An Interview With David Friedman

Fifty years after Nobel laureate and that ardent champion of free markets Milton Friedman came to India, his son, David D. Friedman who describes himself as an anarchist-anachronist-economist, was hopping between Delhi, Bengaluru and Mumbai talking about his idea of an anarcho-capitalist society where there is no state and even law is a product of the market (it’s not his first visit, though). This has been a running theme of his many non-fiction and fiction works, the most famous of which is The Machinery of Freedom.

He started out studying chemistry and physics and now teaches law at Santa Clara University. He took some time off between his engagements to speak to Seetha about his vision of the state and how he feels it can be pushed back. An edited transcript of the interview:

In one of your talks, you say you call yourself a libertarian because the term liberalism has been co-opted by people who are more of socialists. That is happening in India too. And this is putting people who strongly believe in classical liberalism in a dilemma because they don’t want to be identified with those who are called left-liberals but also balk at getting identified as libertarians. How would you define libertarianism?

The problem with that question is that like most political labels it covers a range. When people try to estimate how many libertarians there are in America, they are usually looking for people who agree with the Republicans on economics and Democrats on social policy. Well, that’s a much weaker sense of libertarianism. I would say that the more ideological libertarians are a more extreme version of classical liberalism, but there were classical liberals who were extreme too. For example, a 100 years ago, when eugenics was a big issue, the opposition to eugenics consisted of the radical liberals and the Catholic church. And all sorts of people supported it.

I don’t know if you can reclaim the liberal label or not in India, or call it market liberal. But libertarian is getting to be a more common term in the United States and as it gets more common the opposition does more attempts to attack it and say libertarians are this and that and since there is no copyright on the name, somebody can call himself a libertarian who hates blacks, no way of stopping that, but someone can call himself a progressive who has horrible views on some issues.

But I think in the US, the liberal label has gone, I think we have lost it.  It’s hopeless to try and reclaim it whereas in India, or in Europe that may not be true.

In India there is now a lot of talk of minimal state, with Prime Minister Narendra Modi constantly pitching the idea of minimum government, maximum governance. What, in your view, should a minimal state look like?

The classical liberal minimal state is police, courts and national defence. Adam Smith has a long discussion on education in which he offers arguments on both sides. And his final conclusion that it is not unjust for the government to play some role in education but it would also not be unjust, and might even be prudent, to leave it entirely private. If you look at his idea of government role, he is talking explicitly of part of the salary of the teacher – but not the major part – coming from the government. Mainly private, but with some subsidy by the government. That would look like a very radical position to us.

Ideally I would have no state at all. But it may not work. I am in favour of gradual change, not a revolution, but I would have said that in India you can get rid of an awful lot of government before you got down to thinking there was any argument for it at all. There could be some argument for government in education but there can be no argument for government telling people how high their houses can be or that this land can’t be used for housing or a university can’t hire a professor unless he has certificates the government approves of.

You have the equivalent problem in the US, fortunately not in the university, but where you have to get the approval, that approval is usually controlled by your competitors. There was actually a case of a state law which said you couldn’t do flower arrangements unless you were a licensed flower arranger and in the process of getting a licence, the other flower arrangers got to have a say on whether they approved of you.

One of the things I find disturbing in India is that if you look at the ideology and rhetoric, it is the most egalitarian country in the world. And if you look at the country, it is the least egalitarian. And of all the countries I have been in, this is the one that feels most like the aristocrats grinding the poor down. I was in a place that I was told was the most expensive real estate in the world [Connaught Place]. Why do you have the most expensive real estate in the world when you have people sleeping on the streets? There’s something wrong and it has to do with restrictions on where you can build and land being tied up and height restrictions.

I went to a jewellery store. There was a lot of lovely jewellery, very expensive. Someone is buying it. I have no objection to rich people, but there are two kinds of rich people –  some who become rich by doing things that make other people better off and there are other rich people who get rich by pushing other people down. Seems to me that government is mostly the second category. And then they have the gall to talk about how much they care for the poor.

You say that you don’t think the state is evil but that it is a mistake.

That’s right. I don’t think individual supporters of the state say how can we enrich ourselves at the expense of the poor, but individual supporters of the government, like everyone else, are mostly looking after their own interests. If you honestly believe that the government ought to help the poor, you can also honestly believe that your cousin must have a nice job handing out money to the poor, he should have security, reasonable pay and that’s all part of how we help the poor; that people can, at the same time, honestly believe that system is right and, at the same time, given that the system is there, they are gaming it for their own advantage.

One of the interesting cases in the US is a woman Senator from Massachusetts who is currently the hero of the left democrats. She was a law professor and listed herself as a minority which means, in the US, that people are more likely to hire you. And when someone finally questioned it, her grounds for doing so was that one of her great-great grandmothers was a Cherokee Indian. In one sense, given that I don’t think affirmative action is a good thing, I am not that mad at her. She cheated, but she cheated in her own self interest, and in a way she could get away with. People do that. What bothers me is that all of the people who are for affirmative action still approve of her, instead of saying this is a monster, she stole from the poor. And that tells me that the liberals in America are really cheering for a football team than believing in the ideas they preach.

The reason government exists is not that someone has a plot to enrich themselves. The reason it exists is that most people believe that without government, bad things would happen. Not an unreasonable belief, but I don’t share it.

But the American affirmative action programme is often cited in India as a success story. What is your objection to it?

Well, it depends on the cases. Let me take the particular case of law schools. Affirmative action in law schools means that if you are the son of a black physician, solidly middle class, grew up well and you have worse grades than a white farm boy who grew up poor, you will still get into a law school. One effect is unjust. Because if you real care about injustice, the relevant criteria should not be the colour of your skin; but are you disadvantaged.

But the other problem is that if you are a black who wants to go to law school, who has pretty good but not great grades, you get into Stanford. You are there with white students who have got very, very high grades, the class is based on those students, so you don’t learn very much. There is some evidence – somebody got into trouble for writing this up – that the result of affirmative action is fewer black lawyers, not more. Tom Saw made the same point about colleges. That the black student who is better at math and physics than most students goes to MIT (Massachusetts Institute of Technology) where he is at the bottom of the class. If he had gone to an engineering school one step down from MIT, he would have got a better education.

But there’s another problem – suppose you know that a black student graduated from Stanford, you don’t reach the same conclusion as a white student. Because a white student had to be very good to get in and a black student was good, but not very good. So you discount it. But if you were a really bright black student, it’ll be very hard to prove it because people would actually assume that you got there because of affirmative action. One famous judge said he was glad he went to Yale before affirmative action.

You say that providing money is one of the dangerous things for governments to do. What makes you say that?

There is no reason why the government should print money. Because what you want from money is that its value should be predictable. Sometimes it pays governments to do that, sometimes it doesn’t. In particular, governments have an incentive to inflate before elections because printing money before elections basically means that they can spend money and also that unemployment goes down for a little while. And then you get the opposite effect on the other side when you stop printing money. In addition, printing money benefits debtors at the cost of lenders. Sometimes the debtors are politically powerful, so then you have an incentive for the government to inflate and sometimes the lenders are politically powerful so they have an incentive not to. So it is really hard to see any mechanism that consistently makes it pay the government to do a good job of producing money.

There is nothing about money that makes it necessary to be produced by government. there are lots of historical examples when Adam Smith wrote The Wealth of Nations, Scottish money was private bank notes. If you have a private issuer, he knows that if he doesn’t maintain the value of the money, people will stop using it. The normal system for private issue is that you have a fractional reserve system in which the money is based on, say, silver. So I have a note which says three gm of silver paid on demand. If I print too much money, its value becomes less than the value of the silver, and when that happens, people get the money and come and ask for silver. If I don’t print enough money, its value becomes larger than that of the silver and I say, look I can print some more money and get a free loan, in a sense, and nobody would come in because it is still more than the backing. In that sense, you have an automatic market mechanism for stabilisation, which depends only on the private incentives of the money issuers, not on the government politics.

 When making out a case against the state, you cite the example of people joining private communities voluntarily and abiding by rules set by those communities. And that this is different from the state. . .

The argument is that you end up with something rather similar, but it is produced by a mechanism in which the people producing it have an incentive to do something right. If I set up a condominium and say this is a socially just condominium and everybody who is rich has to pay extra money, I am not going to get many people coming. If I say it is a condominium where everybody has to be moral according to my principles of morality and I won’t allow unmarried people to share accommodation I will get fewer customers. So, in general, the kind of restrictions you can use the political system to impose are much harder  to impose when, at the beginning, you have voluntary customers. So you have an incentive to generate something close to the optimal set of rules you thought you knew in advance what you wanted.

If you have private communities where people agree to live by certain rules, why can’t this be extrapolated to the state – private communities coming together to live by certain rules. In your work, you talk about a diversity of legal codes, won’t there be some need for coordination?

If you have different legal codes, then whatever organisation that’s on a particular legal code will need to have agreements with others specifying who will arbitrate disputes. In the kind of anarchist system that I have sketched with no state, you have private firms protecting rights and each pair of private firms has agreed with each other as to what courts will settle disputes between their parties. So it gives a decentralised mechanism in which it is a pair-wise agreement rather than a single top down agreement. Historically, it’s not been all that uncommon to have more than one legal system in the same place and then having some rules for handling the cross cases, but you don’t need to have one person on top.

So you don’t think the state came up as an economies of scale answer to the problem of coordination?

I don’t know. One theory of the state is that some people said we can steal a lot of money this way and make people work for us. And another possibility is that you had an environment where there were economies of scale in rights protection so you ended up in a single monopoly. But I don’t know enough about this.

What I do know is that a lot of early legal systems were decentralised systems. Feud systems, in which the basic logic is if you wrong me, I threaten to harm you unless you compensate me. What you need for the system to work is some mechanism so that threatening to harm you works better when you have really wronged me than when you haven’t. Otherwise, it is really extortion. I like to describe it as a reason why right makes might. In medieval Iceland, you actually had a legislature and court system but no government enforcement. So if the courts said you owed me money and you didn’t pay no one would object if I hit you. Whereas if I just said pay me money or I kill you, then I would get into trouble and other people would support you.

In Anglo-Saxon England, the king claimed that when I kill you on the public street, I have not only wronged your kin I have also wronged the king. So I owe him money too. So gradually the king’s claim expands until you end up with modern criminal law in which the crimes are not against your person but against the state. You can be a victim of a tort but not a crime. One way of looking at it is that it is a revenue grab. The state says there is all this money being paid in damages, so why don’t we collect it instead. But I don’t know why the state exists and if it is the same for all states.

If law and law enforcement is essentially a market, what happens in case of market failures?

I want to define market failures differently from what people do. Market failures and political failures are not different things, they are the same things in different contexts. To me, the right definition of market failures is situations where individual rationality does not produce good rationality; in which each person correctly figures out what is in his interest to act, and everybody is worse off as a result. The simplest example is the prisoner’s dilemma. That is a two person market failure because each person is making the right choice but they are both worse off as a result. In the particular case of the legal system I have sketched, the clearest form of market failure is any case where the legal rule between me and you affects someone else.  

My standard example is intellectual property. Suppose my rights enforcement agency is negotiating with your agency about whether you will recognize my copyrights. The advantage of your recognising it is that I get some money; the disadvantage is that you pay some money. A further disadvantage is that you might not read my book because of the extra cost and I will have to spend time to watch that you are not pirating it. So if you just look at those terms, it looks like a loss. And the advantage is that I have an incentive to write books. But my incentive to write books also benefits customers of other rights enforcement agencies that have breached the agreement. It benefits them even more because they are not paying royalty on my books. So that means even if copyright is a good thing, even if the benefits are positive, we probably won’t get it because our agencies will ignore the extra benefit.

So there are going to be market failures. It’s just that on most private markets, market failure is a special case when something goes wrong. But in the political system, people are almost always making decisions where they neither bear the cost nor receive the benefit. Therefore, it is quite unlikely that the same decision that maximises social benefit will maximise their benefit. And therefore market failures are the normal state on the political market and the exception on the private market.

You talk about a system where people hire rights enforcement agencies to protect their rights. What about people who can’t afford to buy protection?

In the US, of the total expenditure of government the amount that goes for police and courts is a very small fraction – 2 or 3 per cent. So if you eliminate all taxes, the amount the average person will save will be many times more than the cost of paying for rights enforcement. And that means that for the overwhelming majority of the people, they will be better off on those terms than worse off. That includes most poor people because they pay tax in indirect forms. There may still be people for whom that is not true. And if you have a society where people are reasonably compassionate, then you will be able to raise money for charity to pay for a minimal level of rights protection. And if you have a society where nobody cares for the poor, then having government look after the poor does not seem like a very good strategy because the poor are outvoted by the non poor.

Can you push the state back now?

Is it possible, yes. Will it happen, I don’t know.

One of the programmes that my parents pushed was a voucher system for schools. If you had a full voucher system, the government would still be paying for the school system but it would no longer be controlling it. That will be a very large pushing back. I believe the state of Nevada a couple of weeks ago instituted something close to a full voucher system. And a fair number of states have gone part of the way. Why is that happening? It is happening because parents are concerned about their children’s education; state politicians see this as a way of weakening the teachers unions (which oppose vouchers) politically (if they don’t have their support) and as a way of getting votes from people who want better education.

There’s a gradual move to legalise marijuana in the US. That will be a big weakening of the state, not just because it lets people smoke marijuana but because a lot of aggressive action by the police is just part of the war on drugs. In a sense the state is being pushed back on foreign policy in the US. If the same things had happened in the Middle East before the Vietnam War, we would have an army there. It is very expensive to put an army anywhere any more. Because the Vietnam War was very unpopular, the Iraq war didn’t do very well, so it becomes harder for the government to do things. So it can be pushed back, but there are forces that work the other way.

But the very biggest pushing back of the state is what happened in China after the death of Mao. A billion and a half people have gone from living in one of the most aggressive states in the world to a society that is about as free as India, that may be a little less free than the US but not hugely; it is not democratic, but in terms of controls on daily life. That’s a huge change and it has happened in our lifetimes. So, yes, sometimes the state does get pushed back.

In China, this was not the result of democracy. The people who were running China were socialists because they believed in socialism. After Mao died, they went abroad and found that their wonderful socialist system had done enormously worse than the terrible capitalist system. So they say socialism is still right and we have to figure out how to do it right and they tried various experiments. And the experiments that worked were similar to capitalism. And because they are well intentioned people, they realised that they don’t really know and they are willing to go with the evidence and they gradually grope their way to a more or less semi-capitalist system.

So does the pushing back have to be done top down or bottom up?

Both can happen. One way the state gets pushed back is black markets. People have been smoking marijuana for a long time in the US, even though it is illegal. I smelled marijuana here in Delhi yesterday. And I’m sure it’s illegal here too. So one thing that pushes back the state is the inability to enforce.

Another way that pushes back the state is competition. So if the post office were to go bankrupt tomorrow, it wouldn’t matter. The only thing you would have to do is repeal the private express statutes – the reason UPS cannot carry first class mail or do other things. But they have the machinery to do that. If people observe that they can do a lot of other things, then the argument for retaining the monopoly becomes weaker.

So will pushing back of the state have to happen by stealth?

Well, in China, one of the most important of what [Ronald] Coase [1991 Nobel laureate and co-author of How China Became Capitalist] called marginal revolutions was literally by stealth. Because what privatised agriculture was illegal privatisation. But what the people on top got right was that when they discovered what was happening, they did not punish anybody. They tolerated it and when they saw it was working very well, they approved of it. So some it was stealth and some it was just working outside the political system.

Capitalism is coming increasingly under attack . . .

It has always been, not getting increasingly.

A lot of the discredit is happening because of the actions of capitalists themselves.

Well, if the government has favours to sell, the capitalists will buy them. One of my father’s lines was that the difference between academics and businessmen is that academics are in favour of freedom for themselves and  government intervention for everybody else, and businessmen are in favour of freedom for everyone else and government intervention for themselves and their industry in their favour

How do you see the future of capitalism?

I don’t know. One of the things that’s going to help it is that with things like the internet, you are going to have nearly a world market. So if you are an intelligent and able person in a country that treats you badly, even if you can’t leave you could still work somewhere else online. So that is going to support capitalism because it will give you a more competitive market and it’s also harder to regulate things when national boundaries are as invisible as they are online.

But at the same time, environmentalism has been pushing very hard as an ideology for getting more controls. All of the things that environmentalists say you need to do to stop global warming, are all the things they were in favour of without global warming. So, in that sense, environmentalism is being brought in to give arguments for things that people on the left were in favour of for left wing kind of reasons.