Today marks the 106th birth anniversary of Milton Friedman. Opinion Central will publish some of the edited essays of Milton Friedman.
About Milton Friedman
Milton Friedman was an American laissez-faire economist, and one of the leading conservative economists in the second half of the 20th-century. He was awarded the Nobel Prize for Economics in 1976.
After studying at Rutgers University and the University of Chicago, Friedman received his Ph.D. from Columbia University in 1946 and joined the faculty of the University of Chicago that same year. Friedman became one of the leading American advocates of the monetarist school of economics, which holds that the business cycle is determined primarily by money supply and interest rates rather than by a government’s fiscal policy. In Capitalism and Freedom (1962; with his wife, Rose D. Friedman) Friedman argued for a negative income tax, or guaranteed income, to supersede centralized, bureaucratized social welfare services, which in his view are inimical to the traditional values of individualism and useful work. Among his other works, many of which concern the theory of money, are A Monetary History of the United States, 1867-1960 (1963) and Monetary Trends of the United States and the United Kingdom (1981).
Following essay is published from his “Essays on Public Policy”
Government actions often provide substantial benefits to a few while imposing small costs on many.
A dramatic example occurred to me recently when I was talking to a taxicab driver in New York City. (Taxicab drivers seem to be the source of all anecdotes.) I have long been interested in the problem of regulation of taxicabs. If the limitation on the number of taxis were removed, the benefits would greatly exceed the losses. Consumers would benefit by having a wider range of alternatives. The number of cabs would go up and so would the demand for drivers. To attract more drivers, the earnings of drivers would have to rise. In economic jargon, the supply curve of drivers is positively sloped.
Why does the limitation of the number of cabs persist? The answer is obvious: the people who now own those medallions would lose and they know it. Although they are few, they would make a lot of noise at city hall. The people who would end up driving the additional cabs do not know that they would have new jobs or better jobs. There is no New Yorker who would find it worth his or her time and effort to lobby city hall to remove the arbitrary limitation on medallions simply to get better cab service. It does not pay the individual taxi riders to do so. They are right; it is rational ignorance on their part not to do so.
The phenomenon of concentrated benefits and dispersed costs is a valid explanation for many governmental programs. However, I believe it does not go far enough to explain the kind of situation in which we now are. For example, it does not explain why, once a government enterprise is established, it should be so much less efficient than a comparable private enterprise. Maybe concentrated benefits lead to the establishment of a government enterprise.
One answer is that the incentive of profit is stronger than the incentive of public service. In one sense I believe that is right, but in another sense, I believe it is completely wrong. The people who run our private enterprises have the same incentive as the people who are involved in our government enterprises. In all cases, the incentive is the same: to promote their own interest. The people who run our private enterprises are people of the same kind as those who run our public enterprises, just as the Chinese in Hong Kong are the same as the Chinese in Mainland China; just as the West Germans and the East Germans were not different people, yet the results were vastly different.
The point is that self-interest is served by different actions in the private sphere than in the public sphere. The bottom line is different. An enterprise started by a group of people in the private sphere may succeed or fail. Most new enterprises fail (if the enterprise were clearly destined for success, it would probably already exist). If the enterprise fails, it loses money. The people who own it have a clear bottom line. To keep it going, they have to dig into their own pockets. They are reluctant to do that, so they have a strong incentive either to make the enterprise work or to shut it down.
Suppose the same group of people start the same enterprise in the government sector and the initial results are the same. It is a failure; it does not work. They have a very different bottom line. Nobody likes to admit that he has made a mistake, and they do not have to. They can argue that the enterprise initially failed only because it was not pursued on a large enough scale. More important, they have a much different and deeper pocket to draw on. With the best intentions in the world, they can try to persuade the people who hold the purse strings to finance the enterprise on a larger scale, to dig deeper into the pockets of the taxpayers to keep the enterprise going. That illustrates a general rule: If a private enterprise is a failure, it closes down—unless it can get a government subsidy to keep it going; if a government enterprise fails, it is expanded. I challenge you to find exceptions.
The general rule is that government undertakes an activity that seems desirable at the time. Once the activity begins, whether it proves desirable or not, people in both the government and the private sector acquire a vested interest in it. If the initial reason for undertaking the activity disappears, they have a strong incentive to find another justification for its continued existence.
A clear example in the international sphere is the International Monetary Fund (IMF), which was established to administer a system of fixed exchange rates. Whether that is a good system or a bad system is beside the point. In 1971, after President Nixon closed the gold window, the fixed exchange rate system collapsed and was replaced by a system of floating exchange rates. The IMF’s function disappeared, yet, instead of being disbanded, it changed its function and expanded. It became a relief agency for backward countries and proceeded to dig deeper into the pockets of its sponsors to finance its new activities. At Bretton Woods, two agencies were established: one to administer a fixed exchange rate system and the other, the World Bank, to perform the function of promoting development. Now you have two agencies to promote development, both of them, in my opinion, doing far more harm than good.
Let me take a very different example in the United States. [In United States] At the end of World War II, we had wage and price controls. Under wartime inflationary conditions, many employers found it difficult to recruit employees. To get around the limitations of wage control, many began to offer health care as a fringe benefit to attract workers. As a new benefit, it took some years for the Internal Revenue Service to get around to requiring the cost of the medical care to be included in the reported taxable income of the employees. By the time it did, workers had come to regard nontaxable medical care provided by the employer as a right—or should I say entitlement? They raised such a big political fuss that Congress legislated nontaxable status for employer-provided medical care.
Liberal pundits will tell you that the problem is that the public wants the goodies that government supposedly provides but is too stingy to pay for them. If only, liberals say, we could get those greedy, stingy people to provide us with more taxes, we could solve all these problems. They may be partly right, but only partly. For example, that explanation cannot be the reason we have agricultural subsidies. Do the people of this country really want to pay farmers to grow goods and throw them away or give them away at low prices abroad?
On the contrary, when people have the opportunity to vote on those issues, they overwhelmingly vote the other way. The public at large thinks that government is too big. People know they are not getting their money’s worth for the taxes they pay.
However, the liberal pundits are wrong in a more fundamental way. The problem is not that government is spending too little but that it is spending too much. The problem in schooling is that government is spending too much on the wrong things. The problem in health care is that government is spending too much on the wrong things. The end result has been that government has become a self-generating monstrosity. Abraham Lincoln talked about a government of the people, by the people, for the people. What we now have is a government of the people, by the bureaucrats, including the legislators who have become bureaucrats, for the bureaucrats.
Again, let me emphasize, the problem is not that bureaucrats are bad people. The problem, as the Marxists would say, is with the system, not with the people. The self-interest of people in government leads them to behave in a way that is against the self-interest of the rest of us. You remember Adam Smith’s famous law of the invisible hand: People who intend only to seek their own benefit are “led by an invisible hand to serve a public interest which was no part of” their intention. I say that there is a reverse invisible hand: People who intend to serve only the public interest are led by an invisible hand to serve private interests which was no part of their intention.
I believe our present predicament exists because we have gradually developed governmental institutions in which the people effectively have no voice. A recent study by James Payne brought this home to me very clearly. Examining fourteen different government hearings dealing with spending issues, Payne found that “1,014 witnesses appeared in favor of the spending. Only 7 could be classified as opponents. In other words, pro-spending witnesses outnumbered anti-spending witnesses 145 to 1.” Striking as that is, an even more important finding was that “of the 1,060 witnesses who appeared, 47 percent were federal administrators, and another 10 percent were state and local officials. An additional 6 percent were congressmen themselves.” Thus 63 percent of the witnesses in favor of the spending were from government. They were telling us that they should spend our money, I won’t say for their benefit but for what they believed, or said they believed, was our benefit. Payne added, “Overwhelmingly, Congress’s views on spending programs are shaped by government added, “Overwhelmingly, Congress’s views on spending programs are shaped by officials themselves.”What is true of spending proposals is equally true of other governmental measures: sugar quotas, the tax exemption of medical care provided by employers, the agricultural subsidies, and so on down the line.
The problem of concentrated benefits and diffused costs is a real problem. However, I do not believe that at the moment it is the key problem. The key problem is that we are unable to practice what we preach because of what has happened to the governmental structure. We preach free enterprise to the newly freed communist countries. We tell them to privatize, privatize, privatize, while we socialize, socialize, socialize.
Heretical though it may seem, it would be nice to get back to the spoils system instead of the civil service. That would de-bureaucratize the administration. We now have people in secure, permanent positions whose well-being depends on having government play a major and ever-larger role. Although I see no possibility of getting back to the spoils system, term limits on members of Congress would de-bureaucratize not only Congress itself but also congressional staffs, about the only governmental employees who are not subject to civil service rules and tenure.
At any rate, something drastic is needed to reverse the direction in which we are moving. The United States has a great heritage and a great history. Since the beginning of our republic, every generation has been better schooled than its predecessor and has had a higher standard of living. The coming generation threatens to be the first for which that is not true, and that would be a major tragedy.