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Interview of Milton Friedman Conducted by Robert L. Hetzel March 4, 2003 Robert L. Hetzel: You Milton Friedman: …you’re chances were it’s up against a—what’s the word I want? Robert L. Hetzel: A society that never had a track record for… Milton Friedman: No. I don’t mean that. It’s up against an easy target. The totalitarian society that you describe, it’s very, very unattractive society, as you describe it. Robert L. Hetzel: Right. Milton Friedman: As you described it. And yet, in fact, such societies have been able at times to get the adhesion and support of a very large number of able people. Robert L. Hetzel: I think what I said—each kind of society has to empower its own citizens and a collective society does that by making people feel part of a greater whole, something big. And that’s the… Milton Friedman: But your emphasis is on the—that collective society provides power and really you put it into a great big pyramid and there’s only a little bit of—one person up here can occupy that position of power. But in fact, in any totalitarian society as in a free society; you’ll have many different avenues of power. There’s not a single avenue of power. The church is a hierarchy, but it has many bishops and… Robert L. Hetzel: Cardinals. Milton Friedman: Right. So the piece as a whole needs to give a more specific analysis of the alternative of the collective society. Now, you take a society like the Chinese society, which has lasted for several thousand years. And it’s obviously different in different parts of that dynasty, with different degrees of central control. But during most of that period, they’ve been able to get the adhesion and loyalty of the bulk of its people. And that’s true even today. And that really—there you’re seeing an interesting example where giving a greater degree of individual choice is changing the character of the society very drastically. Robert L. Hetzel: That cohesion is organized around Confucian culture and language. Confucian culture stresses the obedience of the individual to authority. But there’s also a sense of civic responsibility for the person. Milton Friedman: And also very strong family. Robert L. Hetzel: Yes. Milton Friedman: Sense of family. And indeed, I guess in many ways. Robert L. Hetzel: Egyptian society is an example of a society was all organized around the cult figure and around the priestly class and survived for 3,000 or 2,500 years. Milton Friedman: Yeah. Robert L. Hetzel: And to say that it’s striking that those societies survived so much longer than ours is a [unintelligible 00:04:31]. But what’s different is that free societies have been able to grow and create wealth and that’s created a sense of progress, a sense of looking forward and a sense of time where things get better rather than a time where it’s God’s time and that’s something we have control over. So once started, this society could have sustained power—yeah, I don’t have a good answer to your criticism that I don’t have a good account for why certain dictatorial societies were able to survive so long. Milton Friedman: And in that, so far as your own comment, it seems to be that you’re setting up a straw man in part and you need to fill in that—give that straw man some character. And you recognize in there—you of course say very little about, I would suppose that 80% of your words in there are about free society. And so I don’t think your purpose then is—I don’t think—there isn’t a—it’s not clear what the theme of that is. Are you discussing the requisites for growth? I don’t think that’s your part you seem to be doing, and I don’t think that’s your theme. Robert L. Hetzel: Well, yes, it’s sort of… Milton Friedman: And so I would as you the question, what is it you’re trying to say? What is it you’re trying to explore? Are you trying to explore the virtues of a free society? Are you trying to explore the vices of a collectivist society? Robert L. Hetzel: Well, it started out, I was reading newspapers about religious— newspaper articles about religious fanaticism and the common element appeared to be the idea of absolute truth organized around some virtuous behavior. Milton Friedman: In the end, I think that’s right. I think that is a central feature of a religious society. -2- Robert L. Hetzel: And if you have absolute truth, then choice becomes problematic. Why allow people to choose when they can make their own choice and choose a sinful behavior and when you combine that with recourse to forcing power of course, then you have terrorism and religious zealotry. And so then you’re right. Then what I do with that—the comparison it—the original idea was to then say, well, what advantages does a free society have in combating that sort of threat? And the idea was that well, you have two things. One is the choice gives full play to the creative energies of the individuals and the price system coordinates voluntary activity in the way that allows specialization. And that’s specialization provides an incentive for people to invest in different kinds of knowledge and that there are externalities from that that allows innovation and growth so that we can create growth in a sense of progress that’s absent in the other kind of society. But the attack, on free society by the terrorists, it’s not unlike other collectivists attacks in utopian attacks where the adherents want to create a seamless society organized around their principle of truth. And part of the attack, part of the reason the other side is effective is because this side can say we are for virtue. We’re creating a virtuous society and you’ve got this society—look, it’s Sodom and Gomorra out there and free enterprise, capitalism and that leads to individual greed and we’re not very good at responding to that. We’re too busy sort of going about our own business and making money. So one of the other things was that, well, we don’t have a society which is created to enforce a particular version or virtue, but we have societies organized around the respect for individual conscious. And that allows the formation of voluntary associations that pass down virtues and create a civic society so that the ideological attack on a free society is missed—not from their point of view—but is not a weakness. So I can see why it doesn’t seem like it has a single theme. Milton Friedman: As I said, the individual paragraph and sections read very well and make what seem like valid points. But the question is, if you were trying to write a brief summary of it, a three or four sentence summary, I’m not sure how I could write that summary. Of course it’s—you’re dealing with some very complicated issues. Robert L. Hetzel: Yeah. Are there obvious things to read in terms of having more insight into the other side of why it’s a viable form of social organization? Why ultimately… Milton Friedman: I’m not very good at literature references. I have read very little myself on that. It seems to me there must be—there is some good literature, actually, again, about Islam. A fellow at Princeton who’s retired—what’s his name? Robert L. Hetzel: I don’t know, but I can find out. That’s an obvious place to start. And it certainly makes you wonder—there must be some powerful force that took a group of disparate warring, dessert nomadic tribes and gave them a cohesion that they could extend their empire from northern India all the way through Spain and southern Europe. So there had to be some powerful organizing force, something that gave a cohesion in my best… -3- Milton Friedman: It’s so hard to know what—you see, picking a different society. How can you explain Napoleon’s hold on the ordinary citizens of France? When he came back from exile the first time and was able to gather a new army and get everybody enthusiastic. Robert L. Hetzel: It’s what makes people enthusiastic supporters of a winning football team. There’s a real sense of power to be part of something that’s grand and big that’s exciting. It gives you a sense of identity that—even today, the Frenchman are still thinking about Napoleon and Louie the XIV. I mean, their heroes are not Pasteur and La Bossier, they’re Napoleon and Louie the XIV. Because it gave them—they were part of the sense of collective… Milton Friedman: And that must have been the same with the Muslims movement that made people feel that they were conquering the world, and they were. Robert L. Hetzel: Yep. So that’s… Milton Friedman: And that’s what’s the weakness in the kind of system you and I would like to see, of complete free and individual choice. When such a system is established, it sometimes tends to destroy itself. Robert L. Hetzel: On the other side, totalitarian systems that grow through conquest, like the Ottoman Empire. Each new sultan, the first thing he had to do was to go out and conquer some new territory for the empire. That was his first job. And in Rome, the path to power was to conquer some new province. And so the—as the perimeter of the empire spread, a society that was not good at generating wealth, it could only redistribute wealth, would become stretched too thin. And then it would become vulnerable to attack itself. Egypt was a nice example, because they had the dessert between them and all the other conquering powers. So they were able to last longer. I would guess on the other side, the fundamental problem like Gary Becker said. (Let me just close this..) Milton Friedman: Let me keep the sun from coming in here and getting too hot in here. I’m sorry. I didn’t mean to… Robert L. Hetzel: Maybe I extend this analogy too far, but a perennial problem and perhaps the reason that the industrial revolution did not begin in the 10th century Iraq, modern-day Iraq, or in 12th century China was that collections of wealth attracted foreign conquests. And in a free market society that creates enormous amounts of wealth, you also have an incentive to redistribute income not through military conquests, but through use of the government. Milton Friedman: I guess China is a—I guess in a way, you can say the industrial revolution did begin in China. Many of the later developments had their origins in China. But they weren’t carrying through for some reason. Robert L. Hetzel: They were court novelties. -4- Milton Friedman: Yeah. Robert L. Hetzel: They weren’t applied to create wealth or even to create [unintelligible 00:17:55] in the case of gun powder, the printing press case used to mass produce books. Is that what you were thinking in terms of inherent instability of the free market economy, but it… Milton Friedman: Well, no. What was I was thinking there was... Robert L. Hetzel: As opposed to create wealth. And at some point, you live with the incentives. Milton Friedman: Well, it’s not that, it’s that if you take most free market societies, the United States is a good example, we are—in terms of economic system, we’re much more free now than we were 50 years ago. To the extent of—and surely less than 100 years ago. We’ve gone from the situation in which government spending at all levels was about 10% to 13%--national income in 1950 was what—25% or 30%, now probably about 40% to 45%. But that’s interesting there because as you know, it went straight up like this until 1980, and it’s been flat since 1980. So there’s been a counter force coming in. But the short-term—most measures of restraint, government restraint—have long-term gains and short-term costs; and popular measures of government involvement have short-term gains and long-term costs. And that means that you’re always—I don’t think anybody is ever very satisfactorily answered the question whether a free society is a stable or non-stable equilibrium. Robert L. Hetzel: As measured by income re-distribution, the great growth of government was in the 1960s. Milton Friedman: That’s right. Robert L. Hetzel: And that was also a time of very rapid growth. It could be that people thought that they were becoming wealthier and they would trade-off some of this wealth for increased personal security, protection from the market forces that create uncertainty. They thought that was a trade. Milton Friedman: Well, it was really a—the big period of government expansionists really came with Nixon. Robert L. Hetzel: Well, the redistribution of income came with Johnson and then the regulatory society came with Nixon. Milton Friedman: That’s right. I mislead you by bringing you in here, because it’s getting too hot in here. Anyway, I want to get some—a drink of water. Robert L. Hetzel: Well, we just mentioned two hypotheses for the rise and the influence of government in the United States. One was that as society became wealthier, they thought that they could trade-off that wealth for a reduction in the individual insecurity that -5- comes from a free market. Or, your hypothesis was that in terms of the Nixon regulatory society, that people think government can solve problems and they see immediate benefits. Some groups see immediate income redistributions and it’s very hard to see the cost, that abuse. And it’s really true that they fall on other people. Milton Friedman: The argument for any individual intervention is almost always clear and direct. And in many ways I think the miracle is we’ve kept government down as low as we have. And I think the only reason we have is the government is so completely and so utterly inefficient. Robert L. Hetzel: But that’s less obvious to people when it comes to income distribution. Milton Friedman: Yes. Robert L. Hetzel: And that’s where growth has been. I think the other part that’s less obvious is the moral hazard aspects of a welfare society that is—you can start with society that has a strong work ethic that comes from individuals having the responsibility to care for themselves, and you can move marginal tax rates to 90% and move them all around and it seems like the economy just grows and grows and grows, like it doesn’t make any difference. But that work ethic is a virtue that disappears over time as particular individuals begin to realize that they can live without working very hard and at some point they can become important enough to kind of move to another equilibrium. And I think that’s what’s hard. I think ultimately that’s the long-run cost, it’s very hard—it’s very hard to see that. Can I ask you some questions about your own travels? Milton Friedman: Anything you want to sure. Robert L. Hetzel: After World War II, in the intellectual community, there was universal acceptance of central planning and it seemed obvious because of the failures of the Great Depression and also the revival of economic activity in wartime or economic activity was driven by government expenditure and government control. You also had the example of Germany recovering in the 1930s because—what appeared to be because of a rearmament program. So there was really an intellectual consensus that capitalism was an economic organization of the past and there was also a presumption among intellectuals that there was a nihilism and moral bankruptcy in the 20th century that had allowed totalitarianism to arise. In that environment, there were—the intellectual consensus was in favor of central planning, a welfare state, a move to monetarian society. Milton Friedman: Before the Great Depression. Robert L. Hetzel: Yeah. Milton Friedman: In the 1920s. Yeah. The intellectual community at large was predominantly socialists. The Depression had the effect, essentially, of converting the rest of -6- the population to the belief the government -- remember when—I would suppose in 1928, a very large fraction of the intellectual community voted for Norman Thomas for president. And certainly the general intellectual opinion at that time was socialism. But the public at large was not. Robert L. Hetzel: The same thing in Britain. Milton Friedman: The same thing in Britain. The Fabian Society—well, to even to a greater extent in Britain. Robert L. Hetzel: And so why are intellectuals… Milton Friedman: Have you read Dicey on Law and Public Opinion in the 19th century? Robert L. Hetzel: No. Milton Friedman: You should read that. It’s a very good book, because he predicts in the—these are a series of lectures he gave at Harvard in the 1890s sometime. But there’s a second edition in 1913 with a new preface. And the new preface is very important, because in that preface he essentially predicts the welfare state that comes into Britain after the end of the war. And it’s really a very important book. Robert L. Hetzel: So if I were to ask him why are intellectuals predisposed toward socialism, what would he say? Milton Friedman: He would say because of the positive effects. Do I have that book? I’m trying to remember whether I’ve got that book here or not. See, if I had it up at Sea branch, I gave them my whole library at Seabranch, to Chaplain University as a way of getting rid of it. I think Dicey was one of the books I had there, rather than here. He would say very clearly, because the negative effects of government intervention are—tend to be concealed, hidden and to work-out over a long time, the causative effects are obvious and direct. I’m sure he would say that. He did say that. But I’m just going back on your historical story, that the role of the Great Depression was not to convert the intellectuals because they were already converted, most of them. It was to convert the populous at large, who before the Great Depression, were in general, I think, of the opinion that, that government was best, that governed least, the idea of Thomas Jefferson. And the feelings among the population, many of whom had come from collectivist countries were highly centralized countries in Europe. Robert L. Hetzel: But none of that differentiates intellectuals from average individuals. If anyone can see the long-run consequences of government intervention, it should be an intellectual, not a person in the cabinet industry. There’s a puzzle. -7- Milton Friedman: And yet—it is a puzzle. But yet the majority of the population at large is not – but that is another topic [unintelligible 00:30:23]. But I think if you had the—I don’t know whether the data exists. At any rate, it’s certainly true that the effect of the Great Depression was to lead to a lack of respect for the private enterprise and for the belief that government was the answer to every problem. And then as you went on with your story. Well, everything you described was correct and so by 1950 or so, 1945 to 1950, is what you were talking about. There was no doubt that the overwhelming intellectual influence—attitude was that you needed central planning of one kind or another. Robert L. Hetzel: Are intellectuals skeptical of the market because it gives decisionmaking to the guy on the street, the person who would rather buy beer than chardonnay wine? They feel distrustful of—does it make sense to them? Milton Friedman: Intellectuals are distrustful of the market because it doesn’t give them a large place and a centrally planned society, obviously, that’s something where they can play a really big role. Robert L. Hetzel: That must account for why so many economists valued their role as policy advisors in the ‘60s and ‘70s. It made them feel like they were remaking society as a better place. It’s a nice feeling. Milton Friedman: Sure. And they were, as they saw it. Robert L. Hetzel: There’s been a lot written about the Chicago tradition that more on policies having to do with the Depression and on money than just intellectual attitudes. In the 30s, Chicago, the Economics Department, not the University, had a very skeptical attitude toward collectivist solutions. That was a historical accident? Of having [Jacob]Viner and [Frank] Knight there? Milton Friedman: I don’t think so. I think it all is either—it goes back to James Lawrence Laughlin, who was the first chairman of the department of economics from the University of Chicago in 1890. And unless I’m mistaken—I really don’t know enough about the early days, but I know so far as Laughlin himself was concerned. He was very much of a free enterprise. He was bad on money. He was against it—against the quantity theory. Robert L. Hetzel: That was partly because he associated the quantity theory with the paper money schemes of the populous at the time and he wanted the market to take care of money, not government. So that may have influenced his views as a scientist. Most wellknown economists at the time weren’t willing to talk about paper money schemes. They thought they were vaguely immoral and they could lead to ruin. And he politically was opposed to William Jennings Bryan. Milton Friedman: Oh yeah. He was one of the most effective opponents of William Jennings Bryan. Robert L. Hetzel: How long was he in Chicago? When did he cease? -8- Milton Friedman: He was here a long, long time. From 1890 to 1920, in the ‘20s. I’m trying to remember how long was he the chairman. Robert L. Hetzel: Would he have brought Devlin in? Milton Friedman: Oh, he did. He brought Devlin with him. Homogeneity. Robert L. Hetzel: So he would have hired Frank Knight? Milton Friedman: I think so, but I’m not sure. [Sound of pages turning…] Here we are …in 1892 he—came to Chicago. And he held the position—he started in 1916. From 1916 to his death in 1933, he continued his writing and political activity. So… Robert L. Hetzel: At the time, Chicago was— Milton Friedman: as you were saying, “the proponents of free silver party used the truest form of the quantity theory to support their position, and would suffice to enter the theory anathema to Laughlin. I was trying to see about… As you know, Wesley Mitchell was one of his too. And Thorstein Devlin — Laughlin brought Thorstein Devlin with him to Chicago and defended him against attack, but finally had to let him go. Robert L. Hetzel: Was that because of his personal life? Milton Friedman: Yeah. [Sound of pages turning] Here. [Reading…] ”Laughlin’s most important and lasting contribution was as head of the department of Political Economy for the new University of Chicago. While himself, a hard money man, of rigidly conservative views, he demonstrated an extraordinary degree of tolerance for diverging views of staffing and writing of reports. At the very onset he brought with him from Cornell, Thorstein Veblen, who remained in the department for 14 years, the longest period Devlin spent in any single university during his stormy career, etc. etc. Laughlin—Jacob Viner was Laughlin’s latest appointment—last appointment. …no, you’re right. He couldn’t… …you know, the only thing—way I can interpret this, is that Laughlin exercised influence after he retired. Robert L. Hetzel: Yeah. Milton Friedman: He was really complacent on other stuff. But Viner went to, he earned a PhD. in 1922, so he couldn’t have been appointed then. -9- Robert L. Hetzel: Maybe he was teaching as an assistant while he was doing this graduate work at Harvard. About 1924 is the date that comes to mind. I’m not sure where that comes from. Milton Friedman: Well, let’s see if we can look it up here. Robert L. Hetzel: …making Chicago a center for neoclassical economics for Viner and Knight? Were there others that… Milton Friedman: I think they were all in that field, but they were ones who mattered. Except don’t underestimate the influence of Henry Simons. That was a little later. Then Knight came—when did Knight come to Chicago? He came in the 20s. Robert L. Hetzel: 1924 is the date that comes to mind, but that’s just a guess, I didn’t read it in the… Milton Friedman: [Laughs]Yeah, this is crazy. Robert L. Hetzel: In terms of trying to understand why the economics department at Chicago was so at variance with the intellectual currents in the 1930s, there have to be two things. One is the neoclassical training, the economics training of Knight and Viner and Simons, but also skepticism of mind? Because other places like Harvard were neoclassical and they ultimately went Keynesian. So there must have been something about intellectual temperament of these individuals that made them skeptical of fads or… Milton Friedman: Well, I think it had something to do also—well, first of all, Chicago as a university, did not escape the general compliance. It was a very strong communist element at the University of Chicago. And you know, Frank Knight once gave a talk, a lecture, on “Why I am a communist: by an ex-liberal.” He later said he wished he could un-give, un-talk. Robert L. Hetzel: It was tongue-in-cheek? The talk was tongue-in-cheek? Milton Friedman: No, it wasn’t really tongue-in-cheek. It was really an examination, it’s available, you can get it; it’s on the Net somewhere. Robert L. Hetzel: Okay. Milton Friedman: It was a really—an analysis of the weaknesses of a liberal society, when he says “by an ex-liberal.” Here he was in the midst of this Great Depression. This was something I think the talk was given in 1934. I think that was when it was. Robert L. Hetzel: I’m sorry. Milton Friedman: That’s all right. No harm done. - 10 - [Unintelligible]…economy is essentially amoral that he does in his—famous essay. He had to fix the competition. [Unintelligible 00:42:18]. …it was easy in 1932, 1933, 1934, at the bottom of the Great Depression when you had this whole society, essentially, a state in which a quarter of the able-bodied people were unable to get work, which there was starvation and great suffering, not to be very positive about the liberal society. Robert L. Hetzel: But he was equally skeptical about the alternatives and so his, as I understand, his view was that well, we - western civilization had been in terrible muddles before and that we would get through this one, too. But he never gave up his faith in individual freedom. Milton Friedman: No, no. As I say, that talk was in large part tongue-in-cheek. And as I say, he said later he wished he could un-give it. Robert L. Hetzel: Then how did Simons fit in? Did he just arrive like Viner and Knight? Milton Friedman: Oh, no. Robert L. Hetzel: With his own ideas? Milton Friedman: Simons was a student of Knight at Iowa State and Knight was responsible for bringing Simons into Chicago. Robert L. Hetzel: Oh, I see. I didn’t know Knight really had very many students. Milton Friedman: He didn’t. He had very few, but Simons was one of them. And Simons—see, Knight had a very bad effect on most of his students. He was—his skepticism and his… Robert L. Hetzel: Cynicism. Milton Friedman: No, it wasn’t that. He didn’t seek the perfection. He was always criticizing his own work, his own life. And he sort of had—as George says, he had a drive for the truth, which was much stronger than that of most people. And the effect on his students was to inhibit them so that, for example, Simons never really wrote a proper PhD thesis. In fact, I don’t think he ever got a PhD. The same thing was true with Rose’s brother, Aaron, who was a student of Knight’s. And he was really very much inhibited in terms of what he wrote .and. And he—George Stigler was a great exception. And George’s creative drive was so strong that Knight was unable to kill it. Robert L. Hetzel: Part of the problem, too, must have been that Knight was not an empiricist. He worked through introspection. - 11 - Milton Friedman: [Unintelligible 00:45:32] He never took it seriously? Robert L. Hetzel: He never developed the combination of using theory to develop testable implications. And so he couldn’t really be a role model for what was developing as modern economics. Milton Friedman: At the time he was at his peak, that hadn’t developed yet. Robert L. Hetzel: So should we mention Douglas in this? Milton Friedman: Yes. Robert L. Hetzel: He also—he was both an empiricist and a neoclassical economics. It’s just he became involved [46:25] in politics and that was his passion rather than economics. Milton Friedman: But his influence, I think, was primarily as an empiricist. He was a, as you say, he was a neoclassical economist, and a good one. And I always used to say about Douglas, that if there were no votes involved, so he was always on the right side. Robert L. Hetzel: He also had an abrasive, arrogant personality that made it hard for him to work with other people. At least the people I’ve talked to about him have said that he was never as effective as he should have been as a politician because people felt like he was condescending toward them, and probably with good reason. But it wasn’t—he wasn’t somebody who could build coalitions and he wasn’t the natural politician. Milton Friedman: That’s right. Robert L. Hetzel: So how did Hayek interact with these people when he came to Chicago? Did they have more in common because of the neoclassical economics and the free markets, or was it sort of a mixture of… Milton Friedman: Very little, Hayek had very little to do with did not interact a great deal with either—Knight or , Viner—well, Viner was gone by the time Hayek came — he did not interact much with him. And Devlin wasn’t there. You’re talking about a new group. Well I interacted mainly with George Stigler, but George was at Columbia at that time, not at Chicago, Aaron Director, and the first year with Henry Simons. Robert L. Hetzel: Did he come… Milton Friedman: And John Nef who was—Nef was an American economic historian and was not really involved in the ideological disputes. But he was a man of wideranging culture. He was very much taken with Arthur and was really responsible in large part for Hayek being brought to Chicago. [00:48:53]. Robert L. Hetzel: Would you consider Hayek a neoclassical economist? - 12 - Milton Friedman: Yes. Robert L. Hetzel: And so intellectually, Milton Friedman: He should have been much more…so far as the economic department was concerned; I was probably the person who interacted most with Hayek… Robert L. Hetzel: Through seminars or personal contact? Milton Friedman: What? Robert L. Hetzel: Through seminars or personal contact? Milton Friedman: Me? Robert L. Hetzel: Yeah. Milton Friedman: Yeah, through both, personal contact. Hayek gave a seminar that I attended and it was a marvelous seminar. [00:49:32] Ranging very widely. [Unintelligible 00:49:43]. Milton Friedman: The great physicist You know… Robert L. Hetzel: Szilard? No, Fermi. [9:47]. Szilard also, but Fermi. Because I remember one of the seminars that made the most—had the most influence on me was one that Fermi gave,on the meaning of measurement in which he emphasized that measurement was description. It was mostly description. Accurate measurement is an accurate description. That the statement, this is a dog or this is a cat, was a very inaccurate, a very imprecise form of measurement. But it was a variety of measurement. And that measurement was something that we invented and we attributed to things, not something that was out there waiting to be found. And it wasn’t a natural phenomenon, but it was a phenomenon. It was a very, very profound analysis. Robert L. Hetzel: Was that in the ‘40s before you were or while you were working on [unintelligible 00:50:58] areas? of methodology? Milton Friedman: Yeah. Well, it would have been—let’s see. Hayek came in what, ’47—Hayek came in… Robert L. Hetzel: ’46. Milton Friedman: so he came, I think, in ’47 or ’48—maybe ’48. Robert L. Hetzel: Okay. - 13 - Milton Friedman: And so this seminar would have been ’48, ’49. Hayek’s main interactions, were with the philosophers and the people in the, many in the …John Nef—the social—Committee on Social Thought. Robert L. Hetzel: So we keep talking about Arthur Burns and so Arthur Burns devoted his life at the NBER, to measurement, but maybe he needed Fermi’s perspective to realize that measurement was not something that was just out there, that it would allow us to understand the world in itself if we had enough of it and enough—and if it was active enough. We had to organize it and organize it in a way that we could use it to predict. And he didn’t do that. So the world didn’t—when his predictions didn’t work, or the unemployment rate stayed at 6% and the inflation rate stayed at 6%, too, it was because the world had changed. [00:52:43]. It wasn’t because he had a theory that mis-predicted and therefore he had to go back and examine the theory. It was just because, well, the world has changed and now the power of labor unions was much more important than it used to be and while it was—as the world changed you had to change your description. I know, he was a much more complicated man than that. Milton Friedman: Well, maybe he wasn’t. What you’re saying may well be right. But I don’t know, somehow it doesn’t seem to me to be the right description of what happened. I’m not… Robert L. Hetzel: You tended more toward a political—and that’s possible. And when he was criticizing the 1962 Economic Report of the President, and the Kennedy goal of 4% unemployment rate, Burns said that 6% unemployment rate is about all you could hope for. And he had to accept that unemployment was affected by structural factors now and technology and changes that were going on in the coal mines and it sounds very reasonable. And then when he becomes chairman of the Fed, he accepts the 4% figure and you think what’s going on and I think one thing that was going on was he thought that the country was very—was divided, that there would be riots in all the American cities and people in the streets if we didn’t do something about unemployment, given the stress of the Vietnam war and the racial situation. He thought that 4% unemployment was a socially desirable objective. So there’s that aspect of it to Burns as the person who’s guessing the political system rather than just kind of being an honest economist and let the chips fall where they may. Burns as presidential advisor and… Milton Friedman: I think there’s no doubt that that was a very important—that he viewed himself as playing an important political role. Robert L. Hetzel: But it’s also true that Burns and Mitchell were at Columbia and Columbia was an institutional—it was not a neoclassical center. I assume when George Stigler got there, all that changed, I would think, but not before. Milton Friedman: And Arthur was primarily responsible for bringing George in, — there was a good deal of disagreement about whether to appoint George to Columbia. - 14 - [00:55:50]. And from what I remember of that experience, Arthur was the main tactician on George’s side. Robert L. Hetzel: That’s seems… Milton Friedman:…which is not true, that he was a neoclassical, but only that he appreciated neoclassical economics. Robert L. Hetzel: Yeah, that’s one of the interesting things is that he could teach it and he knew it so well. Milton Friedman: But he was very much of a student of Marshalls [00:56:26]. And yet he was also very close to Mitchell, who was not a neoclassical guy. Robert L. Hetzel: How did Oskar Lange get to the University of Chicago? Did you ever meet him? Milton Friedman: Yeah, sure. Robert L. Hetzel: So wasn’t he gone by the time you had come? Milton Friedman: Yes. He was gone away from the faculty, but I—no. When I was a student—I didn’t not meet him at that time. Somehow when I was a student and I was working for Henry Schultz in the 1934 to 35, Oskar Lange, he was not at Chicago at the time, but he came through. I don’t know where he was at the time, but I remember his coming in to talk to me on something connected with statistical demand curves or something or ruther or something with what Schultz was doing. But what I remember about that best was that he— his English wasn’t very good at the time. And he—both coming in and going out, he said hello. See, in German it was Guten Tag either way. But let’s see—when did Lange? Good that Rose has left this book here, I can look it up. [00:58:19] Robert L. Hetzel: I can look that up, too. Milton Friedman: 1938 to 1945. Robert L. Hetzel: So did he… Milton Friedman: No doubt Marshak must have brought him there. Robert L. Hetzel: So Lange didn’t leave… Milton Friedman: He was at the Cowles commission. I believe. Robert L. Hetzel: That makes sense. - 15 - Milton Friedman: He was—I’m sure… Robert L. Hetzel: So he was a mathematical economist, like the Cowles commission Milton Friedman: Right. Robert L. Hetzel: People in that group. He was non-empiricist. He was an neoclassical economist, but his sympathies were with socialism and that’s what produced this mix of… Milton Friedman: I don’t know whether he was neoclassical economist or not. He was a socialist. Well, yes, he was a neoclassical economist. He and Lerner wrote that famous paper about how you can run a social economy. Robert L. Hetzel: You could divorce ownership —the government… Milton Friedman: Could play at a capitalist society, could play at a free market society. Robert L. Hetzel: And your criticism of Lange was that prices are determined through a discovery process of people entering and leaving markets and for that to happen, you have to allow the incentives created by the price system to motivate behavior. And so to think that you can discover the relevant prices, what we call first order conditions now, is — silly because you don’t have a competitive market that allow the discovery. Milton Friedman: You couldn’t get—there’s no way in which you can simulate, to play act at taking risks—because the way in which risks work fundamentally is that here’s something which has a one change in 10 of paying off, but if it pays off, the payoff is 1,000 to one. An individual can take that risk. A bureaucrat who was playing a game and is pretending to be [01:01:02] is never going to take that risk. Because it’s one chance in 1,000—999 and it involves a large investment that you’re sure to be—you’re never going to be able to get the game and you will bear all the costs. So that you can’t—in a completely static world where things are going on every day the same way, you might be able to play the game. But you can’t play the game in a dynamic world. Which is what you’re saying, in a different way. [ 01:01:41]. Robert L. Hetzel: So what was Hayek like to argue with… Milton Friedman: Hayek? Robert L. Hetzel: Yeah. What was he like as a—I’d assume he was very cultured and very knowledgeable, but was he also dogmatic or no? Milton Friedman: No, I don’t think so. He had no problem with that, having fruitful straightforward and good argument with him Frankly,,he was a very, very cultured and - 16 - widely-read, very—he spoke very clearly and very well. I enjoyed—I thought very highly of him, of Hayek. Robert L. Hetzel: Let me ask you one more question and then I’ll leave you. You made monetarism your own through your research at the Bureau. That is, you must have been predisposed toward the quantity theory because of your teachers. But your writing assumes its monetarist characteristic after you put the data, the NBER data, after you’d seen a wide spread association between money growth and inflation, after you know that you can give an empirical context. Your free market views must have undergone some similar—well, that is Viner and then later Knight gave you the price theory tool kit to work with. But it must have been through the process of applying it that you came to your support of free markets. And what I’m thinking about is when I was in your course, you would assign problem sets and you—as students you were always working on those and you didn’t think about it at the time. I didn’t think about it until much later. But it was only much later that I realized I really was a neoclassical economist because I had this tool kit and I was just using it all the time and it worked. I could see it was useful. And it wasn’t sort of an intellectual thing and you must have gone through a similar process yourself. Your first period of academia was Wisconsin when there was a debate there of whether the part was going to be institutionalist or neoclassical. Did you teach any price theory or interact with the graduate students there with the price theory? So you were just teaching NBER sort of, what caused the recession, the business cycle. Milton Friedman: I was teaching statistics—had courses in statistics and a course in business cycle. I don’t think I taught any price theory. I did teach some price theory at an extension class in Columbia in ’37 or ’38. Robert L. Hetzel: Yeah, Bromowitz mentions that. You were working on consumption studies in the 1930s. Milton Friedman: Yes. Robert L. Hetzel: But you really apply the Fischerian framework to that later on in the ‘50s, right? And you’re working on income for professional practice. So you are—to that extent you are practicing… Milton Friedman: That was fairly straightforward neoclassic economics. Robert L. Hetzel: So that would have been your first real application? Milton Friedman: Yeah. Robert L. Hetzel: What about working with Kuznets on that project? Did he have the same price theoretic approach, do you feel like, to these issues that you had? Or was he more - 17 - kind of measurement, conceptual? You think of him with the National Income Product Accounts [01:06:05], which is theory, but… Milton Friedman: He did not have the same. I shouldn’t say that. He was amenable to it. No conflict. It wasn’t a problem of … Fundamentally; he had collected these data at the Department of Commerce in connection with his work on the National Income Accounts. And he had written a kind of a manuscript where it summarizes some of the statistical characteristics of the data, which was primarily the kind of thing you would expect from him. And essentially when he got me, he threw it to me and said go ahead and do what you want. And he really did not exercise very close control, Thank God [unintelligible 1:07:00] So he was very much—he was more than receptive. He liked what came out. But it is not the kind of thing he would have done, that part of it, analysis in terms of the advantages and disadvantages, pecuniary and nonpecuniary advantages and disadvantages. Robert L. Hetzel: And that’s what started you thinking about entrance into the professional end of that. Did you talk to Stigler or it sounds like his sort Milton Friedman: Oh, sure I did. Yeah. Robert L. Hetzel: And so then during the war years, you really had no occasion to use the price theory. At the treasury, it was how to drain off, siphon off expenditure so you don’t get inflation and the statistical inference problems. So in terms of making the price theory tool kit into an engine of analysis, it must have been the income from professional practice and as much as anything, it must have been the price theory course, you were teaching at Chicago? Milton Friedman: Oh, yeah. Robert L. Hetzel: Having Viner’s course. That must have been sort of the counterpart to working with money at the National Bureau where then you began to really apply this tool kit to… Milton Friedman: Well, I think there’s no doubt about that. Teaching Viner’s course essentially [01:08:55]. Robert L. Hetzel: And so I think your life would have been different if you had been hired as a statistician. You would have… Milton Friedman: Of course. It could easily have been very different, sure. Robert L. Hetzel: You didn’t come with—you had a temperament that combined— you had an analytic temperament combined with the curiosity about how the world works. Of course, that would have stayed with you, but you wouldn’t have necessarily have applied it to the competitive market model and become the advocate of free markets that you ultimately became. - 18 - Milton Friedman: Accident plays an enormous role in this world. Robert L. Hetzel: Yeah, well, we survive… Milton Friedman: What are you doing with your Japanese story? Robert L. Hetzel: I’m going to publish it in our Economic Quarterly. Milton Friedman: You should expand it. Robert L. Hetzel: Okay. Tell me what I… Milton Friedman: It’s too condensed. I think it’s very good. But only those who are largely know what you’re saying, will understand it. I think you may need to fill it out, fleshout the various sort of—I meant to go over it again, but I did go over it once. And I liked it very much in terms of its content. But to the point of view of publication, it needs to be twice as long. You know, this is one of the—I’ve never had this experience before. Nine times out of 10, when I’ve read a manuscript, I tell the author you’ve got to cut it in half. But in your case, I think you’ve got to double it. You’ve got to spell-out—you are very concise in— maybe I can, I can find some examples on it. …some of them in terms of your explanation, I think you need more detail shorts you cover just the little period you’re talking about. …in 1987 outward growth flow in—well, three quarters later in 1988 and inflation two years later in 1989 [unintelligible 01:11:39]. Those additional words are really very—see you just said over here, you told over here about length of lag? [01:11:49]. Robert L. Hetzel: Yeah. Milton Friedman: And the whole part here is to show that these are conforming to that length of lag. [01:11:54]. Robert L. Hetzel: Yeah. Milton Friedman: But you leave it to the reader to do that—he can do the arithmetic, but he likely just to read on, or if you said money growth or upward growth three quarters later and inflation two years later. It ties it together. And throughout—you need additional words of that kind. It’s not that you need a bigger analysis, but you need to spell it out more so that you don’t impose too much on your reader. Again, this is the same thing: “Growth peaked in 1990/91.” The peak of the business cycle occurred in 1991 between and later peaked. And here again, if you said not the peak, but the business cycle peaked four quarters later in 19—and inflation peaked seven quarters later in… Robert L. Hetzel: Yes, I got it. Yes. - 19 - Milton Friedman: Paragraph. “Lowering asset prices requires deflation. That’s a very dense sentence. Robert L. Hetzel: Yeah. Milton Friedman: You can take paragraph or two to explain. Robert L. Hetzel: Yeah. I’ve got to do that. Milton Friedman: Yep. So what it needs to be is—it needs another 50% longer. [01:13:42] [END OF RECORDING] - 20 -
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