♪ Music ♪ Reality captured in user friendly symbols and processed for understanding. ♪ Music ♪ The Idea Channel ♪ Music ♪ The subject of the talk tonight is "The Role of Government in a Free Society," and I think in discussing that subject the first thing you have to do is to emphasize the very different meanings that free has. There are two quite different meanings of free which tend to get confused and which it is important to keep separate. The first is freedom in the sense of the absence of coercion. That is the sense in which I shall be trying to use the term. The second is free in the sense of free lunch, in the sense of absence of cost. The two meanings are very different and there are few more important sources of confusion about the proper role of government in our society than the confusion between the two very different meanings of the word free. When we speak about the right to free speech, as in the First Amendment of the Constitution, that's the meaning of the term in the sense of the absence of coercion. That says government shall make no laws that interfere with the freedom of speech. It means that people shall be free to speak voluntarily to one another. It's often forgotten that a corollary to freedom of speech is freedom to listen. Freedom of speech does not mean the right to force anybody to listen to what you have to say. Freedom of speech means the freedom to stand up, hire a hall and offer to speak, and let anybody come who wants to listen to you. A very sharp contrast to that kind of freedom is the freedom that was suggested back in the days of World War II by Franklin Roosevelt when he spoke of the four freedoms and spoke of the freedom from want. That's a very different kind of freedom. How can you guarantee one person a freedom from want except by coercing another person to provide the material means for his being free from want? Freedom from want involves coercion. It may be a fine objective but it uses the word freedom in an altogether different sense. So when I speak of a free society, I mean freedom in the first sense, absence of coercion. By coercion I mean very simply the use of physical force or threat of force to make one person the instrument or agent of another person's will. It's very tempting to use coercion in a broader sense. We often talk about people being coerced by opinion or by talk or by a TV program or by propaganda. Once you start down that line, I think you're in great trouble in preventing yourself from going very far indeed. Persuasion is one thing; coercion is very different. And by freedom we mean the absence of the physical force or the threat of force to make one person serve another. Now obviously if men are going to live in a society there is no way in which you can have absolute freedom. There is a famous dictum of a Supreme Court justice that my freedom to move my fist is limited by the proximity of your chin. In a society in which there are many people freedoms are bound to interfere one with the other. We are bound to have limits, and the question that we need to ask and the question that I want to talk about tonight is, what arrangements in a society will minimize coercion while preserving the maximum opportunity for members of a society to cooperate with one another to achieve their separate objectives? The fundamental principle that I'm going to try to uphold was stated by John Stuart Mill in On Liberty over a hundred years ago, and I quote from his statement in that essay: The object of this essay is to assert one very simple principle as entitled to govern absolutely the dealings of society with the individual in the way of compulsion and control. That principle is that the sole end for which mankind are warranted, individually or collectively, in interfering with the liberty of action of any of their number is self-protection, that the only purpose for which power can be rightfully exercised over any member of a civilized community against his will is to prevent harm to others. His own good, either physical or moral, is not a sufficient warrant. That's the fundamental principle that I am going to take as a given, as describing my own values in trying to discuss the question of what government's role is in a society dedicated to promoting freedom in that sense. From this point of view the nation-state is a means to an end not an end in itself. This notion that the individual or rather, in our society and every society, the family is the basic unit, that we have responsible individuals or family cooperating one with another to achieve their objectives, is in very, very sharp contrast to the notion that the fundamental unit is the state, that you have a nation-state, and that the individual exists to serve the state. The right notion from my point of view is the other: the state, the government, is a means, an instrument through which we can jointly serve some of our ends, but it is not an end in itself. Patriotism may be a widely shared feeling because many of us feel a member of the same community, as we feel a member of the same family, as we feel a member of the same smaller community and larger community, but that is a voluntarily shared consensus and the state is not an end in itself. The ultimate unit is the individual or the family or such other voluntary groups as individuals may choose to participate in. To a believer in a free society in this sense the ideal is unanimity. The ideal is that you shall have joint action only insofar as people have been persuaded to act together, that you should have joint action only insofar as responsible individuals after free and full discussion have agreed jointly to cooperate in some venture. It's from this point of view that the market, voluntary exchange through buying and selling, is so important as a basis for a free society. The market has the enormous virtue that it enables you to achieve voluntary cooperation, to achieve unanimity, without conformity. Everybody can do his own thing. Everybody can go to the store and buy what he wants to buy. If one man chooses to have a shirt of one color, he can have that shirt; another man a shirt of another color, he can have another color. Everyone can do his own thing within the limits of his resources. However, there are some items where it is not feasible for everybody to do his own thing. There are some cases in which you must have uniformity, some cases in which the answer must be the same for all the people. The most obvious example is in the case of national defense. There is no way in which some people in a country can be engaged in an international war and other people in a country can be not engaged in that war. The decision whether the country is at war is a yes or no decision that must be the same answer for all. The ideal would be that we should not engage in such joint activities unless we have first achieved unanimity, but it is clear that that's not a feasible ideal. It is clear that you cannot in a changing world subject to problems that come up from time to time that you cannot afford the time that would be required in order to get everybody jointly to agree on the same course of action. Hence, all of us who have lived in these kinds of societies, all societies of this kind, have been led to adopt something short of unanimity, a majority rule, as an expedient for reaching those kinds of decisions which require conformity. Let me stress that the majority rule in that context is not a principle; it's an expedient. People generally are inclined to equate democracy with majority rule. I believe that is a great mistake. There is nobody who believes in majority rule as an absolute. There is nobody who believes that if 51 percent of the people should vote to shoot the other 49 percent that that would make it okay. And our society in particular is erected on the notion that minorities have rights and not merely majorities. The Bill of Rights of our Constitution was an attempt to prescribe and assure in advance that majorities would not rule, and we are not willing to have a simple majority settle everything. For some purposes a simple majority will do. If it's more important to reach a decision than it is what decision to reach, fine, a majority will do. But if it's something fundamental, for example a foreign treaty, our Constitution requires a two-thirds vote. If it's something even more fundamental, such as changing our basic Constitution, well then we provide that you must have much more than a simple majority; you must have a qualified majority of the various states as well as of the Congress. So majority rule is an expedient which we have adopted in those cases where we need conformity. Now the reason why this is important is because the use of the political channel for deciding issues, while it is absolutely inevitable, while you must do it, inevitably tends to strain the social cohesion essential for a stable society. No society can be stable unless there is a basic unthinking, unquestioning allegiance to certain common principles. You cannot possibly conduct a society and have agreement unless that basic homogeneity and consensus exists. But every time you have to reach an agreement that requires conformity, when a majority votes and a minority must conform, you strain that social fabric, you strain that cohesion. As a result, the political mechanism does least harm to the stability of a society in those societies that are most homogeneous and that have the closest approach to a common value. You can use the political channel, you can use government decision, government enforced conformity, to a far greater extent in a country like Sweden, which has a highly homogeneous population with a very, very common set of values, you can go much farther, than you can in a country where there is a wider variety of values as in the United States. The experience of Great Britain is a dramatic illustration of this phenomenon. At one time you had a much greater homogeneity of values, much greater cohesion, in Britain than you have had in the past ten or twenty years. One of the sources of Britain's problems has been the attempt to use political mechanisms in a society that is getting increasingly diverse in its values, in its beliefs and where therefore there is a greater strain imposed upon that society. It's interesting to note that in the past decades we have had a whole spate of regional conflicts develop. The most obvious are the move for autonomy in Quebec in Canada, the move for Scottish and Welsh autonomy in Britain. Why? Because, as those countries have tended to come to rely more and more on the political mechanism and less and less on the market mechanism, they have tended to put greater strain on the things that were holding the society together. After all, so long as you rely on the market mechanism, the people of Quebec could go their way, the people of Ontario their way. When you rely on the political mechanism you put much greater strain on the relations between the French and English in Quebec, between the French in Quebec and the people in Ontario. Again, if oil in the North Sea is going to be a private matter, it doesn't matter to the Scotts whether they are independent of Great Britain; but if oil is going to be handled by government, then it makes a great deal of difference to the Scotts who is in charge of the oil development and exploration. Or come closer to home. Why have we had an expansion in this country of ethnic divisions, of differences among subgroups in the country? We always prided ourselves on being a melting pot. That did not mean that we converted people to identical items that we made one like another, but that we could live comfortably and conveniently with each group going its own way with its own customs and yet cooperating with one another in those areas which were of joint interest. But the more we have turned to the political mechanism as a way to solve problems, to handle the allocation of resources, the more we have tended both to increase the advantage of ethnic isolation and to increase the frictions among the groups. So if we are going to maintain a free society, especially in a society in which you have wide differences of customs, values and beliefs, it is essential that you rely as little as possible on the political mechanism and as much as possible on the market mechanism of voluntary cooperation where each group can go its own way. The view I am expressing is the view that classically has been termed liberalism. In the modern day and age the word liberal has come to mean almost the opposite of what it used to mean. If you look at the dictionary, liberal means of and pertaining to freedom. If you look at behavior today, liberal means of and pertaining to freedom with other people's money. I am a liberal, in the sense in which John Stuart Mill was a liberal, in the sense in which his statement was a statement of liberalism. The liberal view that the justification for government action is to prevent coercion and to promote voluntary cooperation among responsible individuals leads to a very short list of basic functions which government should undertake, and I may say that short list is one which has a long intellectual history coming from Adam Smith, and I should say Thomas Jefferson and the writers of the Declaration of Independence and the original Constitution, down through the philosophical radicals of the nineteenth century, Bentham and John Stuart Mill, down to the present. These basic functions can be listed very simply. They are, first of all, to prevent one man from coercing another--the internal police function. They are, second, providing for external defense. These two are really part of the same: to prevent coercion--to prevent coercion from within, to prevent coercion from without, and beyond this to promote voluntary cooperation among people by defining the terms under which we are going to cooperate together and by adjudicating disputes. Let me say a word about this problem of defining the rules of the game, the role of a legislature in a free society. Many proponents of a market society, of private property, take it for granted that property is something that defines itself. That's very far from the case. Of the groups that are sponsoring this talk, the law groups know particularly that it is very far from the case. In fact if it were obvious and evident, they would be out of business. There is no natural meaning of property; it's all a question of convention. If you fly an airplane over my house, 10 feet above my roof, are you violating my property rights? What about if you fly it 10,000 feet? What about 30,000 feet? Obviously that's not natural and therefore if we are going to cooperate with one another in a voluntary way, we have to know what the rules of this game we're playing are, what are the terms, what rights do I have, what rights do you have. And one of the very important and basic functions of government in a free society is to define those rules of the game and to adjudicate disputes among people. There is little dispute about the general character of these basic functions, although of course there is much debate about details, and I mention them in order to get them behind us and turn on to the more complicated, difficult and controversial questions because there are two additional functions which are much more difficult to handle and yet which it cannot be denied a government in a free society may have to serve. The first of those is to provide a substitute for voluntary cooperation when such cooperation is for one reason or another not feasible. There are two classical cases that come under this heading. One is the case of technical monopoly when for reasons of physical circumstance it's not possible to have competition. The essence of avoiding coercion is the availability of alternatives. You can only coerce me if I have nowhere else to go. Every individual is protected from coercion by a seller by the presence of alternative sellers. A worker is protected from coercion by his employer only if there are alternative employers to whom he can turn, and so on down the line. But you have some cases in which it isn't technically feasible to have alternative suppliers. The classical cases are things like telephones where it doesn't seem really feasible to have six telephone companies serving the same community so that each of you have to have six telephones or so that each of you is connected to only one-sixth of the people in the community, and there are various other technical cases like that. They don't raise too much of a problem. The more serious problem and the classical case, and the one I am going to come back and discuss at greater length, is the problem of what are called neighborhood effects or, if you want the jargon of economists, externalities or, if you want still another jargon, third-party effects. These are the classic cases in which two people in entering a deal with one another have effects on third parties who didn't enter into the deal. The much discussed current cases of pollution and environment all fall under this heading. If somebody pollutes the river and somebody downstream gets polluted water, what you have is that somebody upstream is engaging in exchanging good water with someone downstream for bad water. There might be nothing wrong with that if the two have voluntarily made a deal to do so, but the problem arises when it isn't feasible to make this as a voluntary arrangement and when the person downstream gets the bad water willy-nilly and without having agreed to be subjected to it. Those are the cases of neighborhood effects. That's one additional function, providing a substitute for voluntary cooperation. Another is to protect irresponsible people. We can only really believe in freedom for responsible individuals, but a society includes irresponsible individuals of whom there are two major classes, children and the insane. I do not say those are overlapping; on the contrary, they are largely disjunct. But we cannot really argue for freedom for either group. This is the paternalistic function of the society and it's also an extremely troublesome one. We have resolved it in most free societies by assigning primary responsibilities to the parents, by taking the family as the unit in considering policies, but fundamentally there remains the problem. That's again an expedient not a principle. We are not willing and should not be willing to treat children as the absolute property of their parents which their parents may do with as they like. We really want to treat children as potentially responsible individuals whose freedom and opportunities must be protected, but that raises enormous difficulties. If the parents are not responsible it is very difficult to find a surrogate that will do the job. Both the functions I have described raise problems because they are difficult to define precisely and even more to limit. There is an enormous range of activities which could be justified by government or which you could attempt to justify on the grounds either that you have third party effects or that you are dealing with irresponsible individuals. After all, in a complex society in which tens of millions of people are cooperating together, there is hardly anything that people do that does not have effects on third parties, on people other than those who are directly involved in the arrangement. And there is hardly any policy--well that's an exaggeration as I'll point out in a moment--but there are a very broad range of policies that can be justified on grounds of protecting irresponsible individuals, particularly if you allow the definition of irresponsible to be broadened. After all, a very large number of us know that there are two classes of people, ourselves and all those other irresponsible people. Nevertheless, to digress for a moment, even in this vague form in which I have so far expressed it, the principles I have listed are not empty as can be seen by just listing some of the present governmental activities that cannot be justified in terms of these principles even on a very broad and very generous interpretation of neighborhood effects and irresponsible individuals. Let me just give you a small list. For example, on these principles there is absolutely no way in which you can justify the imposition of safety requirements on autos and motorcycles to protect the drivers of those vehicles. You can justify safety requirements to protect third parties, to protect pedestrians, to protect others, because in that case you do have an effective third party effect. But how can you justify safety requirements which are intended to protect the driver himself? If you will think of John Stuart Mill's statement, that the only purpose for which power can be rightfully exercised over any member of a civilized community against his will is to prevent harm to others, his own good, either physical or moral, is not a sufficient warrant. Indeed I must say I have long regarded the law various states have requiring motorcyclists to wear helmets as a kind of litmus test of whether a person really believes in freedom or doesn't believe in freedom. If I'm riding a motorcycle, I may be a fool and stupid not to wear a helmet to protect myself but it's my life. What right does the state have to tell me that I must wear a helmet for my own good? Is not the right to commit suicide a basic human right? It's not one we would like to see exercised--well, for some we would; but in general it's not one we'd like to see exercised and in general we would certainly try to do our best to persuade any friend of ours not to exercise it. But when you come down to the ultimate point, how can we justify saying that it is illegal to commit suicide on John Stuart Mill's grounds? I warn you that you must beware of the answer which you will be given as I have been given when I've tried this at various times, and it's in a way a correct answer. It shows how wrong breeds wrong because the answer I have been given is, "Well now, after all, you do have to require the helmet on a motorcyclist because when a motorcyclist spills himself on the road and spreads himself over the highway, he isn't really only hurting himself. A government ambulance will come to take him to a government hospital, he will be buried with a government subsidy, and his wife and children--if there are any--will thereafter be entitled to government welfare payments. Therefore, when the motorcyclist spreads himself over the road, he really is harming the rest of society and not merely himself." Think about that proposition for a while and you can see what it leads to. What it says is that each of us is the property of the U.S. Government and that we each of us bear on our back a sign, "Property of the U.S. Government. Do Not Fold, Mutilate or Spindle." There are a host of similar paternalistic regulations for adults which cannot be justified in any way, shape, form or manner by the general principles I have been talking about as the possible functions in a free society. In addition, you cannot along these grounds justify tariffs on imports or restraints on exports, with minor exceptions for special cases of national defense. You cannot justify on these grounds parity prices on agricultural products or rent control as you have it in New York or general wage and price control as was imposed by Nixon in 1971 or the current price controls on natural gas and oil. You cannot justify along these lines government control of output through farm programs, state oil commissions, federal energy administration, the detailed control of industries through ICC, the FCC control of radio and television which I think is a particularly pernicious control because of the extent to which it violates fundamental freedom of speech, and, to get to a point which would require much fuller discussion to persuade you of it, you cannot in my opinion justify along these lines compulsory Social Security or licensure provisions denying the right of a person to practice an occupation unless a governmental commission has certified that he may do so. Now as I say, I could go on and on with this long list. I list it merely to point out that the principles, the views, and the beliefs in freedom even on this vague level are not empty. But let me digress for a moment to tell a story along these lines. Once some years back I had a debate at the University of Wisconsin with Leon Keyserling. Some of you may have heard of him, a notorious lawyer turned economist. Keyserling and I were debating essentially the issue of the role of government in a society, and in his attack on me he decided to show how silly, absurd, and absolutely far-out I was. So he did so by taking a list of a similar kind which I had in my book Capitalism and Freedom and starting to read it. Now I should say this was some years back when the United States was engaged in the Vietnam War and when students and all young men were subject to military conscription. He started to read one item after another about how can you be so stupid and absurd to say that there's no justification for safety regulations or for tariffs or for price controls, and then he came to the point where I had in that list "and there is no justification for military conscription." Of course the student audience immediately started applauding to the end and Keyserling lost that debate right then and there. But there is no justification for military conscription to a believer in freedom. It's another one of those things which you can readily rule out once you start from that premise. I want to take the rest of my time to talk about the difficult cases, to return to these so-called externalities or neighborhood effects, which have been used to justify such a very, very wide range of governmental activities. The general approach has been to regard any example of this as a case of market failure. That's the term that has been used, to say well after all this is something that the market cannot take care of. For example, the classical case has always been the smoke nuisance case. The electric utility puts smoke in the air, the smoke makes my shirt dirty, that imposes costs on me, they don't have to pay me for it, and so they are imposing costs on me without my consent; and therefore, the argument is, that's a market failure. And so it is; it is a failure of the market. If you want to see what's involved in this, I submit to you a very simple example. Contrast the problem of a utility in driving its trucks which have automobile accidents with the problem in putting out smoke. You know one of the things that people tend to talk is as if the desirable thing is to have no pollution. Now that's obviously silly. We could have no pollution in this room very quickly if everybody just stopped breathing, but the cost would be a little higher than the gain. In the same way, suppose you asked yourself the question, what's the right number of automobile accidents for a utility to have? Now offhand that seems like a silly question. Why, of course, it shouldn't have any automobile accidents. But maybe the only way in which the utility could avoid automobile accidents would be by having its trucks never go more than 3 miles an hour and only between the hours of two in the morning and four in the morning when there are no other cars on the road. That would raise the costs of producing electric power very much, it would make it necessary to raise the prices to customers, it would raise the cost of power to customers, so that's obviously silly. On the other hand if the utility has an automobile accident, until we went down the wrong road of no-fault insurance, the utility was liable to pay the damages to anybody it hurt. Therefore if it drove its cars in such a way as to increase the number of accidents, it reduced its costs of producing utilities, it increased its costs through accident payments, and it had the right incentive to have the number of accidents in which the extra cost in the form of increased liability payments just matched the extra gain from cutting its production costs. No problem arises; there is no market failure, Why? Because it's easy to identify who is hurt and who did the hurt, and so you can make it the subject of a market transaction. But when I come to the dirty shirt which the same utility puts out, and in principle I ought to have the solution to the right amount of smoke in the same way, the transaction costs, the costs of entering into the deal, of finding out who dirtied my shirt and of getting them to pay for me, are just greater than it's worth paying for the benefit. As it turns out, hard though it is to believe, almost all externalities or neighborhood effects arise out of these transaction costs. As I say, the approach has been to regard any market failure, however minor, as a sufficient excuse for government intervention. The market has failed; therefore the government should step in. But this is a basic error because it involves a double standard. There is not only such a thing as a market failure; there is also such a thing as a government failure. That's not unknown in the modern society and hence the cure may be worse than the disease. And there are two very important reasons to expect government failure to be very prominent. The first is that the very features that inhibit the market solution also inhibit government solution. If it's difficult in the market to know who has benefited or harmed whom, it's difficult for government to know who has benefited or harmed whom and to put in corrective action. But a much more important reason is that government actions have laws of their own. You and I as well-meaning people may say that government should step in to correct that market failure, but once we get the government into the act it's going to go according to its own rules, and those rules will mean that the ultimate results are very different than the initial intent. The will will be different than the deed. When the government steps in and makes mistakes and has failures, they're going to be big failures and not little ones. We've had some dramatic examples that illustrate my point very quickly. Four or five years ago the government required all producers of children's nightwear to add Tris to the nightwear in order to make it flameproof, and lo and behold throughout the country every manufacturer of children's nightwear added this substance to it. Four years later the government discovers that the chemical Tris is carcinogenic, and lo and behold every dealer throughout the country is required to take the nightwear off its shelves. An example of government failure of a large scale. Again, in the early 1970's on grounds of reducing pollution, the government required on a wide scale utilities and manufacturing firms to convert from coal to oil and gas. Now the government is trying to get laws passed to require them on a large scale to convert back. So it's obvious that the fact that you have market failure is not a reason to call on government, unless you take into account the fact that you may have government failure and that the end result may be worse than the situation you started with. Because of this possibility--and this is the final point I want to discuss-it's worth reexamining the existence of other ways to cope with market failure than calling in government to redress the balance. I think one of the great difficulties in discussions of this kind is the tendency to proceed as if there is only a pure market on the one hand and a pure government on the other and to neglect the whole host of intermediate voluntary arrangements which there are which tend to arise when there are market failures because, after all, the existence of market failure implies a potential gain and hence gives an incentive to solve the problem. Let me give you some very simple examples. One, which I owe to my son, is the custom of tipping. Now you know its worth stopping and thinking about the custom of tipping. There's not a person in this room who doesn't tip even though he doesn't himself ever expect to come back to that restaurant and have that waitress serve him. Why do you tip? Not for self-interest. Tipping serves a very important social function. There is a market failure here that has to be redressed. How do we have an arrangement under which people are induced to give good service? Well, the best way to do it is to make it worth their while to give good service, to reward people who give good service, and to punish people who give bad service. But how do we do that? If you or I are going to come back to the same place time and again, it's easy; but if we're not, how do we do it? We have developed a very extensive social custom for exactly this purpose, that without thinking about it all of us act as if we were serving the interest of other people in tipping for good service. Politeness serves the same exact social function. I'll give you another very trivial and basic example. All of us who have traveled on highways around this country have recognized the great social value of conveniently available rest facilities. Now why on strictly business principles should any gas station provide rest facilities to people who aren't going to buy gas there? He's rendering a benefit to a third party. Surely, if you were to think of market failures, you would say, "Well no gas station would do that, and therefore there would be no way in which this useful social function could be provided." But in fact it is provided, in some cases by governmental stations but more generally because there are national chains of gas stations which benefit as they see it from good will in providing these facilities; because in other cases the cost of enforcing payment, the cost of restricting the use of the facilities only to those people who are going to buy gas there or pay for it, is greater than the gain from doing so. And so society has developed a technique for handling this case of market failures. There are many other cases. Here in Palo Alto you have local associations of homeowners who join together voluntarily in order to provide services for the group as a whole. But I want to come to a more interesting and sophisticated case which is especially relevant here and to this audience, and that has to do with the private subsidization of basic scientific research. One of the standard examples of market failures, one that you will find time and again, is that since basic scientific research yields knowledge which is not patentable and which cannot be kept secret, the major benefits from research go to people other than those who do it and therefore there is no incentive. Let me give you a quote from a professor here at Stanford, Professor Henry Rowen of the Business School, writing on energy in which he says and I quote, "Research, i.e., those activities in which the private sector under invests because many of the benefits are not appropriable by firms." Well now, let's stop and look at that. It is true that society has very great benefits from research; there are real third party benefits. But is it true that society has not developed a mechanism to finance it without governmental assistance? Not at all. Society has developed a very ingenious mechanism. Universities exist and universities are institutions which are selling three products. They are selling schooling, they are selling research, and they are selling monuments. The monuments serve to finance the research, and the monuments are linked to the research precisely because the research has third party effects and cannot have benefits that are appropriable. If Mr. X or Mrs. X wants to honor her husband Mr. X, no one would regard it as an honor to have the ABC manufacturing enterprise build a factory there and say that's the X factory because everybody says, "Oh, that's no honor to him. They're just doing it to make money." On the other hand, if Mrs. X puts up a Mr. X library on the Stanford campus, that's a great honor to Mr. X. Why? Precisely because it is associated with something which is rendering a public service and which cannot be appropriated privately. So that in fact long before government stepped in to the financing of basic research, there were in fact extensive funds being devoted to basic research through the development of institutions which engaged in tie-in sales of research and monuments. This case is very interesting and I think very important because it brings out another very important distinction that is often confused. That's the distinction between third party effects, the effect on society, on the average and the effect of an additional measure. Let me go back to the research. Once you recognized that there would be a great deal more research financed than can be justified by the returns appropriable by individual firms, once you recognized this social institution that has grown up voluntarily to finance basic research, it's no longer so obvious there's any room for additional government funds. Now I recognize that that's heresy in this room where most of us are being supported by those additional funds, but nonetheless it's heresy worth considering. If there were no source of support outside of strict profit seeking narrow firm support, then you would have to recognize that the benefits to society from a little extra research will almost surely more than balance the costs associated with raising the funds to finance it that way because that's the other side of the problem. Every time government steps in it has third party effects, too. The government invariably raises the money from people other than those whom it's intended to benefit. It invariably introduces friction into the society and, more important than any of this, it threatens the freedom of the society because of the intimate connection between limited government on the one hand and human freedom on the other. But nonetheless, if there were no source of support for basic research other than private profit-seeking enterprises looking at their narrow self-interest, almost everybody would agree that there would be a strong case for governmental subsidization. But now, let's suppose you have a great deal already from this private arrangement I've described. How do you know that it's worth having some more? If you'll pardon my jargon, how do you know that the marginal benefit is greater than zero? The average benefit may be positive on the whole society. Let me illustrate how important this is. Henry Ford, when he introduced the Model T and developed the automobile industry, undoubtedly conferred enormous third party benefits on the society as a whole. He made it possible for millions of people to live a different kind of life. Was that an argument for the government subsidizing Henry Ford? Not at all, because he had plenty of incentive to do it without the government subsidizing him and at the margin, given that he was willing to do it and go as far as he was, it's not clear that extra development of the automobile would have added extra benefits. In the same way once you recognize the importance of distinguishing between the margin and the average, the extra and the whole thing, you will immediately see that a very large fraction of all the arguments for government involvement on the ground of external effects, of neighborhood effects, of third-party effects, fall to the ground. Now I do not want to suggest that you take the easy way. I don't want to say whenever there's a problem something will come up to solve it. I think that's too easy an answer. There are real issues here. Nobody can set forth a hard and fast line on what government should or should not do in concrete form. What all of us can do is to try to find out what are the principles on the basis of which to judge governmental activities. We have to think in terms of a balance sheet in which for any proposed governmental activity here are the advantages, here are the disadvantages, how do they balance out. What I am suggesting is, first, that we should be much more sophisticated in constructing that balance sheet than we have been. There has been so much of a tendency to look only on one side of the balance sheet, at the alleged gains, and not at the other, the cost; so much of a tendency to assume that the will is the deed, that if the intentions are good the results will follow. So the first thing I want to emphasize is the importance of really exploring seriously what alternative mechanisms there may be for resolving these real problems before we turn to the government. Moreover, when government was very small, fifty years ago when total government spending in the United States was less than 10 percent of the national income, when federal government spending was 3 percent of the national income, it was understandable that you could have a one-sided attitude. If in doubt, why not have the government try it? What harm can it do? But today when government spending is 40 percent of the national income, when federal government spending is over 25 percent of the national income, the situation is quite different. There is no excuse for this one-sided attitude, especially with the added experience we have had over the past decades of government failure. Indeed, as of today it is hard not to start out by saying that the right way to go is to assume first that there is government failure before you look at market failure. I have discussed the role of government from the point of view of a believer in freedom, but the actual explosion in government has reflected three different forces. In my opinion it has reflected, first, the failure by believers in a free society to understand the implications of their own values. Many of the expansions in government have been brought about by people who were seriously and sincerely seeking to promote freedom of the society, who believed in a free society, but did not recognize the dangers to freedom from the governmental extensions they were supporting. Second, a very wide range of governmental activities have occurred because of the pressure by people who do not believe in freedom, by the attempt by people to impose their values on society, the paternalistic view, the belief that some know better what's good for the public at large than others, the belief that the natural elite should rule. Indeed, many of the objections to a free society, many of the objections to the use of the market, are precisely that it limits the power of some people to impose their will on other people. It makes it hard to do good-- and it does. With a big free enterprise sector, it's very hard to do good. But by the same token it's hard to do evil. In a society of imperfect human beings, with the experience we've had, it's worth paying a big price in reducing the chances of doing good in order to avoid the chances of doing evil especially when one man's good is another man's evil. The third reason why you have had an actual explosion, why you've had such a big explosion in government, is because of non-ideological pressures by all sorts of groups to use government for private advantage. That's been a major source as we all recognize, and we are among those groups. We mustn't blame other people. All of us are only too willing to see government expand in areas that benefit us. What we object to is paying when it benefits somebody else. I haven't discussed the second and third pressures because of limitations of time. I have really tried rather to put in broad focus what for a believer in freedom is the proper and appropriate role of government and how to think about that role of government. I believe that is important because I believe the failure by believers in a free society to understand the implications of their own values has often led them to collaborate with their ideological opponents and to serve as front men for non-ideological special interests. So that if we can be more aware of what our values imply--I say our values because I think they are the values of most of us--I do not believe that the people of this country are really divided very much by their basic values. I believe most of them, given the choice, would set a very high value on freedom and on the freedom to pursue their own objectives, but a lack of understanding has in my opinion led those who believe in freedom sometimes to collaborate with their enemies. Thank you. Professor Friedman, my question really goes to part 1 of your speech. It seems like you mentioned the words coercion, persuasion, and exchange about a half dozen times each. I think I understand the difference between exchange and coercion, but I'm confused about persuasion. My question is, and perhaps you can answer it as quickly as I offer the question, what is the difference between commanding somebody--A commanding B to do something, i.e., coercion--and A persuading B to do something? The difference is that A commands B on the threat that if B doesn't do it he goes to jail or if B doesn't do it he gets hit over the head. In my opinion I am going to distinguish between persuasion and coercion entirely on the basis of the actual use or threat of use of physical force--not mental persuasion, not brainwashing. I find it impossible to accept brainwashing except under conditions of physical coercion as well. You may have a person held violently and brainwashed, for instance; but other than that, the fundamental distinction I would draw is the use of force. Well let me ask you this. You seem to say that coercion is bad and I think persuasion is good because it helps us achieve the necessary cooperation and uniformity that makes the society hold together. What are the implications of the freedom of the individual when individuals are barraged by all sorts of persuasive communications by the media, by lawyers, by business executives, by professors? We are constantly being persuaded. What would John Stuart Mill say to my fear of being so persuaded that I really don't have free choice? He would say to you and I would say to you, as long as there are alternative channels of persuasion, as long as there is freedom of different views to be held, well then I'm not worried. Maybe I should be but I'm not. The real problem arises when you only have one thing you hear. Now it is coercion if you are prevented by force from expressing a view. If you are a citizen of the Soviet Union you are addressed with a great deal of persuasion, but the sources are limited and if sources are limited and if somebody else wants to come in and try to persuade you differently--if a Solzhenitsyn or a Sakharov wants to persuade you differently--he's prevented how? By the threat of physical force. Now the fact that we have a great many different channels of persuasion is a very healthy thing as long as there is no monopoly. The real problem arises when we don't have. I mentioned that one of the worst things we have is the control by FCC of radio and television. Why? Because it reduces the range and variety and alternatives of persuasive material; it gives a special advantage to the advertisers. You ought to have a system of radio or TV in which the material can be disseminated the same way it is in print, in which you could do it through fee TV, paying for it, or other ways. But we use force, namely the denial of a license, the fact that a policeman will come and put you in jail if you operate in contravention to the FCC rules, to prevent alternative means of dissemination. In my opinion that's why you have had a wasteland of television, in the phrase that Minow used some years ago. So I think the fundamental answer to your question is that we must try to keep all channels open. If we do that then it's very tempting for individuals to say, "I want to be free of that." You know, freedom imposes costs as well as benefits. If you have to make up your own mind, that's a terrible thing. Most people would much prefer to have their mind made up for them, but if we're going to maintain a free society we each of us have to undertake the task of making up our own mind. Thank you. In reference to talking about government's role in a free society, you mentioned some of the market failures and I think that you may have just passed over one that is of utmost importance, and that is of poverty. In prefacing my question I would like to refer to what President Kennedy said that if a free society cannot help the many who are poor it cannot save the few who are rich, and to say that while we are a government of the people and when there is a large sector of the people who are hurting perhaps it is the responsibility of this government of the people to help out. My question is regarding how free are the poor, how free are the unemployed, and how free are those people who are disadvantaged, and so in reference to that, what is government's role? I'm glad to see one vote for the poor. First of all, the government doesn't have any responsibility; people have responsibility. This building doesn't have responsibility; you and I have responsibility. People have responsibility. Second, the question is how can we as people exercise our responsibility toward our fellowman most effectively? That's the problem. So far as poverty is concerned, there has never in history been a more effective machine for eliminating poverty than the free enterprise system and the free market. The period in which you had the greatest improvement in the lot of the ordinary man was the period of the nineteenth and early twentieth century. Those of us in this room are the heirs of that. We benefited from the way in which our parents and our grandparents were able to come here, and by virtue of the freedom that was offered to them were able to make a better life for themselves and us. But next, if you look at the real problems of poverty and denial of freedom to people in this country, almost every single one of them is the result of government action and would be eliminated if you eliminated the bad government failures. Let me be precise and specific. Why do we have so high an unemployment rate among black teenagers? It's a disgrace and a scandal. Why do we have so high an unemployment rate? First of all, because we give them lousy schooling through governmental schools which make them unqualified to hold decent jobs and, second of all, because we require employers to discriminate against them by not hiring them unless their productivity is enough to justify a minimum wage. The minimum wage rate is the most anti-Negro law on the books and it's an anti-Negro law because of precisely having first not enabled the young blacks to have a decent schooling so that they can have productivity; we next deny them the on-the-job training that they might get if you could induce employers, by being able to hire them for relatively low wages, to give them on-the-job training that would make them qualify for higher payment and higher productivity. In the third place, we have constructed a governmental welfare scheme which has been a machine for producing poor people. We have induced people to come under control of welfare. I'm not blaming the people; don't misunderstand me. It's our fault for constructing so perverse and so ill-shaped a monster as the whole set of welfare programs we have under which we encourage people, families to break up--we encourage people to move from one part of the country and come to another, under which we have in effect made many people poor.... (Interrupted) Have I ever been where? Have you ever been on welfare or poor? Of course, of course! More so than most of the people in this room. How many of you have worked a twelve-hour day and gotten paid 78 cents? But, you know, that's all irrelevant. Is there one of you who is going to say that you don't want a doctor to treat you for cancer unless he himself has had cancer? I could go down the line but when all is said and done, while there are people in this country who are worse off than other people, by and large even the poorest people in this country are relatively well-off compared to the conditions in many other countries in the world. What we take as our standard of poverty is above the average income of all of the people in the Soviet Union let alone the people in India or China or in other countries. Now that doesn't mean we should be satisfied with it. We are a wealthier country and we've been more productive, and we should set higher standards by ourselves. But by the same token, we ought to have a sense of proportion and we ought to recognize both the source and the problem. You say that you believe many people in America believe in your definition of freedom--freedom from coercion--and I might agree with you, but I also believe that many people in America really believe in a different kind of freedom and that is freedom of well-being, a certain double of standards for housing at a good price, education, etc. The other thing I want to say is that the system has built into it that the poor remain poor and the rich remain rich, and that is an externality of the system.... It is not built into the system at all; it has never been true. It's simply false if you look at the evidence. There is an enormous amount of mobility from one class to the other. In fact there used to be a saying, "Three generations from shirt sleeves to shirt sleeves," which reflected exactly the opposite effect. So it simply is not built into the system. On the contrary, there's a great deal of mobility within generations and between generations, and we shouldn't argue on the basis of false factual premises. Let me continue, because I'm not sure it really has an effect on the question. Because it is not immediately easy to become in the wealthy class, there are certain parts of the system which make that virtually impossible for the real person. Now I believe that this freedom, too, represents the belief in equality as opposed to liberty, and I wonder is it possible to build this system based on this equality which I believe that many people agree in and would not be willing to sacrifice to the liberty of freedom from? I'm not going to be able to give a full answer to your question because you've asked a very, very complex question, and so you're going to have to pardon me if I'm a little dogmatic but I only want to suggest that the statements I'm making are not without some thought and reason behind them. In my opinion a society that aims for equality before liberty will end up with neither equality nor liberty. A society that aims first for liberty will not end up with equality but it will end up with a closer approach to equality than any other kind of system that has ever been developed. Now that conclusion is based both on evidence across history and also, I believe, on reasoning which, if you try to follow through the implications of aiming first at equality, will become clear to you. You can only aim at equality by giving some people the right to take things from others. What ultimately happens when you aim at equality is that A and B decided what C shall do for D, except that they take a little bit of a commission off on the way. I'd like to ask a question on behalf of the lawyers in the audience. You talked tonight a lot about freedom and it seemed to me that one of the types of freedom that was implicit in your talk was the freedom for an individual not to act as well as the freedom for an individual to act. This, in light of your discussion of externalities and market failures, reminded me of the problem in law that's called the nonfeasance-misfeasance distinction, and the typical example is the Good Samaritan paradox. That simply is, if I'm walking alone on a beach and I look out in the water and there's somebody drowning, does society have the right to impose upon me the duty to rescue that person in the water? In other words, am I no longer free not to act? So the question I'd like to ask you, Professor Friedman, is under what circumstances may government in a free society impose upon an individual a duty to act? Note the shift you've made. You started with society and ended up with government. Are those synonymous? That's a rhetorical question that has an implied answer. It sure does. Let's go back because what you're really asking is a very fundamental question and we can leave aside the legal aspects of it. The real question is what's the case for believing in freedom? In particular, is a man free to sin? Because this is what you're really saying: if I see you about to sin, am I free to let you sin? If I know that you are sinning, the answer is no. The justification for freedom is that we don't know. And who are we to judge for our fellowman? Humility, the belief that after all I can try to persuade you but I can't force you, must ultimately rest on a recognition of the limitations of our knowledge. We don't say that there isn't such a thing as sin; all we say is we can't be sure we're right when we think it. Now you see this man walking on the beach. How can anybody force him to go out and rescue that fellow, and is it right to force him? You know that's a problem that is not easy to face. What we want to do is we want freedom in my opinion, first, because we cannot know, we can never be sure we are right and therefore we have no right to force our views on other people; and second, because the thing that's really important is the individual's own values and his own beliefs. If you're not free to sin, then neither are you free to be virtuous. Virtue is a meaningless concept unless an individual has a free will to choose between one act and another. You and I might think very, very well of that individual if he jumped in and tried to rescue the man sinking and we will impose that value on him through the social process whereby we construct values and transmit them to one another. A good society will certainly be one in which people in that position will be strongly inclined to move out and try to rescue the man, but that's a very different question from saying that if the society is bad we can make it good by using force to drive them out there to bring the other man in. I'm not sure that's an answer to your legal question but it's an answer I think to the moral question. In your book Capitalism and Freedom which I've read cover to cover you presented the thesis that a capitalist society was a prerequisite for a free and democratic society, but how does this fit with the example of South Africa, a nation which fits your criteria for a capitalist society--it has relatively unregulated free enterprise, market diversification, and multinational participation--but in no way could be considered free with apartheid discrimination and forced labor by the Passbook Law. I'm afraid you read the book from cover to cover but not line by line because you will find that the statement in question is that a free market economy is a necessary but not a sufficient condition for a free society. I have never argued that it's a sufficient condition. I gave in there examples of societies which predominantly relied on market economies, on market mechanisms for their economy, but yet were not by any stretch of the imagination free societies. So I don't believe that's a contradiction. I think free societies are very rare things, and most societies in most times in human history have not been free. So, I don't know any simple formula to produce a free society. I only know that if you don't have market economy you won't have a free society. I'd like to follow up. How do you see the role of the multinational in a system like South Africa? I believe we have to separate issues. I believe that on the whole the blacks in South Africa have benefited greatly from the multinationals in South Africa so far as their economic condition is concerned. I want to say something to you people. This is Stanford and I want to tell you something that it seems to me about the multinationals in South Africa. I think you missed a great opportunity here in this university. A while ago as I understand it there was a commission here that was investigating the question of the cost to Stanford in income if it were required to restrict its investment to enterprises that had no connection with South Africa. Is that right? Wasn't there such a group that investigated it? As I understand it, they came out with the conclusion that it would cost something like, I think it was, $300 or $400 per student per year. And then they made the wrong choice. What they should have done is they should have said to the students, "Any students who want to pay $300 or $400 more a year, we will segregate that part of the portfolio and invest it in this way, not going into South Africa." Of course they should have offered the same opportunity to the faculty. Because the problem is that it's too cheap to get your gratifications at somebody else's expense; you pay for them. If I may again digress, I think one of the real objections people have to the market system, the real reason why the market has a bad press and there is an anti-market mentality, is because the market makes people pay for what they get, it makes people responsible. Of course everybody would rather have somebody else pay for them. So if you go to this case, I remember when I was in South Africa--I've been there; I'm surprised I haven't been picketed on that account--I spent a day with the leader of the Zulu tribe, a very intelligent, thoughtful, farsighted black man who was there, Gatsha Buthelezi--an extraordinarily impressive person, and I have seldom spent a day that I learned more from. If you asked him that question there is no doubt what he would say, and what he did say, what he has said in public speeches, that the way to help South Africa is not to cut off the capital which provides the opportunity for expansion and for employment for the blacks, that that's not the way to help South Africa; that's not the way to help the blacks. He changed his mind a month ago. No, he didn't. He made a speech of a different kind a month ago. He said he had lost a great deal of hope in the possibility of having the kind of multinational, multiracial society that he had been expecting to have. That's because it's a capital crime to say explicitly that he supported that. As I say, the speeches that he gave at some earlier time are available on the record for you to read and to look at. In any event, as I say, I do not believe it is an issue; I think it's an issue that each one of us must face separately. I think each of us should be willing to put his own money where his mouth is. Can and does the market place deal effectively with irreversible externalities? I'm not sure you touched on that. For example? This is hypothetical but may be true, air pollution. Assuming that the world can only handle so much pollution; can we really leave it up to the market place to deal with that sort of irreversible or potentially irreversible externality? Well insofar, there is no difference between irreversible and non-irreversible ones if the benefits can be identified, if you can make it subject to the market, if you can make the costs be borne by those people who are involved and responsible for it, well then they will have every incentive to take account of the future effects. It's the argument of whether the fact that you have, let's say, finite resources somehow or other prevents the market from providing for the future. So that the situation for what you're calling irreversible is I think no different for the non-irreversible. In the case where you have strong externalities, the fundamental answer to you is that there is no good solution. You see we must not let the best be the enemy of the good. Utopianism is a great disease. The idea that there is something wrong doesn't mean that there is something better, so that in many of these cases there may be no good solution. That's why I stressed that I do not think that you can make a hard and fast list of what things government can do. You have to look at each case and look at its pros and cons, but you have to be even-handed and in that evaluation include government failure as likelihood as well as private failure. On the whole my impression is that governments have been far less farsighted than private individuals have been, that they have been far more willing to play fast and loose with the distant future than have private individuals and private groups.
