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On Milton Friedman

Terry Gray

24 Sep 2005

It is rather presumptuous for a mere computer geek to question a Nobel-prize winning economist, but I will anyway.

I'm watching BookTV on CSPAN2 again. They're showing a repriese of a 10/28/94 BookNotes interview by Brian Lamb of Milton Friedman, who had written a prelude for the republishing of F. A. Hayek's "The Road to Serfdom".

After lamenting that over half of the spending in the US is determined by the government, he listed a bunch of things that didn't come from the government. My ears perked up... especially when he mentioned computers.

It seemed to me that he totally misunderstood the importance of federal research funding in fostering innovation. And he also did not mention that many other innovations came from monopolies --which seem to be equally at odds with his faith in the marketplace. We all know the story of the ARPANET and Internet; certainly that did not come out of the private sector. And computers? Didn't the war department have something to do with that, back when they needed projectile trajectory tables in a hurry? And both the transistor and laser, essential for the modern computing and communication, came from Bell Labs --a creature of a government regulated monopoly. Who would argue with the following claim? That almost all corporate R&D goes to develop the next product cycle; very little is targeted for 5-10 year payoff, and virtually none for truly basic research where you, by definition, have no idea what the answer is.

Friedman refers to Clinton as a socialist, which he defines as someone who thinks governmentt is needed to solve problems. He cited the Clinton health care plan as an example. But this makes me wonder: since health care is one of the disciplines where competition drives prices up (like national defense), and the current healthcare free market in the US shows little sign of controlling explosive cost increases, what would an *efficient* delivery system look like? What are the alternatives, if we postulate a different approach to driving efficiency? For example, is single-payer fundamentally and hopelessly flawed? Or might there be some checks-and-balances that would achieve high efficiency? (For comparison, I've been told that a higher percentage of medicare dollars actually go to care than HMO dollars.)

Friedman asserts that all government is inefficient. Having seen counterexamples in the public sector, and also having seen massive inefficiencies in the private sector, I have a problem with that. (Does anyone really think of the defense industry as highly efficient? How much do those hammers cost? Of course the customer's red tape is a part of that story, but not the only part.)

In one South American country, and even a few counties in the US, I understand that local water districts are being privatized. Some reports indicate disastrous results, with massive price increases and obviously unfair pricing models.

Recent excesses of the private sector have been well-documented, as have been inefficiencies in the public sector. In the former case we have the consequences of greed at the expense of the people; in the latter case we have the consequences of power, again at the expense of the people.

What's wrong with a corporation where the *people* are both customers and shareholders? There is precedent... credit unions, and a few creative entrepeneurs seem to have found some success with that formula.

Where Friedman and I strongly agree is in his libertarian instincts to limit the power of government and try to restore more individual freedom; where we differ is in believing that the market is a sufficient alternative to government regulation. There is, however, a Third Way. It would require radical changes to our legal framework for corporations, but it might be a more efficient way to provide checks-and-balances across the different consituencies of any enterprise: shareholders, customers, employees, suppliers, and the community.