0:33 Intro. [Recording date: March 12, 2013.] Russ: Our topic today is your book, The Great Persuasion, which chronicles the reemergence of free market economics in the aftermath of the Great Depression. Let's start with the state of that viewpoint at the end of WWII. What was the intellectual situation for free market economics and free market economists? Guest: What I found about the really striking thing about free market economics in the wake of WWII was just how downtrodden its leading proponents found it to be. And so if you take somebody who at the time was seen as a really central figure in free market advocacy, Friedrich Hayek, author of The Road to Serfdom, which came out in 1944, he really emphasized that very few people believed in free market ideals. Even among academic economists. Today we tend to think of economists as people who are broadly oriented toward the market mechanism. But at the time even they, Hayek thought, were deeply skeptical of the capacities of the market to solve social problems. Russ: And, in 1944 he publishes The Road to Serfdom. And what was its impact in the short run? What kind of reaction did it get? Guest: Yeah, so Hayek himself--I think it's important to understand just a little bit of background. He grew up in a fairly aristocratic Viennese family. He was a fairly abstruse academic intellectual, so when he gave his initial talks at the London School of Economics (LSE) in the early 1930s lots of people in the audience complained that they simply couldn't understand what he was saying. So, he was a very unlikely public intellectual. And that fed into his writing of The Road to Serfdom. He didn't think it was going to be a broadly popular book. He wrote it, he thought for a few hundred people maybe in England who would go out and buy it. And then it came out, and it started to sell very well in England. To his surprise. And then the copy came out in the United States and he was invited to head over there for a lecture tour. So he got on a boat to head across the Atlantic and when he arrived on the other shore he was stunned to discover that he had become a kind of massive celebrity. Lots of people had encountered his work. And the primary reason for that was the Reader's Digest, which was enormously popular at the time, had condensed it into a 20-page version, much easier to read than the original version. Which is itself fairly easy to read relative to the other things that Hayek had written. And that condensation got into the hands of tens of thousands of people. It was made available in reprints that went to over a million people. So in the United States at the time, that was an enormous readership for an economist. And so Hayek got off the boat and was almost immediately ushered into a lecture with over 2000 people, an overflow lecture in New York City. And he'd never given talks like this before, so he was stunned to be confronted by all the microphones and reporters and everything else, and had to reconcile what he saw as his fairly abstract and complicated ideas with this massive wave of popular interest in them. Russ: And he got used to it. Guest: Well, he did and he didn't. This is one of the really interesting things, I think, about Hayek. On the one hand, it's very exciting. Anybody in academia, whether they like to admit it or not, loves the idea that lots of people out there want to hear what they have to say. And so he was fairly excited about that; and that shows in some of his writings at the time, and also when he wrote some of his later books that didn't sell as well you can hear little notes of lament over their sales figures. But at the same time he was fairly ambivalent about the way that people were reading the book. The first thing to understand about that, I think, is that most people weren't reading the book. They were reading this 20-page condensation. And it's called a 'condensation'--but I argue that if you actually go through it, it's very hard to see it as such. It's not like they were just cutting out lots of paragraphs. It's almost like you took The Road to Serfdom and put it in a blender and took out random sentences and words and combined them all together into a fairly coherent-seeming 20 pages. So, it really wasn't the book that Hayek had written, at all. Russ: It's sort of like the movie version of some long novels that you read. They get some of the scenes. But they kind of miss-- Guest: Exactly. But it's even more condensed. The movie version at least there's not supposed to be a consonance of form. It's not a written text; it's a visual text; people know that it's in some ways different. Whereas, this condensation, the ambiguity of these Reader's Digest condensation is that they are still nominally by their authors even if they weren't precisely written by them. And so, one result, naturally, when you reduce something down to 20 pages is that it becomes simpler. And Hayek thought his views were very complicated; he thought of them as in some ways ambivalent about--they're sometimes unclear and vague and often very nuanced in how they think that the market should operate, where it should be embraced and where it should be constrained. And lots of people got their hands on this condensed version and got very excited about a version of Hayek that he didn't think exactly represented his own views. Russ: And it got some rather harsh, savage criticism I would say from fellow academics. Some of them hadn't read it probably, but-- Guest: Well, it did, but at the same time it attracted some enthusiasm. When I talk about the nuance of The Road to Serfdom that's sometimes forgotten, one of the really interesting things is just how enthusiastic Keynes was when he wrote Hayek about it. Keynes indicated that agreed with almost everything that Hayek said. That goes to show that--immediately you think of Hayek and Keynes as being opposed in lots of ways, which they were--but that goes to show that this is a little bit different from the version of Hayek that we sometimes receive even in a caricature representation today. Russ: Well, yeah; that enthusiasm was in a letter, if I remember correctly. Guest: That's right. Russ: They were friends; he may have just been encouraging. I assume he certainly agreed with the idea that he didn't want to see England turned into a totalitarian state. Right? Guest: Well, yeah; well, so, this is actually a crucial problem for me. I'm a historian, and I've spent a lot of time going through people's letters. And you always have to ask yourself: to what degree, how do you value what people say in a private letter versus what they say in the published record? And you have to think about them a little bit differently. But I'm inclined to think that it's actually important. You read lots of nasty letters, lots of criticisms in letters. People don't always just say what somebody else wants to hear. There's usually at least a kernel of meaning behind it. And so part of what Keynes was doing was encouraging a friend; they shared a lot of interests during the war. But at the same time he I think was acknowledging that Hayek was accepting large possibilities for certain kinds of social provision and so on, that sort of reduced understanding of Hayek's views at the time doesn't always allow for.

7:58 Russ: So it was an important moment in this post-Depression, post-war era; this book comes out, it gets a lot of attention. And a group of people at that point, including Hayek, decide that they need to do something in concert, at least get together. And the Mont Pelerin Society is born. And you spend a lot of time on the Mont Pelerin Society. It's something that I knew a little bit about, and now I know a lot more about thanks to your book. And it's utterly fascinating because anybody who cares about political movements, rhetoric, the marketing of ideas, all those issues come together in the Mont Pelerin Society and its aftermath. So start with its beginnings. How did it start? Guest: Absolutely. Hayek found himself, as we've discussed a little bit, in this position where he suddenly had this newfound fame extended beyond the economics profession alone. And at the same time he looked at the world situation and saw what he saw as a kind of inexorable march toward totalitarianism. So on the one hand, in the wake of WWII the memory of fascism is deeply ingrained. On the other hand, you have what seems like a fairly aggressive Soviet communism that has the potential to expand ever outwards across the world. And then if you look at home, if you look at England or the United States, you see the rise of much more substantial state apparatuses than had been the case 20 or 30 years before. So Hayek was looking at these broader trends and considering them in light of his newfound fame and trying to think: What can I do to leverage my fame in order to try to alter the course of events? And this is I think something that's really interesting about Hayek. A normal person confronted with that person would be inclined to go outwards and speak to broad audiences, give lots of public lectures. Hayek had done a little of that on the Road to Serfdom lecture tour. But he didn't think that was actually the effective way to bring about political change. His position was that if you want to bring about long term ideological change, the way to do it is to get together a group of highly selected, largely intellectuals, some business and political elites, and get them to talk to each other about their views and try to re-ground them, try to think through what the central problems were, and develop a way to understand them and a way to represent them to the public that would be compelling in the longer term; and that if you were successful at generating a sense of cohesion within that group and in founding a genuine intellectual project, over time that would filter down to other intellectuals, and from them to college students, and then from them to positions of power 20 or 30 years later. So he saw this as a very long-term project. So, the Mont Pelerin Society is what he created in order to try to achieve that goal. He started it in 1947. It was a group of just under 40 intellectuals, politicians, business people, and so on, that all gathered together at the base of Mont Pelerin in the Swiss Alps for a week to discuss the state of free market thought and the broader political state of the world, and to try to figure out what they could do to improve it. Russ: Really, in a way, he was trying to capture what a great economics department or a great university is about. But there wasn't a place that was that friendly at the time, or a place where a lot of people could get together, and as you point out in the book, he wasn't particularly interested in it only being economists; he really wanted it to be a really wide range of thinkers, because that was the way he thought about the world. Guest: Yeah, no. And this is so crucial to understand about Hayek and I think about this whole era of market-oriented thought. There's a tendency when we talk about the history of economic thought to look at it as an internal problem, a kind of doctrinal problem in the history of economics itself. But part of what I am trying to do in this book is to say that economics is deeply engaged with questions of moral philosophy, political practice, and so on down the line. That it's a thick social problem that needs to be considered as such. And that's very much what Hayek himself thought; and he thought that if you want to think about economics as a philosophical problem in addition to a technical set of problems, you need to bring together economists and philosophers and people who do political theory and get them all discussing with one another. So this was--you know today lots of people talk about interdisciplinarity. At the time that wasn't really the term that they used. But this was very much an attempt to create an interdisciplinary endeavor, to say: What can we as economists take from philosophers and what can we tell them? And is there in establishing dialogue across people who share a certain loose set of views, can we figure out new ways to frame our beliefs that would be compelling to a broader public?

13:07 Russ: So, who were some of the key people at that first meeting? Guest: You can look at it in terms of institutions, is one way to look at it. So, there's a large contingent from the U. of Chicago Economics Department, which was incredibly important in the world of American economics at the time. So, some of them were Frank Knight, who had grown up as a farm boy and still had a little bit of that rough-hewn quality, but at the same time was an incredibly important kind of philosophical theorist of economics. He wrote a great book called Risk, Uncertainty, and Profit that was based on his dissertation and had made his reputation from that. And his colleague, Jacob Viner, who worked on international trade and had done actually a little bit of work in the Roosevelt Administration. And Henry Simons, a third colleague of theirs who also was very important in that world. And then you had the Institute for International Studies in Geneva, which had been home for quite a while to Ludwig von Mises, the Viennese economist who had been a kind of mentor to Hayek early in his career, and also to Wilhelm Roepke, displaced German sociologist and economist who was a major player in these early years. And finally you had a contingent from the LSE, the London School of Economics. That's where Hayek was for the 1930s and most of the 1940s, and his colleague Lionel Robbins, also a very important LSE professor at the time. So they were the major players, but then there was a broad penumbra of people from a number--it was mostly, all across the Atlantic world, so mostly European countries, they really dominated the numbers in the early years. And also they brought in some journalists, so for the course of the Society's early meetings you had John Davenport, a journalist at Fortune Magazine, for instance. And there were some funding institutions. The Volker Fund helped--this little charitable foundation that helped to finance the travel for the Americans to the first meeting--and the Foundation for Economic Education (FEE), which was designed to bring economics to the masses, were represented there as well. Russ: You left off two Chicago economists who were younger than Knight, Viner, and Simons. Guest: Yeah, right. Well, so, students of Knight--Milton Friedman and George Stigler, very important. So the reason I left them off that list is they still were very young at the time. We think of them as these enormous names in the present day. Friedman certainly was a frequent contributor to the initial meeting. But at the time he had much lower stature than somebody like Frank Knight, who almost nobody outside of the academic world talks about today. Russ: Right. Which is interesting. But obviously Knight, Viner, and Simons were giants. And you talk--you bring them back to life a little bit, which is a very nice thing. And we have a lot of their work here at the Library of Economics and Liberty. We'll put some links up to their bios and work. Guest: I mention Simons in the context of the U. of Chicago Economics Department at the time, but he died in 1947, so he wasn't able to actually attend the first Mont Pelerin meeting, even though they were very clear that he was part of the inspiration for it. And so he lived on in memory but wasn't actually a participant there. Russ: And as you point out, he was an early spokesperson for free market ideas that were struggling to get any kind of foothold at that point. Guest: That's right. Just to say something about Simons in that regard that I think is really interesting, is, so Simons was seen in the 1930s as a kind of free market radical, this Chicago economist who wrote what other economists really thought diatribes in favor of the free market, not as really scholarly writings but much more oriented toward a popular audience. But when you actually read them today, they don't read like diatribes in favor of the free market really at all. So, Simons had lots of ideas that almost seem like sort of crackpot ideas from the far left. Like for instance the notion that you should break up all large corporations and have America be a nation of small businesses, because those large corporations distorted the process of free competition, for instance. And he was in favor of steeply progressive income taxation. And things like that. So you get this wonderful experience of these later Chicago economists, people like Friedman, or, there's a great quote from Ronald Coase looking back at Simons's early writings and saying: Why did we think this guy was a free market advocate? His views look so different to us today. And I think that speaks to some of the transformation in the way that people think about economic problems from the 1930s to the present. Russ: That's true of The Road to Serfdom. The Road to Serfdom has a social safety net--support for a social safety net--health insurance. And I think people who read it then thought it was the most radical, right-wing propaganda. Now it seems kind of tame. Guest: Yeah. That's exactly right. Hayek has some passages where he talks about that's an important function for the state to have potentially, to relieve the misery of the poor, to aid the sick, to prevent factories from spewing poisons out into the environment, and so on. So he seems to have a fairly robust concept of the social safety net and the regulatory state, and what he's really concerned with is the government actually taking over--some things like the National Recovery Administration (NRA) where the government actually starts to take over price setting mechanisms of businesses themselves and to engage in large-scale planning of that kind. And so yeah, Hayek reads much less extreme today than I think people sometimes make him out as being, when you look back at The Road to Serfdom. But it does tell us something that at the time this was seen as really radical rightwing propaganda.

19:04 Russ: So, talk about the early years of the Mont Pelerin Society. There were some interesting tensions. Many of which were never resolved. It's a strange club. I've been to one of their meetings, and if I can, I have a photograph of myself being upbraided by Milton Friedman himself for a mistake that he thought I'd made--which I probably did make--in raising a question at one of the sessions. He was telling me why I was wrong. Which of course was something he liked to do. In the picture he's talking and I'm nodding. If I can I'll get a picture of that up at Cafe Hayek, my blog. But in the early years, Friedman, as you say, was young. He's going to become a much more important figure by the early 1960s. But in the late 1940s and 1950s, the Society was grappling with some issues that seem rather strange to us today. But they were very front and center then. What were they? Guest: Oh, yeah. The major issues that the Society was thinking about in the 1940s and 1950s. The big concern in a way that animated the gathering in the first place was a notion that Hayek had, what he called 19th century liberalism or Manchester liberalism--in reference to the old British Manchester school from the 19th century--had advocated a certain vision of the free market that didn't make room for social ideals. So, what he saw as--the central one really for him was religion: What's the relationship between the free market and religion? And do free marketeers become aligned in the public imagination with a certain kind of agnostic or atheistic attitude that doesn't pay attention to social traditions and religious beliefs. And so Hayek wanted this group, a central mission of this group for him, was to try to figure out how to come up with a way of framing the free market that would be friendly to those who held religious beliefs and those who were deeply concerned about the maintenance of social traditions. I think this very much resonates as a concern today, because I think we are all aware that the market is this enormous source for social disruption, right? When the Schumpeterian process of creative destruction is a central aspect of how the market works. And so in a period, in the wake of the 1930s, in the wake of the 1940s, you have the Depression and war on everybody's mind, the deep concern is: how do we have a social order that can remain stable? That won't lead to political disruption or enormous financial dislocations? So one of the central reasons, Hayek thought, that the free market was discredited in people's imaginations, was that they saw it as responsible for these kinds of disruptions. That the dislocations of the market led to the Great Depression and led to the rise of Fascism, and so on. And so he wanted to find a way to frame the market that would seem friendly to traditions, to stability, to religious belief. And therefore make it once again compelling to an everyday person. Russ: He was not a religious man himself. But he had respect for religion--you can read that in The Fatal Conceit and elsewhere. And certainly as a marketing issue he felt it was important. Guest: Yeah; this does not necessarily align with one's own personal religion. Frank Knight is one of the fascinating cases in that regard, because he was notoriously anti-religious in some ways. Every time, supposedly, he saw somebody in the back of the lecture hall with a clerical collar on he would give up the lecture he was giving and just start ranting about all of the problems of the Catholic Church. And so he had in some ways deeply anti-religious views. He just loathed what he saw as the dogmatism that he associated with religion. At the same time, at these early meetings he was one of the most vocal people about saying they needed to figure out ways to open themselves up to religious belief, that the free market itself had become this sort of abstract, dry logic, this economistic logic that's wholly separate from the search for meaning that animates religious belief--that it wouldn't be compelling to anybody. And that there may well be a reason for that; that the market itself shouldn't only be seen in these abstract terms; that it needs to be connected to broader questions of meaning and morality. Russ: Yeah. And in our time we have these issues with the alleged effect--I think it's sometimes exaggerated for political reasons--of Wal-Mart and the super-large big box stores on Main Street and traditional American towns; we've got the outsourcing issue. The whole issue of values and meaning I think remains the central question for those of us who favor liberty. And I think about that issue a great deal. I think about how it can be that people can list Ayn Rand as the second-most influential--her book, Atlas Shrugged--book they've read, in surveys, allegedly; so people say. And yet her ideas have so little impact, apparently, on people. It's a small group, of course, that hold her views. But her book is a particularly anti-religious, amoral, self-centered viewpoint. It's a fascinating book; it had a big impact on me. But most of the people I know who read it find it repugnant in many ways. Just for that reason. Not for the economics, but because it's self-centered. Or selfish, depending on how you want to phrase it. Most people are interested in helping people other than themselves, and don't see anything wrong with it. In fact, they think it's a good thing. Guest: Right. And to me this is really a crucial problem. And it's one people writing about the history of economics don't devote sufficient attention to: What is the embedded moral theory that these people adhered to? And how did the moral assumptions of economists change over time? So for me there's a really instructive three-part comparison that you can look at to think about some of these changes. So, if you look first at how Knight thought about these problems, Frank Knight, the great early Chicago economist, Knight had a really interesting view about the relationship between markets and morals. He was on the one hand a market advocate; he thought that capitalism delivered great benefits to societies and should be preserved. But at the same time he thought that it inspired behaviors that are repugnant. And so you just talked about a lot of them--this kind of self-interest, greed, stuff that makes its way onto the front page of business sections on a regular basis. Knight worried that market society creates precisely the behaviors that lead to its undermining. That it generates a certain kind of greed that eventually makes it unsustainable. And so the central problem of market societies as he saw it was to try to create a framework that would restrain those excesses sufficiently in order to allow markets to continue to operate successfully. Now, if you contrast that with Hayek, in my reading of Hayek, at least, there are some powerful sections on these issues in The Constitution of Liberty. Hayek says that we shouldn't favor--that markets don't necessarily lead to beneficial behaviors or destructive behaviors. Rather, the reason that we should favor market society over socialism or communism is that, as he saw it, it's a morally neutral arbiter; markets yield outcomes that don't claim to have any moral significance. And as soon as you have a moral arbiter, you have somebody enforcing their moral view of the world on everyone else; and that creates all kinds of problems and restrictions. So to him the very virtue of the market is with the fact that they were detached from these kinds of moral issues. And then finally, if you look at Friedman and talk about the ethos of self-interest, Friedman thought that there was basically complete overlap between market outcomes and people's contributions to society. So, if one is virtuous, the market will reward it. If one is doing something that benefits other people, you'll be paid commensurately. So for him it's almost exactly the opposite of somebody like Frank Knight, and the market doesn't generate behaviors that are cause for concern, but rather it generates precisely the behaviors that you want to see.

27:42 Russ: And I think Adam Smith also felt that the market was a civilizing force. That it encouraged and rewarded virtue. We know of course there are exceptions. The question is: What's the alternative? I like the old joke--I don't know where it's from; somebody said it's from Mad Magazine--that under capitalism, man oppresses man; under socialism, it's the other way around. Bureaucrats are greedy, too. Politicians are self-interested. The question is: What's the best way to harness people's best aspirations while restraining their worst? And I think what's missing from most discussions today of the market and so-called free market economics is people forget about what's often called 'civil society'--the ability of people to spontaneously, voluntarily create organizations that help other people. And to me that's part of the market vision of Hayek, and it often gets forgotten. As if somehow the market is only about buying and selling. It's not just about buying and selling. Guest: And you know, one of the fascinating areas if you look at Friedman talking about these kinds of issues is that Friedman claimed--so, if you were to take, and I'm not going to evaluate the rightness or wrongness of these different perspectives--but if you were to take a leftist perspective on the market and sort of democratic thought, the concern that a lot of leftists have is that large corporations or wealthy individuals effectively use their money to buy the opinions of large bodies of people through all kinds of propagandistic means. Friedman has an interesting contrary perspective. Friedman's view on that was that wealthy people enabled the incubation of dissent. That is to say that if you have a wealthy person who has some crackpot view that nobody else agrees with, but if you have a free society, they can go off and fund a little institute that supports that view. And that can help to foster greater diversity of perspectives than is possible in a society that doesn't actually have sufficient amalgamations of wealth to make that kind of institution-building possible. There are benefits and hazards in terms of public opinion in terms of large aggregations of wealth, but Friedman was adamant about drawing attention to the benefits. Russ: The same role that venture capital plays in destroying large businesses that are comfortable and not innovative. Startups can challenge them ultimately through--if there are enough wealthy people to fund their competitors. The same could be true of the intellectual marketplace. That's his argument, right? Guest: Yeah, that's right. That's really well put. And I think the fascinating thing about looking at some of these early members of the Mont Pelerin Society is that they really saw their project in precisely those terms. So if you look at an organization like the Volker Fund, that helped fund the Americans' travel to attend the first meeting, the people involved in that wanted to support free market views; and their idea was that you put what are relatively small amounts of money into getting these kinds of people together. Much like a venture capitalist with a little bit of money into a variety of little startups; and then you just sort of wait. And some of those bets will work out. Some of the people who attend that meeting will go on to do really interesting things maybe as a result of having attended it. And other people will turn out to be duds. You can't really know at the outset and so you spread your bets. And then you have to be patient; you have to wait and see what happens.

31:19 Russ: So in the late 1950s another voice against communism, at least, comes forward, and that's William F. Buckley of the National Review. And I was fascinated--I didn't know any of Hayek's views about that, but Hayek was not comfortable with the National Review and Buckley, Russell Kirk, and other Conservatives. And both he and Friedman resisted and resented being called 'conservative.' Why was that? Not the same reasons, of course. But why did they resent that and why were they not comfortable with the rise of conservatism in America at the time? Guest: Actually, I think I'll answer that question in two parts. Because there was a little bit of a change in Hayek's perspective. Hayek was initially quite enthusiastic about Russell Kirk. When Russell Kirk came out with his giant book, The Conservative Mind, Hayek was fairly enthusiastic about a lot of it. He had some quibbles, but he thought that he largely shared Kirk's point of view. Fast forward a few years later and you have Hayek getting up before the Mont Pelerin Society to give his talk on "Why I Am Not a Conservative." Which you can largely read as a criticism--you can read it as a criticism of several people, but it's largely oriented against Kirk's views. So Hayek had taken a turn. I argue that you can begin to see there the rigidification of certain kinds of different perspectives in the American conservative intellectual world. People who saw themselves in the late 1940s and early 1950s largely as sharing the same kind of project, by the time you get to the late 1950s and early 1960s begin to see themselves as more oriented toward something we'd see now as libertarianism. Or more oriented toward a certain kind of traditionalism; and see their views as not being as aligned as they once thought they were. And so you see Hayek giving this lecture on "Why I Am Not a Conservative." And Hayek's concern about conservatism is that conservatism embraces the status quo. And Hayek thought the market is a progressive phenomenon. The market creates change. Somebody like Kirk--Kirk was famous for refusing to drive an automobile and wearing a cape around and living in northern Michigan in a sort of ancient house, so he very much seemed--he loved St. Andrews and old gothic buildings--he was envisioning himself as in some ways as somebody aligned with a certain kind of medieval idea, let alone with an early modern or more market society ideal. So Hayek says that being an advocate of the free market is something really different from that. That it is not an embrace of the status quo or a nostalgic valorization[?] of an old way of being. Instead it's, he thought, a certain kind of progressivism--progressivism engendered by the forces of the market itself. And Friedman very much hewed to those views. But the one thing I'd add to that is it's just fascinating to look in the 1950s at how much trouble these people had with all these different kinds of terms. Whether it's libertarian or conservative or neo-liberal or classical liberal, or Hayek used the term at one point 'Old Whig,' they had all these different words that they could conceivably use to describe themselves, but they really couldn't, the early members of the Mont Pelerin Society couldn't figure out what they actually were. They all disagreed about what they should name themselves. Russ: I think actually--it sounds kind of silly to worry about--but I think it's actually quite important. I am often called a conservative economist, and I hate that. And I always say: I'm not a conservative; I'm a classical liberal. 'Classical liberal' is a nice phrase; nobody knows what it means. You can then describe it; you can say: limited government and personal responsibility. It's not a bad forward description. But 'Old Whig' is definitely not a good term to market yourself as. And I think without a term, without a banner to rally under, it hampered them. And I think it hampers the movement today. Guest: Yeah, that's absolutely right. And I talk about this rigidification of differences over the 1950s and early 1960s. One of the reasons--it's both a reason and a symptom--that they couldn't actually figure out what it was that they all precisely agreed upon; they all felt that they shared certain kinds of loose affiliations but how they defined it really differed. And so each of these different kinds of terms signified a different orientation, subtly. At the time--and this is really different from the way the term is used today--but at the time to call yourself a 'neo-liberal' was to emphasize the ways in which your views were different from, say, 19th century Manchester liberalism. So, we've talked about some of the ways--the embrace of social insurance and so on down the line, all the ways in which you saw our government intervention potentially working to the benefit of society. That was what at the time made you 'neo-liberal.' If you called yourself 'libertarian' it had this slight anarchist undertone that worried even somebody like Friedman, who really in almost every case thought that the market was the way to go, worried that it made you sound libertine in a way that was aligned with a certain kind of fringe sensibility. So he thought that that was a marketing problem. And, as you say, a 'conservative' signifies an orientation toward the status quo, that it doesn't really conform with a lot of their views. And so you have a lot of these terms, but none of them seem quite right. Russ: My former colleague and occasional guest here, Dan Klein, likes the term 'Smith-Hayek.' It's not a good marketing term but it's very accurate, the way a lot of people-- Guest: That kind of has resonance with--Hayek wanted to call the Mont Pelerin Society the 'Acton-Tocqueville Society.' That caused all kinds of disputes over the fact that they were both European Catholics was concerning people who were thinking about marketing these ideas in the United States, for instance. I think the fact that you can't find a single term and try to associate yourself with these complex views of different individuals is telling in its own right. Russ: There's a lot of entertainment in your book as people resign, threaten to resign, don't want to go along with--it's a very academic game that we all play: If I'm going to join a club it's got to be just like me; and no club is really just like me except my club; and so it's a lonely club. And if you want to join with others you've got to compromise a little bit. Most academics aren't so good at that. That was interesting. Guest: That's right; and I think that aligns, too, with the fact that academics often are the most violent in describing their disagreements with the people who are relatively close to them. You look at the Mont Pelerin Society meetings and I think there could be a certain kind of--people who don't really look that closely into them can assume that everybody largely agreed on a lot of things, but then you actually dig into the transcript: It's almost all disagreement, these people all expressing deep enmity over relatively minor distinctions. Russ: Some of that's marketing, too, right? You are trying to create your own product. It's a complicated thing.

38:46 Russ: Let's move on to Milton Friedman, which is a big chunk of the last half of the book. You have a lot of interesting things to say about Friedman. One of the things that I was most fascinated by was your discussion of his methodology work, which I don't usually think of as being so important. It was important in certain--to my mind, justifying the Chicago School of economics, which when I think of it was applied price theory. Meaning certain basic assumptions about individuals maximizing their own self-interest, broadly defined--it can include charity, it can include altruism. It's a fairly neutral idea that the world then has empirical realities that are either consistent with those views or not. And that to me is sort of what his paper is about--his paper on methodology. But you have a different take on it. You argue that his methodological view helped advance his ideological position. Explain what you mean. Guest: Absolutely. I think it helped it in two ways. Russ: You should say what it is first. Guest: Yeah, well, I'll step back and say the first thing to understand about Friedman's methodology, the way that he represents it, is at least a little bit unique in the time. One reason is he was educated in two different places. Lots of people think of Friedman as a Chicago economist, but he spent a year at Chicago and then went and spent a year at Columbia. In Chicago it was much more oriented--it wasn't an a priori view of how you think about economics, it wasn't a notion that you just generate pure abstractions out of thin air; but at the same time it was much more theoretically inclined. It was: you start with theory and you work from there. And then he went to Columbia, which was really oriented toward empirical data collection. So, Wesley Mitchell, great institutional economist at the time, emphasized that the main duty of the economist was to assemble empirical data. And then you try to induce from that what the theory should be. So Friedman had this dual education in two very different ways of thinking about economics, and he brought them together in a sense in "The Methodology of Positive Economics." And so what he said is the economist starts with a theory, a kind of hypothesis; and then you take that hypothesis out into the world and you test it against the empirical data that you can gather that's relevant to it. And that might prove or disprove it; and you try to refine the hypothesis. And that's the way that he thought that economists should generally proceed. Now, I think this is important for a couple of reasons. One is, I see it as a kind of embedded rehabilitation of the idea of the homo-economicus--the economic person, the rational calculator. And so this was an idea, if you read the economists of the 1930s, that was deeply maligned. If anybody advocated for the free market on the basis of the idea that the individual is a kind of rational utility-maximizer, they were criticized because of some things we've already discussed in the past half hour--that it seems to contradict all kinds of behaviors in people's everyday lives; people are very conscious of the way that they and their family and friends seem altruistic, so this idea of a rational calculator seems intuitively wrong. But what Friedman said is what makes a hypothesis useful and powerful isn't whether it accords with our intuitions, but whether or not it's accurate in a predictive sense when looking at broad masses of empirical data. So his methodology I would say is an attempt to say that we don't evaluate a hypothesis of this kind on the basis of whether or not it seems right to us. We evaluate it based purely on its predictive capacities. And there he thought it was very robust. And so that's one way in which it was important. And the second was, in this emphasis on empirical data collection, if you compare an Austrian view of economics, which derives basic principles from abstract theorizing--and in the case of a purist, somebody like Mises, there's basically no empirical dimension here; you are creating elaborate theories based on your own thought alone--and you compare it to Friedman's perspective, which is very much outward-reaching, they are very different forms of argumentation. I think this gets to exactly what you were saying about Ayn Rand--why has Ayn Rand, read by so many people, intensely influential among subsets of them, but at the same time the broader influence in the social environment is more limited. And, Friedman's argument about that--he made it explicitly about Mises and about Rand--is that if you argue that you have an abstract logic that's universally true, that you can derive wholly from thoughts within your head, if other people don't believe that they share that logic, you are going to have an enormously difficult time convincing them that you are right. And Friedman said, in contrast, what I can do, my method, is I can say: Okay, we both share the same end; we share the end of the well-being of the poor; but I think that if you examine the data, I can show you that my way of organizing society will be more successful at achieving that than your way. And whether or not one buys into how Friedman read the data, Friedman was adamant that that mode of argumentation was much more likely to get somebody to rethink the views that they already hold than a mode that proceeds based on an abstract logic alone.

44:20 Russ: And on the surface, it appears to be more scientific. And I have to say, as someone who was educated at Chicago and influenced deeply by Austrian thinking after graduate school, I'm sort of in between. I see the argument that you don't want to spend all your time trying to convert people--I think is the phrase you used in the book that Friedman didn't want to have to convert people using just logic. He said, if it's all logic then you have to convert them through logic or force them, and he didn't want to force them. Then you've got to out-argue them. And of course he was really good at arguing. But most people don't argue to learn the truth. They argue because it's fun. So, most people who you argue with aren't going to go: Wow, I never thought of that. Now, you might dent them eventually, but the empirical approach has obviously got some superior virtues. The problem I have now, 30-something years out of graduate school, is: I used to have a romance about empirical evidence that I think Friedman had--that the truth will out, that eventually the best empirical work will convince people. And I think that's true of certain kinds of empirical work. His is the best kind. I think the Monetary History of the United States is probably the single most influential piece of empirical work in economics. But it's not complicated empirical work. It's not multivariate regression. And I've come to believe--we did a podcast with Jim Manzi on this and it's certainly the essence of Hayek's Pretense of Knowledge Nobel Prize Address--that in complex systems, we can't measure things the way it seems like you can; and what then tends to be overwhelming is bias and you're back really just pretending you are scientific. What Hayek called 'scientism.' So, I think if we are really honest, we are ultimately going to be arguing about logic, but we are going to be using these empirical studies often as support that maybe is not so legitimate. Guest: Oh, absolutely. That's absolutely right. There's a deep tension in the history of economics. There's often an attempt to represent ideas as more scientifically-based, more empirically-founded than often is the case. Russ: Obviously a problem on both sides of the spectrum. Guest: Right. Russ: I'm not picking on one side. Guest: Oh, absolutely. That's an interesting thing about looking at the contrast between this generation of talking about the 1930s and the generation of which Friedman was a central figure: is that you look in the 1930s, you look at people like Knight, and Hayek at the time, and a number of their colleagues; and they looked at Keynes. And they thought, you know this guy has an enormous amount of public credibility and he leverages his scientific reputation, the fact that he has these fantastic scientific credentials, to head out and to claim that there's scientific merit behind propositions that they say as really based on his own personal views, and not as being a product of scientific consensus at all. And their response to that was to say: okay, we shouldn't embrace this kind of public role. That what Keynes is doing is in some ways antithetical to what the academic should be doing. Raising this kind of public role is a false kind of representation of something that's not science as being such. And there's a real generational transfer when you get to Friedman and you see how vociferously Friedman embraced his public role. And in a sense he modeled himself in that way after Keynes. And Friedman and Keynes are in some ways the two great poles of 20th century public economics. And so it cuts both ways, this representation of ideas as being scientifically based that aren't necessarily so can happen on the right and on the left. And the one uniform thing is that it bothers colleagues on the other side of the aisle who watch it occurring. You know, one other interesting thing I'll say if you talk about this sort of marketplace of ideas and that's something that Friedman really believed in. Friedman thought much as you have goods competing in the marketplace and the best good will win out, you have ideas competing in a marketplace of ideas and the best idea will win out over time. He had a real faith in the capacity of better ideas to win when you have clashes in public debate. And that undergirded a lot of the way in which he participated in public debate. And as an historian I appreciated that because it also, it was the way he thought about his own papers--he was very open about his own papers because he thought that scholars reading them, the ones who were reading them in the right way, would win out over time. Russ: Yeah, it's interesting. I interviewed him for EconTalk in 2006, shortly before he died. Guest: Yeah, yeah, I drew on that interview a little bit. It was helpful. Russ: And he says in there--and it may be false modesty, again, this is one of those issues again for an historian it's hard to know--but he says that he didn't feel that his Monetary History of the United States, co-written with Anna Schwartz, was decisive in bringing the world to the view--which certainly became the view--that monetary policy is the key to stopping inflation. As opposed to all the other theories which were prevalent in the 1960s, which were cost-push and cost-pull and unions and oil prices. Friedman say: No, it's the money supply. And I think he basically won that intellectual debate. But when I asked him about that he said: No, no, no, it wasn't my study; it was events in the world that caused people to see--in New Zealand, for example, they'd stopped printing money, and inflation went down. What he would admit to--and I think you talked about this as well--is that you need to have ideas around that allow events to take advantage of them. So, when you see that inflation went down, it's nice that there's a study you can wrap your arms around and hold up and wave and say, Oh, look, here's the proof. But that's the direction of causation. Guest: Yeah. That's absolutely right. And that's a crucial thing to understand--that Friedman thought a lot about this. Both Friedman and Hayek thought a lot about the relationship between ideas and political change. And Friedman's theory was very much the one you laid out right there--that his role as he saw it was to lay out a kind of intellectual infrastructure, to put a whole set of policy ideas out there on the table, and then they would sort of lie in wait. So this is what he did in his Newsweek columns, started in 1966, read by over 10 million people. Very influential column. And he threw out all kinds of stuff, whether it's cutting funding for the Corporation for Public Broadcasting, eliminating government aid for natural disasters, the flat tax, school vouchers, negative income tax, and so on. All these ideas. Russ: Volunteer army. Guest: Yeah, volunteer army. So he threw all this stuff out there. And most of it at the time looked absolutely crazy to people. It seemed like totally infeasible ideas. And then as he saw it, you just waited for these different--whether it's the public education system or whether it's monetary policy--you wait for a crisis to arise where people are suddenly sensing that the existing system isn't working and they are casting about for other ideas. And then, having this set of alternatives lying there ready to hand would make them suddenly seem viable in a way that they weren't before. And so this isn't a story of ideas bringing about prophecies of political change. Instead it's a story about people generating ideas and then waiting for political events to reach a point where they seem viable when they didn't before.

52:21 Russ: Now, you describe Friedman as a utopian. Which he clearly was. And as you point out, those ideas you just listed, most of which he laid out in Capitalism and Freedom in 1962, were so far out of the mainstream. And many of them, of course, were adopted. Although in 2006 when I interviewed him he emphasized that many of them weren't. He was very much at the end of his life--and I think you mention this as well in the book--he was a half-empty rather than a half-full kind of guy, particularly with respect to the size of government. So one of, I think, the ironies of this whole conversation is that while the idea of the free market has been resurrected since the Great Depression, it's not zero but it's not anything close to what its proponents certainly argued for. But I want to make a different point, which is you describe him as a utopian, who at the same time was willing to get into the policy arena and put forward ideas that were steps toward utopia. Rather than pretending that one day overnight people would just say, let's let government get much smaller, he wanted to take steps toward it. So, two examples that you mention that I think are important are school vouchers and the negative income tax. The negative income tax was the inspiration for the earned income tax credit. Which has become a very important idea. And it just strikes me, as a student of Milton's and as somebody who agrees with an overwhelmingly large amount of what he had to say, that those, you could call them compromises, he sort of held his nose. He sort of said: These are things we could do in the meanwhile, till we get to the better solution. But they have a tendency to get entrenched. A lot of people, myself included--I don't want to see school vouchers and I don't want to see the earned income tax credit because the recipients, once they get the money, are going to use the political process to enlarge the scope of those programs, and I think do some bad things. Which I think is what has happened. What's your reaction to that? Guest: Yeah. Well, so, I think that this is important for a variety of reasons. First of all I think it's important for understanding Milton Friedman. I argue in the book that with limited exceptions of which monetary policy is an obvious one, Friedman almost always believed that the market was the best way to order any kind of social decision-making process, rather than relying on politics. And so, these examples--vouchers and the negative income tax--are usually the first things that are brought up as counterexamples. These are potentially--the negative income tax seems to embrace the social welfare state. School vouchers seem to embrace public education. But you are exactly right. When you'd catch Friedman talking to libertarian organizations he was very quick to say: These aren't part of my ideal society; my ideal society wouldn't have public education; my ideal society would not have income redistribution; but the reality is that we live in a world where abolishing these systems is highly unlikely. I think to him it's highly unlikely that we'd reach a state of crisis that would lead people to take them seriously as possibilities. So in the absence of that he thought that the best way to bring about social change was to advocate for these kinds of policies, that would help to bring more of a market sensibility into what the government administered. And this was powerful for a couple of reasons. One, is that it made Friedman seem like a more practical thinker than the utopian thinker. I mean, utopians can be powerful in changing how people think about the world, but when it comes to practical policy implications, it's very hard for a Congressperson to say, Okay, here's how I put this into effect. So this enabled Friedman to put together a range of proposals that did seem feasible, that did seem like things that Congress could enact. And the second thing is it enabled him to speak to different audiences in different ways. So if Friedman was speaking to a kind of centrist audience and he wanted to seem like a reasonable person, he could talk about the ways in which vouchers would save public education. And at the same time, if he was talking to a libertarian audience that had some of the skepticism that you've just expressed, he could say: Well, this isn't what I really believe; I share your ideals but I think this is the best way to bring a system close to your ideals into effect. So, it gave Friedman a great deal of versatility in talking to different kinds of people.

56:44 Russ: So, let me give you a pessimistic view and get your reaction. I would suggest that to a large extent, at least so far--and of course time passes and things change, people make predictions and people say that's right or wrong, but sometimes predictions come back to bite you and sometimes they come back and are redeemed. Friedman was very critical of the Eurozone, said it wouldn't last. He was onto something. He may not be right, literally, but he certainly understood some of the tensions that they are facing right now. But my question would be this: Certainly Friedman and Hayek have--and their peers--have had a tremendous impact on intellectual life in the last half of the 2th century and up to the present. But their impact on policy has been very limited. We haven't moved to social planning; we haven't moved to central planning; we haven't moved towards communism or socialism. We deregulated the Federal Trade Commission (FTC) and the airlines. But in terms of just the overall hand of government--you know, right now we're fighting about whether you can have sugar in the drinks in New York City. It's rather striking to me how half-empty in some sense the glass is. What do you think of the argument that says the main impact of Friedman and Hayek has been on the intellectual environment rather than on the policy space? Guest: As you pointed out that's certainly an argument that Friedman himself shared, and as he put it: We've had an enormous effect on the ideas but not on the practices of our time. I think it's a very thick problem. When you look at the list of all the different proposals that Friedman put out there, a fair number of them have--as you say, things like welfare reform, the earned income tax credit--or whether it's discussions, very live discussions about aid following national disasters that didn't seem like live discussions generations ago--there are a whole--the volunteer army one that you mentioned that was immediately successful: there are a whole host of policy proposals that Friedman threw out there that gained a certain degree of traction and had fairly significant effects on politics. I mean, you look at the transformation of the income tax system in the early 1980s. So you can look at a whole host of areas where these ideas have had significant effects. At the same time, the basic structure of the Federal government certainly hasn't been transformed in the way that it impacts people's everyday lives, hasn't been transformed in the way that Friedman would have envisioned and hoped. There's absolutely no question about that. The changes felt to him much more incremental than deeply substantive. So maybe I would have a more robust view of their influence than you just expressed there. I don't think it's a matter of purely--I think the intellectual environment and the political environment are thickly intertwined. Some scholars have done great work on the influence of think tanks, for instance, where you can see how that functions. But at the same time maybe less influence than people who see Friedman as a maligned force would have one belief. Russ: You misspoke, by the way, when you talked about Friedman supporting the abolition of the volunteer army. You meant the draft. But I'm sure most listeners caught that. Guest: I apologize. Russ: No problem.