The direct use of physical force is so poor a solution to the
problem of limited resources that it is commonly employed,
only by small children and great Nations.
Probably my favorite quote from this excellent book.
The Machinery of Freedom by David Friedman, you can find mr.
Friedman's work at David D Friedman.com where you can also
find PDFs of his books, both nonfiction and his novels and
That's where you can find his blog.
Mr. Friedman. Thanks so much for taking the
time happy to be here. I don't think I actually have
the text of either of my novels there.
Although I do have a link to recordings of my first novel but
I do have the text of a number of my other books in one one
form or another HTML or page images or depending which book
it is. Okay, that's that that must have
been the link. I was looking at.
How would you define capitalism and why is it morally Superior
to socialism? Huh?
That's hard to answer because the word socialism means a lot
of different things to different people.
I think of capitalism. Let me go back a step all
societies face. When he condom is called a
coordination problem that in order for anyone to do anything.
You have to somehow coordinate the activities of a very large
number of people, that famous example, was that to make a
pencil. You need wood to get wood.
You need chainsaws to get chainsaws.
You need steel and Fuel, and a bunch of other things.
So if you push back, that supply chain making a pencil involves a
million people more than a million, probably somehow
coordinating what they're doing. So there's enough steel to make
enough chain saws to cut down enough trees.
He's to make the number of pencils, you want to make that's
a grossly oversimplified version and they're basically two
solutions to the coordination problem.
And the obvious one doesn't work.
The obvious one is to have somebody at the top, telling
everybody what to do and that works for very small groups.
If you think about sort of a football team or a small firm
with a few employees, you're going to have one person more or
less, making the decisions, but it's scales very badly.
And when you have a large Society, It turns out that the
problems with trying to run it that way, make it pretty much
unworkable which is part of why the Soviet Union didn't work and
why China stayed poor until now died, the alternative method and
the non-obvious method is some decentralized system where each
individual has a tiny bit of the problem that he's solving how
much he wants to make how much he wants to consume and so
forth. And you have some mechanism to
coordinate signals among those People.
So the fact that I need steel shows up from the standpoint of
the Spiel manufacturer as the price of steel being higher
which makes it in his interest to make more steel.
That's again a vast oversimplification of a semester
or two above price, Theory and economics course, but the basic
argument is that the solution that works.
So there are a number of different variants of it.
Is some decentralized one in which each person is controlling
a tiny bit of the problem that being With problems, which he
has the best information so that I know more about what I can do.
And what I want than you do and decisions of what I consume and
produce in part. Depends on what I want.
And what I can do the other part that depending on other people
want is handle demanded to me. Mostly through the price system
that I observe that people are willing to pay for certain
things that makes it in my interest to produce them.
I observe the people charged me for certain things, that makes
it me in my interest to consume them.
Only if they're worth more to me than the cost of making.
And again, that's a very, very sketchy description of a much
more complicated argument. But basic point point I'm
making, is that capitalism is one label for the system in
which we use private property and trade to get a decentralized
solution to the coordination problem, to get a way in which
we can somehow coordinate, so that there's enough of
everything done without having anybody in charge.
And I was told that an An economist spoke to a Chinese
visitor. This was quite a long time ago.
And the Chinese visitor was part of the department in China that
was responsible, for making sure that all the firms had the
inputs they needed, and he wanted to know he wanted to meet
his opposite number. He wanted to find out who in
America did the same job. And the answer was either nobody
or everybody that is, there is no one in charge of that and
understands everybody is in charge of that when you I'd that
you would like to have ice cream with your dinner.
That sends a very weak signal via, you are buying some ice
cream or the grocery store, and the grocery store, order
ordering some ice cream foreign suppliers, and its suppliers
ordering input for ice cream from the people who produce the
inputs, but you are in a sense, doing a tiny bit of the
signaling, which is controlling the allocation of impulse, is
that it's a long answer, but I'm afraid there isn't a short
answer that that's useful. Sure, juice, begin your book
with a defense of property, basically saying that it's
understood operationally pretty much by everyone but
intellectually by no one. Why is it important to have a
proper intellectual understanding of property?
Because private property is the Machinery that lets us do the
trick that I was describing that.
That one of the problems that Libertarians have to face is
that we would love what we want. Is the world where everybody
controls his own life, which sounds like a wonderful idea
Until you realize that everything you do is depend on.
Lots of other people. So, we have a highly
interdependent society and property gives you the solution
to that problem in the sense of giving away in which you can
Define my controlling my life, which is consistent with
interdependence and Actually was actually works and that's that I
control what I own. Which includes most importantly
me, you control? What you own?
If I want to get something from you.
I've got to make you an offer. You're willing to accept.
Unless what I want is for you, not to take my property and then
I'm allowed to use Force to stop you from taking my property, but
it's a way of breaking the world up into tiny bits with each
person controlling one bit and it's hard to see.
See any other way that you could.
I mean I don't I don't think we've imagined all possible
human institutions, but it's hard to see any solution that
doesn't come down to some variant of that.
And of course there are lots of different variants of one of the
things you Economist realize when they study law is the
property is a much more complicated idea than than when
it first thinks. So that you say well I own this
house and land. What rights does that give me?
It doesn't give me the right to prevent somebody else from
standing outside my Operating in talking to his friend, even
though that affect my property because I can hear him from
there. It doesn't give me the right to
prevent my neighbor from turning on the light in his living room,
even though the fact that I can see that light means of there
are photons that he's creating that are trespassing on that
property. So it's actually quite a
complicated concept. I believe it is the case that I
own along with my house half the width of the street in front of
my house because the house I believe is Other than the
street, but I am confident since I observe cars.
Going along that straight that long ago, some previous owner of
the house in effect, sold the city of San Jose, the use of
that bit of his property. That's what we call an easement
and property law. So you can think of my ownership
of land as sort of a bundle of Rights, and one can sometimes
take one piece of the bundle and transfer it to somebody else
because that strip of land was worth much more in the city of
San Jose. A to have a street on that.
It was to me to have a little more grass on or the previous
owner of my house, 80 years ago, whenever the transaction was
made. So property is not a simple
idea. If there are any lawyers
listening, they already know that but most other people don't
but it is the basis to the problem of deciding who gets to
use. What when, how our proper how
what gets produced what gets consumed and so forth.
I once asked a woman who was saying capitalism's terrible.
It's exploitative. It hurts the poor, it creates
poverty. She even said, and I said, how
would you define capitalism and her face turns white?
And she goes capitalism, is when the rich get richer, and the
poor get poorer. You have a great chapter in your
book titled, the rich get richer, and the poor get richer.
If I'm a poor person. Why should I want or The Kate
capitalism. Well empirically, of course if
we look at more or less capitalist societies, we observe
that in the more capitalist societies, the poor have gotten
richer. Sometimes they've gotten richer
faster than the rich have gotten richer.
Sometimes slower that varies in a sense, one of the most
interesting experiences from this standpoint.
I've had was visiting in India because India is a country that
has been nominally socialist since it came into existence.
It is always considered itself. Socialist.
India is also feels to me as a visitor like what Russians?
Imagine capitalist societies must be like, because this is
society with a mass of very poor people and a small number of
relatively well-off people much much more strikingly so than the
us or Western Europe, or Hong Kong or Singapore Taiwan or any
of the more nominally capitalist capitalist country.
So I gave a talk. A cat a sort of the equivalent
of a business school in a city. And in India, it had been
initially subsidized by the government.
Although I think they claim they were now paying their own way,
and it was very lovely. It was about a half-mile.
Rectangle, square, roughly rectangle of forest, and grass
and buildings. Lovely Place, surrounded by a
high wall topped with barbed wire and that's the image that
the critics of capitalism have and is in a society, which at
least claims. May be an exaggeration to be
socialist, and always always since that government existed
since it became independent of England has been.
But if you ask, what's in the sense?
The more relevant question in our context, which is why should
you want the kind of what the society more capitalist, then
you have to ask, what are the ways in which the governmental
Parts? The non-capitalist parts are
making poor people better off or worse off.
And both of those exist that you have welfare transfers, which
certainly helps. Poor people, you also have rules
for professional licensing, which says that if you want to
employ yourself as a barber depending on the particular City
or in you first have to take several hundred hours of classes
and how to cut hair, despite the fact that lots of people, lots
of parents manage got their own kids here, no particular
difficulty. That, if you want to be a flower
arranger, you've got to pass the test of the people who already
flower arrangers, are typically in control that test and use it
to keep down the competition. So, there are a bunch of ways in
which the Pam up is blocked. One of the ways Which is less
obvious. And most people disagree about
is the existence of a minimum wage law that a minimum wage law
sounds as though, it ought to help the poor by giving the
higher wages. But the problem is that when you
raise a price above the market price, that means you're raising
it above the price at which the amount people want to buy equals
the ovule want to sell. Which in this case means, you're
raising it above the price at which the number of unskilled
workers employers want to employ is equal the number Who want to
work? So, the typically the result is
that, when you push up the minimum wage, you are pricing at
least some low wage laborers. Off, labor is off the market.
So, the result is that instead of getting a low wage, they get
no wage. And that's a particularly
serious problem because typically the low-wage job is
the first step in a ladder. Not necessarily laddered being
rich for the latter two being less poor.
That part of the way you get a decent job is demonstrating that
you come to work on time and hard work.
ER, and don't steal stuff and things like that.
And you can't demonstrate that if you never get the first job,
now, people will disagree on this and it's an open question
that if you raise the minimum wage, some people will get
higher wages. Some people will lose their
jobs. You don't know on Theory, how
big those two effects are, but one of the effects at least is
to make it harder for people who work for stopping for one thing
that I found striking a long time ago, was looking at the
pattern of the poverty rate in the US.
And roughly speaking using a constant definition of poverty.
The pattern is that from the after World War 2, which is
about when our data go to, from then until the point, when the
war on poverty was declared the percentage of the population
that was poor was falling pretty rapidly from the time.
When the war on poverty, got fully funded, got fully into
operation. The percentage of the population
that's poor at least by the statistics.
I Look to a few years ago has been roughly constant.
Isn't going up and down with General economic conditions.
Now, that certainly isn't a proof.
You know, you correlation is not causation is people correctly
say, but at least suggest that the war on poverty.
Who's declared purpose was to make people no longer poor.
The declared purpose wasn't to make it a little less unpleasant
to be poor, which is what it ended up doing.
It was to provide retraining and other things.
Such that people would end up with good jobs and be
self-sufficient that never happened.
There's an interesting book, Charles Murray is first book.
I think called losing ground, which is a description of that
process of how you started out with policies.
Who's declared purpose was to make people no longer poor.
They failed. And as it became clear, they
failed. They sort of retrofitted it into
a policy into a program for making poverty, somewhat less
unpleasant. So, you know, it's hard to prove
anything to anybody at least any reasonable person who's as
skeptical, as you ought to be of people trying to prove things.
This to you, but I think if you compare the situation that even
the poor in a country, like the US with the situation of the
average, people say, in the Soviet Union, when it was
Communist during China, and it was Communist, which are
relatively extreme cases. The poor in America are quite a
lot better off and that's true in other countries.
Now, of course, none of these countries are fully capitalist.
We don't have the experiment of saying suppose we have what I
would want to have what I argue for in the Cure referring to
those data aren't available. Unfortunately, but we can say
that on the whole if you compare more capitalist and less
capitalist societies. We've had a number of pretty
about as close to controlled experiments as you get in this
field because we had East Germany and West Germany which
were culturally the same society.
And one of them was under a communist government, one of
them under a more or less capitalist government and after
that. Separation existed for like 50
years or so, it was clear, that East Germany was a great deal
poorer than West, Germany enough.
So people some people were willing to risk their life to
get across to get out. We have had the example of North
Korea and South Korea, where again, you are starting out with
more or less the same society and you have ended up you've
probably seen these satellite photos people show of the Korean
Peninsula at night and it's quite striking because the South
half is light. The north half is black because
there isn't enough power there. So that ordinary people have
their lights on at night. And, of course, there's lots of
other evidence that things are much worse off there and we had
in a sense and even bigger and more interesting experiment with
China because to begin with, we had china, Taiwan and Hong Kong.
So those are three places with culturally the same the same
population, Singapore. You could argue as a fourth and
while China was He's under a explicitly socialist, and
communist system, but formaldehyde Taiwan Hong Kong
and Singapore, were all getting by their standards.
Rich. And China was standing still
that Hong Kong is the Striking case because in terms of
material, resources, Hong Kong was probably the poorest Society
on Earth back a long time ago. When people were, when people
believe that, the reason poor countries were poor was
overpopulation. I did a very simple calculation
of population density just people per square mile for every
country in the world and it turned down to the 5.
Most densely populated countries where to Rich European countries
Belgium and the Netherlands, and three poor countries in the
process of getting rich, Taiwan, South, Korea, and Singapore.
Singapore. Have the highest population
density of any country in the world Hong Kong, which was not
an independent country had 10 times the population, density of
Singapore. So you had a basically a place
with no real natural resources other than a good Harbor.
A place that had the import drinking water from China
because they didn't produce enough for their population,
which had masses of poor refugees coming in and some
decades, back the per capita income of home.
On past that of England. So, that's a sort of an extreme
case. So, again, it's not a perfectly
capitalist Society, but it's a great deal, more capitalist than
the alternative. But then you've got the, in a
sense, the most dramatic example, and that's what
happened to China, after mom died, because I expect that both
now and the rest of the top people in the Czech ominous
party. We're mostly well-intentioned
people who wanted their country to prosper when Mal, they all
believe in socialism. When Mao died, I'd the others
were now free to go abroad. And what did they observe?
They observed that their country with what they believed to be.
The best economic system in the world was dirt, poor compared to
the rest of the world. They could look at a place like
Japan which isn't very far away and see the Japanese were
ordinary. Japanese workers were enormously
better off than ordinary Chinese workers.
So what was their conclusion? They were still socialist, but
they said we must be doing socialism, wrongly making some
kind of mistake. So let's experiment.
Let people do things and not stomp on them and they tried in
a number of ways to change their system and some of them made it
a little bit better in some of them didn't.
But meanwhile, things were happening on the margin.
Things were happening that the Communist Party had not decided
to have happened, but when it discovered didn't stop of which
the most important, one was the shift to something close to
private property for agricultural land.
Where what happened was that there were a number of very poor
Villages, which covertly assign plots of land to families to
households and let them be responsible for cultivating them
and getting the crop from the - whatever.
They had to contribute for their share of the of the common in
one Village. It was done covertly by the
local communist official and in once in one Village, it was done
covertly by The Peasants, not telling the Communist official
in both cases. The result was that what had
been very poor Villages. Did much better eventually they
went public. And the response of the
Communist party was this is illegal.
You're not allowed to do it, but we are going to punish you.
And they watched for a while and then they said well in those
Villages where the present system is working very badly,
you're allowed to try this experiment and they walked for a
while and maybe everybody should do it.
So that was a case in which it wasn't that they figured out
what to do. It was a they had the good sense
to realize it didn't know what to do.
Unless not to stop. What was happening is a very
interesting book. By Ronald coase who was a very
important Economist who died a few years ago.
His last work was a book on how China went capitalist.
Bunch more stuff. I'm summarizing a lot of stuff
from the book. But the basic bottom line is
that between Mao's death and 2010.
The per capita, real income of China, went up, twenty fold.
It's probably the largest increase in you and Welfare.
There's ever happened in that short period of time in history,
and that was the difference between a socialist system and
they more or less capitalist system.
And again, it's certainly not a pure capitalist system.
I would say that Shanghai where I visited on paper, in theory,
is a little bit less Capital than America and in practices a
little bit more capitalist America that as far as I can
tell, there are various regulations, but if you know who
to pay off, they don't get enforced.
Other parts of China, are probably less capitalism that I
think Shanghai is one of the better areas, but check China.
In terms of the economy is not strikingly less capitalist than
the u.s. Western Europe Canada.
And it is Norma seem more successful than it was when it
was a real communist Society. They still call themselves
Communists. They kept changing the label.
It was socialism with Chinese characteristics was that they
were doing because they couldn't say it was capitalism.
But nonetheless, it's essentially a largely private
property market exchange society in which the government owns a
bunch of firms and metals and a bunch of other firms.
And as a lot of other stupid things just like our government
does. But it's still a whole lot
better than what they had before.
So I think that would be those are some fairly striking pieces
of evidence that capitalism on the whole is good for the poor
as well. As well as for the for the rich
Ben Shapiro had a discussion with Sammy and rest.
And Sam Harris said, there is one argument that I basically
cannot get on the capital aside for the reason we can't really
have a market Society is because of the existence of Market.
You've actually given a presentation on market failure.
Yeah, you address the market failure concern.
Just let me first, give what I think is the best definition of
market failure because it isn't really about markets.
What market failure is is the situation where individual
rationality does not produce group rationality, that is where
you have a group of people. Each of them is making the
correct decision for himself and yet all of them be better off
for they. Something else and my favorite
example, story. I like to use when I give a talk
on, this is to imagine. It's a thousand years ago and
you're somewhere in Europe and you're one of the line of 10,000
men with Spears. And the reason you are standing
in that line with your spirit pointing in One Direction
pointing North is that North of you there, another 10,000 men
with Spears on Horseback and they're coming at you and you do
a very quick cost-benefit calculation to decide what to
do. And you say, well, if all of us
stand, and if we keep our Spears planted and pointed at them with
luck, we can stop there charge and some of us will be killed
but most of us will survive. If we run horses run faster than
we do, I should stay. And then you think amazing.
Wait a minute. I'm making a mistake.
I said we I don't control him and him.
The guy on either side of me. I only control me if everybody
else stands and I run one man, out of 10,000 won't have much
effect on the chance of stopping the charge and I will be one of
the ones who gets killed if everybody else runs and I stand.
I'm dead. In fact, whatever everybody else
is doing. I am Her off running than
standing. We all run in most of us die.
Welcome to the dark side of rationality and that's a
particularly dramatic example, but it's a problem that exists
in lots and lots of other contexts and you can find, if
you go on my webpage. I've got a link to recordings of
talks I've given and you could find it there.
If you read my book Machinery or Freedom.
I've got a chapter on it, but this the logic of such a
situation happens in lots of context of which the market has
only one. And what's basically happening
is that I make Decision or I get the benefit of other people get
the cost. And in that case, even if the
cost is larger than the benefit, it pays me to make it.
So when I run away, the cost is the whole line is a little bit
less likely to hold that's cost. Spread of Mi all 10,000 people.
The benefit is I'm a little farther ahead and might get
away. So it's in my interest to do it,
even though we're all worse off as a result, the standard
example of the textbook is something like air pollution.
Where when I when my factory put sulfur dioxide in the back side,
in the air that imposes costs on the people downwind but I ignore
those costs. It makes it cheaper for me to
make steel. So I do it that way.
Even if the cost of filtering the smokestack and preventing
the sulfur from going into the air is less than the damage done
because the damage is done to other people in the cost of the
filters, will be to be. So these are situations where
individually rational. Activity on the market May
produce the wrong result and it could also in the other
direction. If you have a case where I bear
the cost that you get the benefit, again, even if benefit
is larger than cost of doesn't pay me to do it.
Those are the economist often refer to that kind of cases an
externality, but it's really a pretty General pattern and it
describes market failure. And it sometimes happens on the
market and the result is that a market was, no government
intervention. Sometimes does the wrong thing.
That's actually correct. The Problem is that we have no
better alternative because if you think about the alternative
to the market, it's having those decisions made by the political
mechanism. Why do you expect the political
mechanism to do the right thing for the group?
And if you think about that for a little, you realize that the
mac and the machinery for getting the government to do,
the right thing is run through with market failure.
So if you think about the sort of simple model of democracy,
which is, why does the government have to do the right
things for us? Because we'll vote them out if
they do. For that to work, the individual
voter has to know what the government is doing and what it
should be doing. Answering both those questions
is hard that when a politician introduced a bill into Congress.
He never says this is the bill to make Farmers richer and city
folks poorer. Every year we have such a bill
is called the farm program. He will naturally present it in
a way, which is designed to make it look good for everybody.
And then you have to pay some attention as an effort to figure
out it is, as far as I know. No politician ever runs on the
slogan. I'm the bad guy.
So again, in order to figure out in order for that mechanism for
controlling government to work, each individual voter has to put
quite a lot of time and effort into figuring out what the
government is doing, what it should be doing, what the
particular politician is voting for, or against has been doing
what he should be doing. So this is not a trivial
problem. There is essentially no benefit
to doing that because if I do that in a presidential election,
my voting for the right guy, instead of the wrong guy
increases by about One five, millionth the chance of getting
elected, right? We've got large populations
here. Exact numbers ready?
Come here. That's the right approximate
number. So if the right guy gets
elected, that benefit is spread among 300 million fellow
Americans. I get a tiny fraction of it.
I Bear all of the costs of my decision to make it a little
more likely, that's an extreme externality in the extreme case
where I Vera cost. Everybody else gets the benefit
so I don't do it. And the result is that in
practice. There are many people People
believe that they are rational voters, but if you actually ask
them, I've done the experiment when I was teaching an
undergraduate class in University and Silicon Valley of
asking. My students most of whom almost
all of them were old enough to vote.
If they knew the name of their congressman and about half of
them did really hard to keep track of what a politician is
doing. If you don't know his name and
in general if you went people, do polls the population.
Vastly overestimates the size or something.
Actually government budget. Such as foreign aid
underestimates others, and that's perfectly rational
because the information in order to be a, well, informed voter is
quite expensive and it's irrational, not to buy
information if it costs more than it's worth to you.
But the result is that the fundamental mechanism that
supposed to make our political system.
Work is one where market failure is not the exception, but the
norm and that's true. If you run through the political
mechanism, the governmental mechanism.
It's Ooh, right through it. So you might say, well, the
reason the system works is not really Democratic voting.
That's sort of the cover story. It's really Market corruption.
It's really the fact that if some positive, some Bill
benefits your group, you're willing to offer, Congressman
donations. If they'll vote for it, if it
hurts your group, you're willing to vote offer donations.
If they vote against it, so, you have a sort of a market for
legislation in which people might say, if it's worth more
than it costs. The Winners will outbid the
losers. So, to speak the trouble with
that, is you again have a market failure problem, because if my
group of people, let us say, the contest is between the producers
of automobiles in the consumers of automobiles.
And the question is, shall we have an auto Terror, shall we?
Make it expensive to import for and the American Auto companies
would like to do that because it means they can charge higher
prices for their automobiles. The American consumers would
like not to do that because it means they pay a higher price.
Has the American Auto companies are a handful of large
organizations. Must one big Union.
They can pretty easily get together and say look we all
contribute 50 million if you contribute 40 million and at the
United Auto Workers tells all its people to vote for the guy.
We told them to vote for and weaken us push for the tires.
The victims are 100 million people who are going to buy
automobiles. There's no way they can get
together from the standpoint of each.
One of them. It isn't even worth.
Cost of finding out whether the terror for its mmm, let alone
doing anything about it. And, you know, I go into more
detail on this elsewhere, but the basic argument is, if you
think about the sort of silikal version of why it works, it
still works very badly because you heavily overweight, the
interest of organized interest groups of relatively small
numbers of large players like the Auto industry and you
underestimate how will be underweight the interests of
large numbers of dispersed disorganized group.
Such as all consumers. So, again, sort of tariffs are a
case with your sort of striking for an economist because the
realm of Economics were worked out by David Ricardo a little
bit over 200 years ago. We understood them quite well,
ever since the implication of those arguments is that with
certain rare exceptions, a country that imposes.
A tariff makes itself worse off that quite aside from anybody
else, does in response to the Tariff in effect means that we
are producing. Goods at home, get them, more
cheaply by producing something else and trading it for for
those goods. And yet for those 200 years,
almost no countries, follow the logic of that argument and had
no tariffs. The England of the 19th century
was a famous exception and it did very well Hong Kong in the
20th century was another exception and it even better.
But those were very much the exceptions.
Almost every country has had tariffs.
And the reason is that a tariff is away.
Of benefiting a constant rate of interest group.
Namely, The Producers have the cost of a dispersed interest
group, namely, the consumers and the result is that it's
politically profitable to have it, even though it makes the
country worse off. So those are the example.
But the basic point I'm making is that the choice of the
alternative is not. Do we have a less a fair free
market, which works perfectly. Sorry, is less a fair free
market where, which works imperfectly or have the
government correct, this mistake?
X, the alternatives are between a free market system, which
mostly works and occasionally doesn't, and a governmental
alternative, which occasionally works, but mostly, but mostly
does not work due to the fact that the same problem of market
failure, is the exception on the private Market.
Most of the time, if I want an input, I have to pay for most of
the time. If I produce an output, I can
sell it to someone so I get paid for it and only in some special
cases like a radio. Broadcaster, I can't control who
hears it, or air pollution where, I don't have to pay for
the people who are injured by it.
Only in those special cases, does the free market give the
wrong answer? Where's the political system is
one in which the normal situation is.
It gives the wrong answer. Because almost without
exception, the actors of the political Market, neither bear
the costs nor receive the benefits, all of the benefits of
their action. It's true of the politicians.
It's true of a lobbyist. It's true of the administrators
people who are enforcing the rules.
It's true of Judges. If a judge sets, a precedent,
which is the wrong legal rule, if that legal rule makes the
country 100% poor, a hundredth of a percent of the national
income of the u.s. Is something in the tens of
billions of dollars a year. It's an enormous amount of
damage for a human being to do and you'll never know.
He's not paying for it. So it's not like a A system
where it is in the rational interest of judges to make the
right decision or of Administrators or if
politicians. So, what you want to do is to
think of the government, not as a sort of a god reaching down
from behind to fix things. But is itself a market, a
system, which the individual actors are acting in their own
interest. The only difference is that is
under a set of rules in which the conflict between their
interest, in our interest is normal.
Whereas on the market its exceptional but that sometimes
happen, perfectly true. So, that would be my long
answer, but I don't think I have had the opportunity to argue
with Harris. So I don't know if I could
persuade him with that or not. All right.
So the other day in the Wall Street Journal, this was on the
cover, the iPhone now. So basically this article says,
if you take each part of the iPhone and add them up, it costs
$390. However, the evil greedy
capitalists are charging 1099 dollars.
The average person might look at this and say, okay, I could see
400. 500 or 600. But how can you charge so much
more? This is ridiculous.
How would you approach this subject?
Suppose we think about all the stuff that goes to make up you?
And it only comes down to a bunch of carbon and bunch of
hydrogen. A bunch of water and certain
amount of nitrogen and oxygen. If you other chemicals, and I
think, if you value it up all of those chemicals at market
prices, I doubt your worth as much as 20 bucks.
Probably less than that. Me too.
So the problem is that you're taking the individual pieces and
you're ignoring all of the costs that go into assembling them,
designing them, marketing them. You've got to get that phone to
somebody. So, there are a whole bunch of
costs other than the literal costs of the pieces, that that
go into it. And I think the real answer is
that Apple, after all, has to compete with Samson, they have
to compete With who away they have to compete with a bunch of
other firms. Even after compete with tiny
firms. Let me show you a toy that I
acquired not long ago. There used to be a personal
digital assistant called the Scion made in Britain, which I
love dearly and it was basically a miniature laptop.
This was before cell phones. And what was amazing about it.
Was that a keyboard you could actually use that.
They had some kind of a magic spell or something on their
Board. So that in this in the size, or
the form factor of what I'm holding, which looks very much
like a Scion. But isn't you actually had a
real keyboard with movable keys that you could type on and some
people in England, I think a couple of years ago who like me
remember, dearly their old Saiyans because it went off the
market. Many years ago, decided to
create a cell phone based on the sign on this line and they put
it up on Indiegogo, which is one of these websites where you get
funding for new projects. Was one of the people who
offered money to go into the early buyers of it and I ended
up getting it. That's a tiny firm.
I doubt that there were as many as 20 people involved in the
original group from what I can tell.
I don't know it cook, but I think a couple of years, it
costs. I think less than half, what
that iPhone does. On the other hand.
It's got some disadvantages compared to the iPhone that I
haven't actually switched to making it my main cell phone yet
because I'm still figuring out how to use it as a little bit
less smooth. And the Samsung I've got, which
cost twice as much, but if it was really true that one could
produce a phone as good as the iPhone for $400.
I got a feeling somebody would be doing it.
It's not as if there is a block, which keeps those people from
starting your cell phone company.
I'm giving the example of Planet computers that For the make my
little machine, which I say it's a very pretty machine called The
Gemini. And I expect some point.
I'll switch my SIM card to it and make it my main phone
because it would be really nice to have a phone.
I could really type one. I would no longer have to Lug
around my laptop all the time in order to type on it.
Maybe younger people have got me good on these virtual keyboards,
but I've never gotten to be able to use one decently.
So in fact, there's a world out there where if you really
believe that for four hundred or even five, A hundred dollars.
You can make a phone as good as that iPhone.
You ought to be out there making it and selling it for 550 and
becoming a billionaire. But somehow we observe that the
companies that are making phones at the level of the iPhone,
which is basically Samsung and Apple, and a few others also.
End up charging roughly similar prices.
Occasionally. Somebody comes in and disrupt
that there is a which company would there's one of the smaller
companies now which has a phone, which is noticeably last, it's
not as big as five. Dollar even is noticeably less
with some reviewers think is as good.
But it, that's all in sort of the margin of how well you can
do it and what features it hasn't and, and all the rest of
it. So, so the basic answer is that
just looking at the pieces that make it up, doesn't really tell
you the cost of bringing it to Market and distributing it and
selling it and telling people about it and all the other costs
associated with Bernie Sanders was debating Ted Cruz and he
said You can't be free. If you don't have health care,
you can't be free. If the government doesn't
regulate such and such the leftist will look at the economy
and say, well first, you need the state to control a great
deal and then you can be free. Why is why is that an incorrect
way to look at Freedom? Yeah, they're really two
different dishes. And one of them is definitional
and one of them is sort of real-world Economic, and the
definitional issue is The distinction, which I would make
the distinction between freedom and power.
That I would have said that, if I'm dying of an incurable
disease, I am still free. I am just very unfortunate.
I don't have very much power. And of course, we all are dying
things. Horrible disease.
It's called Aging farther along than you are unfortunately.
But but that freedom, I think it's usefully.
At least one useful way of thinking about it is to, what
degree, what you can do is constrained.
By other people, by other people, forcing you to do
something, not allowing you to do something, and so forth.
And in that sense, the person who is dying of cancer is still
free, even though he's very unfortunate now, we value both,
of course, I don't want to be dying of an incurable disease.
So one point is that, that I think Sanders is confusing and
confusing is unfair. Use words.
He wants to use them, but he's not making an important
distinction between having your choices constrained by the fact.
That other people are stopping you from doing things and having
your choices constrained by the fact that either you can't do
things or other people and help you to do them.
So I guess I would ask Sanders whether if he is in love with a
woman and wants to marry her, her refusing him as a violation
of his freedom. Because in his terms it is that
something he desperately wants, he can't have it and he can't
have it because she refuses to marry him.
All right, and yet, I am not sure he would be comfortable
with saying, therefore we should have the government intervene
and make sure if you're enough in love with a woman, they make
him make her marry you which would in a sense be the launch.
But the second question. The first question is, is this
really what you want to call Freedom.
And the other question is is he right that people would have
more power. Would have more control over
their own. Lives.
If we did it his way into dead and I think in a sense, I've
already answered that question twice.
That is, we've had a whole bunch of examples where you had two
Societies in one of which resources were allocated,
primarily through the market and one of which they were allocated
primarily by government decision, and we can observe
that we ended up with North Korea among individuals.
Much worse off than South Korea East Germany, individuals, much
worse off than West, Germany. Malice.
Is China individuals much worse off than in Taiwan or Singapore
or Hong Kong or modern China? No law, which has shifted large
a they're not entirely they having things allocated on the
market that after all the fat, if the fact that the government
makes a decision doesn't mean it'll make the right decision
that you mentioned earlier. The fact that I've written a
couple of novels, the second one was called salamander and it was
a fantasy and it Didn't out the original idea, was the fantasy
version of what I think of as the central planning fallacy and
the central planning fallacy is, the idea that there's all this
stuff out there, people labor materials, and so forth.
Only some sensible person at control of it.
What wonderful things he could do.
And that seems very plausible and there are three things wrong
with it. One of them is forgetting that
all those things are already being used by the people who
owned them for their own purposes.
So in order to be able to give you something, we've got to take
it away from somebody else. And then the question is, is it
really true that whoever decides what gets taken and let's gets
given as got everybody's best interests at heart.
Why would you expect him to any more than you expect?
Anyone else that everyone's best interests at heart?
Second thing wrong with it is not realizing how complicated a
problem it. Is that goes back to my pencil
at the beginning to figure out what everybody should do.
And the third thing wrong with it, which I've touched on is
assuming that whoever controls will be a good guy that he will.
In fact, be acting. And so in in salamander I had a
world where magic was very weak where a fire Maj was more like a
match than a blowtorch in terms of the power.
He has and a brilliant naive. Young magical theorist thinks up
a way in which one Maj could pull in the power of everybody
around him. Funnel it through him.
And finally do real things. And that's like the central
planning fallacy is. The idea all these little bits
of dispersed, magical power, only controlled.
By one person. He could do wonderful things and
he's making the same mistakes. So in the story, he is the, uh,
he's one of my protagonist. So the other protagonist is
Annie, Lee Drew brilliant, female student.
And he tries to persuade her to help him with his project to
develop this spell. And her answer is my mother is a
Healer. I have seen men with gaping
wounds that she has closed when you have taken her power to end.
The flutter of plague on Whose hand is the blood of those.
She can, I feel that is she is making the point which he has
been forgetting that he's got to take away from all these people
in order to use it in the way he wants to use it.
And they already are using their power for what they think are
important. And in the same sense, if
Sanders sets up a system where the government decides who gets
Medical Care and who produces Medical Care, and how that's
gotta mean controlling people and making them do what he wants
them to do. Not what they wanted to.
Now the novel, what you also end up with a bad guy, sort of take
trying to take it over which is one of the problems and the
third problem. With Central planning.
I never get to in the novel because I like to, Say that no
clot survives contact with the characters.
So the story went the way it wanted to go and set the way I
planned it to go, which was fun. But, but the basic point I'm
making is that it isn't a choice between having things done.
The way, the market doesn't having them done.
Right? It's the choice between having
things. Done the way the private Market
wants them done and having them done the way the political
Market wants them done. And the way the political Market
wants them done does not consistently lead to the kind of
um's that Sanders would like that.
If you look at how what government apps was of actually
subsidized, they subsidize Opera which is consumption of the
rich, not of the poor, they subsidize heavily subsidized
college education, which is a consumption not if the rich, but
of the top third or top 40 percent or so of the population
with General taxes, some things governments do help the poor,
that's certainly true. But a lot of things that
governments do help. Our people, the expense of the
poor and a lot of things cover to just make it all of us poor
and that's often not visible. That when the when Trump puts up
a tariff that's really imposing a cost on ordinary, poor people
who have to pay more for their shirts, but you don't know.
They do the shirt doesn't have a note on it saying, 15% of the
prices is due to the Tariff. So that's invisible, but it's
nonetheless a very real cost. I have about 10 more questions
for you. Could you do a lightning round
as in, give me a one minute or less answer?
I can try. Alrighty.
Capitalism creates inequality therefore.
It's immoral. How do you respond?
The fact that human beings differ creates inequality, as
far as I can tell, all political systems, end up with inequality,
capitalism creates wealth, and makes people better off some
people. It makes a lot better off.
Some people, not so much better off.
Very few people worse off. That's a net benefit.
How would you define government? That I spend about a chapter
doing that in the Third Edition, Machinery of Freedom.
My short answer, is that all of us have lines.
We Believe other people can't cross that.
All of us have this sort of built-in system of commitment
strategies. Such as you try to push me
around in ways that I strongly approval.
Fight back very hard government. Is that institution against
which we drop those strategy? Those commitment strategies.
So I when I in the first edition, I Described it.
As an agency of legitimised, coercion that government is that
agency, which can do the sorts of things that we would see is
outrageous of anybody else did them, but we don't respond to
them the way we respond outrageous things.
So if an employer says, we've decided to hire you today, we're
going to pay you $15 and if you don't come to work, we're gonna
put you in jail, we would object-- very violent that when
you get a notice saying that you've got jury duty, however,
you don't eject violently over. That's essentially the terms of
the jury duty so much longer term when we had military
conscription, but we still have at least conscription for being
on a jury. If if a seller said, here's what
I've produced, you're going to get it, you're going to pay for
me. You don't have a choice of
saying, no, we would again, regard that as a violation of my
rights, except the government. Does that all the time, when it
collects taxes for things that's producing.
So that's the defining characteristic.
Government. I think is that we accept don't
respond. To it's doing the sorts of
things, which we would strongly object to have anybody else.
How would you define anarchism? I would Define it as a society
without a government and that could be good or bad.
That is after all private people can violate your rights to.
But what I argue in Machinery or freedom is the one could
plausibly have a set of institutions in which there was
no government. The useful things governments do
including preventing people from killing you, we're being done by
private institutions and the undesirable things weren't being
done. And I spend about what, I don't
know, 80 pages are 90 pages of the book, trying to sketch, how
such a system would work and people can read the book.
They want. I can't do it in a minute.
If we didn't have a government, wouldn't there be chaos?
There are large parts of life, which are not controlled by
governments that are not chaotic foreign trade.
For example, is mostly private and the way in this world
governments do control. And yet we've got this enormous
lie. Elaborate enter.
Interacting interdependent system where goods are made in
one country from inputs made in another and sold in the third
country and so forth. Most of it by private actors.
The English language is an enormously complicated
construction. Being shared by what may be 500
million people. Maybe a bit more.
If you count all the Indians speak English.
Nobody controls it. There is no one who designs the
English language. There is no one who tells you
how you use words and yet somehow it's a very orderly
system. We get to understand each other.
With with no government government control.
And it's true of markets in general.
So I would have said that. If anything governments tend to
create chaos, although they also sometimes reduce it.
What are the best examples of a society without a government if
there are any? Yeah, there are a number of
historical examples of much earlier Societies in which you
had nothing that we would recognize as a government.
I suppose the closest one to where Where we are at the
moment? Would be the Comanche.
Indians, who were stateless society?
Not a very attractive one. The interesting thing about them
is that one would problems for commit for a stateless society
is, how do you defend yourself against governments without a
government Army and the problem of the command?
She proposed was, how is everybody else to defend
themselves against them? Because they had to stateless
society, but one that was very good at fighting people and in
fact, did quite an impressive job given that they were heavily
outnumbered by people with much higher technology.
They still blocked expansion across Texas for 20 years.
Hey, the one I know most which is not.
I wouldn't call fully stateless, but clothes would be Saga
period, Iceland. That was a society in which they
had a court system, and they had a legislature, but there was no
executive arm of government. So there was no government to
enforce the results. So that courts that was entirely
private. And that Society lasted for
about a third of Millennium bit over 300 years and it eventually
He collapsed but of course, our society went into the Civil War
less than a century after it was set up.
So that's they did relative. They took them about 250 years
to get to their equivalent of the American Civil War.
So that was a what I think of as a semi stateless society, the
another interesting one which people say nasty things about
clear. Only thing about it would be
Northern Somalia Somali land where you had a society which
had For settling disputes, which did not involve the government
and at the point when England, ceased being nominally in charge
of Northern Somalia and Italy ceased being nominally in charge
of Southern Somalia. They set up a modern centralized
democratic government for a society that a never had such a
thing. It lasted for a few years to be
replaced by a military dictatorship or rather
unpleasant. One the military dictator
eventually got thrown out at which point the US and the UN
decided that some all you need are two.
Aunt and we've been trying to impose the government on them
ever since with very unpleasant results.
And the way we try to impose the government on them is to use the
troops of Ethiopia, which is the country next to Somalia and its
traditional enemy. It's a little bit like trying to
set up a government in France, using German troops.
So, Somalia to the extent, it's amasses a mess because we've
been trying to impose the government on them and the
northern part of it. Somaliland has in fact, set up
its own system, mostly long traditional lines.
The sort of a very weak government over it and seems to
be doing tolerably well, but we aren't willing to recognize them
because that would be admitting that there is no such country as
Somalia. So that would be another
example, but there are a fair number of examples.
I think in the anthropological literature, what we don't have
is a modern developed Society with no government and that's
what I would like to see, but I can't give you any examples of
that. Obviously.
There are lots of chunks of it, in the sense of international
trade has no government in that sense and really the Internet
has no real government, which is what we're attracting on the
moment, but you don't have anything.
That's the equivalent of a country with no government over.
You could say the sea ocean is, I guess to some extent.
We need government to protect us from monopolies.
Government is, of course, a monopoly or tries to be a
monopoly, at least over the use of force governments can
sometimes reduce Monopoly, but government's quite routinely
increase Monopoly, any terrorist tends to increase Monopoly
because it means you have a smaller Market.
If you had a high tariff on automobiles, that means that for
doesn't have to compete with Mercedes.
That governments quite often set up monopolies or cartels.
That before deregulation the US airline industry was a cartel
run by the government. Meaning that if an airline
wanted to cut its fairs and had to get permission from the Civil
Aeronautics board and the other airlines can go to the Civil
Aeronautics board and says don't let them cut their fares that
will hurt us. If they wanted to fly a new
route. They had to get permission.
That was also true of the trucking industry under
regulation that if you wanted to have a truck line going from
Chicago to Detroit, the other trucking companies could go to
To the Interstate Commerce Commission and say we've got
enough trucks on that route. Don't let them do it.
We don't want the competition. So I would have said that all
the monopolies occasionally occur in a free market Society
government on that does much more to promote Monopoly the
defendant without government. The poor would not be helped in
forms of food stamps or welfare. Therefore, would die.
And this is immoral without government.
The poor would not be hurt in terms.
The sales taxes that they are paying in terms of the
restrictions that keep them from doing things.
And that is immoral. That if you, in fact, look at
times when there was essentially no welfare, the whole society
was much poorer than it now, is but you didn't deserve that.
The poor were dying on, mass populations, kept going up.
And those were size where the bulk of the population was was,
in fact, poor, not very poor by our standards and he would core
by, by their standards. That in a very poor Society.
Some people will probably die, but they may die with welfare
because they guy giving the welfare it sighs.
He doesn't like them or they may die without welfare because I
don't have a job, but generally in any reasonably Rich Society,
like ours people can earn enough money to feed themselves.
One of the interesting statistics that I came across,
was the calculation by an economic historian.
That the, if you look at the average income of the world,
through most of History, The current average income of the
world is about 10 times as high as that and the current average
income of the developed world of countries.
Like the US and Western Europe is 20 to 30 times as high as the
average income of the world was through most of History.
So I don't think we appreciate just how rich we are by
historical standards. What is the most important
message of your non-fiction book laws order?
I don't think there is a most important message.
The book is an attempt to use economics to understand law and
that's part of a project that's been going on.
Before I got involved in it. Referred to the economic
analysis of Law and laws order tries to do that.
And I hope when you finish reading it, you will understand
that law is a much harder problem Than People imagine that
it really is not trivial to construct a good legal system.
And indeed, one of my Arguments for Anarchy.
Is that just as Remnants, do a bad job of building cars are
growing crops. They also do a bad job of
Designing law that designing laws, a similarly difficult
problem. And the you therefore need some
system which the legal rules are being designed on the market
rather than by the government. And I try to sketch a way in
which that could be done. What is your biggest criticism
of the Austrian School of economics?
That's tricky because it depends, which Austrian there is
an extreme version of the Austrian position which holds
that economics is entirely ah, priori that you don't have to
look at real world evidence. You just work out the logic, and
reach your conclusions. And I think that's clearly
wrong. That is far as I can tell.
There are no real world conclusions.
At all. You can get purely on the
grounds of theory. Because Theory does not tell you
any Economist. Jargon either utility functions.
Action functions. It doesn't tell you either what
people want or what are the ways of getting it, and even real
world conclusions. That seemed very unlikely.
In terms of economic theory, you can generally think up some
logically possible set of utility function, the production
funds that we gave you that result.
So for example, I mentioned that we expect a minimum wage law to
result in fewer workers fewer jobs for low skilled workers,
and I would expect that but you could imagine Imagine a society
where the consumers really want to enjoy much more buying goods
when they're sure that they were made by workers who were paid
well, and the result is that the consumers value those goods more
and therefore you put in the minimum wage law.
There's more demand for those goods than before and therefore,
they, the low-skilled workers are better off.
It's not what I expect that but it's logically possible.
So, in my view, the right way of doing economics is the use the
theory to form conjectures. The form plausible guesses, but
because the system is too complicated in the real world to
be sure of your conclusions you then test those those
conjectures against Real World predictions, and that's the way
I think, economics want to be done.
But I am sure there are people looking through themselves.
Austrians would agree with me. So it's not a, a black and white
decision division. It's only that some people in
the Austrian School believe that.
Now, the other issue is one. I'm not really competent to
judge. And that's Various theories of
the business cycle of what's referred to as macroeconomics
and there. I have been told by people.
I trust that the Austrian version of that is not
consistent with the data, but that's not something I really
know about because it's not my field.
But as I say the the methodological issues, really
the one that interests that interests me, any more
questions. Yep, just four more quick ones.
What is the most important thing you learned from Adam Smith?
That's a very interesting question.
But I think it would take me a while to answer that Smith was
not a very good theorist. Ricardo was a much better
theorist Smith, new an enormous amount and he was a very bright
guy and he writes a whole lot about interesting things, but I
can't think of a single lesson that I would say that I have
learned from Smith. Maybe there are some lessons
that I learned from people who learned to be able to learn to
learn them from Smith, but that's a very different and
much. Or indirectly.
What is the most important thing you learned from David Ricardo?
Boy, that is theory of comparative advantage, which is
the modern understanding of international trade.
I didn't learn directly from him, but he invented it and I
learned it therefore, through many hands from him.
Similarly the well, he didn't really invent the ricardian
theory of rant even though it's named after him, but he did
invent marshallian quasi events, which are named after somebody
else. And that's again a very
important. Of ideas, which I think I get
from get from him. But again, it's you can't really
give one minute answers to these things.
That that part of the problem with a lot of courses in history
of economic thought, is that what they're teaching is
cocktail party conversation with their teaching is six sentence
descriptions of ideas that take a book to explain.
So I'm an admirer of Ricardo. He's I think the first person
who did General equilibrium Theory.
And he did it with no mathematics Beyond arithmetic,
which any modern economy should tell you is impossible, but he
was a very bright guy and he did I thought a very interesting
job. So I guess maybe, you know, way
what I learned from him is the use of simplifying assumptions
to build models because what he did was to make some assumptions
that he knew weren't true. Make, a rough estimate of how
one true they were, how much they would destroy these results
and then build a model of the economy.
Which depended on those assumptions because without them
the problem was too complicated self.
And that was a very impressive intellectual accomplishment.
One that I admire. If you could recommend one book
for everyone in the world to read, what would that one book?
Be there? Isn't any such book, different
people need different books. Final question.
What is the most important thing you learned from your father
Milton Friedman? That would be a bunch of lists.
One of them, I guess is not to argue about whose fault things
are that his, his attitude was that if we have any question,
whose fault it is, it was his fault as he would say, my
shoulders are broad, but it's a waste of time.
I guess. One of the things is, to be
honest. One of the things is to in a
certain sense, treat everybody as equals, that is to say that
if I was having an argument With my father, the question was not
whether he was older and I was younger but only who had better
arguments. And I was having a discussion
actually, with my older son recently on the question of
status and signaling status in various ways.
And I said that part of what I admired about my father was that
he didn't signal status that. He as an Englishman would say he
had no side if he would argue with anybody as equals as long
as they had. Good arguments.
So to speak. And I've tried Tried to imitate
that as best I can. But that was certainly one of
the lessons that I learned but it's hard.
I learned an awful lot of lessons from him when I finished
my first novel, I concluded that I had modeled the personality of
my protagonist on my father. I didn't realize I was doing
that but I think it's pretty clear looking back at it.
That's what I was doing. Well, mr.
Friedman. Thank you so much for for taking
the time to do that. My final comments.
For the show notes, people, the Ronald coase books that I would
recommend, our, how China became capitalist and his work on
lighthouses, and my favorite works of Milton Friedman are
from his book free to choose. Who protects the worker and who
protects the consumer to Great chapters in that book.
Mr. Friedman, recommend for my father, would be the first one
name in capitalism and freedom. Excellent.
Perfect. I finally got an answer for for
the one book. Mr. Friedman.
Thank you so much for your time. I greatly appreciate it.
I enjoyed it too, bye-bye.