Interview. “Freedom and Philanthropy: An Interview with ... doesn’t mean you can ... I have for many years argued that given the present system of rag-bag ... it would be far better

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Interview. “Freedom and Philanthropy: An Interview with Milton Friedman.” Interviewed by Willa Johnson. Alternatives in Philanthropy, March 1989, pp. 1-6. Reprinted in Business and Society Review, Fall 1989, pp. 11-18.

Dr. Friedman, do you accept the premise that government action is necessary to meet the

needs of those in our society who are unable to care for themselves?

Government action on balance has hurt those people who are most unable to care for

themselves. Why is it that the worst schools in the country are in those parts of the urban

communities occupied by the poorest people? It is because the schools are run by the

government.

What’s necessary, what would be most effective to help the poorest people of this

country, would be a reduction in the extent of government action. From a long-run point of

view, the most important step that could be taken to help the most deprived in this country

would be to introduce a voucher system for schooling and eliminate the monopoly of the

public schools with respect to these youngsters.

If government were to withdraw from this form of activity, what would be the result?

It would depend on what activity. The activity most people would refer to is not what I

was referring to.

The kind of government activity that I think has been hurting poor people is bad schools,

rent control which has led to destruction of neighborhoods, minimum wage laws which have

denied them jobs, drug legislation which has led to an enormous black market and corruption.

Those are not ordinarily regarded as programs either to eliminate poverty or to reduce

poverty, but they are the programs that have done the most to give us the terrible problems we

have.

From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

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The programs people generally refer to are welfare programs, or transfer programs. I

believe the material Charles Murray has assembled in his two books—particularly in Losing

Ground, but in some ways more persuasively in his most recent book, In Pursuit of

Happiness—demonstrates almost beyond a shadow of a doubt that those programs have done

poor people far more harm than good.

That doesn’t mean you can abolish them overnight. You cannot. Once you have

undertaken a commitment for people, you have a moral obligation not to go back on that

commitment unless you provide some alternative.

I have for many years argued that given the present system of rag-bag programs

supposedly to help the poor, it would be far better to replace the whole bunch of them with a

simple negative income tax which would provide people below a certain income with a cash

grant equal to a fraction of the amount by which they were below that income.

In an ideal world, I don’t believe a negative income tax would be necessary. But it is

necessary now, given where we are; and though perhaps it is a second-best solution, it would

be far better than what we have now.

Many programs that are sold as programs to help the poor are mislabeled. Take food

stamps. It’s not a program to help the poor; it’s not a program to help the agricultural

community. After all, whom are you benefiting if you provide an artificial market for food?

The poor would much rather have the money equivalent of those food stamps and be allowed

to spend it as they wish. In fact, they’d be willing to trade it off, which they do; they sell those

food stamps at a discount on the black market.

Similarly, direct programs of agricultural aid are mostly a waste of money; the funds

generally go to people who are very well-to-do by most standards. Agriculture has become a

large and capital-intensive industry. Again, you cannot abolish those programs overnight,

although in my opinion you ought to as soon as you can and replace them with less harmful

alternatives.


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Do you think that government welfare and entitlement programs have a crowding-out

effect on voluntary charitable activities?

There’s no doubt they do. The crowding-out effect is misunderstood because it means

crowding out in the sense not necessarily of the aggregate amount of voluntary charitable

activity, but of the character of voluntary expenditures.

If you look at the history of the United States, the greatest period of private eleemosynary

activity was in the nineteenth century when the federal government had expenditures equal to

about three percent of the national income. Federal, state, and local expenditures all told were

under ten percent of the national income. Half of the federal government’s spending was for

the military, and half of the state and local spending was for education.

What happened during that period? You had the great movement for private nonprofit

hospitals which served the poor as well as other people. You had the establishment of the Red

Cross, the Boy Scouts, etc. You can name one eleemosynary activity after another. That was

also the period when you had the establishment of many private colleges and universities,

when you had private philanthropic organizations such as the Salvation Army take over

responsibility for helping the poor.

But now, if you look at private eleemosynary activity, where is it going? It’s going to

symphonies, to art institutes, to elite universities, to elite private schools; and that’s

understandable. If the government has taken over responsibility to help the poor, there is very

little incentive for me to do so. In my opinion, it’s an unfortunate change because private

activity is more effective and more meaningful. Individuals who help poor people they know

personally will do a far better job than bureaucrats who are overburdened. Bureaucrats

become overburdened and are unable to pay the kind of personal attention to the individual

case that somebody who knows a case intimately and is spending his own money on it is

likely to.


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I have always said that nobody spends somebody else’s money as carefully as he spends

his own, and that’s true whether he spends that money for goods and services or devotes it to

charity.

Given this increased role of the federal government in social welfare programs, how do

you explain the fact that charitable giving in the United States reached an all-time high in

1987?

It’s partly a question of how you define charitable giving. A social welfare expenditure is

one thing; the effect on social welfare is a very different thing. By increasing the number of

poor people, by increasing the misery of the poor, governmental activities have expanded the

demand on private charitable expenditures.

Unfortunately, however, the growth in private charitable expenditures has not been

meeting that demand. As I understand it, the big growth has been in the direction I mentioned

before, towards symphonies, museums, universities, and the like. If that is the case, there’s no

particular reason why it affects the expansion of expenditures by the federal government on

programs that are called social welfare. Most of them are not social welfare programs.

The actual social expenditures that could really be called social welfare programs—I’m

not at all sure whether they’ve increased. Even if they have, and even if they have produced

more need for social welfare by worsening the condition of the poor, there isn’t any reason

why that should diminish the total amount of money that people want to give for other

purposes.

What is it in the American character or tradition that has made so many observers call us

the most generous people in the world? And is that true?

It very likely is true, and I don’t think it’s very hard to understand.

The United States of America has always been a fundamentally democratic society.

Almost every other society in history has developed as an aristocratic society.


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America was a new world in which people of all kinds came to make their fortunes, to

have a better life under conditions in which there was no feudal structure, no aristocratic

structure, and in which there was a very great egalitarian sense, not in the present notion of

equal results, but in the sense of equal opportunity and of being friends with your neighbor

and helping him—and, if necessary, his helping you. I believe it’s that fundamentally

democratic tradition that’s at its base.

Could you comment on the growing trend of public-private partnerships where

government and the private sector work together to solve—

There are no public-private partnerships. There are government and non-government

partnerships. I believe that the terminology “public” and “private” is about as misleading as

anything can be, and look at how inconsistently we use it.

“Public” utilities are mostly privately owned. Stanford is a private institution; Berkeley is

supposedly a public institution. Is there a real difference between the two? One is just as

much a public institution as the other. I think we ought to use descriptive, accurate language:

“government” and “non-government.”

Now, when you have a government/non-government kind of thing, I’m not sure what

you’re referring to. If private individuals want to spend their money that way, they should be

free to do so. If corporations spend their money that way, it should only be if they can see that

it promotes their direct pecuniary interest, or if they are instructed to do so by their

stockholders.

Should a corporation which eschews government assistance be held to different standards

than one which seeks subsidies and regulation and is a kind of semi-public institution?

That’s not an easy question. I applaud privately controlled corporations that eschew

government assistance on grounds of principle. I believe that they deserve the highest respect,

because it is their own money they are spending.


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On the other hand, if I have a corporation whose stock is widely held, the managers of it

have a fiduciary responsibility. It’s not their business to spend their stockholders’ money; and

if, in fact, by eschewing government assistance they are spending their stockholders’ money,

they are violating their fiduciary trust. If they believe so strongly about the issue, the right

recourse for them is to quit, to set up their own enterprise or get another job. So I do not

believe you can say different standards should be applied to widely held public corporations.

What do you see as the fundamental role of the corporation in society?

To produce goods and services to satisfy the demands of the public. The role of the

corporation in to serve as an intermediary between individuals in their capacity as workers,

providers of capital, providers of organizational ability, and so on—that is to say, as

resources—and individuals as consumers.

Corporations purchase the services of factors of production, use those to produce goods

and services, sell those goods and services ultimately to consumers for other enterprises.

That’s their role.

They perform that role best when they direct their attention to maximizing their profits.

That’s a measure of whether they are serving the needs of consumers. An enterprise that is

losing money is not using its resources in the best interest of the public at large.

So while its role is to act as intermediary, the immediate objective of any enterprise, if it

is to perform that role, is to maximize its return. The best quotation on this subject comes

from Adam Smith’s famous statement that an individual who “intends only his own

gain…is…led by an invisible hand to promote an end which was no part of his intention.” But

what I like best is a later sentence in that paragraph: “I have never known much good done by

those who affected to trade for the public good.”

So you would reject the notion of corporate social responsibility and the suggestion that

corporations should operate charitable grant-making programs?


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There is a very real social responsibility, and that is to make as much money as they can

subject to staying within the law and within the appropriate ethical standard. Subject to those

limits, their social responsibility is to make as much money as possible because that will serve

the consumers best.

Charitable activity in some cases may contribute to a corporation’s making as much

money as possible. It may be that an enterprise that needs the good will of the community,

that wants to have its workers motivated to regard the enterprise as one that’s worth

sacrificing for, worth working hard for, and so on, may find that the most effective way to

promote that kind of an environment is to provide charitable assistance in its local

community.

In addition, the tax laws enable a corporation’s stockholders to make larger gifts through

the corporation than they can make on their own because corporate contributions are

deductible for corporate tax purposes and dividends are not. As a result, the corporation may

serve its stockholders by acting as a conduit through which the stockholders can use their

money most effectively. The best way to do that is a way which has been done, I think, by

only one major corporation, and that’s Berkshire Hathaway.

Warren Buffett says to his stockholders, “In addition to X dollars that we are paying you

as dividends, we plan to spend Y dollars per share of stock as a contribution to charity. Please

tell us what charities you want it to go to.” The stockholders indicate what charities they want

it to go to, and the corporation sends the money to those charities. It doesn’t require a

matching gift or anything else; all it does is say “We’re going to give a certain amount of

money to charity, and we’re going to let our stockholders decide where it should go.”

If you look at what corporate enterprises actually do in the name of charity, I believe that

there is a lot of mislabeling. A lot of what they call charity is really tax-deductible expenses.

For example, they classify as charity educational grants to children of their workers. That may

be an effective way of remunerating their workers, and it may be cheaper. From the workers’


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point of view, if they receive the money directly, they have to pay taxes on it; but if they get it

in the form of scholarships for their children, they don’t have to pay taxes on it.

So a company can, at the cost of a dollar, give a worker something that he may regard as

worth a dollar and a quarter or a dollar and a half. That may be an appropriate activity in

pursuit of the corporation’s own interest; moreover, given all the nonsense that’s talked in

public about social responsibility, it may well be in the self-interest of a corporation to profess

to be socially responsible, whether it is or is not in any meaningful sense.

I don’t want to blame the corporation for doing that. The corporation’s managers have to

behave in a way that will promote the interest of their corporation. It’s the rest of us, who

make it worth their while to talk that nonsense, that I object to.

In the same way, I can’t blame corporate executives for going to Washington and trying

to get tariffs for their products. I blame the rest of us for letting them get away with it. They

would be violating their fiduciary responsibility to their stockholders if they did not seek to

maximize the return to their stockholders’ capital.

On a very different level, I am strongly opposed to rent control. I always have been. I

have been on both sides of it, but I was just as opposed to it when I was a tenant as when I

was an owner. I believe, however, that there’s a big difference between taking advantage of

what the law provides, even though you disagree with the law, and coming out in favor of

such laws.

Corporations allocate a large percentage of their charitable dollars to education—

You mean to schooling, which is not necessarily the same as education.

What do you think they should consider in making such grants?

I don’t believe they ought to be contributing at all, unless it’s in their immediate, direct

pecuniary interest, except insofar as they’re doing it at the behest of their stockholders.


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I have often talked with corporate executives about this. I’ve said, “If your corporation

goes out to buy a valve, you don’t ask, ‘Is there somebody who went to the same school I did

that produces that valve?’ You ask, ‘Who is producing the valve that will serve the interests

of my company best, that will fit into my product the best?’ Shouldn’t you do the same thing

when you send your money to schools? It seems to me you should ask, ‘What school is

producing the education results that will contribute most to the kind of society in which my

corporation can prosper?’”

I would appeal to individuals, when they are spending their own money, to look at the

thing from the point of view of supporting the kind of ideas they believe in. There is nothing

wrong with that. If I believe in a certain religion or a certain political view, there is nothing

wrong with my spending my money to promote that. We want competition in the market for

ideas as well as in the market for goods; but we don’t want to get the two mixed up.

What do you think of the trend to endowing college and university chairs of private

enterprise?

I’m opposed to it. I don’t believe there ought to be a chair of private enterprise any more

than I believe there ought to be a chair of socialism or a chair of Marxism.

A university is a place for the production and dissemination of knowledge. It can operate

best in achieving that objective if the academic community is free to pursue ideas wherever

they go.

I happen to be a very strong believer in private enterprise. I have several times been

offered chairs with that kind of a title, and I have always refused to take them because I am

not a paid advocate for anybody. I am not willing to have my opinions determined for me in

advance. People who are named professors of private enterprise are being told, in effect, “You

may not think independently; you are only entitled to have certain views.”

That’s not a desirable attitude. It promotes what we now have on campuses, which is

deplorable: a litmus test for appointments on the basis of one set of ideas. Anyone who


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accepts one kind of litmus test can’t object if somebody else imposes a different litmus test—

on the basis, say, of whether other people believe in socialism or communism or something

else. In practice, our universities have become overwhelmingly left-wing in orientation.

That’s what these professorships are intended to counter; but their effect, in my opinion, is

exactly the opposite.

The thing to emphasize in a university is that people should be appointed solely on the

basis of their professional competence. If a man is an absolutely first-rate mathematician, he

deserves a position on a university faculty in mathematics regardless of whether he’s a

communist, a socialist, a libertarian, a Republican, or a Democrat.

Also, it ought to be a part of the academic ethical standard that he does not use his class

time to promote these extraneous ideas. If he were to violate his trust by using his class time,

however good a mathematician he is, to promote communism or libertarianism or Republican

or Democrat doctrines, he should be subject to discharge.

There has been a proliferation of what they call special-interest advocacy groups. What

impact are they having on society?

The problem they raise, in my opinion, is that most of them are financed by tax money. If

people want to spend their own money on promoting special interests, that’s their business.

But if we look at, for example, the Legal Services Corporation, a very large fraction of their

activities, financed by government funds, is devoted to propagandizing rather than to helping

the poor.

If you look at many of these special-interest groups, and you really get down to where

they get their money, much of it ultimately comes from the taxpayer through government.

Insofar as private people want to pursue private interests, that’s their business; but the

organizations ought not to be tax-exempt.

Am I begging the question, then, to ask about the recent interest on the part of Congress

in changing the restrictions on some of these educational think tanks’ lobbying activities?


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Given that these organizations are tax-exempt and there is no immediate prospect that

their tax exemption will be withdrawn, you have to consider the question of second-best,

third-best, fourth-best solutions.

In both areas you’ve raised, I think the exemption of what are strictly commercial

activities from tax is a very bad idea, including the PXs on military bases. That’s a direct form

of government competition with private enterprise which is tax exempt and which, in fact,

spends taxpayers’ money and ought not to be engaged in. Similarly, if a church sets up a

spaghetti factory, it ought to be taxed on that spaghetti factory, given the way the laws are

now.

In the same way, I believe it’s disgraceful that government money should be used for

lobbying. The difficulty is that the most egregious example is campaign financing by

government, government funds given to presidential and primary candidates, franking

privileges of members of Congress, and so on. I think that’s using government funds for

propaganda and lobbying.

A Capital Research Center study of patterns in corporate philanthropy shows that seven

of every ten corporate public affairs dollars supports groups working for an expanded role

for government in society. How would you explain this behavior?

That’s not hard to explain. They are simply trying to buy current political influence; and,

again, I can’t blame them if we let them do it.

I have often argued that businessmen, while they’re very longsighted with respect to their

internal affairs, looking at five, ten, fifteen years, are very shortsighted when they get into the

political world. They end up doing things which, while in their short-term interests, are very

harmful to their businesses in the long run.

The commercial banking industry has always propagandized for limits on the interest

rates they can pay, the so-called regulation Q, for fixed exchange rates, and for limiting the

number of banks. The result is that while the commercial banking industry at the end of


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World War II accounted for the overwhelming bulk of all commercial banking, maybe 80

percent, it now accounts for less than a third.

There have been a few exceptions, the most notable of which was Walter Wriston of

Citibank, and it’s no accident that Citibank has been the most successful of all the banks. He

was the only banker in the United States at the time who was willing to come out early in

favor of the floating exchange rates and ending the Bretton Woods commitment. The rest

were on the other side.

Let me give you another example of a wholly different kind. For many years, a committee

of prominent bankers promoted the sale of U.S. savings bonds at a time when the interest

rates that savers could earn on those bonds were less than the inflation rate.

That was what I used to call the biggest bucket-shop operation in American history. The

bankers not only joined this committee that had full-page advertisements on why you should

buy savings bonds; their banks also would send out in their bills, or in their statements, the

Treasury Department propaganda for it.

I have asked quite a number of bank presidents why they do it. I say to them, “Would you

buy these savings bonds for your own portfolio?”

“Of course not.”

“Would you recommend to your customers privately that they buy them?”

“Of course not. They are lousy investments. We know that.”

“Why, then, are you willing to make statements that you don’t believe in? Why are you

willing to serve as a distribution agent for the Treasury?”

“Oh,” they say, “the Treasury Department wouldn’t like it if we didn’t.”

That’s true. In the short run, the Federal Reserve and the Treasury Department wouldn’t

like it; but ask those same bankers whether they benefited from the inflation they were

contributing to, whether the long-run effect was good or bad. Wasn’t it exactly the kind of


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policy encouraged by them that led to the inflation during the ’70s which forced the

development of money market accounts, which gave a big boost to all of their competitors?

They destroyed their long-run market.

Let me give you still a different example: the steel industry in its advocacy of tariffs,

protections for steel. Is it true that tariff protection and quotas have really enabled the steel

industry to perform very effectively? Ask any stockholder in the steel industry, and he’ll tell

you the answer.

With respect to tax matters, business groups still are propagandizing for higher

depreciation allowances, for all sorts of things. I used to urge on them that they would do

much better for themselves, as well as serve the public interest better, if they used that

political power to propagandize for indexing the tax system against inflation, both the

corporate and the individual tax. They never did that.

We ultimately got indexing, but despite them; and we never got indexing where it would

have been in some ways most important to them, namely indexing the base for calculating

capital gains, which ought to be done and hasn’t been done. It would have been in their long-

term interest to have adopted a different program of eliminating the corporate tax altogether—

providing that undistributed earnings should be attributed to the stockholders. That is, each

stockholder would receive with his dividend check a statement that X dollars per share had

been reinvested, and he would have to include that in his personal income tax. That would

eliminate double taxation and also evasion of taxation.

Let me emphasize something. I have always believed that corporations should not be

allowed to deduct charitable expenditures in computing their taxes precisely because most of

what you’re talking about is lobbying activity on a different level. I don’t blame them for

doing it; I blame us for letting them get away with it. These activities ought to be entirely at

their own expense. I don’t believe the government ought to be subsidizing, directly or

indirectly, such activities.


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Many corporations refuse to release information on their grant-making activities even to

their stockholders. What are their responsibilities to their shareholders in this regard?

Their responsibility to their shareholders is clearly to release all information about the

corporation, not only about charitable contributions. As I’ve argued before, I believe the

device that Buffett adopted of allowing the shareholders to decide to whom the contributions

should go is appropriate and desirable.

There’s a current debate concerning the unrelated business income tax.

In my opinion, there should be no tax-exempt enterprises, profit or nonprofit. Let me

expand on this a little, because I think it’s a very important point.

First of all, the distinction between those enterprises that are entitled to tax exemption and

those that are not is purely artificial. Why is an enterprise selling recreational services is not?

Why is an enterprise selling educational services exempt, but one selling books is not? It’s

absurd.

But in the second place, and much more importantly, by having tax-exempt institutions,

you are creating a group which has a strong self-interest in promoting the growth of

government. Universities and churches don’t pay taxes. There is no cost to them from urging

higher taxes on everyone else, so their self-interest leads them to favor more government

intervention and control.

For example, you’ve discovered that all of these so-called private universities are in favor

of larger government expenditures on scholarship aid—scholarship aid, incidentally, to the

middle- and upper-income classes in general. They are all in favor of government spending

more money on higher education, or on any education.

It’s understandable. These costs will be borne by them as individuals in the form of

private taxes, not by their institutions. So I believe that the fundamental principle should be

no tax exemptions of any kind for any kind of institution.


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You’re familiar with the Buck Trust litigation where trustees of a foundation litigated to

remove restrictions on how the monies were to be spent. In your view, does this violate the

donor’s right and intent, and are there matters of contract and other issues involved?

Obviously, those questions are involved, and I’m not competent to judge them in detail;

but on the general principle, the question is: “In general, what ought to be the rules about

private property?”

People think that private property is a natural thing, but it isn’t. It changes with

circumstances. To take the simplest of examples, if an airplane flies 100 feet over my house,

is it violating my private property rights? When an airplane flies 20,000 feet over my house, is

it violating my private property right? It’s arbitrary where you draw the line. That problem

didn’t arise 100 years ago when there were no airplanes, but now it’s a very real problem.

One of the basic functions of government, as I understand it, is to establish the rules that

determine what we regard as private property and what we regard as appropriate contractual

arrangements. The issue or general principle that arises in a case like the Buck case is what

ought to be the rules that govern the ability of people to dispose of their property? Just as we

say you can’t dispose of your property in a way that harms your neighbor, so it would not be

inappropriate, in my opinion, to say nobody can establish an endowment with a life of more

than 30 years.

Similarly, there are cases of people who have established foundations to benefit certain

narrowly restrictive classes of beneficiaries of whom there are no more left. What happens to

the money? It seems to me there is a strong case for having the rules written to rule out those

kinds of cases. The most obvious way is to limit the period of time for which such restrictions

can be imposed, just as we limit to 17 years the period for which a patent is valid. It is exactly

the same kind of principle.


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It is highly desirable to enable people to dispose of their private property as they wish to.

I believe it’s highly desirable to enable people to leave their money to their children or leave

it to one or another cause. The only question is under what terms and what conditions.

This brings us to the question of standards in philanthropy, by which I mean standards

being advocated by the philanthropic establishment for grant-making entities. It seems to me

that this would have a chilling effect on the very diversity that’s one of the great strengths of

philanthropy and charitable giving in the United States.

One of the basic truths is that it’s extremely hard to do good, especially with other

people’s money.

What is your favorite charity?

My favorite charity is the Israel Center for Social and Economic Studies, because it seems

to me to be the only thing that’s offering any real hope for a change in Israel in the right

direction.


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Interview. “Freedom and Philanthropy: An Interview with ... doesn’t mean you can ... I have for many years argued that given the present system of rag-bag ... it would be far better