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Cooperation Between Capital-Rich and Labor-Rich Countries, Part 2


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The Common Market has an enormous opportunity. The Eastern European countries are a natural extension of the Common Market, and the Western European countries could benefit themselves and the Eastern European countries by opening their markets. We could do the same. We have talked for decades about trade, not aid. Yet we are now engaged in the United States in preparing to send a lot of money to help the Russians. That is not what they need. We could do them far more good if we simply abolished our tariffs and allowed them to send their goods to the United States and sell them here.

We have a curious paradox: governments that are too big in the West are trying to tell governments in the East how to become smaller. We are engaged in what is called foreign aid, which does far more harm than good. The reason is simple: from government, aid goes to government; but the problem in all those countries is that government is already too strong. Their governments need to be weakened, not strengthened. Private ventures are one thing, voluntary cooperation is one thing, but government-to-government aid is a very different thing.

We are involved, all of us, in an intellectual dilemma that affects us every day. On the one hand, we look to government to define and protect private-property rights. Government has a very important and basic function. It is difficult to conceive, in my opinion, of a truly civilized society in which government does not have an important role. Yet, at the same time, the problem everywhere is excessive government. Government is trying to do so many things that it has no business doing that it is not able to do the things that it alone can do. The dramatic recent riots in Los Angeles, following a verdict that was a trigger, not a reason, for the riots, display in microcosm the extent to which government is a problem in my country and in many countries.

Consider the residents of the Los Angeles ghettos. In what respects are they worse off than most citizens of the country? Probably, the respect in which they are worst off is the kind of schooling that they can get for their children. Those of us who do not come from low-income groups have something to say about the kind of school our children attend. If we are rich enough, we can pay twice for schooling, once through taxes and once by sending our children to a private school. But even if we are not that rich, we have some choice about where we live. In local communities and suburbs, there are reasonably good public schools, but there are few, if any, in the Los Angeles ghettos or the New York ghettos or the Chicago ghettos. In those areas, the schools are terrible. Dropout rates are high, and the schools graduate illiterates who have few skills — not because parents are not interested in their children getting good schooling but because, with the possible exception of the military, schooling is the largest socialist enterprise in the United States. It is a government monopoly, and, like any socialist enterprise, is inefficient, costly, gives great benefits to a small group, and imposes high costs on a large group. It doesn’t have to be that way, but it is that way, so one respect in which citizens of the ghetto areas of Los Angeles are worse off than the rest of us is the kind of schooling that they can get for their children.

A second respect in which they are worse off is that the inner cities are almost unlivable because of the inability of the government to provide law and order, which it is the basic function of government to provide. Why is government unable to preserve law and order? In large part, because it has undertaken to prohibit drugs. However excellent you may believe the objective to be — though I am not of that view — prohibition of drugs has been an utter and complete failure, just as alcoholic prohibition was in the 1920s. Its effect has been to make inner cities almost unlivable, to convert them into war jungles. Unless we first eliminate the corrupting and disrupting influence of a government policy that is trying to do something government cannot do, it will not be possible to provide for all of us the security of person and property that we are entitled to or expect from a proper government.

Parenthetically, I may say, this conference is wonderful, because all of these topics I am talking about will be discussed at greater length later. All I’m doing is setting up some signposts for people to knock down.

I want to note that my objection to what we are doing in drugs is not primarily economic; it is moral. We have come close to destroying Columbia and Peru, because we cannot enforce our own laws. What right does the United States have to impose enormous costs, measured in thousands of lives, on other countries because we cannot enforce our own laws? If we could enforce our drug-prohibition laws, there would be no market for drugs; there would be no Medellin cartel. There would be no problem in Peru about coca being such an important crop. That is the immorality of drug prohibition on an international scale, but it is immoral on a local scale, too. We establish a system under which the inner cities become the locale for distributing drugs to customers who come from the suburbs, and in which the process of distributing drugs establishes areas where there are fights over turf, in which there are innocent victims, in which children are shot by random shootings, and in which one cannot walk the streets safely.

After a similar riot in the Watts area of Los Angeles 25 years ago, the government undertook many programs to do something to prevent another. Those programs are of exactly the same kind as foreign-aid programs. We extended aid from the government in Washington to the friendly government in Los Angeles and, as in most bureaucratically administered foreign-aid arrangements, the aid went to the wrong people and did the wrong things. All together, several trillion dollars have been spent on those programs, a magnificent and marvelous bureaucracy has been created, and very little has trickled down to the poor. There was once a lot of talk about a trickle-down philosophy, and there really is a trickle-down philosophy, though it is not quite what the earlier users of that term had in mind: spending by the government for the poor trickles down to them only after most of it is absorbed in layer after layer of bureaucracy. And what is true in Los Angeles is true to a large extent countrywide.

The United States is a wonderful country. It is surely an enormous tribute to the effectiveness of a private-enterprise system that a country in which probably half or more of the resources are controlled and disposed of by the government should still produce a standard of living that is the envy of the world. We do have many problems of which I have listed only a few: schooling, crime and lawlessness, breakdown of family values, highway congestion. You can go down the list, and what do you find? Every single one traces back to government. It is hard to find any major social problem in the United States, with the possible exception of the breakdown of family values, that is not almost wholly traceable to excessive governmental intervention.

Why is this so? Why is government the problem? It is not because the people who run the government are bad, mean, nasty. Quite the opposite. The people who run the government mostly come from the private sector. They are the same kind of people, with the same background, same ideas, just as the people who made Hong Kong into a Little Tiger are the same as those on the other side of the border who earlier made China a hellhole. Same people. The difference is not because one group of people was smart and the other stupid. The difference between China and Hong Kong was in institutions and incentives. The fundamental problem in government here too is the same: institutions and incentives. There are many reasons why the government is the problem, including the role of vested interests, of people trying to benefit themselves by special government subsidies and favors.

However, I believe that the basic reason is the difference in incentives, in the bottom line, between private and government ventures. If private people start a venture, if, for example, they start a school and don’t get any customers, it is a failure. They can keep it going only at their own expense. They would have to dig into their own pockets to do so. Suppose exactly the same project is started as a governmental venture and has exactly the same results. The people who run it now have a different alternative. With the greatest of sincerity, with the best of motives, nobody likes to admit that what he or she has done is wrong, it a failure. It is natural to say that the only reason the school has not been a success is because it wasn’t established on a large enough scale. They have a much deeper pocket than their own to turn to. They have the taxpayer. They only have to persuade the government, that is, the legislature, that the school is a worthy project. Of course, it is. Nobody would have started it if he or she hadn’t thought it was a worthy project. The result is a general rule: if a private venture is a failure, it is closed down; if a government venture is a failure, it is expanded. I challenge anyone to find an exception.

How many government ventures can you think of, however big a failure, that were ever closed down? That is why, in my opinion, government has so frequently been the problem. It is why projects undertaken with the best of motives under government auspices over and over again produce results that are the exact opposite of those that were intended by their well-meaning sponsors.

We are not talking about the problem of good people and bad people. As Karl Marx would have said, “It is the system,” and it is the system that we have to change. You in Mexico, the people of the underdeveloped countries of the world, can learn from our example. Indeed, I believe you and they have been learning and will be learning.

Despite unduly big and strong governments, I believe that the long-term prospects are bright, in spite of, and not because of, what governments have been doing. They are bright because ultimately ideas matter, and there has been an enormous change in the climate of opinion around the world. Opinions that were hooted at, that were not given a hearing 20 or 30 years ago, are now taken for granted. Even the biggest of governments preach privatization. More than three centuries ago, La Rochefoucauld said that “hypocrisy is the homage that vice pays to virtue.” All of the talk about private enterprise and private markets that emanates from Washington and that will be heard on the campaign trail this fall is that kind of homage.

The public has learned faster than the political authorities. Underlying all is the tremendous opportunity opened up by the availability to multinational enterprises and venture capital of a tremendous pool of workers earning very little and yet capable of developing higher talents and earning much more.

The rates of return on capital that can be earned in that way are going to be very high. That incentive plus the widening disillusionment on the part of the public about what government can do is, I think, a reason for optimism. One way or another, the public will cut the government down to size. We see it happening everywhere. You just need to take a look at the elections going on around the world. They all tell the same message: people are disillusioned with government; they want a change. This opportunity and this change in the climate of opinion offers great encouragement for the future. Thank you.

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This is the concluding part of a keynote address delivered by Dr. Friedman in Mexico City on May 19, 1992, at a conference on “Liberty in the Americas: Free Trade and Beyond,” co-sponsored by the Cato Institute, 1000 Massachusetts Avenue NW, Washington, D.C. 20001 and CISLE (Centro de Investigaciones sobre la Libre Impresa, Camelia #329, Col. Florida, Mexico, D.F. 01050, Mexico). It is published for the first time here with the permission of the Cato Institute and Dr. Friedman.

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    Milton Friedman was born in 1912 in New York City and was graduated from Rutgers University before taking an M.A. at the University of Chicago and a Ph.D. at Columbia University. Professor Friedman taught for many years at the University of Chicago, where he was the Paul Snowden Russell Distinguished Service Professor of Economics. He has taught at the universities of Minnesota, Wisconsin, and Columbia and lectured at universities throughout the world, from Cambridge to Tokyo. In 1976 he became a senior research fellow at the Hoover Institution at Stanford University. That year, Professor Friedman was awarded the Nobel Memorial Prize in Economic Science. Among his best-known books are "Capitalism and Freedom", "Monetarist Economics", and (with Rose Friedman) "Free to Choose" and "Tyranny of the Status Quo".