Milton Friedman - Economic Myths

Myths are like an air mattress. They are terribly comfortable, and when deflated, cause a serious jolt.

Josh Billings: "It ain't what people know that causes trouble. It's what they know that ain't so."

Myth #1: Robber Baron myth - that in the 19 century there was an era of unrestrained rugged individualism in which heartless monopoly capitalists exploited the poor unmercifully.

Myth #2: Great Depression myth - 1929-late 30s was a failure of private enterprise.

Myth #3: Demand for government service - govt. had to step in because of failure of private market and great demand for government services.

Myth #4: Free Lunch myth - that there is such a thing as free lunch.

Myth #5: Robin Hood Myth - That government operates by taking from the rich and giving to the poor.


Myth #1 - has roots in the Greenback Party movement - "all problems could be solved by printing more money"; Free silver movement - William Jennings Bryant "Will mankind be crucified on a cross of gold."

Reality: There was almost no period in all of human history when you saw a more rapid increase in the well being of the common man as in the middle and late 19th century. Did people come here in droves from all over the world because people were being driven into the ground? Instead they came and sent back for their extended families.

The number of farmers increased, the price of farmland rose. Over time the great efficiency led to huge productivity and a reduction in the price of farm goods, but an increase in the price of farm land because they were still making more money.

The spending of govt. was less than 3% of GDP, unrestricted immigration, economic regulation. Highest point of changeability, highest founding of charitable, humanitarian and educational institutions by far.

comes from Common fallacy that men only benefit from other losses. While true in a very few cases as it always is, the great successes were instrumental in providing the opportunities for the common man.

The robber barons of today are able to get their money by getting government assistance - monopolies, licensing, political influence. They used to keep each other in check. Now they enable each other.


Myth #2: The Great Depression: caused by a failure of private business. Over extension, over-speculation, excessive concentration of wealth. Government had to step in in order to rescue private business from itself: Nothing could be further from the truth.

It was produced by a failure of monetary policy, the federal reserve system to act in accordance with its founding principles. Why so widespread? The government has more press agents than private business.

We are all the same. Nobody likes to admit its mistakes. In a good year, during a boom - the Fed takes credit. During a slump - it is despite the best efforts of the fed, due to outside sources...

From 1929-1933 the total quantity of money - currency and bank deposits declined by 1/3. the total number of banks went down by 1/3. Because the Fed failed to prevent the decline. There was never a moment the Fed didn't have power to prevent the decline. At all times the NY and other Fed branches plus Congress and outside commentators begging the FED to act and change policy. Causing and facilitating a series of bank runs.

Congress had the power to print money, but abdicated it to the Fed.

The Fed won't fail the same way again. They will fail a different way.

Just as business was responsible for depression, it is responsible for inflation according to the Fed. Wrong. Inflation is made in one place and one place only. Washington DC. The Fed. And Congress is a major accomplice.

We are accomplices. "Spend more money on us, but don't raise taxes."

Inflation is the hidden tax.


Myth #3: The private market has failed to provide certain important services.

Reality: Every program the government has adopted has required enormous propaganda campaigns to get them passed. By the few people who wanted to expand the scope of government.

There was no public demand for Social Security. It had to be sold. It was packaged as an "insurance scheme". A combination of a bad tax system with a bad way of distributed welfare.

A wage tax discourages hiring and working. It is a regressive tax. You could never have gotten such a tax passed as a tax.

The benefit: based on the sector you work and you get paid on how many quarters you worked. If you work after 65 you get no benefit, and have to still pay taxes to finance the benefit you aren't getting. If you have other income and stop working, you still get the benefit. If you have no other income and have to keep working, you don't get the benefit.

The tax is called a "contribution".
The "benefit" is really a subsidy.
It is called "insurance". But the relationship between payment and receipts are very small.
And, your payments never go to you, but to the retired people today.
But the number of recipients grows much faster than the payees.

Safety equipment: Great public demand? No. Ralph Nader launched a major propaganda campaign characterized by misrepresentation: Book: Unsafe at any price. (unjustified claims)

National Health Insurance: Widespread demand? No. If passed it would bear as little resemblance to insurance as SS is. It is a program for making Doctors and Nurses government employees.

FDA: Has the ban on saccharin been because of a public outcry? No.


Myth #4: Free lunch myth. That the government can spend money at nobody's expense.

2 parts: 1) You can tax business without individuals paying for it.
    2) You can print money at no cost

1) Can you tax business? There is no business to be taxed. Only people can be taxed. The buildings can't pay taxes. They have to be paid by somebody. Stockholders, customers or workers. No Santa Clause or Tooth fairy or Easter Bunny. Myth that the worker pays half of ss, the employer pays the other half. But that's nonsense. The employer has to pay the worker more so the worker can pay the social security tax. The employee pays the entire tax.

"Taxing corporate profits"... baloney. The CEO that writes the check doesn't actually pay it. It comes from the proceeds. It is less money available to customers (through lower prices), dividends, or wages.

2) Printing money is just a different form of taxation. People have more money to spend and prices go up and people pay more taxes.


Myth #5: The worst of all. That government has benefited the poor at the expense of the rich.
Director's law: Government programs benefit the middle class at the expense of the very poor and the very rich.


Laws are passed by 51% voting against the 49%. The middle 51% are more skillful politically for the same reasons they are not at the bottom of the income scale. The middle also sees the top as exploitable.

Example: State financing of higher education. Most of the benefits go to middle and upper class families. But everybody pays the tax.

There's a strong case to be made that everyone who wants to go to university should be able to... if they are willing to pay for it. Not necessity right now, but to pay it back in the future when their income improves.

Social Security - sold as a program to benefit the poor. But it is a tax that imposes higher taxes on lower income. Lower classes go to work as teenagers. Upper classes go to work in mid twenties. Under classes retire later and die sooner as well. Social security also dis-incentivizes working past 65.

Same is true of almost any other govt. program. The people who pay taxes get fewer benefits.

Welfare is the only program that does so, although extremely poorly. but it is very unpopular because of that.

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2 sets of effects of any action.

The immediate visible effects and the invisible long term effects. The invisible are much larger but are invisible.

Example: Sugar quotas. Visible effect: certain farmers do a bit better. Invisible: Everyone pays twice as much for sugar. Visible is also concentrated while invisible is diffuse.

Our "majority" is a logrolling majority. A bunch of minorities voting together to pass laws. If really given to the majority of actual people to decide, there would be no special incentives.


Most socialized sectors: Military and Schooling

The cost for schooling keeps going way up while quality goes way down, but confers special benefits on small groups.

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Anything government does costs twice as much, so it should do as little as possible.

Government should:

1) Defend against foreign enemies.
2) Defend citizens against each other. [it does a poor job now because it is trying to do too many things.]
3) Define the rules of the game. What is private property? How low can an airplane fly without violating your private property etc.
4) Provide courts to settle disputes