Broadcast: April 14, 1975.

ANNOUNCER: From the Australian Administrative Staff College, Mt. Eliza, Victoria, MONDAY CONFERENCE on our economic future … inflation, unemployment, and what’s to be done.


Professor Milton Friedman is on a brief visit to Australia. During his days with us he’s already done a great deal to shake up our thinking about inflation, unemployment, and the general economic future ahead of us. In his books, articles and lectures, throughout the years, Professor Friedman has done a great deal to shake up everyone’s thinking about economics.

Milton Friedman is Professor of Economics at the University of Chicago. He’s regarded as the leading light of what’s commonly called, I’m told, the “Chicago School of Monetary Economics”. Just what that means we’ll find out in the course of this programme. Enough to say at this stage that Professor Friedman is an influential economic adviser in the United States and that to most of us economic laymen, he’s also known as a contributing editor to the weekly magazine, Newsweek.

Well once again we’re the guests of the Administrative Staff College at Mount Eliza, and in our audience are not only members of the current course of the College, but also some economists, trade union spokesmen and members of the public — young and old — who we’ve asked to join us for this edition of MONDAY CONFERENCE.

Professor Friedman, since you’ve been here you’ve necessarily been spending a lot of time talking about the ills of the economy, particularly the rate of inflation. I’ve heard you — on at least one occasion — use a medical analogy that the longer the operation is delayed the more severe the surgery will be; if we could just put that out of our mind for the moment to try and see the present situation in context, what would be a healthy economy? I mean by that a slight inflationary rate or a slight deflationary rate or what?

PROFESSOR MILTON FRIEDMAN: In many respects the Australian economy is healthy. This is a very prosperous and a very rich economy which really has less than its share of the ills that bedevil many of the countries of the world. It’s health would be greatly improved, however, if it could have policies which would lead to essentially no inflation. Now I say essentially no inflation — perfection is not for this world — you’re not going to have an exactly zero change in the price level from year to year, but if you could keep the rate of price change within the range of plus or minus 3% or 4% a year, a level where it isn’t really very noticeable, it doesn’t apparently affect your daily life …

if you could do that with a set of policies which also left a great deal of individual freedom, which did not involve extracting from the pockets of the Australian people an undue proportion of their income for governmental and other purposes which they don’t choose for themselves, if in addition you could have a reasonably free economy so that you could benefit from the products produced elsewhere and available to you cheaply so you could sell them on the world market, where Australia has an advantage, that would be a pretty healthy — indeed an extremely healthy and vigorous and vibrant — economy.

I may say I think Australia has tremendous potentials, this is a country of enormous untapped wealth; of a population which is schooled and able and industrious. In all respects I am extraordinarily favourably impressed by the potential, and it will be shame if you waste it by following unwise policies.

ROBERT MOORE: Right. What is the link, if any, between solving inflation and unemployment? I mean is there a nexus, an inevitable nexus?

PROF. FRIEDMAN: Oh yes, there is a nexus, but the nexus is complex, it is not a simple-minded nexus. For many years people thought that inflation and unemployment were antagonists, that more inflation meant less unemployment and less inflation meant more unemployment. There is a sense in which that’s true, but it’s also very misleading, as you can see by just noticing that over the past 10 or 15 years in Australia the average rate of inflation has been climbing up and the average rate of unemployment has also been climbing up. That’s true not only in Australia but in many other countries; in Great Britain today inflation is running at about 20% a year and the rate of unemployment has been rising, so that there is not a simple-minded relationship.

The thing is this. Inflation itself does not reduce unemployment. What reduces unemployment is unexpected inflation — it’s fooling people. If you have an inflation at a faster rate than people anticipate, why then that produces a euphoria which is temporary and which will disappear. A real understanding of the relation between inflation and unemployment, I believe, can be obtained — if I may go to a different analogy, it’s not quite medical, but it has to do with spirits and alcohol that we drink, and that’s really a very close analogy. If you drink one night, the good effects come first, the bad effects come the next morning when you wake up with a hangover.

Inflation is exactly the same way. When you first start to inflate it initially has good effects; unemployment goes down, the economy is booming, but then you discover that the next morning there is a real hangover when you get the kick of higher prices, and this works … this analogy carries farther, as many of you have known, I am sure, when you get somebody who becomes a habitual drinker, in order to get the same kick he has to drink more and more, and it’s the same way with inflation.

10, 15 years ago a little bit of inflation would give you a kick — now it takes quite a lot more to get the same kick, but also it’s equally true, the analogy carries over — with curing the problem. If you’ve even known one of those unfortunate creatures who has been an alcoholic and who has tried to cure his disease, it’s extremely hard on him to taper off, when he first stops going on the bottle the withdrawal pains are very severe. In that case, curing alcoholism, the bad effects come first and the good effects come later on and that is the real problem with curing inflation.

When you set out to cure inflation there are going to be some bad effects right away because as you slow down the rate of monetary growth, as you slow down the rate of inflation, it takes time before people adjust to this and understand what’s going on and in the meantime you have withdrawal pains, you have temporary unemployment higher than you otherwise would have. If you have the patience and the will to stick with it you will enter into the promised land where the good effects of being off the bottle come through.

ROBERT MOORE: Can we — this will be my last point — come to monetary economics which I’m sure I’m not the only person not to fully understand, to put it mildly. How much control of the money supply, how much can that in itself, control inflation? What other factors come into it?

PROF. FRIEDMAN: Control of the money supply is the only way to control inflation, but that oversimplifies the problem because other factors come into it in respect of the means that are used to control the money supply, in respect of the consequences of controlling the money supply. For example, to illustrate in a very important way for Australia; you cannot simultaneously control your money supply and have a fixed or rigid exchange rate between the Australian dollar and other currencies. If you go back a few years in Australia; you cannot simultaneously control your money supply and have a fixed or rigid exchange rate between the Australian dollar and other currencies. If you go back a few years in Australia it was the unwillingness of the Government to permit the exchange rate to alter that forced the first of your major deflationary episodes in 1971 and 1972 when the Australian dollar, being undervalued, you had a large foreign income and it was very difficult, almost impossible, for your monetary authorities to control the money supply at the same time you had this foreign inflow, so a necessary part of controlling the money supply is a willingness to allow the exchange rate of the Australian dollar with other currencies to be determined by market forces.

In the same way, at the moment, you are having an extremely rapid increase in government spending. Now government spending by itself will not produce inflation if it is financed by either taxation or borrowing from the public. It may be good or bad for other reasons, but from the inflation point of view, if government spends more and its gets the funds which its spends by taxing people or by borrowing direct from someone, the government spends more and private people spend less. Either the taxpayers spend less — if it’s taxes — or the people who would have used borrowed money to put up houses or factories spend less, but if the government follows that policy it will have a tendency to drive interest rate up very sharply — which governments don’t like — and therefore when governments spend heavily — as your government is now beginning to do — there is great pressure to finance that spending by creating money — and by money here I mean the currency you carry in your pockets, or the deposits that are to your credit at the various banks — why then you’re in the situation where the government spends more and nobody else spends less, and that is inflationary.

So that the statement that the only way you can control inflation is to keep down the rate of growth of the quantity of money is the beginning of the enquiry and not the end of it.

ROBERT MOORE: Well just one last point. It’s necessary but is it sufficient?

PROF. FRIEDMAN: Yes, both necessary and sufficient if you can in fact control sufficiently the rate of growth of the quantity of money it will control inflation. If you cannot it will not, and there are many many episodes of this kind that will illustrate both its necessity and its sufficiency.

Let me tell you one little story which will illustrate the point. In the American Civil War back in 1864 — more than a century ago — the southern states in the United States, which were the states that were in rebellion against the north, were having a raging inflation because the only way they could pay for their expenditures were by printing money — prices were rising at that time, if I remember, at something like 4% or 5% a month, and at one point in the war the northern troops overran the city in which the south has been printing its currency, and the south for about two or three weeks was unable to print any currency because they had to move the locale to another place and lo and behold the inflation stopped. (LAUGHTER FROM AUDIENCE)

ROBERT MOORE: (Laughing) A drastic solution. (LAUGHTER FROM AUDIENCE) You wouldn’t like to extrapolate from that? Yes?

DR. DUNCAN IRONMONGER, Deputy Director of Institute of Applied Economic and Social Research, Melbourne University: Professor Friedman, I think it’s good that you’ve come to Australia because it’s given us all an opportunity to swot up on your readings, re-read them, also some of your — not only your academic ones but your more popular one like your Playboy interview and your Newsweek contributions …

PROF FRIEDMAN: I was sorry not to make the centrefold on that. (LAUGHTER FROM AUDIENCE)

ROBERT MOORE: (Laughing) Your price was too high, that’s it.

PROF. FRIEDMAN: No I’m afraid the goods I had to offer were … (LAUGHTER FROM AUDIENCE)

ROBERT MOORE: Not inflated.

DR. IRONMONGER: It’s also true, I think to some of us, to find that a lot of what you say is agreeing with a lot of what we’re saying. A lot of sense is being said which is comfort to us and maybe that’s some comfort to you, but one question I have is about your — I think — belief in the free enterprise system which I think you’ve put in some of your articles as believing the Post Office and superannuation and old age benefits and so on would be better financed by the private sector rather than the public sector. Don’t you think that’s going against the tide of history too much to expect that we will return to that sort of world?

PROF. FRIEDMAN: I don’t believe that there is a tide of history which men cannot affect by their deliberate policies and actions and I think the question we want to address ourselves to is not is there some inevitable tide of history of which we float willy nilly, or what way do we want to make the tide of history go, and I would say it’s never too late to try to make the tide of history go in a direction which will benefit the ordinary man, the ordinary human being in our societies which will enable him to have a greater measure of individual freedom and a higher level of prosperity. I don’t know enough about the postal system in your country, but I can assure you that the postal system in the United States would be far more efficient and far less costly if the government monopoly of the Post Office were eliminated and private enterprise were permitted to carry the mails, and I think the same thing goes for these other activities. I believe in free enterprise because I believe it is the only kind of a system which will enable the ordinary man, the ordinary citizen in a country, to have a maximum degree of both freedom and prosperity.

DR. IRONMONGER: We have a set of institutions of parliaments and parliamentarians, or politicians, who are continually promising various things though the election system and so on and we vote for them and then they believe they have the mandate to tax us, to put into effect these things that we’ve been promised. I see this as at the heart of the problem, it’s, if you like, the struggle between public goods and private goods as the heart of the problem of inflation.

PROF. FRIEDMAN: Not at all. It’s a struggle between governmental expenditures and private expenditures. Not all government expenditures are for public goods and not all private expenditures are for private goods. Many of the greatest public institutions in your country and in mine were created by private expenditures and many of the most shameful rakeoffs on the public at large were under governmental programmes.

I do not believe that expenditure by the government as subsidised in industry is necessarily in the public good. I don’t believe that the deficits in the United States arise in the postal system. I don’t believe that’s buying a public good, that’s buying a public bad.

In my opinion most governmental expenditures are not merely not buying a public good, they’re doing positive harm, but I agree with your basic point — one shouldn’t blame the politicians. The politicians are in business just as businessmen. Businessmen don’t produce good which they think the public ought to buy; they try to produce goods which the public will, in fact, buy, and similarly you mustn’t suppose that politicians are expressing views about policies in terms of what they think is … believe is right, they’re expressing those views in terms of what views they think will get them the votes. I’m not blaming for this, this is the kind of system we have. We want a system in which governmental policies are determined by what the public at large really wants, but the problem as I see it in our system is that we have defects in our political mechanism. We are supposedly ruled by majorities, and yet in practice we are often ruled by minorities of special interests because of the fact that time and again the effect of a government programme for a small group will be concentrated and large and visible. The harm which it does to a large group will be widely diffused and invisible and nobody will get politically agitated about it and the result of that is that political actions taken in parliament under the kind of structures we have do not always in fact conform to the public will.

DR. E.P. KELSALL, Director, Administrative Staff College, Mt. Eliza: Kelsall, the local boy from the College. (LAUGHTER FROM AUDIENCE) Indexation, Professor Friedman. This is important here, we’re talking about it, and you’ve written about it and advocated it. I couldn’t see how this really fits into the harsh medicine you want us to take, with which I thoroughly agree. What about indexation?

PROF. FRIEDMAN: I don’t want you to take harsh medicine, I want you to take the medicine that is needed to cure your ill and I want you at the same time to take some painkillers which will reduce the harshness of the cure. In my mind indexation, by which I mean the adjustment so far as possible of all kinds of contracts for the effect of inflation, is not itself a cure for inflation, but it is a very desirable measure to reduce the costs of curing the ills of inflation.

The problem is that today when anybody enters into a contract whether it be a labour contract, whether it be a contract to borrow money, to rent a house, if he enters into a contract in which the terms are stated in dollars, he and the person he is dealing with have two problems. They have to decide what are the real terms on which they want to engage in the contract and they have to make guesses about what the rate of inflation is going to be in order to translate that agreement into dollar terms. Now, people in general are not in a good position to make judgements about what the rate of inflation is going to be. The effect of indexation is to make it unnecessary for them to make that judgement. You and I enter into an agreement and we say we’ll meet these terms subject to the adjustment that if inflation is 10% the dollar values will go up 10%, if inflation is 8%, it will go up 8%, 16% it will go up 16%. The most important place, in my opinion, where indexation is urgently required — in your country and in mine — is in respect of your tax system, and in respect of your government borrowing. In the tax system the effect of inflation — as every listener, I am sure, knows — the effect of inflation is to drive them up into higher and higher tax brackets. The effect of inflation is really to destroy precisely the political mechanism that we were talking about a moment ago. You now bear in this country tax burdens that are heavier on people of modest incomes than any person in your parliament, and legislator in your parliament would ever have voted for.

Why do you bear that? You bear that because without anybody having voted for it, a very heavy hidden tax has been imposed on the people — the hidden tax of inflation. Last year you had an inflation rate of about 16%. Did any congressman, any member of your Senate vote to impose a tax of 16% on the cash balances you held? Of course not! It’s taxation without representation.

Now it seems to me that if the people of Australia wish the government sector to expand at the expense of the private sector that is of course their right, that is their due, but their representatives should be required to do it openly and explicitly and above board. They should be required to vote for the higher taxes to pay for that and not allow those taxes to be obtained by the accident — or by the indirect method — that inflation pushes people up into higher and higher brackets, so I would say that the first reform that is most urgently necessary in light of indexation is to have your personal and company taxes expressed in a form in which inflation is allowed for an in which the tax rate that is imposed on people is not affected by inflation.

Today, if prices rise by 16% and your dollar wages rise by 16% you may think that you’ve just offset it but you haven’t, because you will discover that you’re poorer off because your taxes, your income taxes, will have gone up by something like 32% so I would say taxation is the first place for indexation and the second place is government borrowing. I think it’s disgraceful the way in which my government and your government has essentially mastered the … taken the ordinary people who have bought government securities, to the cleaners. There is nobody who has loaned money to the U.S. Government or the Australian Government over the past 5 or 10 years who has not paid through the nose for the privilege of doing so. He may have gotten 7% or 8% interest — supposedly. Of that 7% or 8% interest he had to pay maybe 2% or 3% or 4% back in the form of taxes so he was left with 4% or 5%. Last year inflation was 16% so at the end of the year he was 11% poorer off than he was at the beginning. He paid the Government 11 cents out of every dollar for the privilege of lending to the Government.

Now that’s bad enough in general but it’s even worse when the inflation which has this effect on him is produced by the Government which leads these poor sheep to be shorn.

MR. JOHN HALFPENNY, Victorian State Secretary, Amalgamated Metalworkers Union: Professor, Halfpenny, Amalgamated Metalworkers Union. The first part of my question is directed towards trying to understand the way in which you relate your economic theories to your practical way of life. You preach the gospel of less money but I understand the sponsors of your visit are charging $25 a head for attendance at the meetings to hear you. Don’t you think that that in itself is inflationary?

PROF. FRIEDMAN: Not at all. On the contrary I’m … the fact is the evidence …

JOHN HALFPENNY: I find that … my question is whether it’s inflationary, I think but …

PROF. FRIEDMAN: The evidence of the market is that it’s a below market price. (LAUGHTER AND APPLAUSE FROM AUDIENCE) You are … you really … no, seriously on this point, let me just stop you. Rises in prices aren’t inflationary, they’re the consequence of inflation. You’re taking the effect for the cause. Inflation is produced by increased … by a more rapid increase in the quantity of money than in output because that increases total spending; that drags up prices and it drags up wages. A higher price is not inflationary, it is a reflection of inflation.

JOHN HALFPENNY: I could suggest that that’s, with due respect, a bit of an oversimplification, but I want to dwell now on something about which I agree with you I think. There is a very popular but nevertheless false notion abroad [and] in this nation at the present time that wage increases are the cause of inflation and of unemployment. Now in Newsweek of September 1970, I think, you wrote that it is easy and I quote here, “It is easy to show that the widely held union wage-push theory of inflation is not correct”. You then go on to say, “What is involved in the fallacy of composition”. I wonder if you could perhaps enlighten those unenlightened people in our community who share that view where it is that they make the mistake in regard to the fallacy of composition.

PROF. FRIEDMAN: Isn’t it extraordinary that the first half of your question should be exactly contradictory with the second half? (LAUGHTER FROM AUDIENCE) If you take the logic of the second half, which is certainly correct, union wage increases … (Interjection from John Halfpenny: inaudible) … but union wage increases do not cause inflation, we agree, but by the same logic an increase in a particular private price doesn’t cause inflation. Now how in the world can a man with your intelligence and insight possibly juxtapose those two statements, the first of which completely contradicts the second.

But now let me go to your main point and try to meet it.

JOHN HALFPENNY: Well because I disagree with your view that in relation to price and inflation and the cause …

PROF. FRIEDMAN: If price increases cause inflation then wage increases cause inflation. Wages are a price and there’s no logical difference. Now you have to go along with me on both sides; you can’t have it one way. You can’t have your cake and eat it too. We both have to agree that neither wage increases nor price increases cause inflation; both are consequences of inflation. If either one causes inflation then the other causes inflation, you’ve got to be consistent. If you say A, you’ve got to say the B. So let me go to your main point, why is it that it’s a mistake to suppose that wage increases cause inflation? The answer is very simple. Greedy … there’s no doubt that trade unionists are greedy — so are the rest of us. There’s no doubt that businessmen are grasping — so are the rest of us. But neither the greedy trade unionist nor the grasping businessman has a printing press in his basement on which he can turn out those multi-coloured pieces of paper that you in this country call money, and because you can’t do that you cannot cause inflation.

If a trade union gets a higher wage increase then it has … the effect of that, in and of itself is that those people who remain employed get more money; the businessman, the employer who hires the people has less funds left to spend; there is … the higher spending by the workers will tend to raise prices; the lower spending by the employers will tend to lower prices, these exactly offset one another.

The only way you can have inflation if is there is some way in which somebody can spend more without anybody else spending less, and the only way in which that is systematically possible is if the additional spending is financed by the creation of new money.

Now let me add, in my opinion trade unions — in your country and mine — do a great deal of harm. I don’t want to be misunderstood, but I think we ought to understand correctly what are the harmful and what are the good effects they do and not use bad argument for what may be good objectives. In my mind the harm which trade unions do is not in producing inflation. The harm which they do is in denying employment opportunities to people who might otherwise have them. It’s the restrictive practices of trade unions — of many trade unions and in my country and in yours — which reduces the job opportunities which forces other people into less productive and less effective … less well paying jobs which in my opinion is a harm which they do. This harm also manifests itself in their reducing the effect of this with which you use resources and making some prices too high relative to others, but they do not harm, in my opinion, by causing inflation and it’s a complete … it takes, I think, the attention of the public off the right track to suppose that they do.

JOHN HALFPENNY: There’s 300,000 people in Australia and around 6,000,000 in America unemployed at the present time, none of whom are denied employment opportunities by trade unions …

PROF. FRIEDMAN: Of course they are, of course they are. Do you mean to say that in the United States there would not be a very much larger building industry at the moment with many more people hired as carpenters and as plumbers and as electricians if it weren’t for the extraordinarily high trade union wages that are enforced? Of course much of that unemployment is attributable to the actions of trade unions.

Now, I grant you, some of the cyclical unemployment, the fact that the unemployment has gone up in the United States from 3,000,000 or 4,000,000 to 6,000,000, that’s not due to the trade union action today, of course, that is due to the fact that we have been in one of these cycles that’s due to bad government policy which overstimulated the economy and then stepped too hard on the brake and over-reacted, so I don’t want to say that the cyclical fluctuations are due to trade unions, but there is no doubt that over a long period the effect of trade unions is not so much to create unemployment as to force people into less attractive employment, less well paying employment than they otherwise could have.

ROBERT MOORE: I wonder if you mightn’t elaborate a bit on that. It seems to me that your last sentence was the most challenging thing you said.

PROF. FRIEDMAN: I will, of course. Let me take … let me start with my own country ‘cos I know my country better than yours, but the economic principles are exactly the same. Let me take one of the skilled craft unions. There is no area in the United States in which you have had greater discrimination against our under-privileged blacks than in the skilled building trade unions. Why? Because if a trade union is effectively able to raise a wage rate that means there are fewer jobs there. And it’s the same with labour as it is with anything else — the higher the price the less will be demanded. If you make the price of carpenters very high fewer people will be able to afford carpenters, there will be fewer jobs, but if you have fewer jobs you somehow have to ration them. How do you ration them? By excluding other people; by imposing irrelevant criteria for becoming a member of a trade union; by imposing long training periods, by imposing featherbedding restrictions or other things.

The result of this is here are disadvantaged people who could be perfectly good carpenters and they’re denied that opportunity. I use the case of the blacks for a very interesting reason. It turns out that if you look at the experience of the blacks in our country — in the United States — they have improved their status over the past hundred years in almost any dimension you can measure, with one exception, and that’s their employment in skilled trades. Before the Civil War when we had the nefarious institution of slavery in the South — I say we, obviously I wasn’t in the country and my ancestors weren’t there either, so … At that time there were very very many blacks in skilled occupations such as carpentry, plumbing and so on. There are fewer, a smaller percentage of blacks in those occupations today than there were then, and why? It’s almost entirely because of the activities of the skilled craft union in excluding them from employment. That’s been a major problem in our country.

Well I don’t know what the exact counterpart is in your country, but I would be surprised if there aren’t similar counterparts.

MAN: Professor Friedman, I agree with you that there is a strong relationship between the supply of money and inflation, but it seems to me that you have not emphasised enough the role of trade unions in the inflation and unemployment situation. If the trade unions have succeeded in pushing up their wages and succeeded in pushing up say the minimum for the whole economy, then if the government does not bring up more money it tends to lead to a situation where we have more unemployment. It seems to me that we agree on this.

PROF. FRIEDMAN: No, I don’t believe we can.

MAN: At least temporarily. In the initial situation.

PROF. FRIEDMAN: No, excuse me, the problem with your statement is that you are treating trade unions as if they spoke with a single voice for all sectors of the population; as if all wage rates throughout the country were altered and changed identically. The fact is that the problem with trade unions as it is with other groups is trying to get … one group tries to get a higher real income relative to another.

Now it certainly is true that if all real wages went up sharply this will create unemployment — this happened here last year, in Australia, you had a 12% increase in real wages, then you had a very sharp increase in unemployment. That is true but it doesn’t follow that that produces inflation.

MAN: Doesn’t this mean, for example, the increase in the minimum wage throughout the economy, that tends to create unemployment, and if the government — for political reasons, and especially in Australia, if you stay here for long you find that as soon as the rate of unemployment increases beyond 2% there will be a public outcry, including the trade unions, and the government’s bound, for political reasons, to reduce the rate of unemployment even … that they can’t let the rate of unemployment persist for any length of time and hence they may be forced to increase the money supply in order to get the temporary … (inaudible) I agree with you that this costs even more, probably, in the long run, but doesn’t this mean that the trade unions movement create unemployment and inflation — at least indirectly?

PROF. FRIEDMAN: No, the problem is the following: if you have a government which is committed — as most governments are — to a full employment policy, in which with any rise in unemployment they will tend to panic and go in for a sharply increased creation of money, then anything which causes unemployment causes inflation. If you have a temporary … a harvest failure which causes unemployment that will create inflation. If you have something happen in the world at large such as a hike in the oil price which causes unemployment, that will create inflation.

Under those circumstances I think it is much more plausible to say that the fundamental source of the inflation is a full employment policy. Now it may be that on some occasions trade unions are one of many factors which produce unemployment. We have to go … if we’re going to go beyond that we have to look at the empirical record, and say, as we look at the record on those occasions when governments have undertaken inflationary policies, has it frequently or typically been in response to unemployment created by trade union push on wages. If you look at the empirical record for my country, for Great Britain, for every other country for which I have looked at it, the occasions on which it’s been the trade unions that have been the stimulus have been few and far between. Indeed, in general, and my country is in this respect a little better case than yours, because we have a smaller trade union movement. In your country nearly 60% of all workers are members of trade unions as I understand the figures. In our country it’s 25%, and therefore we have a better chance to observe the relative movement of trade union and non trade union wages and the interesting thing is that in the early stages of inflation the trade union wages tend to lag behind. They aren’t the leaders, they aren’t the ones in front. It’s the trade union wages that are just more rapid.

Then what happens is as the non-union wages rise relative to the trade union wages there is a push to get the trade union wages up and that’s visible, that’s open. You see part of the fallacy that this gentleman over here was pointing to before is because when you have an increase in wages under trade union auspices it’s visible, everybody can see it and point to it. When the wages in our country, let’s say of non-union people go up, it’s much harder to see that, that isn’t very visible, and therefore I think while under some occasions I’ll admit that possibility, the trade unions might be one of a dozen or other forces, that set in motion this full employment policy, the fundamental source of inflation is a full employment policy and not trade unions.

ROBERT MOORE: Well should a government have a full employment policy?

PROF. FRIEDMAN: No of course not. It should have a policy of stable employment. It should have a policy of following stable policies which will avoid the ups and downs — the real source of unemployment as like the real source of inflation is in Canberra, it’s in the Government … or maybe I guess your Reserve Bank is in Sydney rather than Canberra so maybe I ought to split the blame between those … (LAUGHTER FROM AUDIENCE) … but it’s been … you see the interesting thing here is that it’s been the attempt by governments to fine-tune the economy to offset every minor fluctuation that has itself been a source of instability, and the reason is because when Government acts today the effects may be 6, 9, 12 months down the road and it’s very hard to steer an economy in that way when you are always reacting to current forces in a way which has long delayed influences, and therefore in my opinion the best way to … the best policy for a government to have is not a full employment policy in the sense in which we’ve been talking about a defined delicate tuning, but a policy maintaining a stable framework within which the government itself is not going to be a source of instability but will be source of stability. A stable framework by having a steady rate of increase in the quantity of money as a background against which people can adjust; a stable policy in the sense of long in advance studying the expenditure goals, the tax goals so that those are studied are don’t suddenly go up at a rate of 40% a year as they’ve been doing here, or down at a rate of 40% a year, so that you tell people in advance what you’re doing and let them into the secret and not make them guess what your policy is going to be.

ROBERT MOORE: Dr. Clark, you had your hand up a while ago.

DR. COLIN CLARK, Economist, Monash University: Professor Friedman … Clark, Monash University. Professor Friedman may not know, but I think Mr. Halfpenny is really one of his admirers, he’s been putting up placards containing long extracts from your writings … (LAUGHTER FROM AUDIENCE)

JOHN HALFPENNY: That’s not fair, I did it once, and that was obedience.

PROF. FRIEDMAN: Congratulations and thank you.

DR. CLARK: It’s a very important point, namely the trade union demands for wages are not the cause of inflation, they are the consequence and I’d like to support that too but I’m afraid there may be some disagreement on the point I want to raise. If taxes are to be indexed, government borrowing to be indexed, well nobody’s going to lend much money to the government in future, and there’ll have to be a very heavy reduction in government expenditure and I would suggest that the first candidate for the couch should be education on which we’re trying to spend far too much.

PROF. FRIEDMAN: Well I think you’ve raised, of course, a very complicated question because I think one has to distinguish different categories. I don’t like to use the word “spending on education”, I like to use the word “spending on schooling” because I believe not all schooling is education and not all education is schooling, but with respect to schooling I think that is an area where there are enormous scopes for reduction, particularly with respect to higher schooling.

I believe that one of the scandals — I think no other word is strong enough — in my country, and I suspect in yours as well, has been the financing of higher schooling by governmental spending. If you look at the people who are privileged enough to attend higher schooling — universities and colleges — they are people who typically come from middle and upper income groups and even if they don’t are destined to become members of middle and upper income groups and if you ask who pays the taxes, it includes people who are not so privileged and who cannot go to school.

The governmental finance of higher schooling is, in my opinion, the clearest case in which you have a supposed welfare programme that benefits upper income groups at the expense of lower income groups and I think it’s a disgrace … it’s a scandal from that point of view.

Now, I hasten to add, I want the kind of society in which everybody, regardless of his income class, regardless of the wealth of his parents, has an opportunity to go to university provided he is willing to pay for it, not necessarily currently, but if necessary subsequently out of his higher earnings and I think one of the most healthy social reforms in this area and one of the most effective ways of cutting government expenditures would be to have a system of higher schooling in which fees were charged which were equal to the costs, in which those people who did not have funds to pay for them currently could enter into an engagement with the government whereby they would get their fees paid for them but assume an obligation to pay it back out of their higher earnings later, in a form in which the amount they paid back depended on how much they earned; in a form in which if they earned less than a certain amount there were relieved from the obligation, if they earned more than that they might have to pay back more than they had borrowed. The kind of equity investment that you have in equity shares of risky enterprises.

It seems to me that would be both a far more equitable way to handle the matter and one which would make sure that those who go to universities go there because they are really interested in getting the schooling and are qualified to it. I think one of the most common rules of life — and of economics, but of life in general — is that if people get something for nothing they value it at nothing, and if something is available for no charge people will consume it up to the point at which it gives them no value. I think you should have a far better educational system if people had to pay for what they go so in this respect I certainly agree with you.

I don’t know enough about Australian conditions at lower levels of schooling ot have any confidence in that problem.


HIGH SCHOOL STUDENT: … (inaudible) High School. Professor Friedman, the three states objectives of the Australian Government are: stability of costs and prices, continuation of a high rate of economic growth and the maintenance of an external balance. What would the possible consequences for price stability and external balance be if subject to a drop in government spending?

PROF. FRIEDMAN: If you could reduce … what you really need to have is a simultaneous reduction in government spending and in government taxation. The effect of that would be to promote high growth and high employment because the effect of that would mean that private people would spend their own money, directly, on things which they valued the most. See, I personally think that the great defect in much of our policies in my country and yours, the harm which is done is not because bad people want to do bad things, it’s not, it’s good people who want to do good things, who produce harm by accepting what is a fallacious principle, namely, that you can do good by spending somebody else’s money. (LAUGHTER AND APPLAUSE FROM AUDIENCE) I think that’s a fallacious principle from many points of view; if you’re going to spend somebody else’s money you first have to get it. How do you get it? By force! Thus that principle has force built into it, and that’s why it’s a violation of freedom.

But moreover, if you’re spending somebody else’s money you never spend it as carefully as you spend your own, but go back to your immediate problem, so far as a balance of payments is concerned that is not a problem provided you are willing to do what you should do, namely have a flexible exchange rate. The exchange rate is a price which equates the demand for Australian dollars with the supply of Australian dollars. There cannot be a balance of payments problem if you have a flexible exchange rate, so that, by allowing the exchange rate to be flexible you can rule to one side. With respect to the other two objectives, I believe that a policy of stable prices and costs is best promoted by a steady monetary policy; that reducing government expenditures would promote growth and not have the opposite effect.

PROFESSOR KEITH FREARSON, Associate Professor of Economics, Monash University: Professor, after all, like it’s public money that the government is spending, not just private money, I think that it’s our money that they’re spending in a sense, but my question really is …

PROF. FRIEDMAN: Would you pardon me, but would you tell me what public money is other than the sum of all private monies?

PROF. FREARSON: Well if the Government prints it itself I suppose we call it public money, but I think, like, well we pay taxes …

PROF. FRIEDMAN: Of course you pay tax.

PROF. FREARSON: In the old days we used to say that the tax is something of which we get no quid pro quo, but I don’t think that’s right really because after all we are supposed to be getting something …

PROF. FRIEDMAN: Oh you are getting something. You are getting something, but the question is are you getting your money’s worth?

PROF. FREARSON: Well then the question also arises what we get our money’s worth from because you have said that the activities of government ought to be constrained in the public interest. Now in the private sector we have some very large corporations who are producing vast volumes of goods and bads, but in fact Galbraith has said that the age of Keynesian economics is over because of this great micro-economic revolution in trade unions and in corporate power, so do you think that in the public interest that the activities of these giant corporations ought also to be constrained or do you think that might conflict with your concept of liberalism?

PROF. FRIEDMAN: Of course the activities of the giant corporations should be constrained; they should be constrained by the competition of other giant corporations; but the great virtue of free enterprise is precisely that it prevents any corporation giant, small or middle size from having too much power. The right way to constrain your giant corporations, if there be any in this country, is to open the doors to imports from the rest of the world. I have no doubt that you have monopolies in this country, but you have monopolies by government action. You have corporations which have monopoly power because you do n0t permit competing goods from the rest of the world to come in and force them to satisfy the tastes of the consumer. You see the great virtue of free enterprise is precisely that it prevents capitalists from having too much power. It’s precisely that it sets one capitalist to compete against another capitalist for the public favour.

PROF. FREARSON: But do you really think that a system of completely free enterprise would lead to a system of very small competing firms, rather than …

PROF. FRIEDMAN: Not very small, it would lead to a system of large competing firms. It always has, where it was permitted to operate. After all we’ve got hundreds of years of experience with this. There is no … there is a mistaken belief that somehow free enterprise leads to concentration; it simply is not so. The only cases … or, well, I’m overstating it a little. The diamond cartel is an exception, but almost the only cases in which you have been able to have effective concentration of private power is where it has been able to get governments to assist them — we’re going to see that happen in the next year with the oil cartel — now there you have some giant enterprises, but that cartel’s going to break down, it’s not going to last.

You had a rubber agreement, Stephenson Rubber Agreement in Malaysia in the 1920s, it was giant corporations, it broke down. The Ford Motor Company in the United States — a giant corporation — tried to sell publicly the Edsel automobile; it spent a hundred odd million dollars on advertising and contrary to Mr. Galbraith’s belief, the corporations can make the public buy whatever the corporations want to, but the Ford Motor Company had to withdraw its car rather than get the people to sell it. You know, this naive notion that these private corporations really have some power I think would be dismissed by anybody who studied the Stock Exchange reports. If these giant corporations have so much power, how come they don’t exercise it to prevent governments from imposing taxes of 50% or more on their profits? I think nothing has been more grossly overstated than the thesis which Ken Galbraith has presented, that private corporations have unlimited power to work their will on the poor innocent consumer.

ROBERT MOORE: The far corner, yes.

MR. BALDWIN, Electrical Trades Union: My name is Baldwin, from Electrical Trades Union. Professor Friedman, you’ve unleashed a healthy broadside against the unions, I’d hope to turn this in the other direction slightly and maybe you could fire the other barrel. Inflation, as I’ve known it in my working life, was never coupled with unemployment. Today it is, it’s something new to me as a trade union official, and with it, of course, comes the other complications, and maybe you could help all of us in this situation.

You’ve said, in your theory, that you must keep the rate of growth down and you must also control the quantity of money. If you look at the situation as far as the GNP is concerned over the last ten years, it varied something between 4.2% to 5.6%. To adopt your theory would mean that we could, in the next financial year, have a minus situation. My question here is — and it’s coupled with the capital strike — that the employers have enjoyed, for the last six months or so, by non-investment, they’ve created a situation of … an artificial situation of fear, they have indulged in tactics of retrenchments on the basis that for every cent we pay in increased wages, that we knock another head or so off the balance the budget internally.

The question I want to have answered, if it’s possible, is how do you create employment in this situation at the moment with these influences working conjointly?

PROF. FRIEDMAN: I’m afraid that I … you know, that questions has a “When did you last beat your wife?” quality. (LAUGHTER FROM AUDIENCE) I find it hard to accept your vision of the role which something called the capital strike has played. I believe the situation is very much simpler; I believe the corporations cannot invest, cannot expand production unless it is in the interests of their stockholders to do so, unless it is profitable for them to do so. Just as I believe that no worker should be required to work unless it is in the self-interest of the worker to do so, I don’t think we ought to have compulsory servitude for workers and I don’t believe that we can have, or ought to have, compulsory servitude for capital enterprises, so I don’t believe you can say there has been anything like a strike. What there has been is a simple situation; through a concatenation of circumstances, you have a sudden very rapid jump in real wages at a rate of 12%, in real terms.

You had something like a 16% inflation and a 28% increase in money wages. Now a 12% increase in real wage rates does raise costs very sharply. Superimposed on that you have had a policy of a government Price Justifications Board that has tended to limit the increases in nominal prices that enterprises could pay. Well then you have a very simple situation in which enterprises are squeezed between prices which are artificially held down and wages costs which have rapidly jumped up. The only possible outcome of that with or without inflation … that is nothing to do with inflation. Suppose you have no inflation at all, but wage rates had gone up 12% while prices when up zero, you would have had exactly the same consequences, and the answer to your question is that the only way in which you will be able to have a productive employment situation is by the readjustment of the various wage rates and costs throughout the economy to be in conformity with market reality. Somehow or other market forces operate behind the scenes and somehow or other that abnormal real wage hike, which is not a hike note in earnings, it’s in wage rates.

One of the fallacies is not to distinguish between the rate of pay per hour and the amount people earn per week. What people buy their groceries with is what they earn, not by wage rates which they don’t get, and so some way or another — and I don’t know enough about the Australian scene to say precisely how — the economic forces are going to erode; that very rapid wage increase, they will gradually make it profitable for enterprises to invest and to expand their activities and that will produce a healthy growth in employment. There is no reason why you need to have any substantial increase in unemployment from your present level provided you follow stable policies. I think it would be a mistake to step on the brakes so hard as to create a serious downturn; I think you need to do things in a gradual and steady way rather than swing wildly from one side of the road to the other.

ROBERT MOORE: We have about three minutes to go, I owe the call to two people, so if we could all, between us, keep it brief. Yes?

MAN: Professor, you remind me, with due respect, to the gentleman who found the solution to submarine warfare by boiling the oceans, but he didn’t really know how to do it. Now, in our situation right now, in Australia, we have an unused capacity and it is that, the unused capacity, which makes an industrialist unwilling to spend any money on further expansion, and this is underlying one of our basic problems.

Now, if we’ve got an unused capacity including 300,000 unemployed and perhaps 10%, 15% of unused capacity of machines and equipment, how can we — not how can we not — but how can we get that unused capacity up the the point where it should be, and then that way encourage industry to expand?

PROF. FRIEDMAN: Well there is no way you can do it directly, you have to do it indirectly by creating conditions under which it will be in the self-interest of all the participants in your economy to bring that unused capacity into line, and the way to do that is to follow the kind of steady policy I have and to get people to accept it, to understand it, and to adjust their price expectations so that the prices …

MAN: You’re asking us for a steady policy our of depressed level; at a depressed level we’ve got to get off this floor.

PROF. FRIEDMAN: I understand, but you got into this depressed level by an unsteady policy. Once you’re sick there is no miracle drug that’s going to get you out of it overnight — you’re going to have to pay a price, and you will pay that price if you cure the sickness; you’ll pay a much higher price if you don’t cure the sickness. I don’t believe I can offer you … I can’t offer you because there does not exist a panacea which will you to adjust this problem overnight.

MAN: Are you offering us permanent unemployment then?

PROF. FRIEDMAN: I am not. I beg your pardon. I am saying to you that you have a temporary period of unemployment that you will have to go through, but that is temporary. It is not permanent at all — on the contrary, if you continue on your present path of promoting higher inflation then you will really be stuck with permanent unemployment.

MR. STEVE CRABB, Australian Council of Salaried and Professional Associations: Professor Friedman, I’m Steve Crabb, from ACSPA, I’m one of your greedy white collar unionists. You’ve made a number of excellent academic debating points this afternoon, but the practicality of your theories does tend to concern me a little. In this country, in Australia, we have the deep commitment against the use of unemployment as an economic weapon — I say we being the trade union movement, I think this is also true of the entire population. I think the Government understands this and I think it would be a very brave government indeed in the country that did use unemployment as an economic weapon.

Given that we expect our governments to continue a policy of full employment, what relevance do your theories have .. are you … (inaudible) attempts to solve inflation?

PROF. FRIEDMAN: My … (inaudible) say to you that you do not have that option. You cannot do it. You can no longer continue on a policy of full employment with no inflation or without accelerating inflation without having it ultimately break down, then you, unaided, without any assistance, can jump from there to the moon. Water does not run uphill, and social phenomenon have laws of their own.

Now you ask me about the practicality of these ideas. I have been here before. You remind me so much of the arguments I used to hear 10 and 15 years ago about how it was utterly academic dreaming to suppose you could have a system of flexible exchange rates in the world. The truth is that it is the unrealistic academic who can look at the situation in its broadest context and get away from the immediate policy position who is the most realistic. You don’t have to act in accordance with the suggestions I’m making here. I’m only saying if you don’t there will be certain consequences.

But I want to make one more point. Unemployment is not a weapon to fight inflation. I want to make … I have given you a misleading impression if I have left you with that. I know a dozen ways to increase unemployment which will make inflation worse and not better. Unemployment is a temporary side effect of measure which are taken to cure inflation.

If I may go back to the medical analogy which you started with. If you were sick, you have appendicitis and the physician says I’m going to have to take out your appendix, and he says after I’ve taken out your appendix you’ll have to go to bed for two weeks. You wouldn’t come back to me and say the way to cure appendicitis is to go to bed for two weeks. That’s a side effect. In the same way, if you take the measures that are required to cure inflation you will have to go through a period of higher than normal unemployment, but unemployment is not a cure for inflation, it’s an undesirable side effect, but unfortunately there’s no cure for inflation that will enable you to avoid that.

STEVE CRABB: But any cure that does create inflation is a cure that’s worse than the disease, is the suggestion.

PROF. FRIEDMAN: Well, you know … in this particular case of the disease, I believe not tending to the disease is far worse than trying to cure it, and there is no cure so far as we now know — maybe somebody will invent a miracle drug, it’s always possible, but so far as we now know there is no cure that will not involve a temporary period of unemployment.

ROBERT MOORE: Professor Friedman — and everyone else — even with high inflation there are still only 60 minutes in an hour … (LAUGHTER FROM PROF. FRIEDMAN AND AUDIENCE) … we haven’t indexed the hour yet, and I’m sorry to cut it off there — obviously we could have gone on all night. Thank you very much indeed for joining us on MONDAY CONFERENCE.

(in order of appearance on
  1. 1975 Monday Conference transcript featuring Milton Friedman
  2. Milton Friedman on the argument that capitalism takes us back to the 18th century
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