LINDA CHAVEZ: I'm Linda Chavez. Welcome to Free to Choose. Joining Dr. Friedman in a
discussion of the power of the market are David Brooks of the Wall Street Journal, and
James Galbraith of the University of Texas at Austin. Dr. Galbraith, should we follow
the example of Hong Kong and simply allow an unregulated free market?
DR. JAMES GALBRAITH: I think we do better in this country, with the combination of a
free market and its advantages, and a well regulated, carefully thought out structure
of government, which provides a chance to pick up some of the losers from the market
process and give them a second start. It provides us with a chance to make the economic process
a little safer, a little healthier, a little more environmentally sound and protective,
than you might get from a strict adherence to the free market such as Professor Friedman
has described in the case of Hong Kong.
CHAVEZ: Dr. Friedman, is there any such thing as a well-regulated market?
FRIEDMAN: No. He is begging the question. Obviously he is right. If you could have a
well regulated, carefully thought out, properly done market, benevolent dictatorship is the
best of all forms of government.
GALBRAITH: Oh, I don't agree with that at all.
FRIEDMAN: Neither do I.
GALBRAITH: Constitutional democracy is the best of all forms of government.
FRIEDMAN: No. Constitutional democracy is the least bad of all forms of government.
But you beg all the questions when you talk about well-regulated, carefully thought out
-- if you look at the actual programs that governments follow, they most always have
effects that are the opposite of those that were intended by their well-meaning advocates.
GALBRAITH: Let me tell you what troubles me.
FRIEDMAN: I will tell you something. Matching the invisible hand of the market is the invisible
foot of government.
GALBRAITH: You make the point in the program that in every case where you have a smaller
role of government and a freer market, you have a higher standard of living.
FRIEDMAN: No. I didn't say that. I didn't say that. I said there are better conditions
for the poorer people.
GALBRAITH: Okay. Better conditions for the poorer people. Fine, I will accept that. At
the same time, you are making the argument in the program that the conditions in Hong
Kong are better, for example, than they are in the United States, which is manifestly
not true. You are making the argument that Hong Kong is more free than we are.
FRIEDMAN: It is more free.
GALBRAITH: Does it then follow that the conditions for poor people in Hong Kong are better than
they are in the United States? That I don't believe is true.
FRIEDMAN: I said in there where you compare like with like.
GALBRAITH: Okay, this is an important qualification, which isn’t clear in the program.
FRIEDMAN: Hong Kong obviously started out from a much lower position. If I were to compare
conditions in Hong Kong in 1945 or 1950 with conditions in the United States in 1820 or
1830, you would have a much closer comparison.
GALBRAITH: Are you then saying, a position which I would find much more congenial, that
where you have a country which has developed a base of material wealth, a degree of comfort
for the average citizen, that it is then legitimate for the government of that country to step
in and provide some guarantees and some security for poor people and old people.
FRIEDMAN: No siree. I am not saying that at all.
GALBRAITH: Why not?
FRIEDMAN: Every time they step in and try to do that, they end up doing the opposite.
GALBRAITH: This discussion reflects a feature of the program that I found to be most troubling,
which is the failure to make a distinction between governments of the kind that we have
developed in this country over 200 years, and governments of the kind that you described
in the People's Republic of China. It's perfectly clear that one can have, and many countries
do have, the curse of repressive dictatorships. It is also perfectly clear that an economy
that is organized by commissars is going to fail.
We certainly have seen, laid out before us over the last several years, the ashes of
those failed economies. But is it possible to take the example of the Soviet Union, Poland,
Hungary, and to say that because their governments, which were, after all, dictatorships modeled
after the system of government installed in the Soviet Union by Stalin, are in fact parallel
to the actions of our government, which is a government which operates on many different
federal levels, and where fundamentally what you have is the ability of the ordinary citizen,
whose power is not weighted by the amount of money he or she has, to use the vote in
order to make some collective decisions.
DAVID BROOKS: There are 3,400 pages in the Clean Air Act. Where’s the citizen in there?
GALBRAITH: Granted, after ten years of Reagan's Washington, you've got a serious problem of
corruption. Does that mean we should abandon the idea that you have a democratic process
that should be entrusted with certain important decisions? I don't think so.
FRIEDMAN: You don't have a democratic process in the sense in which you mean it. We have
a democracy, we have a majority rule, but the majority that rules is a collection of
minorities. It is a collection of special interests. You cannot tell me that the consumers
in this country would vote for a sugar quota that makes the price of sugar three times
the world price. When you say you can't compare it to Russia, you are quite right, but only
because they are 100% and we are 50%.
If our system, if our present regulations and rules had prevailed, our scope of government
had prevailed 100 years ago, we wouldn't be where we are today.
CHAVEZ: Let me understand you Dr. Friedman. Do you believe that there should be no role
at all, whatsoever, for government?
FRIEDMAN: Of course there should be a role for government -- a very important role for
CHAVEZ: What is that role?
FRIEDMAN: The role for government is, first of all, to protect people from coercion by,
physical coercion by their neighbors or by foreign countries, that is, to protect the
national defense and to protect law and order at home.
There is a role for government enabling us to have a mechanism whereby we decide on the
rules by which we want to run, how we define private property, what we mean by private
property. There is a role for government in adjudicating disputes between us.
There is a role for government, a very important role, and I believe our government played
that role quite well for about 100 years until the Great Depression.
BROOKS: I would go a little further. I think there is a health and safety role as well.
The problem is that you have to keep your regulations simple and minimal. You have to
realize that there are costs, and often the costs outweigh the benefits. In fact, in Washington
there are interests who want to divert costs to themselves, so there is sort of a built
in structure, a dynamic to make costs outweigh the benefits.
GALBRAITH: We are making progress here. I would add that the government has a role to
protect the environment. I would say the government has a role to set standards for products,
where information is very costly for the individual consumer to obtain. I like very much the fact
that the steaks that that dentist was eating were inspected by the USDA. Their purity was
guaranteed by a rather well functioning aspect of our government.
BROOKS: On the other hand you have the FDA, which has these long delays, 10 years to get
a drug approved, so that the effect is that you have to be a big drug company to get any
kind of dent of the market. Basically you are closing off the market.
GALBRAITH: On the other hand, you have had a set of regulations which have disappeared
without any well-justified regrets; for example, the regulations that govern the entry into
interstate trucking; the regulations that govern entry and rates in the airlines.
FRIEDMAN: Don't tell me that that was done under the Reagan Administration.
GALBRAITH: Oh no. Those reforms were done under the Carter Administration.
FRIEDMAN: They were started under the Carter Administration.
BROOKS: It doesn’t really matter.
GALBRAITH: No it does matter a great deal, who favors these things and on what merits.
BROOKS: There is no doubt that Carter did the heavy lifting on deregulation.
FRIEDMAN: In any event, I am not trying to defend one political party or another. As
David says, a major enemy of a free market is a business interest. The business community
is a major enemy.
And the problem in this society is to have the public at large understand the importance
of free markets so as to protect themselves against the depredations of the business community,
with their tariffs, their quotas, their special provisions, and so on. But if you come to
all of these good things that society is supposed to do, you have to look at how many of them
have been perverse in their influences and their effect. You mentioned the FDA, and that
is a very important case because that's cost tens of thousands of lives over the course
of time.
GALBRAITH: I don’t agree with that.
FRIEDMAN: Oh, the evidence has been- go ahead.
BROOKS: You can start with the AIDS virus where the FDA tries again -- recently there
have been reforms but they were very slow, even people who knew they were going to die
and were going to die without any drug to try experimental drugs.
CHAVEZ: Let me ask another question.
GALBRAITH: You have to establish that those experimental drugs would have, in fact, saved
their lives.
BROOKS: They couldn't have done worse -- they were going to die.
CHAVEZ: Let me give you another hypothetical. What if you have a social need, say a disease,
which is very lethal but affects very few people and you don't have a company who has
an interest because it is not going to make very much money, there is not a large market
for the good to produce a drug. Does the government have any role there to step in and try to
stimulate certain social purposes?
BROOKS: It's hard for me to imagine, I can’t imagine how the government would, in the first
place.
FRIEDMAN: In any event, you must realize that government isn't the only recourse. The great
period-- when were the non-profit hospitals of the United States founded? Almost all of
them were in the 19th century, during the hay day of laissez faire. There are private,
charitable activities, which are essentially the most effective way of handling the kinds
of things you have described.
GALBRAITH: A little bit of faithfulness to history surely would cause you to concede
that in 1937, when we inaugurated Social Security, 1965 when we inaugurated Medicare, we did
so because the private charitable systems, the private insurance systems to care for
people when they were old and when they were sick were failing in a gross way to meet the
needs of the American people. And those programs, which are government programs,
have at least had the virtue of extending access to health care and extending income
security when you are old to a very large part of the population that never had it before.
I would argue too that in addition to the regulatory functions and the judicial functions
that we certainly agree on, that there is, in a rich society which can afford to take
care of people who fall out of the market process, who aren't lucky or gifted or fortunate
in their economic lives, to take care of those people
when they are old and when they are sick.
FRIEDMAN: What about the extent to which the same society that you described, the same
logic you described, makes them poor. What about the minimum wage, which prevents many
people from getting employment? What about the rent controls, which destroy housing in
the cities?
BROOKS: To switch over, you can point to the minimum wage, which everybody agrees increases
unemployment, among the poor especially, but what about the environment? If you have a
simple environmental law -- the reason the West is cleaner than the Eastern Bloc, the
main reason is that we are richer. We can afford to do it.
FRIEDMAN: The problem, so far as the environment is concerned, the real function of the government
is to define the property rights and it is quite clear that if I force you to take bad
water for good water, then I ought to pay you. I am not quarreling with that. But if
you look at the actual environmental measures that government takes, they often have harmful
effects and not positive effects. The new Clean Air Bill that has just been passed,
for example, is going to cost an enormous amount of money.
BROOKS: Nobody knows how much. That’s one of the problems.
GALBRAITH: It is in principle, of course, your argument is one which many economists
are sympathetic to and I have some sympathy for it, but the technical facts of environmental
control are such that it is often very, very costly to define the property rights in a
way in which you can generate an efficiently functioning market.
FRIEDMAN: It sometimes is.
GALBRAITH: That is why you don't have a private and organized market. The information cost
of those transactions is extremely high. So, in some cases, what you want to have the government
do is say, if there is mercury in the water, you find out who is putting it in and shut
them down that is the reasonable way to proceed because the alternative is extremely costly.
FRIEDMAN: Let's look at what the government actually does. In the United States today,
the federal government spends an amount of money which is 25% of the national income.
State and local governments spend an additional 17% of the national income.
That is 42% all together.
Now, some of that is doing good, of course. It would be very hard to spend that amount
of money. But an enormous amount of that is simply taking money from some and giving it
to others and very often taking it from poor and giving it to well-to-do, . . ..
GALBRAITH: . . . Social Security in that which is taking money from the payroll tax from
working people . . .
FRIEDMAN: On the whole, so far as Social Security is concerned, the people who pay are poorer
than the people who benefit.
CHAVEZ: Gentlemen, we are out of time. Thank you for watching Free to Choose. Next week
we will be discussing what happens when government enters
the marketplace.
When anyone complains about unfair competition, consumers beware.
That is really a cry for special privilege,
always at the expense of the consumer.
What we need in this country is free competition.