The Legacy of Milton and Rose Friedman’s Free to Choose
Economic Liberalism at the Turn of the 21st Century
October 23–24, 2003
A Conference Hosted by the Federal Reserve Bank of Dallas

Session 4 Q&A

Q: Let me start with one for Tyler. I believe it was Benjamin Franklin who said “Those who sacrifice liberty for security will soon find that they have neither.” In light of the recent elevation of national security to our number one goal, almost our only goal, with all its implications for American immigration policy, are you concerned that the U.S. will lose its multicultural identity?

A: [Tyler Cowen] I am concerned about this to some degree. I think a number of our immigration problems would be easier if controls on the border with Mexico were not so tight. I think what happens is the tighter you make the control, the more likely an illegal Mexican is to simply stay in this country. But ideally what a lot of them would like to do is come here for half the year and work and then go back to their villages. So that the total size of the problem, I think, would be smaller if it were easier to cross the border. Now, do we think that by tightening up the border with Mexico, we can keep out Al Qaeda terrorists? That to me is implausible. I am no expert on the topic of Al Qaeda and the ability of terrorists to enter this country, but it seems to me that we’ve lost perspective, and the main goal here really ought to still be liberty and prosperity, and we’ll need to rely on other methods to fight off Al Qaeda. Tightening up the border with Mexico is neither an appropriate nor an effective means of doing that.

Q: On the general topic of globalization, we have the following questions. Since globalization seems to be irreversible, how should public policy be structured to make it more palatable to people, for example retraining, education or whatever?

A: [Cowen] Well, I think the important point is that it’s not irreversible. There was a good deal of globalization in the late 19th century. Starting with the First World War going through the 1930s, it was reversed to a very significant degree. We’re very fortunate that post-World War II Europe worked out the way it did. So I think the first priority is not to take it for granted and make sure that you keep free trade, free movement of investment and some fair degree of free labor movement. In terms of how to make it palatable, the question there is to whom? And that’s a case by case issue for the French, the Canadians, the Mexicans, the Americans, it all depends on the case. But I think it’s fair to say, as Milton himself has pointed out, there will always be a stronger emotional resistance to capitalism and trade than logical resistance, and I think none of us really have the silver bullet for that problem.

A2: [Gregory Chow] May I answer the 42 percent, the figure that Gary [Becker] doubts? I have to tell you a few stories, a few examples. Before economic reform, you can say that the government took care of 100 percent of Chinese education on all levels. Now, it’s amazing how fast the private education spread. In the 1980s, for example, when I visited my hometown, one of my colleagues in the university, he was a professor but then he started a private school. And what he did was, he went to a nearby area and he asked the government to give him land. The government is interested in promoting education, so he got a piece of land. But he needs buildings. So what he did was that he collected one hundred thousand yen from the parents. But that’s good for six years of primary school. You give me one hundred thousand; the six years of schooling for your kids will be taken care of. They just started the whole thing, and there are so many people. Now this is in the 1980s, one hundred thousand yen was quite a bit of money. But there are enough people to pay for it and that school was successful, both financially and in terms of quality. Now, I can spend the next hour giving you what I know about this. I have other friends who have started this kind of thing all over the place. Another example. My sister spent only about $100,000 to start a school in interior China to name after our father. Now, $100,000 is peanuts but $100,000 going to a little village, you can start a school out of that. I will finish with one last example. There’s a village that most Chinese in the U.S. came from up to the 1930s and 1940s. One village supplied almost 80–90 percent of Chinese Americans. They all came from the same village. One of my friends in Hong Kong contributed money for education in that village; in fact, two of my friends. So, one day we took a trip to that village. My two friends, they started with grade school, high school, college, everything. Now, I think in that village, it’s not 42 percent. It’s 89 percent. Of course, this is not a typical example. If you include the amount of money that the Chinese citizens are willing to pay and if you include the thing about entrepreneurship, it’s not that hard to start a college. Now, nuclear physics or whatever, now that’s difficult, but if you want to have economics, all you need to do is find somebody who knows how to lecture, so the cost is very cheap. That doesn’t mean the quality is good. But, anyway, it will teach you something. So you don’t need much. You can offer college level courses, and there are so many of them all over the place. That’s what happened in China.

A3: [Gary Becker] I wanted to comment on the globalization issue more. Now, the question in your answer gave the impression that it’s simply an educational process. But what about special interests? A lot of people are opposed to globalization in their own particular context because their company or their industry might be hurt by it, even though the country may benefit a lot. Now, Peter [Boettke], you went a lot into special interests and so on, which is very important, and how much of the opposition to globalization that we’re seeing in certain quarters. I’m not talking about the 17-year-olds who are out there opposing it, but some of the political opposition in the United States, some of the opposition in Latin America, some of the opposition in Europe is a result of the fact that there are industries that don’t want the competition from China and elsewhere. This is an old opposition that’s been with us, as you said, since the 19th century and earlier. The educational process is going to be very difficult because they know what they are doing, it’s just that they don’t want the competition that they have to face under a more globalized environment.

A4: [Cowen] I agree with that completely. I think the problem is not so much educational as emotional. The people choose political views for all sorts of reasons. Special interests have the influence they do because they’re able to reach out essentially to the median voter and package it in a way that many people will buy into. I think it’s this joint confluence of special interests and voters who are more irrational than undereducated. And I don’t have an answer to that. I really don’t.

Q: The relationship between economic freedom and political freedom is widely reported. That said, as economic freedom increases in China, how long will it take for full political freedom to follow?

A: [Chow] What is meant by full? I don’t know whether in my paper I discussed it or not. The optimal degree of political freedom differs across countries in my view, so maybe the optimal degree of freedom could come in the not too distant future. Say there’s an optimal degree of freedom for China. Today it’s not there. Today I would say it’s maybe about 65 percent there. So you have 35 percent to go. So you will see significant changes in the next two decades.

Q: The Chinese banking industry is subject to intensive government regulation. How can we achieve a healthy degree of competition by freeing government regulations, particularly of foreign banks?

A: [Chow] Well, there are some positive signs. The Chinese government would like very much to have their banks behave like Chase Manhattan or CitiBank. But, of course, they can’t do this for a number of reasons. First of all, inertia, because there’s a habit of how people do business. You don’t change institutions so easily by ordering it. So institutional inertia and also human capital. These Chinese bankers don’t have Harvard M.B.A.s. In the old days they did banking the old fashioned way, which is not banking at all. So they don’t have the talent you need for all of this. And it’s not that the Chinese government doesn’t want it. In fact, they give it a lot of attention. They try to send bankers to the U.S. to take lessons. They want to invite American experts to go there to lecture. They try to do all kinds of things. China is big, you know, there are so many banks in China. And the WTO is really shaking them up. I was in China in March and I played golf with a bank president, actually my host. This was South China, near Hong Kong, and I said, well, what’s happening now, because the Hong Kong banks are coming, right? They opened up WTO. Well, he said, we’re in serious business. He said, we are trying very hard to update our skills. We are concentrating on telling our staff that they better wake up. They are trying very hard to modernize things, so they’re under pressure. But, how well they will do is hard to say, but they are under intensive pressure to modernize. Now, some people, in terms of the WTO, they’re concerned. If they let foreign competition come in, will the Chinese banks go bankrupt? But it won’t happen. So, the question about the positive or negative effect of competition through the WTO membership. See, Beijing signed all these agreements to say that in five years time, by steps, a foreign investor can come in, they can know how many percent. They have all these steps. However, if the foreign competitors are going in too rapidly, the local government will slow them down. It’s one thing for Beijing to agree on something, but the foreign firm has to enter someplace, and the local government can just give them a little more red tape. Fill out some more forms. They can slow it down.

Q: You said before that the government really wants this.

A: [Chow] The Beijing government wants it.

Q: But not the local government?

A: [Chow] The local government wants it too. They want it too, but sometimes they monitor it. They monitor the speed of foreign competition, but they wanted it.

Q: But not too fast?

A: [Chow] Not too fast, exactly, not too fast. You do the same.

Q: In the view of government policy, the local government has a lot of power over that. That’s the reason why you’re not getting the banking reform more freely.

A: [Chow] I agree, but it’s human nature. I mean, the best Beijing can do. Beijing is trying its best, but these local guys, it’s not within their control.

A2: [Peter Boettke] Well, I just wanted to comment on the comparisons that are often made between Russia and China and the lessons that that has for gradualism versus big bang approaches. I think that the literature on this is somewhat confused because they don’t recognize the difference between de facto and de jure. In China, you’ve had less de jure changes in the political system but actually a lot more de facto changes. In Russia, you’ve had a lot of de jure changes but not really de facto changes. And the real issue on this has to do with fiscal decentralization. This is an aspect which Barry Weingast at Stanford has emphasized a lot in his work about the emergence of fiscal federalism in the Chinese system, and this is one of the things that’s driven the economic success of China. But it’s extremely important for us to recognize this distinction between what is officially going on and what is really going on, and then the forces of what’s really going on have to bear on the sustainability of the official system. And actually in this debate between economic freedom and political freedom, the argument that I’ve always understood is that economic freedom is not a guarantee of political freedom but it does put certain pressures on it. In Free to Choose the Friedmans have this discussion about letting the genie out of the bottle in Yugoslavia and how that’s going to challenge eventually the system, before the system started to fall apart. I think in some sense we might see similar things going on in some of the countries in order for them to have the sort of sustained economic reforms which they pushed in, you necessarily decentralize the effective decisionmaking power of political authorities.

Q: Many people want to travel to Cuba as it currently is, and fear that it will be spoiled by being opened to capitalism and world markets. What comments would any of the speakers have about that?

A: [Cowen] The golden age of Cuban music was in the 1950s, when North Americans were going there in great numbers and in fact essentially paying for that music. Cuba was an incredibly open economy. It had more TV sets per capita than anywhere else in Latin America. It was a trading nation. It was a combination of Latin and African and European and North American cultures. So the things that are wonderful about Cuba come from a time of openness. To the extent there’s any problem, it’s the problem you see with the former Soviet Union, that when you destroy a place for decades and then open it up, it can’t handle the pressure. It’s not an argument against opening; it’s an argument against destroying the place. But let’s not blame openness, because openness is what brought us great Cuban music.

Q: Many people compare the economic performance of China and India and conclude that autocratic government is superior to democracy? Could you comment on that?

A: [Chow] India has been doing quite well in the last couple of years; four or five percent growth is not bad, while China has eight percent. To the extent that India has not grown as fast as China, I don’t think it’s because of democracy. I think it’s mainly because the Indian market is not open. It’s much easier for a Chinese entrepreneur to start a firm. For an Indian entrepreneur to start something, I was told that it goes through a lot of red tape. I think that’s the reason why, it’s not the democracy in India. That’s my five cents worth.

Q: Well, we’re running out of time. Let me ask one more question, if I might ask Milton and Rose to please answer too as we close here. Why have the two former communist countries Russia and China proceeded down such different paths as they opened up?

A: [Chow] Well, I know why China started that path. In China they wanted to change because the cultural revolution was very unpopular. So the governing Communist Party, in order to stay in power, had to do something different. But the Chinese government economic planners also realized that planning doesn’t work. They learned from bitter experience—they’d tried it. And so there was a lot of understanding. They knew it doesn’t work, so they wanted a change. Another thing, they saw the successful example of the four Asian Tigers: Hong Kong, Singapore, South Korea, Taiwan. And so that’s why the Chinese wanted to do it. But the government is in control. The government wanted to guide China through institutional reform. Now that’s the Chinese story. Let me keep quiet on Russia. Let me not say anything about Russia.

A2: [Boettke] Well, I will just reiterate what I said before; the biggest problem with Russia was that they actually didn’t implement the reforms even though they said that they were implementing reforms. The classic example of this is their adoption of monetarism. They adopted monetarism and all you heard from critics of the system was that the age of monetarism is over and everything like that. At the same time, the ruble went from 180 rubles to a dollar in 1992 to over 5,000 rubles to a dollar in 1995, during a time when they were supposedly following a tight monetary policy. It was only a year ago that they had some discussions about private property. So they didn’t really have the reforms. What instead happened was the underground market economy that existed before under the old system became more of a dominant way in which they interacted, and so that dominated Russia and they didn’t fiscally decentralize. The way that I understand China, you can correct me if I am wrong, is what happened there was the original Deng Xiaping reforms were about worker accountability, and that just exacerbated the problems with the economic situation. So what ended up happening is they adopted it where they switched the fiscal arrangements around, and so you get these special economic zones, which is a form of corporatism, not necessarily capitalism, and they grow and they finance the center, and Russia never had that.

A3: [Chow] China did not do much political reform. So the Communist Party was still in power, and they just did economic reform without much political reform, so the party is still in power. Whereas in the Russian case, the political, the Communist Party was broken up, so there was no stable central government to guide economic reform. People say that China did economic reform first and maybe political reform later. Whereas the order of the reforms in the Soviet Union is the other way around. If history could be changed, I think that Russia would have been better off if the Communist Party had stayed in power and they did economic reform step by step before changing the political system.

A4: [Cowen] I would think in the Russian case the fact that they had a political empire that was collapsing, that prompted all of their reforms, meant they were getting political change first, whether they liked it or not.

A5: [Chow] Yeah, that’s right.

A6: [Cowen] And also, there was the sense of wanting to be, or appear to be, European. That’s how democracy, albeit of a strange kind, came about. That cultural factor was much weaker in China.

A: [Boettke] I had an opportunity to interview Vladimir Dlouhy, who was one of the cabinet ministers in the Czech Republic, this summer, and he had a great line which he said to us, which was that he’s somewhat pessimistic about the corruption charges and all that stuff like that. He said, but if you would have asked me in 1985 if the Czech Republic in the year 2005 would be part of the European Union, we would have a per capita income over $10,000, etc., I would have told you, you’re insane; there’s no way we’re ever going to get that. And so when you look back on these things you become actually very optimistic. Jim Buchanan—Tyler’s [Cowen] and my colleague—refers to himself as, he says, “I’m an optimist when I look backwards and a pessimist when I look forwards.” And I think that’s probably accurate. In fact, I am writing a paper right now. It’s called “Making a Sausage,” which is about the Czech system. We complain about all these problems, just as none of us like to see a sausage being made, but if you look at it this way, it looks like they actually did pretty good.

A2: [Chow] One more point about the Chinese case. I said a while ago the economic reform was successful because China started with the transition from a collective system to private farming. Now, China collectivized in 1958, and 20 years later in 1978 they privatized. So 20 years later the Chinese farmers still knew how to farm. They’re still private farmers; the 20-year-olds are only 40 years old. Whereas in the former Soviet Union, collective farming had been around so long that the Russian farmers didn’t know how to be private farmers. They didn’t know how to farm. And actually the Chinese farmer is very smart. Through years of history, Chinese farmers really learned how to do things. They knew how to do crop rotation. They learned it from experience, so they’re good farmers.

A3: [Milton Friedman] I’m going to differ with Gregory [Chow] on this last one. As I understand the figures, during the communist era, one-third of all the food in Russia came from the private plots that were attached to agriculture. So that suggests that there was a population that knew how to farm. But I think the big difference was that China did effectively privatize farming, and as I understand, Russia to this date has done very little along that line. The problem of Russia vs. China is a very complicated one and we’re not going to come to an answer to that. But I do think one should not underestimate the role that was played by the existence of an overseas Chinese. There’s Chinese in Hong Kong, in Taiwan and in the United States, and there was much more of a feeling of solidarity between the overseas Chinese and China itself than there was between the Russians and any overseas Russians. I think that must have played a big role.

A4: [Chow] I agree completely.

Q: Would you comment also on the order of reform in each of the countries, political versus economic?

A: [Milton] Well, that’s a very hard one, because it depends on what kind of political reform you have. In the Czech Republic, Hungary and so on, political reform came before economic reform, and yet those were successful. So I don’t know that you can make a universal statement. I do want to make one other general statement about the whole subject of this session and Capitalism and Freedom and Free to Choose. In Capitalism and Freedom in particular, we emphasized the relation between political and economic freedom. I’ve since come to believe that the one real defect that I would have liked to correct in that book was the failure to include three types of freedom: political freedom, economic freedom and civic freedom. The example of Hong Kong really persuaded me that was necessary. Hong Kong had no political freedom whatsoever. But it did have almost complete civic freedom, that is, freedom of speech, freedom of religion, etc., as well as economic freedom. And it seems to me that mainland China is moving in the same direction. It’s moving toward a greater degree of civic freedom before it’s moving to a greater degree of strictly political freedom. And so I think, in general, all the discussion on these issues would be enriched by thinking in terms of three kinds of freedom rather than two.