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“The Goldwater View of Economics”
by Milton Friedman
New York Times Magazine, 11 October 1964, pp. 35, 133-137
© Milton Friedman
What is the economic philosophy of Barry Goldwater? The responses of most people to this
question have one point in common: they are based upon a particular proposal or two, correctly
or incorrectly attributed to the Senator. He is against Social Security (wrong) or for less
regulation of business by the Federal Trade Commission (right). He is opposed to labor unions
(wrong) or for less government spending (right).
The unusual aspect of the answers is not that some are wrong—no doubt many people are also
mistaken about some of President Johnson’s views. The unusual aspect is that no one seems to
realize that Goldwater does have a philosophy, and not merely views on particular economic
problems.
Yet the philosophy is far more important than the views on particular issues. If Senator
Goldwater is elected President, like all Presidents he will find that he cannot get some policies he
wants, and he will change some of his particular views. Senator Goldwater’s philosophy,
however, will not change—it is a basic part of the man.
Freedom and opportunity are Senator Goldwater’s basic goals for mankind: freedom of the
individual to pursue his own interests so long as he does not interfere with the freedom of others
to do likewise; opportunity for the ordinary man to use his resources as effectively as possible to
advance the well-being of himself and his family. Government exists to protect this freedom and
to widen this opportunity.
Throughout history, the great enemy of freedom has been concentrated power—private or
governmental. If freedom is to be secure, power must be limited and it must be dispersed. The
most effective way simultaneously to disperse private power and to limit governmental power is
to rely primarily on voluntary exchange through a free market—competitive capitalism—to
organize economic activity. The most effective way to disperse the remaining governmental
power is to rely on a constitutional system of checks and balances, and a federal system of
decentralized political responsibility.
As Senator Goldwater said in opening his campaign in Prescott, Ariz., “This country has grown
great and strong and prosperous by placing major reliance on a free economy. … Private
property, free competition, hard work—these have been our greatest tools. This system has
preserved and protected our freedom, our right to disagree, our diversity, our independence from
arbitrary interference in our affairs. This system is the mighty engine of progress which enabled
this country to develop from a small but independent citizenry to become a multitude spanning
the continent and living on a level that is the envy of the world.”
Wherever men are today reasonably free and relatively prosperous, they have gained their
freedom and earned their prosperity through a system based on private property, free enterprise,
and free markets. There is not a single exception. Centralized governmental control over the
economy has been able to produce spectacular achievements—from the pyramids of ancient
Egypt to the sputniks and space exploits of Russia today. Such a system has been able to attain
great military strength. But it has never been able to achieve either freedom or a decent standard
of living for the ordinary man.
The Berlin Wall is a dramatic monument to the superiority of the free economy. Before they
were torn asunder, the Germans, east and west, shared the same technology, had much the same
level of living, and they are the same people. The West Germans chose the path of freedom. The
East Germans had collectivism thrust upon them. The results are clear for all to see—growth and
prosperity under freedom versus stagnation, deprivations and misery under collectivism.
Of course, every economy is a mixture. In all, economic activity is partly organized through a
free market, partly through rigid customary relations, partly through explicit governmental
authority. But the proportions vary widely. Freedom and prosperity have gone along with a
mixture in which the market is dominant; tyranny and misery, with one in which custom and the
government sector are dominant. Yet the evidence is often misread. After a talk I once gave in
Kuala Lumpur, I was informed that the success of the United States was attributable to the 20 per
cent of socialism in its mixture, and the failure of India to the 20 per cent of free enterprise in its!
Governmental activity, though it must be limited to its proper sphere and decentralized as much
as possible, is of critical importance in protecting men’s freedom and widening their
opportunities. Government must provide for the common defence, preserve law and order, define
the rights of men and enforce contracts among them, keep markets free, provide a stable
monetary and fiscal framework for the private economy, construct public facilities that for one
reason or another cannot be provided by the market, and assist in easing distress and relieving
misery.
It is always tempting to have governments go still further, to have them try to do directly for the
people what the people seem at the moment not to be able to or to want to do for themselves. But
history teaches that this course seldom achieves the intended objectives; that it generally only
weakens the capacity of the ordinary man to provide for his own needs. In addition, it has
unintended consequences. Governmental power, once established, gravitates into the hands of
private groups that use it for their own selfish purposes—groups that, by forming a coalition with
government, are able to strip the consumer of the protection of the market place.
How does the Senator apply these general principles to specific economic problems? To
illustrate his approach, I shall consider five issues: (1) The economics of defense; (2) Federal
expenditures and taxation; (3) Business-cycle policy; (4) Welfare programs; (5) Federal-state
relations.
THE ECONOMICS OF DEFENSE
Senator Goldwater’s proposal to man the armed forces by attracting willing volunteers has
important economic implications. If adopted, the books of the Government might show a higher
dollar cost for personnel. But if so, it would be an optical illusion. Ending the draft will end an
inequitable and capricious system of taxation in kind, recorded on the books neither as receipts
nor as expenditures.
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By any valid accounting, the gain in equity will be accompanied by substantial savings in cost
through reduced turnover, lower expenditures on training and retraining, less waste of personnel
and improved morale and quality of the armed forces. And the savings may well be enough to
reduce even recorded costs. In addition, the private economy will be strengthened as youngsters
will be able to plan their training and careers with confidence and can cease conducting their
lives with one eye on the draft board.
The need to keep our defences strong makes it all the more important to restrain other activities
of the Federal Government. The economic pie is limited—the more we spend for other purposes,
the less is available for the military. There is no surer way to condemn this nation to the status of
a second-rate power incapable of exerting influence in the world at large than to fritter away our
taxable capacity in a miscellany of costly schemes—as we have been doing. Though nondefense
spending accounts for only a little more than half of total Federal spending, it accounts for twothirds of the recent rapid increase in Federal spending.
Some leading pundits have criticized Senator Goldwater as inconsistent because he wants a
stronger military establishment, which is necessarily a Federal responsibility, and at the same
time favors reducing the scope of the Federal Government in other areas. If these policies are
inconsistent, then so are the actions of the family faced with large medical bills that feels
impelled to cut down food costs.
FEDERAL EXPENDITURES AND TAXATION
The size of Federal expenditures is important on the grounds of economy. The more of the
nation’s resources the Federal Government absorbs, the less is left for other units of government
and for citizens in their private capacity. But it is important also on grounds of freedom. The
power of a centralized purse is very great indeed—as President Eisenhower warned so
eloquently in his farewell speech to the nation from the White House.
Political independence, a willingness to oppose the powers that be and to stand up for and
finance unpopular causes—these are luxuries that people, firms and whole industries dependent
for their economic life on Federal favor tend to dispense with. Freedom, too, is a scarce resource.
On grounds of both economy and freedom, the Federal Government is now too big and is
growing bigger at a dangerous rate. The need to halt this trend is the cornerstone of Senator
Goldwater’s immediate economic program. As he put it at Prescott:
“Today you work from January through April just to provide government with the money it
spends. Until early February you are working to pay the expenses of local and state government.
For twice as long thereafter you are working to pay the expenses of the Federal Government.
Only then do you work for money that you yourself can use for what you yourself choose. This
cancerous growth of the Federal Government must and shall be stopped.”
In his specific approach to cutting the Government down to size, Senator Goldwater’s
conservatism comes to the fore. We must, he says, proceed gradually and slowly, with
forethought and care. We must not disappoint reasonable expectations or fall to honor
commitments made. We must not introduce erratic and abrupt changes that will disturb the
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private economy: “Much as we wish it were otherwise, we shall only gradually be able to alter
many polices of the central Government.”
Being a realist as well as a conservative, Mr. Goldwater realizes full well that a change in
direction will not come by itself, that we must plan for it. That is the purpose of his proposed
program of regular tax reductions: a 5 per cent across-the-board cut in income taxes each year for
five years. As the economy grows, Federal tax receipts grow even more rapidly. Congress has
regularly succumbed to the temptation to spend the proceeds—and a bit more.
The Senator wants to reverse this process. A firm commitment to reduce tax rates will put steady
and effective pressure on Congress to hold down spending. At the same time, the reduction in tax
rates will strengthen private incentives and so foster a healthier and stronger economy.
Senator Goldwater is determined to achieve fiscal responsibility. His proposed tax reduction is
part of a package involving a firm commitment to hold down Federal spending, and is intended
to help achieve that result. Since the proposed tax reduction will absorb only part of the
increased revenue that economic growth at stable prices can be expected to generate, the
commitment is only to a slowing down in the growing rate of spending, not to an absolute
decline. Mr. Goldwater is hopeful that it will be possible to do still better and to use further
savings to reduce the debt and to make further tax cuts.
It is worth emphasizing how great are the cumulative effects of his program. This past year we
had a massive tax cut of $11 billion. That was the first major cut in nine years. The five-year
program Senator Goldwater has proposed would mean a gradual reduction in taxes totaling over
$15 billion.
BUSINESS-CYCLE POLICY
In the Employment Act of 1946, Congress declared that it is “the responsibility of the Federal
Government … to promote maximum employment, production, and purchasing power.”
Senator Goldwater fully supports this declaration; he regards it as essential that the monetary and
fiscal policies of the Federal Government be designed to promote full employment and stable
prices—which is what the quoted words have come to mean. In addition he believes that it is
long past time that another objective listed in the act—”to foster and promote free competitive
enterprise”—should be honored in the observance rather than the breach.
It is easy to accept these objectives. The question is how to achieve them. Senator Goldwater has
said bluntly that the economic “wind cannot always blow fair. Occasionally rough weather
cannot be avoided.” What should government then do?
The Senator emphasizes that the spells of rough weather are often of the Government’s own
making—though, of course, the Government never admits that; it always blames the private
economy. Erratic monetary policy has frequently introduced instability that the private economy
has had to cope with, and, despite all the talk of using fiscal policy to stabilize the economy, the
Government’s own expenditures and receipts have been among the most unstable elements in the
national economy—and in a direction increasing economic instability, not offsetting it.
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The first need is therefore that Government conduct its own affairs in an orderly and dependable
fashion to provide a stable monetary and fiscal base for the private economy. His proposed fiveyear program of regular tax cuts would contribute to that objective. It is in sharp contrast with the
recent massive tax cut. That was an isolated action in a year of high prosperity and, along with
other measures taken by the Administration in an election year, threatens to overstimulate the
economy and to store up serious trouble for the future.
With stable monetary and fiscal policies, any recession sets off automatic built-in responses that
tend to moderate the recession. These have the great advantage that they start operating promptly
and in a magnitude proportional to the need. Some, like unemployment insurance, have also the
desirable feature that they ease any temporary distress or loss of income.
On the fiscal side, the automatic responses make for deficits in recessions and surpluses in
prosperity. On this point, the Senator has been much misunderstood. His emphasis on fiscal
responsibility has been taken to mean that he is in favour of balancing the budget every single
year. That is not his view. As a businessman, he knows full well that it would be extremely
short-sighted for a business that experienced a temporary decline in sales immediately to
discharge employees, stop all research work, and so on. The Government, like a prudent business
man, must aim at balance over a period of years.
To reinforce the built-in responses favoring recovery, Mr. Goldwater would call first on
monetary policy, which can react quickly yet gradually. In the past; monetary policy has all too
often been restricted during much of a recession and so has made the recession deeper. Instead,
the quantity of money and credit should increase at an encouraging rate.
Further, the Senator, in addition to having the Government continue its legitimate spending
programs, would postpone any marginal reductions in spending and accelerate any tax reductions
that would otherwise have been made later. In all these measures, he would emphasize steadiness
and the avoidance of erratic actions. Past experience suggests that overreaction, which creates
unnecessary problems for the future, is a very real danger.
Above all, Senator Goldwater would emphasize that the true strength of the economy is in the
private sector. Government policies that provide a favorable environment for the private
economy, that promote competition and avoid governmental intervention, that leave private
individuals with more of their own money for their own purposes, that avoid both inflation and
deflation would release a great reservoir of strength in our economy; they would mean widened
opportunities for all our citizens; they would be the occasion for a rebirth of vigor, for healthy
and rapid economic growth that would make any temporary recessions even milder than they
have been in the postwar period.
WELFARE PROGRAMS
The Government’s primary role in the area of welfare, in Senator Goldwater’s opinion, is to
alleviate distress, to see to it that there is a floor below which no American need fall in the level
of his consumption of goods and services. The Senator would like to see this objective achieved
insofar as possible by voluntary and civic agencies, by private philanthropy. by cities and by
states. But he recognizes that the Federal Government must stand by in case of need to assure
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that the floor is truly there and truly universal. That, in his view, is the prime purpose of Social
Security.
This approach is very different from one that would have government redistribute income in
order to achieve material equality. There is all the difference in the world between 90 per cent of
us voting to tax ourselves to help the other 10 per cent, and 90 per cent of us voting to tax the
other 10 per cent to help 10 per cent—and more than likely, the other 80 per cent as well. Widely
shared taxes to help the distressed are appropriate in a free society. A policy of “soaking the
rich” would ultimately destroy it.
Senator Goldwater’s approach is also very different from one that would relieve the individual of
personal responsibility and make the Government every man’s keeper. The welfare state, with its
vision of the “experts” knowing better than the people themselves what is good for them, and
spending their money for them—for their own good—is completely at odds with the Senator’s
vision of a community of self-reliant individuals promoting common objectives through
government and turning to government and turning to government for help only in time of need.
In judging government action, we must distinguish between intentions and results. Most
measures taken in the name of welfare have been wasteful and inefficient. They have not
achieved their expressed intention, but have generally imposed burdens on the poor to benefit the
not-so-poor
The agricultural program is an obvious example. In the name of helping low-income farmers, it
has saddled low-income city dwellers with higher food costs and heavier taxes. Most of the
proceeds have been wasted in higher costs of production, or have gone to large commercial
farmers, owners of farm land, and the food storage industry. Very little indeed has trickled down
to the farmers who most need assistance.
This case is no exception. Program after program has had effects the opposite of those intended
by its well-meaning proponents. But instead of getting rid of the failures, we are constantly being
persuaded to adopt yet more sweeping programs of the same kind.
In the year 1963, cities, states and the Federal Government spent a total of $45 billion, or onequarter of total government spending, on assorted programs ostensibly designed to help the
distressed—agricultural subsidies, Social Security payments, public housing, public assistance
payments, and so on. And yet the present Administration has just launched with much fanfare a
“War on Poverty,” to be won with a so-called antipoverty bill that calls for expenditures of not
quite $1 billion a year—and most of that on programs that only by the wildest stretch of the
imagination have anything to do with poverty. If any private enterprise were to engage in such
misleading advertising, it would surely and quite properly be required to cease and desist by the
F.T.C.
In recent decades, as over the longer history of our country, there has been a steady and striking
improvement in the material well-being of the less advantaged among our citizens. This
improvement owes little to government welfare programs. It has come primarily from the
economic growth of the private sector. That has been the one truly effective weapon against
poverty.
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Senator Goldwater believes that we must both do more to help those who are really in need and
spend less on the ill conceived miscellany of schemes that have been enacted under misleading
labels. He believes that perhaps the most important single step that could be taken toward that
end is to reduce the extent to which the Federal Government undertakes tasks that could be done
better by local and state governments.
FEDERAL-STATE RELATIONS
The Federal Government now has a host of programs involving grants-in-aid to local
communities, states and other smaller units of government. The grants are for specified purposes,
and are made under conditions that frequently tie the hands of the people close to the local need
and lead them to spend funds on projects they know to be wasteful. The excuse given for these
programs is that the Federal Government has greater financial capacity than the local units of
government.
For the country as a whole this is clearly not so. The economic resources available to the country
are simply the sum of what is available to the separate states. Sending money to Washington and
back can hardly make it grow. It is far more likely to do the reverse.
Certainly communities differ in available resources, and some better-off communities may wish
to tax themselves to provide funds for less fortunate communities. But that hardly calls for
raising money in all the states to send back to all the states.
Here again, there is a problem of transition, of how to go from here to there. The Federal
Government, on the one hand, is pre-empting sources of revenue; on the other, it is financing
many local activities. To eliminate both overnight would be neither fair nor prudent. Again,
Senator Goldwater’s answer is to move gradually toward the ultimate goal.
We should consider, he suggests, separating the provision of funds from control over their use.
Suppose we were to consolidate many grant-in-aid programs and have the Federal Government
make lump-sum cash grants to the states and localities roughly equal to the amount that is now
going to them. Local communities would then be free to use the funds at their own discretion.
We could at one fall swoop, reduce the Federal bureaucracy and administrative expense and
widen the freedom of the local communities, while keeping unchanged the financial burden in
both the Federal Government and local communities.
These examples illustrate, I hope, the Senator’s general approach to specific problems. His goal
is always the same: to promote the freedom of the individual and to widen his opportunity; to
stop the drift toward centralization and collectivism that has been under way in the past few
decades, a drift that has not achieved its professed objectives but that has served to curtail
individual freedom, to undermine individual responsibility and to weaken the moral fibre of the
people.
His means are various but always conservative, in the position that they emphasize gradualness,
order and dependability, the limitations of our present knowledge and the need to learn from
experience.
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The same approach explains his policy on other specific issues: his support of free collective
bargaining, combined with his concern over compulsory unionism and his fear that we are
drifting toward compulsory arbitration; his vote against the so-called “Trade Expansion Act,” on
the grounds that, despite its label, its grant of discretionary power to the Administration to
impose and to change restrictions on trade would lead to greater restrictions rather than less—as
has, indeed, been the outcome; his vote against the interest equalization tax, on the grounds that
it will interfere with the free flow of capital, is a further step toward the direct control of foreign
transactions and yet will be ineffective in reducing the payments deficit; his belief that a strong
domestic economy is the surest guarantee of the strength of the dollar in world markets and that
if the U.S. follows sound policies at home, it need have no fear of a run on the dollar; his
unwillingness to see Federal aid to education, if enacted, go solely to public schools and thereby
impose penalties on these parents who wish to send their children to private schools, whether
religious or secular.
Senator Goldwater is often depicted as a reactionary mossback who wants to turn the clock back
to an earlier but vanished era. The irony is that the critics who charge him with retreading to the
19th century, are themselves working as hard as they can to turn the clock back to the
mercantilism of the 16th and 17th centuries. The policies of government intervention, of wageand price-fixing, of control over the flow of trade, of paternalism that they favour are the very
policies that were then the rule throughout Britain and Western Europe. It was those very
policies that had to be overthrown to permit the economic, social and political revolution of
which we are the beneficiaries.
Mr. Goldwater is, of course, inspired by ideas of an earlier age. So are we all. How else can we
get wisdom and knowledge, except by learning from experience? As the Senator said in
accepting the Republican Presidential nomination. “We must and we shall return to proven
ways—not because they are old, but because they are true.”
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