Interview. Putting a Price on the Planet: A Conversation with Milton Friedman. Environmental Action (South Africa) 1 (December 1990): 4-10.

Transcription

1 Interview. Putting a Price on the Planet: A Conversation with Milton Friedman. Environmental Action (South Africa) 1 (December 1990): EA: Professor Friedman, there is today a widespread and growing concern with the despoliation of our natural environment and the depletion of the earth s dwindling resources. Free enterprise, of which you are probably the foremost living theoretician, is seen by many as the culprit. How do you respond to this charge? Friedman: Private industry does not cause pollution and the problems related to it. Consumers cause these problems! Companies are just intermediaries. They meet consumer demand. Consumers have caused pollution by demanding products and services that have environmentally problematical side effects. In previous years consumers were unaware of these effects or, if they were, they did not object to them through their buying choices. Today the situation is turning. But it is unjust and economically untrue to use industry as the scapegoat. If consumers are unhappy with the side effects of the products they demand, they are free to alter the behaviour of companies by exerting pressure in the marketplace. EA: That s certainly a sobering thought for consumer groups to consider. What about the depletion of resources, though? As centres or instruments of economic growth, it is argued, companies surely have a responsibility to treat resources thoughtfully, and it appears that they have tended not to do so. Friedman: In resource depletion, the fascinating thing is that in advanced countries today the industrial revolution has added to the natural resources available for use. It is misleading to speak of resources as a given amount. Free enterprise is adding to the resources at our disposal, not depleting them. The oil in the ground was of no use to mankind before the technology was developed to find and extract the oil. The decisive evidence is that the price of almost all natural resources, adjusted for inflation, tends to go down, not up, over time. 1

2 EA: With the end of the Cold War, would it be accurate to say that some ideological critics of free enterprise are adopting environmentalism as a replacement for the now defunct intellectual arsenal of the Left? Friedman: There is no doubt that that is happening. Opponents of freedom have historically switched the basis of their attacks on free enterprise as circumstances have changed. Before World War Two their emphasis was on nationalising the means of production. By the 1950s, the inefficiency of nationalised enterprises had been clearly demonstrated so the Left switched its attack to socialising the fruits of production by taxing the productive citizens and subsidising the unproductive. Undoubtedly, this trend is still at work. But as far as the environment is concerned, communist and other interventionist systems of government have led to disasters worse than anything committed under free enterprise. The facts are there for all to see in the environmental condition of Russia and Eastern Europe. EA: There is a strong moral aspect to much contemporary environmental criticism of free enterprise. In your many and varied writings, however, you have defended capitalism not only on economic but on moral grounds as well. Friedman: Markets don t have morality. They re neutral. In fact, it s misleading to overemphasize the importance of markets in free enterprise. All countries and all social systems have markets. Russia has a market and an economy based on market mechanisms. What is important and unique about free enterprise societies is the concept of private property. Private property gives the individual a place to stand. This is the moral link between a free enterprise economy and the free society. The two domains of free economy and politically free society are inextricably linked, and they rest on the idea of a respect for private property as a moral right. All that is productive and efficient, whether we are talking about the environment or any other part of our society, revolves around the recognition of this moral principle. This moral dimension of free choice is what underlies the free exchange of beliefs and ideas the principle that you can propose your own views and try to persuade people to 2

3 agree with you instead of having views imposed on you by government. It is this morality of freedom that Russia and its satellites have not had. When we address the very real environmental problems facing us, we must take care not to adopt a misguided stance that sets us against the only morality capable of creating a prosperous future. EA: What you are saying is that free enterprise and the politics of free choice provide the only road to the solution of our environmental ills, inasmuch as such solutions are possible. But many corporate leaders seem to see environmental values as inherently threatening to business. Friedman: Provided that these values are presented as consumer choices in a free enterprise context, there is no reason why environmentalism should be viewed as inconsistent with business practice. Presented in this way they have as much of a natural place in the market as any other consumer demand. But businesspeople, you must realise, are not the best advocates of free enterprise. In fact, the most vigorous opposition to the principles of free enterprise comes from some of my own academic colleagues and from businesspeople, for opposite reasons. The academic is all in favour of freedom for himself free speech and thought. But he is opposed to freedom for others. He wants to control them. The businessman is all in favour of freedom for everybody else, but he wants special privileges for himself tariffs, quotas, tax privileges. To see how environmental demands fit into a society based on free choice you must look at the marketplace itself, not at the opinions of businesspeople, whose comments often contradict market realities to an unwittingly suicidal extent. There is nothing in the search for new environmental approaches that conflicts with business, provided that this isn t used to justify government control. If environmental problems are to be solved in any productive way, this will come about through price mechanisms and transactions into which businesspeople and consumers will enter for reasons of self-interest. Government has a real role to play, primarily by defining and enforcing property rights, and also in some cases by taxation. Effluent taxes, for example, are more efficient than physical limits. And these are not new ideas. All the dangers of bureaucracy that threaten us today, and the social 3

4 importance of voluntary initiatives uncontrolled by the State, were clearly formulated in the nineteenth century by John Stuart Mill in his essay On Liberty. EA: I take it you re not suggesting that free enterprise has the ability to solve our environmental problems with ease? Friedman: Of course not. Many problems involved are highly technological, and their solution will depend on advances in technology. But these advances have to be sought voluntarily, in response to public demand. It s clear that there are no good alternatives in addressing the environment today there are only bad alternatives. It s going to be a matter of choosing the least bad alternatives, and allowing the free market to produce ways to make them work with the efficiency that only market forces can generate. For example, we can end air pollution immediately by shutting down our factories and agreeing to leave our automobiles unused in our garages. But these alternatives are unacceptable to us as consumers, so we don t adopt them. Similarly, the smog in Los Angeles is to an extent sanctioned by the residents, who obviously find that living there has benefits which outweigh the smog. If the smog problem were solved, more people would probably move to LA and this might be considered undesirable by its present population. Again the steel mills in Gary, Indiana, may be seen as sources of pollution, but the economic well-being of the city is tied up with the steel mills, so the people there are sanctioning the pollution for the sake of other benefits. All this means that there is a natural order of social priorities in these areas, by public choice. If environmental concerns are to be pursued, they must be allowed to rise up the scale of public choice priorities. No workable solutions will come from attempts to move them up this scale artificially, by government decree. What has been happening is that as we have become wealthier, we can afford to devote our income to less urgent wants. Experience suggests that avoiding what is called pollution is among those less urgent wants on which we have become willing to spend a larger fraction of our income. EA: Some would criticise this as an extremely Darwinian view of human affairs. 4

5 Friedman: It is Darwinian! That s precisely what it is. But this is not because I m modelling social processes on Darwin s theory of evolution by natural selection. It s the other way round Darwin s concept of natural selection was influenced by Malthus s work on population and by Adam Smith s Wealth of Nations, with its pioneering idea of the invisible hand of the market and its emphasis on the voluntary co-operation of individuals motivated by self-interest. EA: Speaking of Adam Smith, whom our readers will know as the father of economics, an interesting point that is arising in much current environmental debate is the alleged failure of classical economics to take environmental concepts into account. Is this a valid criticism, in your view? Friedman: Some of the terms that writers are now using may be new but the concepts aren t. There is nothing new in our contemporary situation that cannot be addressed with the intellectual tools already available, although these are of course being constantly refined. Through the work of economists such as Pigou we have for decades been aware of externalities or third party effects, which include environmental effects. It is a mistake to try to treat the environment as something outside the domain of existing economic truths. The only solutions open to us will come through the application of our existing, hard-won body of knowledge about free enterprise and voluntary market transactions. We can t escape these truths and their implications by trying to present environmental problems as a new territory. It is often difficult to translate a specific act of pollution into a set of voluntary market transactions with all the third panics affected by that act because of the practical difficulty, among others, of identifying them. For example, it is not feasible to require a factory belching smoke to compensate separately each person whose clothes are besmirched. This is what has come to be called a market failure. But the proposed alternatives via government action are frequently even more undesirable. Experience in country after country has now clearly shown that however imperfect the solutions of a free market may be, they generally are less 5

6 imperfect than the solutions of government. It makes no sense to replace market failure with government failure. EA: Still on the subject of alleged environmental weaknesses or blind spots in the traditional economics of the Western democracies, it has been suggested that the calculation of Gross National Product is environmentally destructive or misleading, since it does not take environmental depletion and damage into account. For example, the Alaskan oil spill of March 1989 was a disaster, yet it created a rise in the United States GNP because of the huge amount of labour and equipment purchases required by the clean-up operation. Some environmentalists see this as cancerous economics, adding to our wealth on paper by consuming, as it were, our own innards. Friedman: The view you ve described is simply bad economics and bad statistics. If GNP is adjusted for the change in the price level, the oil spill lowered it. Clearly, this particular oil spill drove up the price of oil. The resources devoted to cleaning up the spill a cost of production could have been devoted to producing useful output. EA: Is there a place for environmental values in the economics curricula of business schools? Friedman: I would answer that by asking you: is there a place in these curricula for gustatory values, or for aesthetic ones? My problem with much that is being said about the environment is that it is vague, introducing terms that could lead to misunderstandings about economic and political principles which are well-established but which at best need to be reexplained and defended again and again as clearly as possible. I repeat: environmental problems can be met by applying what is already known about the operation of a price system. There is a place for the application of existing economic principles to special areas of detailed inquiry along the lines of, for example, agricultural economics. In this sense there is a place for an economics of the environment. But if by environmental economics is meant something different then my answer is no. 6

7 EA: Should companies be required to undergo published environmental audits by outside professionals, in the same way as they undergo financial audits? Friedman: Your house has environmental effects. Would you like it to be audited? EA: I would hope that my house is not a major source of pollution. Friedman: Perhaps not. But your whole neighbourhood could be so construed. To answer your question. I think the nub of the matter is your word required. If companies find it in their interests to subject themselves voluntarily to such audits, then I see nothing wrong with it. But if they are to be compelled to undergo such audits by government decree, then that would be looking for trouble. EA: Professor Friedman, throughout the world those who would use free enterprise principles and liberal democratic values as a basis for social policy, not only in the domain of the environment but in all fields, have long looked to the United States as a model and a guide. To many, however, it seems today that the United States has lost its position of leadership certainly in business and perhaps also culturally. Is the baton being passed to others, such as the Japanese? And if this is the case, are there any lessons to be learned by those who aspire to build free enterprise societies? Friedman: I doubt that it is true that America is losing its leadership position. What has happened is that the rest of the world was once far behind America and has now caught up with in many ways. But this has been made possible largely by the example of America s commitment to freedom in politics and trade. The United States still has the highest level of productivity in the world and its institutions of government and business remain vital models to the international community. This doesn t mean American society is perfect. There is obviously a good deal wrong with it. One great deficiency is the poor state of our educational system, which is due to government failure. Next to the military, our school system is the most socialist institution in America. The only way to correct this, in my view, is through privatisation. Another major problem in our society is the drug problem. We are not going to 7

8 solve this problem by taking military action in South America, and sooner or later we ll have to face other ways of dealing with it. Here again. I believe the least bad alternative is getting the government out of it by decriminalisation. America s problems in the main arise out of not applying free enterprise principles more fully. The Bronx, for example, is today a war zone because of rent control. EA: In South Africa today a new political order is in the process of emerging. Ironically, although this is taking place on the ashes of apartheid and in a climate of new perceptions of human dignity as well as environmental values, some politicians are nevertheless suggesting that the new order be built on command economy theories of the kind now discredited even in the Soviet Union and Eastern Europe. What advice would you give to those in South Africa who are trying to build a new society based on free enterprise? Friedman: There are no short cuts to the creation of a free society. Freedom works by persuasion, which is a step-by-step process of give and take. The task in South Africa is thus one of persuasion. Those leaders of thought, business and society who are convinced of the benefits of a free society need to do all they can to persuade other leaders to the same views. It would be a pity to see South Africa, with its great economic potential, make the mistakes that have led Russia and its satellites to ruin. Only a free economy based on voluntary initiative, respect for private property and a free exchange of ideas will provide the resources that South Africa needs to solve its problems, socially and economically as well as in the area of the environment. EA: Finally, a personal question. Professor Friedman, in a long and distinguished career you ve seen many economic and social vicissitudes. Looking at the direction in which the world is moving today, what is your brightest and most optimistic perception? Friedman: I believe that history moves in great intellectual tides. One was the tide of Adam Smith. We are now in the tide of Hayek, in which our insights into the invisible hand of the free market have been developed into an understanding of how and why free enterprise is linked to the politics of free choice and free trade in ideas. These intellectual tides are slow, 8

9 but they exist and they work their way through history. The crumbling of the Iron Curtain has shown that these currents of thought are taking us into a new era of hope for the future. EA: What is the greatest danger we face? Friedman: Complacency. The feeling that the Russians and their satellites have been stupid while we ve been wise. The only difference between communist countries and noncommunist ones is that they went 100% in the wrong direction while we have gone only 50% of the way. The process of correcting our mistakes and applying free enterprise principles more effectively and more fully is an ongoing one in which, as I indicated in my remarks about America, there is a great deal to be done. The temptation to invoke greater powers for government is with us constantly. That is the source of our present problems and threatens to be of our future problems. We have to be wary of government at every step of its inherent inefficiency, its bureaucracy, its tendency to abuse its powers and waste our money. We have to remind ourselves again and again that it is in the nature of government to dig holes and cover them up. The US Government pays farmers to grow tobacco, and then spends taxpayers dollars on campaigns to persuade people to stop smoking. The left hand doesn t know what the right hand is doing. This isn t peculiar to America it s the case with government everywhere. And so we have to work hard to keep government to a minimum. We have to root out interventionist thinking in all its forms and turn our societies into truly free ones, relying less and less on government and more and more on individual incentive based on free choice and private property. This is the way the forces of technology can be harnessed most effectively to address the social, environmental and other challenges of the 21st century. 9