowship at Columbia for the next year. The year at Columbia widened my horizons still further. Harold Hotelling did for mathematical statistics what Jacob Viner had done for economic theory: revealed it to be an integrated logical whole, not a set of cook-book recipes. He also introduced me to rigorous mathematical economics. Wesley C. Mitchell, John M. Clark and others exposed me to an institutional and empirical approach and a view of economic theory that differed sharply from the Chicago view. Here, too, an exceptional group of fellow students were the most effective teachers.

After the year at Columbia, I returned to Chicago, spending a year as research assistant to Henry Schultz who was then completing his classic, The Theory and Measurement of Demand. Equally important, I formed a lifelong friendship with two fellow students, George J. Stigler and W. Allen Wallis.

Allen went first to New Deal Washington. Largely through his efforts, I followed in the summer of 1935, working at the National Resources Committee on the design of a large consumer budget study then under way. This was one of the two principal components of my later Theory of the Consumption Function.

The other came from my next job – at the National Bureau of Economic Research, where I went in the fall of 1937 to assist Simon Kuznets in his studies of professional income. The end result was our jointly published Incomes from Independent Professional Practice, which also served as my doctoral dissertation at Columbia. That book was finished by 1940, but its publication was delayed until after the war because of controversy among some Bureau directors about our conclusion that the medical profession’s monopoly powers had raised substantially the incomes of physicians relative to that of dentists. More important, scientifically, that book introduced the concepts of permanent and transitory income.

The catalyst in combining my earlier consumption work with the income analysis in professional incomes into the permanent income hypothesis was a series of fireside conversations at our summer cottage in New Hampshire with my wife and two of our friends, Dorothy S. Brady and Margaret Reid, all of whom were at the time working on consumption.

I spent 1941 to 1943 at the U.S. Treasury Department, working on wartime tax policy, and 1943-45 at Columbia University in a group headed by Harold Hotelling and W. Allen Wallis, working as a mathematical statistician on problems of weapon design, military tactics, and metallurgical experiments. My capacity as a mathematical statistician undoubtedly reached its zenith on V. E. Day, 1945.

In 1945, I joined George Stigler at the University of Minnesota, from which he had been on leave. After one year there, I accepted an offer from the University of Chicago to teach economic theory, a position opened up by Jacob Viner’s departure for Princeton. Chicago has been my intellectual home ever since. At about the same time, Arthur Burns, then director of research at the National Bureau, persuaded me to rejoin the Bureau’s staff and take responsibility for their study of the role of money in the business cycle.

The combination of Chicago and the Bureau has been highly productive. At Chicago, I established a “Workshop in Money and Banking”. which has enabled our monetary studies to be a cumulative body of work to which many have contributed, rather than a one-man project. I have been fortunate in its participants, who include, I am proud to say, a large fraction of all the leading contributors to the revival in monetary studies that has been such a striking development in our science in the past two decades. At the Bureau, I was supported by Anna J. Schwartz, who brought an economic historian’s skill, and an incredible capacity for painstaking attention to detail, to supplement my theoretical propensities. Our work on monetary history and statistics has been enriched and supplemented by both the empirical studies and the theoretical developments that have grown out of the Chicago Workshop.

In the fall of 1950, I spent a quarter in Paris as a consultant to the U.S. governmental agency administering the Marshall Plan. My major assignment was to study the Schuman Plan, the precursor of the common market. This was the origin of my interest in floating exchange rates, since I concluded that a common market would inevitably founder without floating exchange rates. My essay, The Case for Flexible Exchange Rates, was one product.

During the academic year 1953-54, I was a Fulbright Visiting Professor at Gonville & Caius College, Cambridge University. Because my liberal policy views were “extreme” by any Cambridge standards, I was acceptable to, and able greatly to profit from, both groups into which Cambridge economics was tragically and very deeply divided: D.H. Robertson and the “anti-Keynesians”; Joan Robinson, Richard Kahn and the Keynesian majority.

Beginning in the early 1960s, I was increasingly drawn into the public arena, serving in 1964 as an economic adviser to Senator Goldwater in his unsuccessful quest for the presidency, and, in 1968, as one of a committee of economic advisers during Richard Nixon’s successful quest. In 1966, I began to write a triweekly column on current affairs for Newsweek magazine, alternating with Paul Samuelson and Henry Wallich. However, these public activities have remained a minor avocation – I have consistently refused offers of full-time positions in Washington. My primary interest continues to be my scientific work.

In 1977, I retire from active teaching at the University of Chicago, though retaining a link with the Department and its research activities. Thereafter, I shall continue to spend spring and summer months at our second home in Vermont, where I have ready access to the library at Dartmouth College – and autumn and winter months as a Senior Research Fellow at the Hoover lnstitution of Stanford University.

From Nobel Lectures, Economics 1969-1980, Editor Assar Lindbeck, World Scientific Publishing Co., Singapore, 1992

This autobiography/biography was written at the time of the award and first published in the book series Les Prix Nobel. It was later edited and republished in Nobel Lectures. To cite this document, always state the source as shown above.

Copyright © The Nobel Foundation 1976