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Milton Friedman’s 100th: Exploring His Wisdom for the Ages (Part II: Energy)

[Ed. note: Milton Friedman's views are also explored in Part I of this series (worldview) and in Part III (political capitalism).]

“Economists may not know much. But we know one thing very well: how to produce surpluses and shortages. Do you want a surplus? Have the government legislate a minimum price that is above the price that would otherwise prevail…. Do you want a shortage? Have the government legislate a maximum price that is below the price that would otherwise prevail.”

       – Milton and Rose Friedman, Free to Choose (New York: Harcourt Brace Jovanovich, 1979), pp. 219.

“It is a mark of how far we have gone on the road to serfdom that government allocation and rationing of oil is the automatic response to the oil crisis.”

- Milton Friedman, “Why Some Prices Should Rise,” Newsweek, November 19, 1973.

Milton Friedman is best known for his monetary economics,  Monetarism, a school of economics that challenged and largely defeated Keynesianism. “By century’s end, stated Paul Krugman in the New York Review of Books, “classical economics had regained much though by no means all of its former dominion, and Friedman deserves much of the credit.”

But as Friedman became a public intellectual, writing popular books and writing his biweekly Newsweek columns, he became conversant in different fields, including energy. And energy, and Harold Hotelling’s fixity/depletion model in particular, became the rage of applied economics in the energy-troubled 1970s.

Friedman’s harsh negative reaction to President Nixon’s wage and price control order of August 1971 is particularly important for the energy debate, for this action (and not the Arab Embargo) created the oil shortages that led to a decade of oil regulation and misery from U.S. consumers.

Friedman’s salient quotations on energy, at least what I have been able to find, are presented below. (Perhaps readers can add to this compilation in the comments section below.) For additional thoughts of Friedman on energy, see the MasterResource post, Milton Friedman on Mineral Resource Theory.

Energy Economics

“I do not believe there is a natural resource economics. I believe there is good economics and bad economics.”

- Milton Friedman to Robert Bradley, September 8, 2003

Energy Depletion

“[Oil, gas, and coal are] producible … at more or less constant or indeed declining cost because of the improvements in the technology of drilling and exploring and so on.”

- Milton Friedman, “The Energy Crisis: A Humane Solution” (Cato Institute: 1978).

Protectionism (Think Wind and Solar too)

“The infant industry argument is a smoke screen. The so-called infants never grow up. Once imposed, tariffs are seldom eliminated.”

- Milton and Rose Friedman, Free to Choose (New York: Harcourt Brace Jovanovich, 1979), pp. 5–6.

 Nixon’s Price Control Order: August 15, 1971

I regret exceedingly that he decided to impose a ninety-day freeze on prices and wages. That is one of those ‘very plausible schemes … with very pleasing commencements, [that] have often shameful and lamentable conclusions’.”

- Milton Friedman, “Why the Freeze is a Mistake,” Newsweek, August 30, 1971.

“Individual price and wage changes will not be prevented. In the main, price changes will simply be concealed by taking the form of changes in discounts, service, and quality, and wage changes, in overtime, perquisites and so on…. But to whatever extent the freeze is enforced, it will do harm by distorting relative prices.”

- Milton Friedman, “Why the Freeze is a Mistake,” Newsweek, August 30, 1971

“By encouraging men to spy and report on one another, by making it in the private interest of large numbers of citizens to evade the controls, and by making actions illegal that are in the public interest, the controls undermine individual morality.”

- Milton Friedman, “Morality and Controls,” Newsweek, October 28, 1971.

1970s Energy Crisis

“It is a mark of how far we have gone on the road to serfdom that government allocation and rationing of oil is the automatic response to the oil crisis.”

- Milton Friedman, “Why Some Prices Should Rise,” Newsweek, November 19, 1973.

“The present oil crisis has not been produced by the oil companies. It is a result of government mismanagement exacerbated by the Mideast war.”

- Milton Friedman, “Why Some Prices Should Rise,” Newsweek, November 19, 1973.

“Lines are forming at those gas stations that are open. The exasperated motorists are cursing; the service-station attendants are fuming; the politicians are promising. The one thing few people seem to be doing is thinking….

“How can thinking people believe that a government that cannot deliver the mail can deliver gas better than Exxon, Mobil, Texaco, Gulf, and the rest?”

- Milton Friedman, “FEO and the Gas Lines,” Newsweek, Marc 4, 1974.

“The long gasoline lines that suddenly emerged in 1974 after the OPEC oil embargo … and again in the spring and summer of 1979 after the revolution in Iran, [came after] a sharp disturbance in the supply of crude oil from abroad. But that did not lead to gasoline lines in Germany or Japan, which are wholly dependent on imported oil. It lead to long gasoline lines in the United States, even though … for one reason and one reason only: because legislation, administered by a government agency, did not permit the price system to function.”

- Milton and Rose Friedman, Free to Choose (New York: Harcourt Brace Jovanovich, 1979), p. 14.

“There is one simple way to end the energy crisis and gasoline shortages tomorrow—and we mean tomorrow and not six months from now, nor six years from now. Eliminate all controls on the prices of crude oil and other petroleum products.”

- Milton and Rose Friedman, Free to Choose (New York: Harcourt Brace Jovanovich, 1979), pp. 219.

Shortages and Surpluses: Theory to Practice

“There has been an energy crisis because government created one. Of course, government has not done so deliberately. Presidents Nixon, Ford, or Carter never sent a message to Congress asking it to legislate an energy crisis and long gasoline lines. But he who says A must say B. Ever since President Nixon froze wages and prices on August 15, 1971, the government has imposed maximum prices on crude oil, gasoline at retail, and other petroleum products.

Economists may not know much. But we know one thing very well: how to produce surpluses and shortages. Do you want a surplus? Have the government legislate a minimum price that is above the price that would otherwise prevail. That is what we have done at one time or another to produce surpluses or wheat, of sugar, or butter, or many other commodities.

Do you want a shortage? Have the government legislate a maximum price that is below the price that would otherwise prevail. That is what New York City and, more recently, other cities have done for rental dwellings, and that is why they all suffer or will soon suffer from housing shortages. That is why there were so many shortages during World War II. That is why there is an energy crisis and a gasoline shortage.”

- Milton and Rose Friedman, Free to Choose (New York: Harcourt Brace Jovanovich, 1979), pp. 219.

Energy: The Master Resource (endorsement)

“This splendid book effectively debunks the widespread predictions of energy doom. Its factual base is comprehensive, its exposition clear and straightforward, and its economic reasoning sound.”

(1994 book coauthored by Bradley and Richard Fulmer)

5 comments

1 Eddie Devere { 08.02.12 at 10:21 am }

Some good quotes from Friedman on Energy and Economics. Gov Grey Davis definitely should have read some Milton Friedman during the California Energy Crisis. If he had done so, he probably would have realized that price controls on energy products lead to shortages and blackouts.

Though, it’s interesting that you included the quote about constant or declining prices of oil,gas&coal. Prices of these resources in inflation adjusted dollars go up and down depending on easy of producing the resources, demand, strikes, technology development, government regulation, nationalization of industries, embargoes, etc… Did Friedman really believe that technology development would always allow prices to stay constant or decrease?

The question I still have (even though I’ve read and watched a fair amount of Milton Friedman’s works) is whether he thought that energy was the master resource. Did he think that energy was just one of the many items that make us happy or did he realize that without energy their is no life?

If I’m not mistaken, his philosophy was basically that the individual should be responsible for their actions and should be free to make choices that improve their long-term happiness. But is personal happiness the goal of life? It’s easy to imagine a country in which people are happy, but not reproducing and not growing their capability to do work. (For example, this includes many of the people living in European countries.)

Did Friedman ever comment on whether there was a purpose to life other than just personal happiness? Or did he basically stick with the view put forward by Aristotle, Rand and others that the goals of life are personal happiness (eudaimonia) and the use of human rationality to achieve that happiness?

2 rbradley { 08.02.12 at 10:39 am }

Friedman defined energy broadly (whatever produces the services), so he did not buy the ‘depletion’ argument.

Friedman was utilitarian in his beliefs and was a very kind, charitable person. He loved civil society as much broader than the individual and better than government. Freedom works; government does not.

3 Robert Bradley Jr.: Milton Friedman’s 100th: Exploring His Wisdom for the Ages (Part III: Political Capitalism) | JunkScience.com { 08.05.12 at 2:40 am }

[...] note: Milton Friedman's views are also explored in Part I of this series (worldview) and in Part II (energy).] “The two greatest enemies of free enterprise in the United States … have been, on [...]

4 Mark Heslep { 08.17.12 at 11:02 pm }

I happened to be rereading Capitalism and Freedom when coming across this celebration of Friedman’s 100th. All the Friedman criticisms of government intervention are an appropriate way to celebrate, but alone they are incomplete. Friedman repeatedly drew attention to his view that he favored free *markets* over governments, but that free markets were not at all synonymous with industry and he heaped criticism on industry rent seeking via cooperation with government. A primary, and apropos, example:

Newsweek column, 1967
“Few U.S. industries sing the praises of free enterprise more loudly than the oil industry. Yet few industries rely so heavily on special governmental favors. These favors are defended in the name of national security. A strong domestic oil industry, it is said, is needed because international disturbances can so readily interfere with the supply of foreign oil. The Israeli-Arab war has produced just such a disturbance, and the oil industry is certain to point to it as confirmation of the need for special favors. Are they right? I believe not. The main special favors are:
1. Percentage depletion. This is a special provision of the Federal income tax under which oil producers can treat up to 27½ per cent of their income as exempt from income tax—supposedly to compensate for the depletion of oil reserves. This name is a misnomer. In effect, this provision simply gives the oil industry (and a few others to which similar treatment has been extended) a lower tax rate than other industries….”
http://0055d26.netsolhost.com/friedman/pdfs/newsweek/NW.06.26.1967.pdf

5 rbradley { 08.18.12 at 7:36 am }

Good point Mark. But in the 1970s, this tax advantage got whacked: eliminated for integrated majors and reduced for independents. Today, around $5 billion a year supposedly comes from preferential tax treatment to the industry. (I need to study it more ….)

Also at the time Friedman wrote, we had state-level market-demand proration and a quota against imported oil. The three areas (including tax) gave domestic oil producers a whole lot of government favor. But today it is a different story with government being a net drag on the industry, domestic and international.

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