DISCUSSION

Hello, I am Linda Chavez and welcome to Free to Choose. Joining Dr. Friedman for a discussion of the failure of socialism are Gary Becker from the University of Chicago and Samuel Bowles of the University of Massachusetts. Dr. Bowles, I think we can all agree that socialism has failed Eastern Europe. Dr. Friedman believes that the path out of that is the free market and I think he thinks there are lessons for the United States. What do you think?

Bowles: The homeless people are homeless because they are poor and they are out of work. They are not homeless because of rent control.

Friedman: I beg your pardon. All of them aren’t. Of course there are some like that, but the existence of rent control has certainly increased the number of homeless.

Becker: Many people are homeless because they are mentally ill. But the homeless is a tiny fraction. Housing policy in the United States should not be oriented around the homeless because that is a tiny part of the problem in any major city, and certainly outside of major cities. If you look at the bulk of housing in the United States, I see no evidence that it cannot be adequately provided by the private sector.

Bowles: Let’s talk about incentives because I know both of you like to talk about incentives a lot. I think incentives are terribly important. Milton says in the show, and I agree with him, that we have to choose between taking orders from the top down, or incentives at the bottom. Now Milton’s idea of how do you get the incentives down at the bottom is essentially a view of an economy in which individuals, through their ownership of property, can own the results of their hard work and their innovation. It is a great idea. It doesn’t exist anywhere and it can’t exist. When I read your stuff Milton and when I watch you on TV, I think, you know, Milton has this idea of, Charlie Brown and Linus are going to have a lemonade stand and Lucy is going to have another lemonade stand and that is your idea of capitalism. But that is a myth. That is not what capitalism is. We don’t have thousands and millions of little firms competing on a level playing field. We have giant industrial corporations that use their power to their own advantage and to the disadvantage of others. That is what you have to be able to deal with you if you want to be relevant to the modern world. That is what the countries that I talked about, Sweden, Korea, Norway, Japan, are very good at doing __ dealing with the problem of economic power so that the power of those institutions can be used by and large for public good. If you ignore them with this lemonade stand capitalism myth, you are simply giving those powerful spenders of wealth and affluence free rein.

Friedman: Gary, it is a strange thing that not a single one of the countries that you have described has a standard of living as high as that of the United States with respect to the bulk of its population.

Bowles: Yes and the United States got its standard of living through precisely the policies that you have opposed such as protecting our industrial base from . . . . . .

Becker: I would be very happy to go back to the 19th century U.S. policy. It was a tiny part. The government, sure they did some things, but as a tiny part of the economy and let’s go back to a resource that went through the government at that time what was it? Ten percent of the maximum. The largest employer of the government was the postal system. That is the main thing the government was doing. Some tariff policies probably hurt us and a few other activities. Let me come back to the other issue raised then. There are millions and millions of companies in the United States. It is true that in some sectors these are very large companies like in manufacturing. But what I think has happened, particularly in the modern world, is these large companies are now having to compete with large countries from elsewhere. It is not capitalism. It is the political sector that is limiting that competition, partly at the behest of these companies, but also at the behest of the employees of these companies to limit the competition from abroad, but most industries, it would be hard put for you to argue now that even the large companies aren’t facing significant competition in the United States markets, not only from domestic companies, but from large companies based abroad.

Bowles: Oh, I agree with that completely. But what I am concerned about is this. If you work at General Motors or IBM and you are a secretary or you are a production worker, what you are getting there is you are getting orders from the top down. You don’t own your work. You don’t own the results of your work. When you talk about incentives from the bottom, if you want to get incentives from the bottom, you have to get the people who work at the bottom to own the results of their work and to have a say in how their work is going to be used. You can do that if you . . . like employee ownership and employee control. That is what made Wierton Steel from almost bankruptcy to one of the most successful steel companies in the United States __ employee ownership and control. The same with Columbia Aluminum, one of the most efficient aluminum companies in the United States. It went from shutdown to being a very successful company through employee ownership and employee control over their production processes. That is what I call putting incentives at the bottom where they belong, but you never advocate that.

Becker: I am not against employee ownership, but you have to permit employee ownership to compete on a level playing field against other forms. We permitted that in the United States, up until 1975, when you had trivial employee ownership in the United States. That to me suggests that workers didn’t want it.

Chavez: Dr. Friedman, who owns companies now? Are these in the hands of a small number of people or is it stockholders?

Friedman: No, it is the stockholders who own it and a very large fraction of that is owned in pension plans which are for the benefit of the employees. But of course, Gary is right, what produced the spate of employee ownership was government subsidy through ESOP’s since 1975.

Friedman: I think that is disgraceful.

Becker: That is the only reason you have gotten the growth of employee ownership in the United States. We have 5,000 or 6,000 employee owned companies now in the United States, and you take away these subsidies and they think that would go down to 1,000 or so, and let them be there, that is fine. Let the market determine which form is most desired and which form is most efficient.

Chavez: Gentlemen, obviously we have not exhausted this subject, but we are out of time. Thank you for watching Free to Choose. Next week we will be discussing the failure of our schools. We send our kids to school hoping that they will receive something that will benefit them in the future for when they go out here and compete in the job market. Unfortunately, none of that is taking place out of Hyde Park.

DISCUSSION

Hello, I am Linda Chavez and welcome to Free to Choose. Joining Dr. Friedman for a discussion of the failure of socialism are Gary Becker from the University of Chicago and Samuel Bowles of the University of Massachusetts. Dr. Bowles, I think we can all agree that socialism has failed Eastern Europe. Dr. Friedman believes that the path out of that is the free market and I think he thinks there are lessons for the United States.

Chavez: I would like to bring this discussion back to the United States for a moment. What about socialism in the United States. There has been one area where we have tried to redistribute wealth. We have done that through our welfare policies and social security. Has that worked?

Friedman: For some people, it benefited, but taken as a whole, I think it has been a failure.

Becker: I agree with that. I think the big problem in the United States has been, of course, some of the welfare programs have been successful. But by trying to do too many things, the government is no longer doing the things that it should be doing. We all agree there are many things government should be doing. I agree with Milton __ he is a strong man to be say this is an issue between no government and 100% government. The question is what are the tasks that government should be doing. I believe the tasks are, of course, defense against outside aggression, internal protection, some infrastructure, protection of the people can’t make it. In every one of these areas, we are not doing very well. I think we are not doing well mainly because we are trying to do a lot of things we shouldn’t be doing. They can’t do all of them.

Chavez: I couldn’t help but think, Dr. Bowles, as I watched that film that the public housing area that we saw in Eastern Europe and the problems that we have here in the United States. Aren’t there some lessons to be learned?

Bowles: There is absolutely no reason why housing shouldn’t be privately owned. That does not mean that the government has no role in housing. It seems to me that housing is precisely something that ought to be a matter of private property. But we also know, from the experience of this country, that the market itself doesn’t provide housing that the rest of the public thinks is adequate for the vast majority of poor people in this country. Now that doesn’t mean it has to be done by government building the houses, but it certainly does mean that something has to be done or we are going to have the kind of homeless crisis that we have in this country and they are getting one in Eastern Europe too.

Becker: The homeless crisis is a tiny fraction of the population of the United States. Let’s not make that a major part of the housing problem in the United States. I am not at all convinced that there is any evidence suggesting that the private system cannot provide adequate housing. I think there is a good case to be made that there are poor people in this country and the government obviously has to help them out. We all agree on that. But should they be doing it by building housing or by giving them income and permitting them to spend as they see fit. I see no evidence from the U.S. or any other country who were better off when then government takes a major role in housing or any of these other particular activities that allocate resources.

Friedman: What role has been played in the difficulty of getting housing by government interventions? By rent control? By excessive building code regulations, many of which are designed to protect the interests of special groups. Government played a very large role.

Bowles: Well, there is much to celebrate in Eastern Europe __ not only the elimination of dictatorial rule. I go back on that a long time. I was in the Soviet Union in the late 50’s (1958 and 1959) as a musician and I met many Russian musicians and made friends with a lot of Russian people who found themselves harassed and victimized by the police. In fact, my own musical group was prevented from singing a couple of times by the police. That is all on the way out and I hope it is gone for good. Equally welcome is the end of this myth of a centrally planned society. That is gone too and I hope that basically the lesson is learned. But Milton seems to think that we have to choose between either a centrally planned society or a society in which we have markets which are basically unregulated. So the choice is really between all or nothing.

I don’t think that is the choice. I think what Milton is posing for us is a model which is as unrealistic as a centrally planned model. It is outdated, it won’t work, it is extreme, and I think it is undemocratic. I think that we have choices in between, what Milton called the third way, a way that he said wouldn’t work, has been shown to work around the world. I think that Eastern Europe would be very ill-advised to take Milton’s advise on this. Yet, the last time anybody took Milton’s advise on economic policy was Ronald Reagan and Ronald Reagan has put the U.S. economy into a situation where it can’t pay its bills and is facing mounting economic instability and difficulties.

Chavez: Dr. Friedman, what about this midway path?

Friedman: First of all, I utterly reject what Sam says about the results of Ronald Reagan’s changes. We had a decade of extraordinary growth, increased employment in which inflation was brought down sharply. Ronald Reagan came into office at a period of very high inflation, and so on. But this program is not about the Reagan administration. This program is about Eastern Europe and I want to go to Eastern Europe.

I believe Sam is completely wrong in saying that the model I propose is outdated. I believe that what he calls obsolete is something very different. You have had the third way __ you have had it in the United States; you have had it in Sweden; you have had it in Britain; you’ve had it elsewhere. In every case it has been built on the foundation of a long period of what I call the first way. The United States had 150 years of essentially a free private market before it launched on this period of the welfare state. The same thing was true in Britain, the same thing was true in Sweden. I believe he will find it very difficult to site any example of a country which started from a very low level and immediately adopted that combination of policies.

Becker: Let me add something on that. I think the lesson that we learned from what happened in Eastern Europe goes beyond simply that central planning doesn’t work. I think we all agree that it doesn’t work. But it is more than that __ it is the role of private property in the system and the incentives provided by private property.

I don’t know what socialism means anymore, but I remember when I was in Poland I asked the head of the ideology department is private property consistent with socialism? He said, it may be. Then I asked him, well what is the difference between socialism and capitalism. His answer was, we are still working on that. I think what we have seen is a rejection of the ideas associated with traditional socialism which are suppression of private property, government ownership of property, and so on.

Now, how far should we move in the other direction? I think that is question you are asking Sam, and is there a middle way. I think the middle ways that have been successful have all been largely reliant on private property, private ownership, private incentives. The difficult question is one that Milton raised in the documentary. How far can you redistribute income and make it consistent with effective incentives?

I don’t think we know the boundary point, whether 30% of the income being redistributed is too much, 40%, 50% __ my own feeling is that we have gone much too far in Sweden and some of the other Scandinavian countries, and they are beginning to step back from this. They are lowering maximum tax rates to 50% now __ they were up to 80%. So I think there is a third way, but that third way is going to be a lot closer to unregulated market than toward a socialist organization of resources and a suppression of private property.

Bowles: Let’s get back to the particulars though. You talk about Sweden and you talk about the third way failing, and Milton says nobody has ever really gotten rich on the third way __ they have only benefited from that. Let’s talk about the United States. The period you described included a very long period in which the United States was a highly protectionist country in which our industrial base was developed from Alexander Hamilton on for some time, and then during the late 19th and early 20th century. To call that a free market solution would be against everything you have taught. Or, if one wants to go back into the 19th century, the huge subsidies of the railroads were, of course, an intervention in the market.

In the case of England that you talk about, the same is true. The role of the British Navy and for example the Parliament in actually establishing the private property which is what you favor. This was done by a government intervention. We talk about the other cases. Talk about Sweden or about Korea. These are two countries which I think are justly admired for their economic performance. Both countries have income distributions far more equal than the United States.

In Sweden, over the half the GNP is taxed. Now, people in this country would say that obviously they have gone too far. But let’s look at the test of the market. Sweden and Korea have been defeating the United States in world markets. Exports have grown five percent per year during the Reagan/Bush years in Sweden. In the United States, they have grown one percent per year. In Korea we know they have grown much better. If you want to go on to Norway, where much of the investing is done by the government, they have grown their exports even faster than Sweden. Meanwhile, we can’t compete in world markets.

So the lesson of these countries is if you look at the facts Milton, a combination of government regulation and the market works. I agree with Gary. I think private property is extremely important because the incentives associated with owning the results of your work is essential. But private property does not mean that we have to let the market go unregulated and all the evidence says that the countries that are beating us in the world market today don’t do it. They are not that dumb. Japan doesn’t do it; Korea doesn’t do it; Sweden doesn’t do it.

Friedman: Let’s not throw straw men around. Obviously I am not in favor of no government. Government has some very important roles to play. Those are very limited. You take the case of the United States during the 19th century and of Britain in the 19th century. At the time of Queen Victoria’s jubilee in 1899, total government spending in Britain was 10% of the national income. Up until 1929 in the United States, except for periods of great war, total government spending in the United States was about 10% of national income. Now that is a very far cry from a government which spends over half of the national income . . . . and a little less than half in the United States.

Bowles: You are opposed to capital controls. You are opposed to telling people they can’t move their money internationally. That is what Korea does. You are opposed to . . .

Friedman: I think Korea makes a mistake by doing it.

Bowles: Korea has beaten us by exactly the policies you are posing.

Friedman: So has Hong Kong. Hong Kong has beaten us by the policies I am proposing.

Bowles: . . . if Korea is not a middle way and if Sweden is not a middle way, then I would like to know what you call it.

Becker: Korea is a lot closer to a market-oriented economy than any of the economies we have been talking about.

Bowles: The government approves the heads of the banks in Korea. They have nationalized their steel industry and have one of the most efficient plants in the world at Palhang. If you call that a private economy . . .

Becker: What fraction of resources in Korea goes through the government?

Bowles: A tremendous fraction if you take account of the fact that the banks are centrally run and they control the credit allocations there and they don’t let people take their money out of the . . .