Word
Gems
What is a
man but the sum of his thoughts?
Economics:
Milton
Friedman's
Free
To Choose - 1990
#2: The Tyranny of Controls
I used to be Secretary of State and before that, Secretary of the Treasury. I have
also known Milton Friedman for about four decades and I have benefited greatly from my
exposure to him and his ideas. He's a great economist, a great scholar and a great idea
man. He also has an abundance of common sense and good judgment.
The program you are about to see has to do with international trade. The lessons
here are the same as for our domestic markets. Open markets and free markets lead to low
prices, good quality products, and high wages.
As a government official, I used to work hard to keep our markets open and I had
many battles with people who wanted to close them. I didn't always win. The reason is that
people fight hard to protect themselves, when they find competition from abroad is too
tough. Protectionism is a big problem for all of us. We need to say to those who are
having trouble competing that you have got to get in there and compete. And if they can't
compete, we've got to help them adjust and find new jobs.
But in the meantime, from the standpoint of our whole society, we're all so much
better off if we keep ourselves open to the competition from international trade,
particularly so these days in markets that are becoming increasingly global.
Government is essential to our well being. We need it to protect our security and
we need government to provide stable and orderly and lawful conditions in which our
society can operate. But practically all governments go too far and intrude themselves
much too much in economic and business affairs. It seems an almost irresistible
temptation.
So, let's remember what that great humorist Will Rodgers used to say, just be
thankful you are not getting all the government you are paying for. But then it would be
better if we got less and also paid less.
Friedman: It is harvest time and Japanese farmers gather their crops for the rice
market in Kioto. Of course, they will try to get as much for it as possible and the
buyer's will try to buy it as cheaply as possible. That is how markets are supposed to
work. That is what Adam Smith, the Scotsman who turned economics into a modern science,
observed 200 years ago. He observed something else too.
Adam Smith: In every country it is always and must be in the interest of the great
body of people to buy whatever they want of those who set it cheapest. The proposition is
so very manifest that it seems ridiculous to take any pains to prove it. Nor could it ever
have been called in question had not the interested sophistry of merchants and
manufacturers, confounded common sense of mankind. Their interest is, in this respect,
directly opposite to that of the great body of people.
Friedman: Adam Smith's flash of genius was to see how prices that emerged in the
market, the prices of goods, the wages of labor, the cost of transport, could coordinate
the activities of millions of independent people, strangers to one another, without
anybody telling them what to do.
His key idea was that self-interest could produce an orderly society benefiting
everybody. It was as though there were an invisible hand at work.
The invisible hand is a phrase that was introduced by Adam Smith in his great
book, The Wealth Of Nations, in which he talked about the way in which individuals, who
intended only to pursue their own interests, were led by an invisible hand to promote the
public welfare which was no part of their intention. He was talking about the economic
market. About the market in which people buy and sell. He was pointing out that in order
for a butcher or a baker or a candlestick maker to make an income, he had to produce
something that somebody wanted to buy. Therefore, in the process of promoting his own
interests and looking to his own profit, he ended up serving the interests of his
customers.
When Adam Smith published The Wealth Of Nations, Britain was still a largely rural
and placid place. But the Industrial Revolution was already getting started and standards
of life were beginning to rise. One obstacle was that trade with other nations was still
tightly controlled. Merchants in the home market had persuaded the government of the day
to impose heavy duties and taxes on all foreign imports in order to insure themselves a
protected market.
One of the results was to turn Britain into a nation of lawbreakers. Smuggling was
a national past time: brandy, wines, tobacco, anything with a heavy customs duty on it.
For years, the revenue men fought a losing battle along the shores and inlets of the
British Isles.
In 1846, after years of argument and partial success, the followers of Adam Smith
finally persuaded the British Parliament to remove all duties on goods imported from
abroad. Britain embarked on complete free trade, giving a further push to the rising
standard of life.
What happened in Britain as a consequence of releasing the tremendous force of
self-interest, had the unintended effect of benefiting millions of people all over the
world, and by 1851 the evidence was proudly on show at the great Crystal Palace
Exhibition.
Free trade enabled Britain to become the work place of the world. But was it all
an accident? I don't think it was. Consider what happened in 1868 on the other side of the
world in Japan. For the preceding 300 years, the Japanese had lived in almost complete
isolation. They had discouraged visitors from other nations, especially from the West. The
result was that by the standards of the West, Japan was backward. It was a feudal society
with lords and serfs and woe betide anyone who tried to change the order of things. Women
were third class citizens.
In 1868, a new generation of rulers decided that the time had come for Japan to
make contact with the outside world. And with the arrival of the first foreign traders
from the West, things began to change. The Japanese followed the British trading pattern
because Britain was a leading nation of the world. So free trade came to Japan. Japan
became a magnet for other people's ideas and developments.
One of the first traditional industries to feel the effects was weaving. From
Europe, the Japanese imported the jacquard method __ a way of programming a loom to
control the accuracy of the weave, and so the standardized output. Workers did well in the
new atmosphere and so did their employers. The adoption of mass production techniques
meant that workers were able to move out of the traditional industries and into the new
industries, which all added to the trade boom.
None of us can help being effected by the intellectual atmosphere that we breathe.
In the middle of the 19th century, when Japan ended her self-imposed isolation and entered
the modern age, it never occurred to her leaders to follow any other course than that of
free enterprise and free markets. That was the intellectual atmosphere of the time,
created by Britain's success in applying the principles of Adam Smith.
In 1948, when India achieved independence, her leaders had all been trained in
Great Britain. They had sat at the feet of Harold Lasky and his associates at the London
School of Economics, or of their counterparts at Oxford and Cambridge. It never occurred
to them to follow any other course than that of central planning and government control.
That was the intellectual atmosphere of the time. The intellectual seed took root. As it
grew, it needed to be honored, even worshiped.
Every year on the anniversary of Gandhi's birth, people all over India do just
that __ in homage to the great Mahatma, they sit and spin using methods handed down
through the centuries. But it is more than just a symbol of honoring the past. It typifies
the policy that they are actually following.
The new government in 1948 decided that India's traditional weaving industry and
its workers should be protected from 20th century industrialization. What were the
consequences of that policy? This is India today, 30 years after winning independence.
These are scenes of a very typical Indian community __ one of thousands. It is called
"Anicaputar" and it is about 1,000 miles south of the capital, New Delhi. This
is not the kind of life the government intended to perpetuate. But it is one result of
their policy. But subsidizing the cotton that the villagers spin and the cloth that they
weave, they made it difficult for modern industry to develop.
This is sizing. It's an essential technique in cloth production where the yarn is
smoothed clean. A modern machine could do the same thing in a hundredth of the time. The
result of government planning to modernize industry is that the number of hand looms
roughly doubled in the first thirty years after India's independence. Today, in thousands
of villages throughout India, the sound of hand looms can be heard from early in the
morning until late at night. In this village alone, there are more than 3,000 hand looms
in operation.
Since 1948, three generations of villagers have sat at these looms making cloth
with patterns that never vary, using methods that never change. There is nothing wrong
with this activity, provided it survives the test of the market, provided it is the way in
which these people can use their abilities and their energies most effectively. After all,
in Japan, where the government has not specially encouraged the hand loom industry, there
remains a very small, but very productive hand loom segment. The trouble here is that this
industry exists only because the government has subsidized and supported it because it has
in effect imposed taxes, direct and indirect, on the rest of the people of India, people
who are no better off than these people are in order to enable this activity to continue.
Other industries, both textile industries and industries of a variety of kinds,
have been restricted, explicitly kept back, prevented from providing more productive
employment in order to make room for this industry. The effect has been to inhibit the
development, to prevent the growth, to prevent the dynamic activity that could otherwise
develop out of the energies and the abilities to the people of India. This looks like a
factory, but it is also home for the people who work here. When they are not sitting at
their looms, they eat and sleep in a corner of this hut.
Throughout the world, governments always profess to be forward-looking. In
practice, they are always backward-looking. Either protecting the industries that exist,
or making sure that whatever ventures they have decided to undertake, are encouraged and
developed. This occurs at the expense of the kind of healthy development of new, dynamic,
adapted industries that would surely occur if the market were allowed to operate freely.
If it were allowed to separate out the unsuccessful ventures from the successful ones.
Discouraging the unsuccessful and encouraging the successful.
India has tremendous economic and human potential, every bit as much as Japan had
a century ago. The human tragedy is that in India, that potential has been stifled by the
straightjacket imposed by an all-wise and paternalistic government.
Central planning, in practice, has condemned India's masses to poverty and misery.
We know what has happened in Japan. Free trade set off a process that revolutionized Japan
and the lives of its people. Improvements in material well-being went hand in hand with
the elimination of the rigid social structure of a century ago. It's no accident. As
always, economic freedom promotes human freedom.
And in the meantime, what has happened to the Japanese weaving industry? This is
how textiles start life in a Japanese weaving shed today. A design for cloth is placed on
a drum. As it revolves, it is scanned by an electric eye. Each color, each variation and
the pattern and texture is transmitted faithfully to a computer. It's all that the modern
loom of Japan requires. This loom is fitted with electronics that make it one of the most
sophisticated of its sort in the world. The fabric that it produces is the best silk of
its kind.
Thanks to the speed and efficiency of these machines, the price of the silk is
competitive. The workers are highly skilled and well-paid. With the new technology, there
is very little __ a loom like this cannot produce. This piece will become the sash of a
traditional bridal gown. These are machine-made products. But by any standards, they are
beautiful. They can stand comparison with the very finest work of the hand loom. And it's
not merely the end product itself that is remarkable. The sophisticated technology which
was developed to make all of this possible, has been adapted to other processes. Part of
the self-generating development under free enterprise, and it all stems from an ancient,
traditional industry __ weaving __ that imported a new method for controlling its looms
when Japan turned to free trade more than a century ago.
Yet, believe it or not, many still maintain today that markets cannot be left to
operate freely. That they must be controlled by government. This dockside is in Scotland,
a British government, a socialist government decided that its role was to protect the
workers here from competition. So down there in governed shipyards, they are building
these vessels for the Polish government. To get the order, the British government is using
the money of British taxpayers to subsidize the work. In other words, British people are
making these ships in order to sell them at a loss to the Poles. Not only the Poles, but
we also in America benefit from this kind of philanthropy.
The steel industry in the United States makes a fine profit. Other countries do
too. And their steel is often cheaper, sometimes because their taxpayers subsidize it. So,
why shouldn't the American consumer buy steel wherever he can get it cheapest __ at home
or abroad. The American steel industry works very hard trying to persuade us that it's not
in our self-interest to buy in the cheapest market. They urge the government to restrict
what they call unfair competition, though, of course, they recognize that there are
dangers in this.
Richard P. Simmons, Industry Specializing Steel Committee: The dilemma of asking
our government for assistance in this problem of unfair competition bothers many of us
because the sword does cut both ways. But we believe that what we have attempted to do is
far different than the kinds of direct government involvement that occur in many of the
foreign nations around the world where the governments provide direct financial assistance
in the form of either ownership or loans or subsidies in some fashion or another.
What we have attempted to do is simply to get our government to enforce the United
States laws against unfair competition that have been on the United States' books. We draw
clear distinction between that and, for example, the several hundred million dollars that
the French government has granted to the French steel companies, or that the British Steel
Corporation has received $1.3 billion for capital investment this year. So that while we
are uneasy in any way interfacing with our government in what we traditionally believe are
the free enterprise prerogatives, yet what we are only asking for is that the government
enforce the laws that our Congress has passed. I'm not sure that that's really any
different than asking someone to arrest someone that commits a crime. I don't think we
would be accused of being reactionary if we reported somebody who was stealing, to the
police if it were in violation of a U.S. law. We think that we're doing exactly the same
thing when we bring cases against foreign producers who we believe are violating U.S.
laws.
Friedman: The fallacy with that argument is that it begs the real question. Why
should there be laws that in effect prevent you and me from buying in the cheapest market?
When anyone complains about unfair competition, consumers beware. That is really a
cry for special privilege always at the expense of the consumer. What we needed in this
country is free competition. As consumers, buying in an international market, the more
unfair the competition the better. That means lower prices and better quality for us. If
foreign governments want to use their taxpayers money to sell people in the United States
goods below cost, why should we complain? Their own taxpayers will complain soon enough
and it will not last for very long.
History provides lots of evidence on what happens when government-protected
industries compete with industries who have the operate in an open and free market. It's
almost always the government protected industries that come out second best.
Ask Sir Freddy Laker, the Englishman who introduced low cost air traffic across
the Atlantic. Who were his chief competitors? They were all government protected,
government financed, government regulated airlines. He came out very well, made a mint of
money. And you and I have gotten cheaper travel across the Atlantic.
Nothing would promote the long run health of the steel industry, make it into a
more efficient, profitable and productive industry than for the U.S. government to keep
its hands off, neither providing special privileges, nor imposing special restraints. And
what is true for the steel industry is true for every other industry in the country.
These women work in an industry that so far hasn't asked for special protection __
the silicon chip industry. Every one of these small squares on this disk is a highly
complicated and integrated micro circuit. An American technician examines them for
defects. It is highly skilled work and she's had a lot of training. When she has done her
job, the rejects will be separated from the rest and the good circuits will be packed up
and sent half way around the world to Malaysia. The product of American technological
skills returns looking like this. Each micro circuit has been enclosed in ceramic by a
Malaysian worker who is highly productive at this sort of work. But, the Malaysians are
not able to test their product so back they come here to America to be fed into these
machines.
American engineers are good at producing sophisticated machines. In an operation
that lasts a fraction of a second, these machines can test every circuit, can grade it for
quality, and then can sort it into one of six different categories of reliability. The
invisible hand in this free market has done wonders for both the American girls and their
Malaysian counterparts. And that's not the end yet because American silicon chips are
exported to many countries where foreign workers assemble them. The final product is then
returned to our stores so that you and I, the consumers, can benefit from $10.00
calculators, as well as from a lot of other electronic devices that not long ago simply
did not exist. When this Hi-Fi equipment first came on the market, only the rich could
afford it.
But even when the international market and labor seem to work to everyone's
advantage, people still put up arguments against it. The usual argument against complete
free trade is that cheap labor from abroad will take jobs away from workers at home. Well,
what is cheap? A Japanese worker is paid in yen and American workers paid in dollars. How
do we compare the yen with the dollars? We need some way of transforming the one into the
other. That is where the exchange rate enters in __ the price of yen in terms of the
dollar.
Suppose that some exchange rate, Japanese goods are in general cheaper than
American goods, and we will be buying much from Japan and selling little to them. But what
will the Japanese do with the extra dollars they earn? They don't want to buy American
goods. By assumption, those are all dear. They want to buy Japanese goods. But to buy
Japanese goods, they need yen. Calls will come in from all over the world to places like
this, offering to buy yen for dollars. But there will be more offers to buy yen than to
sell yen. In order to get customers, those offering to buy will have to raise the price.
The price of yen in terms of dollars will go up.
As you remember, that is what happened in 1977 and 1978. By late 1978, it took 50%
more dollars to buy a given amount of yen than it had taken a year earlier. But what
happens when the price of yen in terms of dollars goes up? Japanese labor is no longer so
cheap. Japanese goods are no longer so attractive to American consumers. On the other
hand, American labor is no longer so dear to Japanese. American goods are more attractive
to the Japanese. We will export more to them. We will import less from them. New jobs will
be created in export industries to replace any jobs that might have been lost in
industries competing with imports. That is how a free market and foreign exchange balances
trade around the world when it is permitted to operate.
The problem is that more often than not free market is not permitted to operate.
For reasons that seem to make sense if you don't examine them carefully, government
insists on interfering, but when they do it's not possible to hide the harmful effects for
very long.
The main reason why the Japanese yen went up so sharply in price in 1977 and 1978
was because the Japanese government had been trying to prevent the yen from going up in
price. In the process what might have been small disturbances were allowed to accumulate
into a major gap in trade. As a result when market forces were finally permitted to
operate, as sooner or later they must be, it took a major change in the yen exchange rate
to bring things back into life. Why don't governments learn, because governments never
learn, only people learn, and the people who learn today may not be the people in charge
of economic policy tomorrow.
As you contemplate this, you may come to agree with me, that what we need are
constitutional restraints on the power of government to interfere with free markets in
foreign exchange, in foreign trade, and in many other aspects of our lives.
DISCUSSION
I'm Linda Chavez and welcome to Free to Choose. Joining Dr. Friedman tonight for
discussion of free trade are Michael Walker of the Fraser Institute in Vancouver, British
Columbia, and Steven Cohen of the University of California at Berkeley. Dr. Cohen, is Dr.
Friedman right? Should we keep government totally out of it and allow Adam Smith's
invisible hand to operate?
Cohen: It is not even a question of right __ it is a question of impossible. We
have been trying to keep government out of our economy now for several hundred years. Have
we? I think we definitely have. The last ten years have witnessed the greatest crusade to
pull government out of the economy in this country in many, many years and the net result
is that we have much more of it. This is . . . . .
Friedman: Alexander Hamilton, in his report on manufacturing, came out in favor of
government involvement and tariffs on steel were introduced early in the 19th century
because steel was said to be an infant industry. It was and it still is.
Chavez: Are you saying there is more government control because we have been
trying to get it out?
Cohen: No, of course not. What I am trying to say is we are fighting against the
unreal. We are dealing at the level of ideology right now that government should go away
and stay out of the economy. We are talking as though in the United States we can
determine our own future. For instance, if you take Japan, which has been the most
successful competitor to the United States, they came from frankly nowhere a couple of
generations ago, and they now have wages that are higher than ours. They produce superior
products and they have done this with very active government involvement. Maybe they were
wrong to do that; maybe they were right. Maybe as Professor Friedman said, had the
government butted out, they would have done yet better. The fact remains if we say take
the government out, it is like saying, let's play football with sneakers and t-shirts and
touch, which is a game I like. The other guys are still using hard-shell helmets.
Walker: The fundamental problem with your analogy is that the competition that we
have in trade is not a competition which somebody loses and somebody wins. It is a
competition in which everybody wins and this idea that the Japanese, as a competitor to
the Americans, that the Japanese in some sense won, is nonsense. Look at all the Japanese
automobiles on American roads. Everybody who drives a Japanese automobile or uses a
Japanese product is a winner as a result of this competition that there has been between
the Japanese and the Americans for the sympathies of the American consumer. So it is quite
wrong to take this military or combative notion.
Cohen: That might be right if the whole world did that sort of thing and that
Japanese consumers would have had the choice during the 60's and 70's to drive Fords or
Volkswagens. They didn't.
Friedman: That is a fallacy.
Cohen: It is a fact.
Friedman: Any individual country by itself, on the average, tends to benefit from
free trade, regardless of what the other countries do.
Walker: What you seem to be saying in your argument against free trade is that the
customer is always right, unless they pick an imported item.
Cohen: No.
Walker: And if they pick an imported item, then they require the help of the
government to assist them to tell them, look, you have made an unwise choice here and
therefore we are going to put a tariff or a quota on to prevent you from selecting the
imported article, whether it is the Japanese automobile or Korean television set or
whatever, because you don't have the ability to make this kind of choice yourself.
Cohen: That is not what I am saying.
Chavez: What are you saying Dr. Cohen?
Cohen: I am saying there is a problem here. We gain in the very short run. If we
assume that this whole place is going to have an earthquake and we are going to be out of
business in a year and a half, this is a brilliant idea.
Friedman: No __ we gain in the long.
Cohen: We send them paper, they send us cars. Let me finish. If, however, we go in
the long run, the first round is Japanese semiconductors come in, terrific. Let's even
assume the Japanese are dumping them, they are subsidizing, they are pushing them through.
The first thing we get a lot of cheap semiconductors __ terrific. This wonderful,
fictional person called the consumer has a gain. However, the same person happens to be a
producer. That is where he gets his income to become a consumer. He is suddenly put out of
business and two things occur: it turns out you can't suddenly go back in the
semiconductor business that is, we have been put out but we are going to rally and go back
in. It takes a long time to develop the skills, the know-how, the scales. So, you are
pushed out of that business.
Walker: Neither one of us knows what the future will hold. We don't know whether
it is wise for us to accept these free or almost free semiconductors and use them to
develop our industries and so on, but we can stand back and ask, what is going on? What
are these Japanese, who you apparently think know the future and are taking a competitive
position that says we are going to invest in subsidizing these things and shipping them to
the United States to destroy their industry. Where are they investing? Where are they who
take such a long term view? They are investing in the United States and they are investing
in the United States because they realize that, for example, in the industry that you
selected, the consumer electronics industry, they realize that anybody can make a VCR, but
it takes a good, well-developed service industry, for example, to develop the software
that is played on the VCR. That is why they are buying . . . . .
Cohen: There are no American VCR's.
Walker: But who cares. Sony is just buying MGM because they realize that the
product that is produced by a VCR is not the machine. That is a $200 item. There is a
$1,000 item that is made up of the software, namely the films that are going to be played
on that VCR, and they are investing in America because America produces the software.
Chavez: Let me interject here for a second because I want to ask Dr. Friedman a
question. Dr. Friedman, maybe VCR's aren't that important, but what about the defense
industry? Should we really keep hands off there, or should we step in and protect.
Friedman: Even Adam Smith made national defense an exception. But I think that
while in principal it is an exception, in practice it is an excuse. I think one of the
greatest statements I have heard about this whole problem was by Colin Clark, a famous
economist who said, you know, people say that free trade is fine in theory. That is what
Mr. Cohen is saying. But it doesn't work in practice. He says, they are absolutely just
wrong. Just the opposite. Any half-baked graduate student can give you a half dozen
special cases for tariffs: infant industry arguments, the problem of getting back in, the
kind of thing you have mentioned, and so on. The trouble is that those arguments don't
work in practice. In practice we put on the wrong tariffs in the wrong places in the wrong
way. The same thing is true of Japan. You are talking about Japan's rate of success, but
let me ask you, does the average Japanese citizen, you say, his wages are higher than they
are in the United States. That is only because of an artificial exchange rate. There is no
Japanese who will tell you that the standard of living in Japan is higher than the
standard of living in the United States. It is not and why not? Because of the Japanese,
protectionist policies with respect to rice and respect to land. The average Japanese pays
something like 6_7 times the world price for rice. We do the same thing in the United
States. The average American citizens pays 2_3 times the world price for sugar. How does
the United States benefit from that? Once we adopt your policy, we move in a direction
whose only outcome is a waste of national resources through centralized direction of our
activities.
Cohen: Germany's industrialization went like an express train all through the last
quarter of the 19th century and the first part of the 20th century. German
industrialization did not follow what was then the dominant ideology of free trade. There
was the marriage of rye and iron when Bismarck came in . . .
Walker: What was the first thing the Germans did.
Cohen: They copied all the possible British technologies.
Walker: They first of all eliminated all of their internal tariffs. Germany was an
archetypal . . .
Cohen: Within the nation, they opened up markets and between the German nation and
the rest of the world, they had lots and lots of trade, but they had targeted development.
They had strategic policies __ not stupid, mass government inhibitions. They said, look
the future chemical industry, we push resources and we help the chemical industry, we
protect it for a while because the British are well ahead. They did the same thing in
steel, chemicals, and machines. Nobody is ahead of the Germans in chemicals right now.
Friedman: But if you look at it, the problem is we lose our sense of perspective.
By today's standard, what Germany did in the period you are talking about, we would today
call free trade. Whereas, that is exactly the same thing that you are doing with respect
to Japan. You are not allowing for the extent to which Japan's __ what happened in Japan
is between 1914 and 1939 __ Japan shifted policy and became a highly protectionist, a
highly centralized, a highly controlled, and its real income went down. In 1939, it went
into war and after the war it did abolish, in fact, Japan since World War II has been much
less of a centralized and protectionist state than it was between the wars.
Cohen: That is probably very true, but since World War II . . .
Friedman: By comparison to the United States, by my judgments, the United States
is every bit as protectionist as Japan is.
Cohen: I am not saying the United States is Snow White. I think we have a lot of
protectionism but we have stupid protectionism.
Friedman: The question is __ is there any other kind?
Cohen: Yes there is. Take a look at Japan. In postwar Japan, take the concrete
industry, automobiles, because they are important and you can understand that.
Walker: Don't forget that. When you are talking about this wonderfully,
intelligent policy pursued by the Japanese government. They actively try to suppress the
exportation of automobiles because they felt that Japan, it was silly for Japanese to
compete in the world.
Cohen: The Japanese government has not batted a thousand in its policy. I would
say they have been hitting about 465 which . . . . (one minute, I will) which a 465 hitter
is Nobel Prize baseball.
Friedman: I don't believe they have been batting. I believe that the postwar
development of Japan is a tribute to the force of free markets in opposition to meaning. I
think you cannot attribute it to meaning.
Cohen: This is all true but it has no concreteness. This is ideology. Let's look
at automobiles.
Friedman: It is not ideology. It is concrete.
Cohen: Automobiles are concrete, I can count them, I can drive them. If you look
at the automobile market in Japan in 1962, it was the year I was getting out of college so
I remember the year, Detroit produced more cars in a week than Japan produced in a year.
There was no way on earth Toyota or Nissan could have competed with Ford. And if we want
to argue that Ford was too foolish to sell into Japan, there was Fiat, there was
Volkswagen, there was Renault, and then there is a list of the dead: Austin and the other
British . . .
Walker: There was also very low Japanese real incomes.
Cohen: How many cars were imported into Japan in 1962? Zippo. Go to 1965, Zippo;
1970 __ Zippo; 1975 __ zip; 1980 __ pretty much nothing, a couple of BMW's with the
steering wheel on the wrong side of the road. During all of that period, there was no way
the outside automobile makers could get into the Japanese market, either by selling the
product or by setting up a wholly-owned subsidiary, making the product in the Japan
market.
Walker: Well what is your point?
Cohen: That is what I call a protected market. What happened as a result is that
the Japanese automobile industry now makes more cars than the American auto industry.
Friedman: Not as a result from that __ far from it. Despite that.
Cohen: If the government policy, they would have been producing twice as many cars
now.
Friedman: I don't know about twice as many, I don't even know if they would be
producing as many, but they would have had a more productive automobile industry, it would
have contributed more to the well being of the people of Japan . . .
Cohen: Who can be against progress? __ that is not what we are talking about.
Friedman: But you are against it.
Cohen: Quite the contrary.
Walker: I think there is an important point we are missing here and that is that
we are talking about this as though it were an economic problem. I don't think
protectionism is an economic problem. Protectionism is a political disease. It follow the
well known pattern suggested by H. L. Menken when he said that elections are a kind of a
futures market in stolen property. Who is being stolen from here? It is the consumers who
have to pay a higher price for the product, and who benefits? It is the manufacturers who
get that tax that is levied on consumers. The problem is that even if they know about it,
consumers have no interest in going about and engaging in political action to stop it
because for them, it means a few dollars more on a car or a few dollars more on a VCR, or
whatever. They have no incentives to go and engage in the political action to get the
tariffs taken down or get the quotas removed. So it is therefore a very insidious and
difficult thing. It has nothing to do with economics. It is a political problem.
Chavez: Dr. Cohen, I understand what you are against. You think that free trade
doesn't work in practice. What are you for?
Cohen: It is not a question that free trade is not just working in practice. It
does not work in theory. Let's be very clear. Those films you have been showing, I have
never seen anything with quite the ideology content of that, as I said, outside the Middle
East. It assumes . . .
Friedman: You live a sheltered life.
Cohen: I have been fortunate. It assumes a set of assumptions that have been
proven wrong. American economics sits around, spinning on the basis of its assumption,
admitting of no facts, admitting of no foreign intervention.
Friedman: I beg your pardon. You simply are demonstrating the parochialism of your
knowledge. The facts in that film are absolutely correct. Japan did progress very much
under free trade from 1868 to 1914. India has remained relatively stagnant, under a system
of policy it protects. Those facts are correct.
Cohen: It is also what we used to call glittering half-truths. The other half of
those truths are Germany in the late 19th century progressed splendidly under strategic
policy . . .
Friedman: And in Germany in the last half of the 19th century progressed greatly.
It progressed as Mike was saying earlier because it eliminated the tariffs within the
country, it got a large free trade area in the same way the common market has been moving,
in the same way the U.S./Canada has been moving. It progressed greatly despite the fact
that it introduced some tariffs toward the external world.
Cohen: That is the two cases of the most successful rich country progress. Germany
in the early 20th century and late 19th century, Japan in the postwar period.
Friedman: No, Japan in . . . . .
Cohen: One minute, I haven't finished my sentence. Japan in the postwar period are
the two most startling and impressive examples of truly muscular and impressive industrial
__ both you claim were achieved despite the fact that they used strategic development
policies. I would like to say England and the United States, despite the fact, have tried
to use free market policies and have not. We have had tons of protectionism in this
country. But the intellectual climate that says protectionism __ it is one word __ it is
like people in Florida talking about snow __ there is one word, snow __ Eskimos have 100
words for snow __ we have one word for protectionism __ the Japanese have 100 words.
Despite the fact that these two countries have succeeded so well, you say, well had they
only done it our way, they would have done better.
Chavez: You had the last word Dr. Cohen. Thank you for joining us on Free to
Choose. Next week we will be discussing Eastern Europe and the road to prosperity. This is
where it all happened, in three days they got political freedom, the hopes were high, they
thought economic miracles would follow quickly, yet now it is a year later and almost
nothing has happened.
|