THE CHAMP (via Tom Morin):

Free Markets and the End of History (NPQ, Spring 2006)

Milton Friedman, 93, was awarded the Nobel Prize for Economics in 1976. His monetarist and laissez-faire ideas have been profoundly influential in the past several decades with leading political figures from Margaret Thatcher to Ronald Reagan. In late November, NPQ editor Nathan Gardels spoke with Friedman at his hilltop San Francisco apartment with panoramic views across the San Francisco Bay to the Golden Gate Bridge. [...]

NPQ | Perhaps the Scandinavian countries are a model to look at. They are high-tax but also high-employment societies. And they have freed up their labor markets much more than in Italy, France or Germany.

Friedman | Though it is not as true now as it used to be with the influx of immigration, the Scandinavian countries have a very small, homogeneous population. That enables them to get away with a good deal they couldn’t otherwise get away with.

What works for Sweden wouldn’t work for France or Germany or Italy. In a small state, you can reach outside for many of your activities. In a homogeneous culture, they are willing to pay higher taxes in order to achieve commonly held goals. But “common goals” are much harder to come by in larger, more heterogeneous populations.

The great virtue of a free market is that it enables people who hate each other, or who are from vastly different religious or ethnic backgrounds, to cooperate economically. Government intervention can’t do that. Politics exacerbates and magnifies differences.

NPQ | The inflation rate in America as well as globally remains historically low, even as oil prices skyrocket. Why?

Friedman | Inflation is a monetary phenomenon. It is made by or stopped by the central bank. There has been no similar period in history like the last 15 years in which you’ve had little fluctuation in the price level. No matter what else happens, this will maintain as long as the US Federal Reserve maintains strict monetary policy and control of the money supply. [...]

NPQ | The US Treasury debt is held mainly by China, Japan and South Korea. Is the huge foreign balance of payments deficit a problem for the US and world economy?

Friedman | I don’t think so. It may well be a statistical mirage. If you look at the balance sheet, the US is heavily in debt. If you look at the income account—the amount of interest the US pays abroad—it is almost exactly equal to the amount of interest that it receives from abroad. American assets held abroad are earning a higher rate of return than foreign assets held here.

That is understandable because what is most attractive about the US to people and countries with wealth is that it can provide security, insurance really, against political instability. Nobody is afraid that the money they place in the US is at risk of expropriation or of in some other way being taken away. For this safety, the wealth holders of the world are willing to accept a lower rate of return. US assets abroad, in contrast, are riskier and thus yield a higher rate of return.

This explains why there is a rough balance in real terms. It is not clear there really is a debt.

It's a marvelous thing that Mr. Friedman lived long enough to see himself proven so decisively right on nearly all the great questions of the 20th Century.

Posted by Orrin Judd at February 9, 2006 8:20 AM