Milton Friedman: Immigration And The Cultural Prerequisites for Capitalism

 (First published as Why Liberalism Is Now Obsolete |Interview With Milton Friedman, by Peter Brimelow, Forbes Magazine, December 12, 1988).

See also: Milton Friedman, Soothsayer, December 29, 1997 and An Interview With Milton Friedman, Forbes, August 17, 1992

Peter Brimelow writes:  While poking around trying to assemble my Nov. 17 speech today to the John Randolph Club, I learned that the first and second of my Forbes magazine interviews with Nobel laureate economist Milton Friedman (1912-2006) weren’t available online. Now they are.

This first interview was published in the wake of George H.W. Bush’s election as the heir to Ronald Reagan—a legacy he promptly squandered--and James W. Michaels, the great long-time Editor of Forbes, mischievously headed it Why Liberalism Is Now Obsolete.  Those were the days.

From’s point of view, of course, the really interesting news was, and is, that this libertarian  Immortal calmly supported the idea that there are cultural, and perhaps even genetic, prerequisties for capitalism and the free society. This necessarily means, of course, that importing immigrants from radically different cultures could be disastrous.

Friedman’s remark to me in our 1997 interview (“It's just obvious that you can't have free immigration and a welfare state”) now regularly turns up in the immigration wars (for  a recent example, see here). But this even more radical comment to me, nine years earlier, is never cited.


Has the Reagan Revolution run its course? Or has the American electorate firmly rejected liberalism?

Amidst all the static and breast-beating about a "dirty" presidential campaign, most commentators have overlooked this fundamental question, which was the gut issue in the late presidential election.

That the old game of taxing-and-spending no longer works politically was made reasonably clear by the Bush victory. So, will the so-called Reagan revolution continue? Or will the federal government resume playing a larger role in our lives? To get a longer-range perspective on what lies ahead in politics and economics, FORBES interviewed Nobel Prize-winning economist Milton Friedman. From his magnificent apartment high above San Francisco's Nob Hill, Milton Friedman offers a global and historical vision of where the U.S., indeed the world, is heading.

FORBES: Do you think the current free market cycle that is manifested almost everywhere today—including behind the Iron Curtain—will last? Or will government intervention come back into fashion?

Friedman: The free market cycle will last. The intellectual movement [for a free market] is approaching middle age, but the political movement is in its infancy.

You wrote in 1962 in Capitalism and Freedom that "...the typical state of mankind is tyranny, servitude and misery." How do you feel about that now?

Still true. But I'm much more optimistic than I was in the late 1970s because of the change in the intellectual climate of opinion.

Historically, the intellectual climate tends to be subject to very long swings, which are reflected in public policy only after a lag. At first only a very small group of people are persuaded....

Who tend to be unusually enterprising and/or crazy?

Mostly crazy. Regarded as crazy by their fellows, but certainly unusually enterprising. And all of this occurs when the current system, whatever it is, is having troubles. A case in point is Britain in the 18th century, when the prior system was coming under great strain from the Industrial Revolution and the American Revolution. In 1776 Adam Smith came out with The Wealth of Nations, which criticized very strongly the then-dominant policy of mercantilism [the government effort to maximize national wealth through tariffs and regulation] and proposed free trade and free markets.

Smith's ideas had an instant success among intellectual groups, but no immediate effect on the popular view or on the policy of the government. But gradually his ideas permeated down to the ordinary people and became the basis of political campaigns.

Once such an idea is adopted, it's like a new broom. It sweeps clean. But no matter how successful it is, over time there gradually develop difficulties. In both Britain and the U.S. there was a very sharp reduction in the role of government, which meant that government had fewer favors to give and became more honest and efficient, which in turn meant it appeared possible to use the state to achieve things that nowadays, with the subsequent expansion and degeneration of government, are seen to be impossible.

We're now in the third such cycle. Adam Smith started one in 1776. Then, by the 1880s, just when the results of laissez-faire are really at their high point, you start getting a countermovement. In Britain, the Fabian Society, dedicated to the gradual establishment of socialism, was founded by George Bernard Shaw and Beatrice and Sidney Webb in 1883. In the U.S., the American Economic Association was founded in 1885 originally by a group of young economists who had studied in Germany and been impressed by the efficacy of state action there. And Edward Bellamy's socialist utopian romance, Looking Backward, was published in 1888 and sold over a million copies.

So by the 1920s the U.S. intellectual class was predominantly socialist. And the interesting thing is, almost every economic plank of the 1928 Socialist platform has been adopted by the U.S. in the period since.

It seems clear that the Progressive Era reforms at the beginning of the century were interventionist.

Yes, progressivism was a precursor of socialism. But generally speaking the idea succeeds first, and then it takes some special event to catalyze a complete change in policy. In the U.S. it was the Great Depression that converted socialism from a conquest of ideas to a conquest of policies.

So now we're in the third cycle.

Yes, and I think the Adam Smith role was played in this cycle by Friedrich Hayek's The Road to Serfdom which was a bestseller in Britain and the U.S. in 1944 and 1945. That was followed up by a whole host of books, Henry Hazlitt, the Foundation for Economic Education and so on. The intellectual climate of opinion has shifted toward an emphasis on a greater reliance on markets as opposed to government.

One of the signs of whether a revolution in ideas is affecting practice is its worldwide impact. And just as the Adam Smith revolution reached Japan and continental Europe and the U.S., the most dramatic manifestations of this present revolution are really in China, Russia, Poland and the Third World. As far as rolling back the welfare state, the most radical moves have been made in New Zealand under a nominally socialist government.

In my opinion, this [change in the intellectual climate] would have occurred much more rapidly in the U.S. if it had not been for the Vietnam War. I think that set the thing back by at least 10 or 20 years.

Moreover, the war has had very long lasting results. Part of the deterioration in the intellectual standards and morality of American universities and colleges derives from the Vietnam War. A great many people went to colleges and universities during that period who would not ordinarily have gone there, in order to stay out of the war. And these people, who would otherwise have been businessmen or something, became instead academics. But they are not intellectuals fundamentally, they are really activists.

Could this free market revival prove fragile, if inflation flared up again?

No. Inflation will not be a major problem in the next several decades for a very simple reason: It's not politically profitable.

Why did you have inflation? Because it enabled government revenues to go up as a fraction of national income without any legislated tax increases. Inflation is a source of revenue for the government in three different ways:

First, there is the direct revenue from the pieces of paper printed; second, there's bracket creep, as people are pushed into higher tax brackets without any increase in their purchasing power; third, there's the repudiation of debt, because you were able to borrow at lower rates than subsequent inflation rates. Now, the first is still there, but it's very small—10% inflation will yield in revenue about eight-tenths of 1% of a year's national income. Bracket creep is gone, because of indexing. And the market has become so sensitive that any sign of rising inflation immediately drives interest rates up. Moreover, the public at large has become sensitive to inflation. So it is unpopular, and you gain nothing by it.

But it's still proceeding at a historically high rate—4% a year. Well, it's going up a little now, but I think it will shortly start coming down. I don't think you really have much inflation in the system. It's very hard to judge because of the problem of the bias in the price indices. You can never allow properly for improvements in quality. Some years back, George Stigler headed a committee on price statistics. One of the members of the committee suggested that a 2%-per-year increase in the official price index would be the equivalent of stable prices.

Despite all the free market noise in the 1980s, no country has actually succeeded in reducing government share of GNP significantly. In the U.S. right now, the government share of the GNP, including state and local levels, is at a peacetime high. Doesn't this mean that free market ideas were tried and failed?

No, they haven't been tried, and they haven't failed. But it takes a long time. The real change in the intellectual climate didn't start until the late Forties, early Fifties. So you really don't expect it to be fully implemented until something like 2000.

While it's true that government spending is at a peacetime high, the major increase has been a result of legislation that was enacted before 1980. And you don't hear politicians boasting about wanting to spend a lot more; you hear them trying to figure out how to spend money in ways that don't look like spending money, like Dukakis' imposition of health insurance on firms.

But taxes have been raised under Reagan.

But in indirect ways; they can't do it openly.

You have argued that government intervention has been discredited by its failure to produce better results than market forces. But isn't it the case that in recent years the argument for government intervention has shifted from efficiency to equity, fairness? The liberals don't say that their proposals will help the economy; they say it will make the society "fairer."

Exactly—from the argument that government-owned industries will be more productive, to the argument that you have to transfer income from those who are healthy to those who are hurt.

I did not see President-elect Bush arguing against this approach.

No ... but on the intellectual level counterarguments are emerging. The most recent is Charles Murray's In Pursuit of Happiness and Good Government , which I think is a marvelous book. His approach is very ingenious and effective. He starts out, and you might well think that he's just a committed welfare statist, but then he gradually works around and comes to the conclusion that these policies are doing more harm than good.

But look at affirmative action. It's a substantial expansion of government power, but it's virtually unopposed because in American politics it's very hard to stand up against an accusation of racism. And the California electorate voted themselves a cut in insurance rates.

Don't misunderstand. I am not saying, and I never have said, that it's inevitable that we will reverse the course of events. I just think that the situation looks far more hopeful today. And it will happen, in my opinion, not by cutting government spending but by holding spending steady while the economy grows, so that government becomes a less important part. And the regulated industries will become relatively smaller as they are driven out of business.

Now, I think both the Thatcher government and the Reagan Administration have wasted the opportunity to go much further. The Reagan Administration has been very bad on international trade and international economic policy. But, nonetheless, I think there has been a real change.

The classical definition of socialism is the government ownership of the means of production, distribution and exchange. But hasn't it under the name of liberalism mutated into a more virulent form involving government control rather than ownership—particularly in its American variant?

But it's going to be just as unsuccessful. Look at the savings and loan industry. You're going to have to have a diminution of regulation, not an increase, or that industry's going to disappear. FSLIC is going to have to be replaced, because it's headed toward bankruptcy. All those industries that are highly regulated will tend to decline relative to those that are not.

The really dangerous problem is not regulation but the transfer payments, Social Security and welfare.

Why are transfer payments like Social Security dangerous?

Because you cannot benefit people through what we have come to call rent-seeking [a group's use of political power to extract subsidies from the community]. Take agriculture. In the first place, those being benefited, if anybody is, are generally very wealthy. A modern farm is a multi-million-dollar enterprise. Secondly, I estimated a year or two ago that we are now spending $19,000 per year per person engaged in agriculture, including not only the proprietors but also the laborers. The aggregate net profit from agriculture is half that amount. So most of that money is just being wasted. It's being spent because the costs are spread very widely and nobody has any incentive to do anything about it. But can that continue indefinitely? I don't think so.

Social Security is a rent-seeking operation by the elderly. You can hardly grow out of that.

Oh, yes, you can. In the following sense: The political power of the old is going to get smaller and not larger. The cost to the rest of the people is going up, and you're going to have a revolt of the young against the old.

But it's going to take legislation to unwind it.

It will take legislation.

Another example of this more subtle form of state control: The Economist magazine has been advocating a world currency. Now, in a sense, that's a form of mutated socialism—it's political control at the economy's heart. Do you see this happening?

Not a chance in a million.

More or less of a chance than of privatizing money?

They both have one chance in a million. Both of them, one chance in a million. No government is ever going to give up its right to print money, and no government is going to be willing to allow its own monetary   policy to be determined by an international organization.

Well, there's tremendous pressure on Mrs. Thatcher right now to integrate into the European Monetary System.

Excuse me, you must distinguish between two very different things. One is an agreement to fix exchange rates jointly, and the other is a unified currency. And to have a truly world currency, you need a unified currency. There's no pressure on Mrs. Thatcher to adopt the German mark as the currency of Britain. There's no pressure on the French to adopt the mark as their currency. You see, that would be true unification.

Well, the European Community bureaucrats do want a European central bank.

That's what they want, but they'll never get it.

At the moment, the socialist world may be in trouble. But you have to admit that at various points in the past, command economies like the Soviet Union's have shown remarkable growth rates. And overall, economic growth is the central fact of the modern era.

Excuse me, let me restate what I believe the truth to be. Centralized totalitarian states are very good at producing monuments. The Egyptians could produce pyramids. The counterparts of the pyramids in the Soviet Union are their great dams and their military. If you break down the Soviets' supposed output growth and ask yourself a much simpler question—what's happened to the average standard of life of the ordinary citizen of Russia—there has been no significant improvement.

Of course, any country which emerges from chaos into a period of order, as the Soviet Union did after World War I and World War II, is going to have an improvement in efficiency. And there's no reason a highly centralized state can't benefit from developments outside. Russia can have radios, television sets, where it couldn't previously. But that's no sign of Russian growth. It's a sign of their ability to imitate and import.

In other words then, the West is the economic locomotive of the world.

Absolutely. My interpretation of Russia, ever since I was there 25 years ago, has been a very simple one: You have to regard Russia as a mother country and a colony. The mother country consists of maybe 20 million, 30 million people, the nomenklatura. The colony consists of the rest. It's Belgium and the Belgian Congo.

Now, the mother country views the colony not from the point of view of the welfare of the colony but from the point of view of how much can be extracted from it. It treats it as a cow to be milked. The mother country can have a relatively high level of living by extracting it from the colony. It gives the colony something only insofar as it is necessary. So you see these enormous differences between Moscow and the provinces. You drive through the countryside, there's nothing, naked light bulbs hanging down. . . .

Is efficient socialism a logical impossibility?

Ragnar Frisch argued that one. He counted the number of equations required to coordinate an economy and said that you could not do it, because it would take too big a computer.

Obviously, computer power has increased enormously since Frisch wrote.

You have to distinguish between a static economy and a dynamic economy. I think it is perfectly possible that you could handle a static economy better by computer than by the price system. But the problems are twofold. First, there is no conceivable political system which would lead to the correct programs for the computer. And second, the computer is not capable of initiating improvement by itself. You can't innovate by computer. Is there a computer that could have invented the supermarket? People don't realize what are the great inventions of the 20th century. The supermarket is one of them.

As you know, I have argued that science itself is an example of the free market at work. For sciences like physics (and economics I would say also) that require a good deal of interaction between people and the voluntary exchange of information, an open society is much better than a closed society. In the Soviet Union, they cannot be really innovative.

Except in certain areas. When people make comparisons of the U.S. and the Soviet Union, they don't recognize that, with respect to socialist methods of organization, the U.S. has no advantage over the Soviet Union. We can't organize our military or our schools any better than they can, because those are socialist systems. We can have a better military because we have a private industrial system doing things for other purposes that can be carried over to the military. But otherwise, why should we be better at socialism than they are?

What do you think about perestroika?

I don't believe that there will be a major change in Russia.

You don't?

No, I believe it's mostly talk. Look. The rulers of Russia have known for at least 30 years that they could improve food production drastically by increasing the size of the private plots. Why haven't they done it? The answer has to be because of political control.

What about elsewhere?

I'm more optimistic about China than I am about Russia. The Chinese, first of all, are a cleverer people, fundamentally, a more innovative people, and they have a greater tradition of trading. And they have, most important of all, this great resource in the overseas Chinese. The success of the overseas Chinese in Hong Kong, Singapore, Taiwan, has produced within China a pressure which is not produced in Russia by Poland, Hungary, Yugoslavia, which have higher standards of living than Russia, but which are colonies, and which are not of the same culture as Russia itself.

China is also, of course, more of a nation-state. The Soviet Union is actually an empire. How can the Soviets liberalize their system and hold together their non-Russian components?

I don't think they can. I think what's gone on in Armenia and what's going on in the Baltic States shows what will happen. They will have to crack down. What else can they do?

China is different—although Hong Kong is going to disappear as an example of a real free market economy.

You are not optimistic about...

When Pinochet came in, the government share of GNP was 40%; it's been cut down to 20%. And there's no South American country that has done nearly as well in holding down inflation; it's recently been 20% or less a year. There's real growth, and their debt has been going down. Chile has done very well. And they're now going to move toward democracy.

Let's look at the Third World. Government planning and control was universally recommended by development economists as recently as 15 years ago. Now again central planning may not have worked well—but there has been economic growth in the Third World, hasn't there?

Where—aside from the OPEC countries?


I spent two months in India in 1955 or 1956. I spent some time there most recently in 1978. The only significant change I could see was the international hotels that were not there is 1955 or 1956. The people are just as miserable as they were at the time of independence. It's like the Russian case again. Monuments.

Let me summarize my own view. Private property is essential, but it's not enough. Private markets are essential, but they're not enough. Free private markets are the critical element. India is a nonfree private market. In order to set up a business, you have to get a license from the government. The easiest way to get rich in India is to have an in with the government, so they'll give you a license to get foreign exchange.

In the U.S., of course, these institutional prerequisites for capitalism are being eroded by judicial reuriting of such things as contract law.

Peter Huber has just written a very good book about this, called Liability: The Legal Revolution and Its Consequences. You have the impact of egalitarianism, in the law schools and in society at large, and it's still strong.

What about the rest of the Third World? There seem to be antistatist revolts in Burma and Algeria.

Burma is the most fascinating, because there is on the record no case of a totalitarian country which has really changed drastically toward a democracy. There are cases of military juntas that are doing that—Franco's Spain, Salazar's Portugal and now Pinochet's Chile. But there is no case of a totalitarian country.

But will these revolts lead to the dismantling of socialism, or are we going to see something like the famous description of czarism, "autocracy tempered by assassination"—socialism tempered by periodic chaos?

If Burma really were to move toward a multiparty state, yes, then you can have a very significant improvement, but if another totalitarianism replaces the failed one, you'll have the same thing repeat itself. There's no reason it should progress.

For example, we say the Chinese are clever people, but, as you point out, they never had any tradition of democracy or anything that resembles classical liberalism. And they had this historical episode where they apparently stagnated for a thousand years. What happened there?

I don't know. Why has the world, as a whole, stagnated most of the time? See, you go back to the excerpt you read to me from Capitalism and Freedom. The history of the world is the history of tyranny and misery and stagnation. Periods of growth are exceptional, very exceptional.

You've mentioned what you see as the institutional prerequisites for capitalism. Do you think there might be cultural prerequisites, too?

Oh, yes. For example, truthfulness. The success of Lebanon as a commercial entrepôt  was to a significant degree because the merchants' word could be trusted. It cut down transaction costs.

It's a curious fact that capitalism developed and has really only come to fruition in the English-speaking world. It hasn't really made the same progress even in Europe—certainly not in France, for instance. I don't know why this is so, but the fact has to be admitted.

Does this mean that capitalism may not necessarily be exportable?

Beyond a certain point, it may not be. It's been successful in Hong Kong, but there the limited-government framework was provided by the British—at the same time, incidentally, that they were depriving their own people of its benefits! Whether the Chinese themselves can generate that framework is very much an open question.

As is the future of the new capitalist societies of East Asia, like Japan. It's a myth that the Japanese government has some sort of "industrial economy" and directs the economy; actually they have a mixed economy very like the U.S., and it's grown despite government policy—MITI was originally opposed to automobile exports, for example. But I believe it is still an imitative rather than an innovative economy. Their technology development is still basically derivative.

Well, what does all this tell us about economics? You say that economics is a science, advancing over time and characterized by an ability to predict—but why this endless methodological oscillation between the state and the market?

That isn't economics. That's philosophy, political science. . . . There's an economic element to it, of course. Economics is a much more difficult science, fundamentally, than physics, primarily because of the great difficulty of doing experimentation. People think the natural sciences produce truth, but they don't. The natural sciences, like the economic sciences, produce hypotheses which are accepted so long as no better one comes along, and so long as no contradictory evidence comes along.

I do have real doubts about some of the directions in which economics has been going. I'm a quantitative economist myself, but I think computers have made it too easy to do quantitative work without understanding what you're doing. And I think there has been too much of a drift toward pure mathematics for its own sake in economics, as opposed to economic content. If able people want to do that, then you have got to give them their head to do it. But, personally, I think it's overdone.

Friedrich Hayek has a sociobiological argument for the perennial appeal of socialism. He says that for almost all of its history, the human race subsisted in simple hunter-gatherer bands and that all important relationships were face-to-face. The few thousand years of civilization, just a fleeting moment from an evolutionary point of view, have not been enough to accustom us to impersonal relationships like the price system. So people respond emotionally and want to bash greedy landlords, for example, despite the power of the intellectual case against rent controls.

What do you think about Friedrich Hayek's argument that socialism is nostalgia for getting back to a simpler world, one in which the priests and tribal chieftains made your decisions for you?

I agree with Hayek. I think we're very influenced by our genetic structure. I personally prefer capitalism on moral grounds, but I've always said that the only reason it survives is its material success. Most people find socialism more satisfying emotionally.

One of the things that trouble me very much is I believe a relatively free economy is a necessary condition for a democratic society. But I also believe there is evidence that a democratic society, once established, destroys a free economy. So rolling back the welfare state is exceedingly difficult, there's no question about that.

But, you know, I made a little calculation a while ago that I think you'll find interesting. About 200 years ago an English newspaper wrote, "Slaves are three and twenty times more numerous than men enjoying, in any tolerable degree, the rights of human nature." I estimate now that the ratio has falled in the last two centuries from 23-to-1 to about 3-to-1.

So we've a long way to go, but there's progress.